Gems March-April 2009

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April 25, 2009: A reces­sion buster cut, thank you. Will­liam McInnes, SMH

The hair­dresser was closed. That’s why I ended up at the bar­ber. The last time I went to a bar­ber, the hair­cut was so bad the per­pe­tra­tor refused to look me in the eye when I paid. When I got home my mother held her hand to her head and said, “Oh Jesus, what have you done?”…

Life is full of cycles, just like the econ­omy. We are young, we are old and we die. It is ele­men­tal; it is the order of things. Some­where along the way eco­nom­ics seems to have con­ve­niently become a hard sci­ence of sta­tis­tics and sys­tems instead of a social sys­tem of human soci­ety. It is dis­tant from the beings it rep­re­sents.

April 25, 2009: Bud­get key to future of buy­ers’ sub­si­dies. Jacob Saulwick, SMH

FIRST-HOME buy­ers appear set to hold on to increased gov­ern­ment sub­si­dies in next month’s bud­get — but only for houses yet to be built.

The shadow trea­surer, Joe Hockey, raised con­cerns that the grant could trap young peo­ple into buy­ing houses they could not afford.

I would hate to see that those peo­ple being encour­aged to go out and buy their first homes and are going to end up unem­ployed in the next 12 to 18 months,” he told ABC radio.

It might be great to stim­u­late and dis­tort one part of the econ­omy. But if it means that those poor bug­gers are going to end up unem­ployed and default on their home loan in 12 or 18 months’ time through no fault of their own, then this will be seen to be a mis­take.”

April 24, 2009: Mad­off investors ordered to return false prof­its.

The trustee try­ing to unravel Bernard Madoff’s mas­sive pyra­mid scheme is threat­en­ing legal action to recover $735 mil­lion from investors who unwit­tingly made money off the swin­dle.

For decades, Mad­off paid out steady prof­its to his clients, telling them the money had been earned in the stock mar­ket. The gains, though, were fic­ti­tious, and Mad­off pleaded guilty last month to steal­ing funds from some investors to pay bogus prof­its to oth­ers.

In recent days, court-appointed trustee Irv­ing Picard has sent let­ters to 223 investors, order­ing them to return money they with­drew from their accounts at Bernard L. Mad­off Invest­ment Secu­ri­ties in the six years before the scheme col­lapsed.

These amounts were paid to you at the expense of other cus­tomers while BLMIS was insol­vent,” said one let­ter, sent to an investor who grad­u­ally with­drew $975,000 between 2003 and 2008. “The Trustee demands that you imme­di­ately return such amounts to the Trustee for the ben­e­fit of all defrauded cred­i­tors.”

 

April 23, 2009: RBA, banks must cut rates fur­ther: ACCI.

Aus­tralian Cham­ber of Com­merce and Indus­try chief exec­u­tive Peter Ander­son said it was “bleak news” for busi­ness when cou­pled with gov­ern­ment and RBA acknowl­edg­ments that Australia’s in reces­sion.

In the wake of this bleak news there is a stronger case for the Reserve Bank, when it next meets, to fur­ther reduce inter­est rates,” Mr Ander­son told reporters in Can­berra on Thurs­day.

They have not fallen as low as they should fall.”

April 23, 2009: Econ­omy in rapid decline. Jacob Saulwick and Phillip Coorey, SMH.

THE Aus­tralian econ­omy will shrink faster than the global aver­age this year, the Inter­na­tional Mon­e­tary Fund said last night, fore­shad­ow­ing another dire batch of revi­sions in next month’s bud­get.

The pre­dic­tions fol­lowed the release of mixed fig­ures on infla­tion by the Bureau of Sta­tis­tics. They showed infla­tion was falling, but per­haps not fast enough to trig­ger inter­est rate cuts by the Reserve Bank.

Australia’s econ­omy is set to con­tract by 1.4 per cent in 2009, the IMF said, before grow­ing just 0.6 per cent next year.

April 22, 2009: Global econ­omy may shrink for 1st time in 60 years; Global econ­omy likely to shrink 1.3 per­cent this year, IMF says; first drop in 60 years, Yahoo Finance.

The world econ­omy is likely to shrink this year for the first time in six decades.

The Inter­na­tional Mon­e­tary Fund pro­jected the 1.3 per­cent drop in a dour fore­cast released Wednes­day. That could leave at least 10 mil­lion more peo­ple around the world job­less, some pri­vate econ­o­mists said.

By any mea­sure, this down­turn rep­re­sents by far the deep­est global reces­sion since the Great Depres­sion,” the IMF said in its lat­est World Eco­nomic Out­look. “All cor­ners of the globe are being affected.”

April 22: Fred­die exec­u­tive death appar­ent sui­cide: police source. Yahoo FInance.

RESTON, Vir­ginia (Reuters) — The finance chief of trou­bled U.S. mort­gage giant Fred­die Mac, David Keller­mann, was found dead on Wednes­day after appar­ently com­mit­ting sui­cide, a police source said…

Kellermann’s death fol­lowed sev­eral high-pro­file sui­cides in the global finan­cial cri­sis.

Ger­man bil­lion­aire busi­ness­man Adolf Mer­ckle threw him­self in front of a train in Jan­u­ary after heavy losses on the stock mar­ket.

Merckle’s busi­ness empire included major cement and drug com­pa­nies but was hob­bled by debt and effec­tively con­trolled by the banks that lent it money after a series of wrong-way bets on stock invest­ments.

French­man Thierry Magon de la Ville­huchet, 65, co-founder of money man­ager Access Inter­na­tional, was found dead in a New York office build­ing in Decem­ber, report­edly dis­traught over los­ing up to $1.4 bil­lion in client money to Bernard Madoff’s fraud. He slit his wrists with box­cut­ters.

April 23, 2009: First home buy­ers to lose boost. The boost to the first home own­ers grant will not be extended beyond June 30, Prime Min­is­ter Kevin Rudd says.

April 23, 2009: Car sales sink most in 18 years. Chris Zap­pone, SMH.

For the year to March, the total num­ber of new cars, four-wheel-dri­ves and trucks sold in Aus­tralia slumped 22.6%, sea­son­ally adjusted, accord­ing the Aus­tralian Bureau of Sta­tis­tics. That’s the biggest fall since 1991, based on orig­i­nal num­bers

April 22, 2009: It’s bricks and slaugh­ter out there. Jes­sica Irvine, SMH. Bravo Jes­sica for a forth­right crit­i­cal com­men­tary

What they for­get is that aver­age house prices are now seven times the aver­age annual salary, up from about three times when the boomers first bought in. They for­get, too, that in the months since the tem­po­rary boost to the first-home own­ers grant — $7000 for estab­lished homes and $14,000 for new ones — house prices in the sub-$500,000 cat­e­gory have bal­looned.

Seem­ingly unaware of the false econ­omy, first-home buy­ers have engaged in a game of mutu­ally assured destruc­tion, and in fact, have been bid­ding house prices up…

So the Rudd Gov­ern­ment, which was elected promis­ing to improve hous­ing afford­abil­ity, now wants to seek re-elec­tion next year as the party which stopped house prices from falling.

They’re being egged on by Trea­sury boffins who think reduced hous­ing afford­abil­ity for first-time buy­ers is a small price to pay for the con­fi­dence boost that exist­ing home own­ers get from homes that main­tain their value.

April 21 2009: Timmy Tes­ti­fies, We Take Notes. Dirk van Dijk, CFA

This morn­ing, Sec­re­tary of the Trea­sury Tim Gei­th­ner tes­ti­fied before the Con­gres­sional Over­sight Panel (COP) headed by Eliz­a­beth War­ren. In gen­eral, the ques­tions were excel­lent; unfor­tu­nately, the answers were not forth­com­ing.

One excel­lent ques­tion was, “How does pro­tect­ing the com­mon share­hold­ers of Cit­i­group © help the econ­omy?” There was no real answer to that ques­tion — just a dance about how it was not appro­pri­ate for him to talk about any indi­vid­ual finan­cial insti­tu­tion. The true answer to the ques­tion is: it doesn’t.

He said in response to ques­tion­ing about the asym­met­ric risks and returns in the Pub­lic Pri­vate Invest­ment Plan (PPIP) that if you had to sell your house imme­di­ately but there were no mort­gages avail­able, you would not get a very good price. I think that this is fun­da­men­tally the wrong anal­ogy to use, and it reflects a flawed assump­tion that under­lies the PPIP pro­gram — namely that the buy­ers in the mar­ket are wrong.

It assumes that the rea­son that there is no vol­ume in the mar­ket for these “legacy assets,” the new term for “toxic assets,” is that there are no buy­ers, rather than that there are no sell­ers. This is an unproven assump­tion at best, although one of the bet­ter fea­tures of the PPIP is that it should help answer the ques­tion of a lack of buy­ers vs. a lack of sell­ers.

A bet­ter anal­ogy (or at least one that is equally valid) is: sup­pose you wanted to sell your home, but it has suf­fered major water dam­age and is now infested with ter­mites. How­ever, you owe $500,000 on it, and no buyer is will­ing to pay more than $250,000 for it, and you can­not afford to sell it at that price. Sim­ply because mort­gages are avail­able at rea­son­able inter­est rates will not make buy­ers want to buy your house for any­thing like $500,000.

April 21, 2009: Prof­its mask bank prob­lems: ana­lysts. Rob Lever, SMH.

Mar­tin Weiss at Weiss Research called the surge in earn­ings “bogus”, and a result of tricks includ­ing an eas­ing of mark-to-mar­ket account­ing rules.

Reg­u­la­tors have now agreed to let banks cover up their toxic assets by book­ing them at fluffy-high val­ues, bear­ing lit­tle resem­blance to actual mar­ket prices,” he said.

Like magic, the bad assets are sud­denly worth more.”

April 21, 2009: Bad news prompted RBA April rate cut. Garry Shil­son-Josling, SMH.

The Reserve Bank of Aus­tralia (RBA) cut inter­est rates ear­lier this month after it realised the out­look for eco­nomic growth was even worse than expected.

April 20, 2009:  Spain’s Falling Prices Fuel Defla­tion Fears in Europe.

Nowhere is this cycle more evi­dent than in Spain. Last month, it became the first of the 16 nations that use the euro to record a neg­a­tive infla­tion rate. The drop, though just 0.1 per­cent, had not hap­pened since the gov­ern­ment began track­ing infla­tion in 1961, and Span­ish offi­cials have said prices could keep drop­ping through the sum­mer.

Some of the decline came as volatile food prices sank; the cost of fish fell 6.2 per­cent, and sugar was down 5.7 per­cent. But even prices in nor­mally sta­ble sec­tors like drugs and med­ical treat­ments fell 0.7 per­cent in March, and there were slight declines in footwear, cloth­ing and prices for house­hold elec­tron­ics.

Alarm bells are going off,” said Lorenzo Amor, pres­i­dent of the Asso­ci­a­tion of Autonomous Work­ers, which rep­re­sents small busi­nesses and self-employed peo­ple. “Economies can recover from decel­er­a­tion, but it’s harder to recover from a defla­tion­ary sit­u­a­tion. This could be a cat­a­stro­phe for the Span­ish econ­omy.”

April 20, 2009: Will Bank “Stress Tests” Kill Market…or Gov­ern­ment Cred­i­bil­ity? Henry Blod­get, Tech Ticker (video)

Believe it or not, the “stress tests” that the gov­ern­ment is per­form­ing to see how that banks will do if the econ­omy con­tin­ues to get worse were orig­i­nally intended to inspire con­fi­dence.

April 21, 2009: One in four firms to cut staff. Jes­sica Irvine and Phillip Coorey, SMH

TWENTY-FIVE per cent of small to medium-sized busi­nesses in NSW expect to sack staff within three months, a sur­vey by the NSW Busi­ness Cham­ber has found…

Lack of access to new credit remains a press­ing issue, with one in three NSW com­pa­nies say­ing they had trou­ble being able to bor­row from their bank.

April 20, 2009: Swan con­tends with a mov­ing feast. Phillip Coorey, SMH.

Acom­mon per­cep­tion that refuses to die con­cerns how Peter Costello fore­told the global finan­cial cri­sis…

Cer­tainly, Costello and John Howard warned repeat­edly of eco­nomic storm clouds on the hori­zon in the lead-up to the Novem­ber 2007, poll but the “huge tsunami” of which Costello spoke con­cerned a global col­lapse dri­ven by China.

In an elec­tion cam­paign inter­view with the Herald’s Peter Hartcher and Jes­sica Irvine in late Octo­ber that year, Costello said a “huge tsunami” would result when China floated its cur­rency, which was fixed at below value. There would be a major realign­ment of cur­rency flows glob­ally, wreak­ing havoc with exchange rates, and unleash­ing even greater insta­bil­ity on finan­cial mar­kets than what was being caused at the time by the-then fledg­ling US sub­prime cri­sis.

That will be a wild ride when that hap­pens,” Costello said of the expected Chi­nese action. “That will set off a huge tsunami that will go through world finan­cial mar­kets.”…

In real­ity, no one [ahem…], Costello included, knew back then the scope of what was about to emanate from the US, and politi­cians and econ­o­mists are still strug­gling to get a han­dle on it.

April 20, 2009: China’s money man­darins take the hard line. John Gar­naut, SMH.

The weekend’s Boao Asia Forum may go down as the moment in his­tory China binned the Deng Xiaop­ing dic­tum that had guided China’s for­eign pol­icy for 30 years: “Keep a cool head, main­tain a low pro­file and never take the lead.”

Inside the pala­tial Sof­i­tel resort on China’s south­ern coast, there seemed scarcely a moment when a top Chi­nese offi­cial wasn’t ridi­cul­ing the world’s finan­cial insti­tu­tions, demand­ing major con­ces­sions from the United States, propos­ing new Asia-cen­tric inter­na­tional archi­tec­ture or threat­en­ing to turn off the taps of Chi­nese cap­i­tal which the rest of the world so des­per­ately needs.

And for Lou Jiwei, the sov­er­eign wealth fund chief, it was per­sonal. Lou was engaged in an elec­tric debate about global imbal­ances with Zhou Xiaochuan — the man osten­si­bly in charge of China’s exchange rate pol­icy — and “Dr Doom” Noriel Roubini. Roubini pointed out that China’s “ven­dor financ­ing” pol­icy of fix­ing its exchange rate (for which Zhou was osten­si­bly respon­si­ble) and fun­nelling the result­ing for­eign exchange reserves into the US (through vehi­cles such as Lou’s fund) was an inte­gral part of the prob­lem.

Roubini was asked how he fore­saw the finan­cial cri­sis in all its gory detail. He replied that “the more inter­est­ing ques­tion is why most peo­ple didn’t get it”.

Lou gave as good as he got. And then he paused from a sear­ing attack against “ris­ing finan­cial pro­tec­tion­ism” in the West to offer a digres­sion: “I espe­cially want to thank some­one. Last year, we faced a lot of finan­cial pro­tec­tion­ism. Euro­pean Union offi­cials even talked with me, vis­ited my office, and asked me to declare my invest­ments below 10 per cent or give up my vot­ing rights. They said they will take away my vot­ing rights unless I agreed. I said no, I will not go to the EU. So I have not invested a sin­gle penny in Europe since then.

I have to thank these Euro­pean offi­cials. They have saved me a lot of money.

But this year, Euro­pean coun­tries came to me and gave up all their con­di­tion­al­ity and declared they wel­comed China’s sov­er­eign wealth fund.”

April 20, 2009: Toxic assets leave black hole in high­lands shire’s cof­fers. Clancy Yeates, SMH

THE Winge­car­ribee Shire Coun­cil may seem an unlikely player in the global finan­cial cri­sis. How­ever since the sleepy South­ern High­lands region became tan­gled up in the fail­ure of the Wall Street bank Lehman Broth­ers, its plight has cap­tured the gaze of many investors. Even The New York Times drew read­ers’ atten­tion to the “idyl­lic col­lec­tion of towns and vil­lages” with its koala and kan­ga­roo pop­u­la­tion. The focus is for all the wrong rea­sons, of course.

Through Lehman and its pre­de­ces­sor, Grange Secu­ri­ties, Winge­car­ribee invested $29 mil­lion in com­plex and highly rated secu­ri­ties called col­lat­er­alised debt oblig­a­tions (CDOs), which have now plunged in value. The shire is just one of many coun­cils and com­mu­nity groups fight­ing to regain $625.6 mil­lion from one of history’s biggest bank­rupt­cies, which rocked mar­kets in Sep­tem­ber. Seven months after the bank­ruptcy, Lehman’s admin­is­tra­tors, PPB, have made an offer to the coun­cils: 5.6c in the dol­lar.

 

Oth­ers in the queue, how­ever, stand to recoup a much higher share. Related-party cred­i­tors within the fallen Lehman Broth­ers empire could receive between 34c and 70c in the dol­lar of their $179.8 mil­lion in debts under a deed com­pany arrange­ment pro­posed by PPB.

April 20, 2009: First-home buy­ers swamp­ing banks. Jes­sica Irvine, SMH

LENDERS are strug­gling to keep pace with an unex­pected increase in appli­ca­tions from first-home buy­ers, tak­ing as long as a month to approve loans, which has led to some buy­ers miss­ing set­tle­ment dates.

He said about half of all appli­ca­tions received by the bank for the first-home buy­ers grant in NSW required “a rework” because of insuf­fi­cient or incor­rect infor­ma­tion pro­vided on the forms, adding to delays. The fig­ure was 90 per cent in Queens­land.

There is a mas­sive vol­ume at the moment of peo­ple try­ing to get into the mar­ket,” Mr Bat­ten said. Staff were work­ing at week­ends to clear the back­log, and wait­ing times for approval had been reduced from 20 days to 10.

 

April 17 2009: Why the Eco­nomic Cri­sis Was Not Antic­i­pated. RICHARD A. POSNER, Chron­i­cle of Higher Edu­ca­tion

An arti­cle in the Octo­ber 11 New York Times attrib­uted the almost uni­ver­sal fail­ure to antic­i­pate our cur­rent eco­nomic cri­sis to “insan­ity” — more pre­cisely, to a psy­cho­log­i­cal inabil­ity to give proper weight to past events, so that if there is pros­per­ity today we assume that it will last for­ever, even though we know that in the past booms have always been fol­lowed by busts. But experts on the busi­ness cycle, such as Fed­eral Reserve Chair­man Ben Bernanke, are not con­fined to bas­ing pre­dic­tions on naïve extrap­o­la­tion. So why did he and other experts, inside and out­side of gov­ern­ment, neglect warn­ing signs of a com­ing crash?…

 On August 17, 2008 — just a month before the finan­cial tsunami struck — The New York Times Mag­a­zine pub­lished an arti­cle reveal­ingly titled “Dr. Doom” about an econ­o­mist at New York Uni­ver­sity named Nouriel Roubini, who, for years, had been pre­dict­ing with uncanny accu­racy what has hap­pened. Two years ear­lier Roubini had “announced that a cri­sis was brew­ing. In the com­ing months and years, he warned, the United States was likely to face a once-in-a-life­time hous­ing bust, an oil shock, sharply declin­ing con­sumer con­fi­dence and, ulti­mately, a deep reces­sion. He laid out a bleak sequence of events: home­own­ers default­ing on mort­gages, tril­lions of dol­lars of mort­gage-backed secu­ri­ties unrav­el­ing world­wide, and the global finan­cial sys­tem shud­der­ing to a halt. These devel­op­ments, he went on, could crip­ple or destroy hedge funds, invest­ment banks, and other major finan­cial insti­tu­tions like Fan­nie Mae and Fred­die Mac.”

 

April 17, 2009: After Year of Heavy Losses, Cit­i­group Finds a Profit. ERIC DASHNYT.

But the head­line num­ber — a net profit of $1.6 bil­lion for the first quar­ter — was not quite what it seemed. Behind that fig­ure was some fuzzy math. 

One of the maneu­vers, widely used since the finan­cial cri­sis erupted last spring, involves the way Cit­i­group accounted for a decline in the value of its own debt, a move known as a credit value adjust­ment. The strat­egy added $2.7 bil­lion to the company’s bot­tom line dur­ing the quar­ter, a fig­ure that dwarfed Citigroup’s reported net income. Here is how it worked:

Citigroup’s debt has lost value in the bond mar­ket because of con­cerns about the company’s finan­cial health. But under account­ing rules, Cit­i­group was allowed to book a one-time gain approx­i­mately equiv­a­lent to that decline because, in the­ory, it could buy back its debt cheaply in the open mar­ket. Cit­i­group did not actu­ally do that, how­ever. 

It’s junk income,” said Jack T. Ciesiel­ski, the pub­lisher of an account­ing advi­sory ser­vice. “They are mak­ing more money from being a lousy credit than from extend­ing loans to good cred­its.”

April 16, 2009: A Min­sky Melt­down: Lessons for Cen­tral Bankers. Pre­sen­ta­tion to the 18th Annual Hyman P. Min­sky Con­fer­ence on the State of the U.S. and World Economies—“Meeting the Chal­lenges of the Finan­cial Cri­sis”, Orga­nized by the Levy Eco­nom­ics Insti­tute of Bard Col­lege, New York City 

By Janet L. Yellen, Pres­i­dent and CEO, Fed­eral Reserve Bank of San Fran­cisco

It’s a great plea­sure to speak to this dis­tin­guished group at a con­fer­ence named for Hyman P. Min­sky. My last talk here took place 13 years ago when I served on the Fed’s Board of Gov­er­nors. My topic then was “The ‘New’ Sci­ence of Credit Risk Man­age­ment at Finan­cial Insti­tu­tions.” It described inno­va­tions that I expected to improve the mea­sure­ment and man­age­ment of risk. My talk today is titled “A Min­sky Melt­down: Lessons for Cen­tral Bankers.” I won’t dwell on the irony of that. Suf­fice it to say that, with the finan­cial world in tur­moil, Minsky’s work has become required read­ing. It is get­ting the recog­ni­tion it richly deserves. The dra­matic events of the past year and a half are a clas­sic case of the kind of sys­temic break­down that he—and rel­a­tively few others—envisioned…

[This speech by a Fed­eral Reserve Pres­i­dent eat­ing hum­ble pie, and eulo­gis­ing Min­sky, so it belongs here on Gems. But it is also on the Brick­bats page. Why? Because her under­stand­ing of Min­sky is so flawed. Read­ing this was rather like read­ing Hicks’s “Mr Keynes and the Clas­sics” (1937), in which the deeply neo­clas­si­cal young John Hicks com­pletely man­gled Keynes’s argu­ments in the Gen­eral The­ory to argue that Keynes was com­pat­i­ble with neo­clas­si­cal thought:

Income and the rate of interst are now deter­mined together at P, the point of inter­sec­tion of the curves LL and IS. They are deter­mined together; just as price and out­put are deter­mined together in the mod­ern the­ory of demand and sup­ply. Indeed, Mr. Keynes’ inno­va­tion is closely par­al­lel, in this respect, to the inno­va­tion of the mar­gin­al­ists.” (p. 153)

Yellen didn’t claim any­thing quite as brazen as this, but her unin­ten­tional emas­cu­la­tion of Minsky’s argu­ment was, to me breath­tak­ing.

April 18, 2009: IMF warns recov­ery a long way off. Clancy Yeates, SMH.

THE Inter­na­tional Mon­e­tary Fund has set the scene for more gloom on the world econ­omy when it releases fresh pre­dic­tions on global growth next week…

The fund’s lat­est fore­casts said the world econ­omy would shrink by between 0.5 per cent and 1per cent this year, the biggest fall since the Great Depres­sion in the 1930s. But this week’s com­ments sug­gest the IMF’s pre­dic­tions on regional growth, to be pub­lished in its World Eco­nomic Out­look on Wednes­day, could be even more dire.

April 17 2009: Lat­est fig­ures show investors return­ing to prop­erty mar­ket. Des­ley Cole­man, Late­Line busi­ness (video)

STEVE KEEN, UNIVERSITY OF WESTERN SYDNEY: The basic rea­son I’m a scep­tic is that I’m expect­ing a depres­sion to come out of this global finan­cial cri­sis. And for prop­erty to con­tinue to be a good invest­ment, it would need to be able to sur­vive a depres­sion, and I sim­ply I don’t believe that’s fea­si­ble. 

April 16, 2009: Hous­ing Dilemma: Govt. Needs Banks to Play Ball as Pub­lic Out­rage Grows. Aaron Task, Yahoo Tech Ticker (video).

Hopes for a bot­tom in the hous­ing mar­ket took a seri­ous knock Thurs­day as the gov­ern­ment reported hous­ing starts fell 10.8% in March while build­ing per­mits fell 9% to a record low…

But, of course, the gov­ern­ment must also respond to the public’s out­rage over the bailout bonanza the banks have got­ten to date. Whether the Obama Admin­is­tra­tion can suc­cess­fully nav­i­gate that very fine line will go a long way in deter­min­ing whether the hous­ing mar­ket really can estab­lished a floor sooner rather than (much) later.

April 16 2009: U.S. Hous­ing Starts Fall; Per­mits Drop to Record Low, Bloomberg.

U.S. builders broke ground on fewer homes in March and per­mits fell to a record low, as home­builders sought to rein in inven­tory amid ris­ing fore­clo­sures.

Hous­ing starts fell 10.8 per­cent to an annual rate of 510,000, the Com­merce Depart­ment said today in Wash­ing­ton. Build­ing per­mits, a sign of future con­struc­tion, fell 9 per­cent to 513,000.

Thurs­day April 16, 2009: US fore­clo­sures up 24 per­cent in 1st quar­ter as tem­po­rary halts expire. Yahoo Finance.

The num­ber of Amer­i­can house­holds threat­ened with los­ing their homes grew 24 per­cent in the first three months of this year and is poised to rise fur­ther as major lenders restart fore­clo­sures after a tem­po­rary break, accord­ing to data released Thurs­day.

The big unknown for the com­ing months, how­ever, is Pres­i­dent Barack Obama’s plan to help up to 9 mil­lion bor­row­ers avoid fore­clo­sure through refi­nanced mort­gages or mod­i­fied loans. The Obama admin­is­tra­tion expects its plans to make a big dent in the fore­clo­sure cri­sis. But it remains to be seen whether the lend­ing indus­try will fully embrace it, despite $75 bil­lion in incen­tive pay­ments.

The fal­ter­ing econ­omy is caus­ing the hous­ing cri­sis to spread. Nation­wide, nearly 804,000 homes received at least one fore­clo­sure-related notice from Jan­u­ary through March, up from about 650,000 in the same time period a year ear­lier, accord­ing to Real­ty­Trac Inc., a fore­clo­sure list­ing firm…

April 16, 2009: Respond­ing to the global cri­sis, Lind­say Tan­ner.

Under­stand­ing the global eco­nomic cri­sis is a bit like analysing an avi­a­tion dis­as­ter but with­out a black box. There is no sim­ple cause. The inter­ac­tion of a num­ber of ele­ments in a dynamic and rapidly evolv­ing global econ­omy has pro­duced the worst eco­nomic cri­sis since the 1930s. Why did this hap­pen? 

The ori­gins of the cri­sis can be found in changes in the global finan­cial sys­tem decades ago. The break­down of the Bret­ton Woods sys­tem in the early 1970s and the aban­don­ment of cap­i­tal con­trols by major devel­oped economies at the end of the 1970s trig­gered the onset of eco­nomic glob­al­i­sa­tion. ..

So what do such pos­si­bil­i­ties imply for the way we view the world?

Main­stream eco­nom­ics is in cri­sis. The era of math­e­mat­ics dom­i­nat­ing eco­nom­ics is clearly end­ing. The effi­cient mar­kets the­ory, and the assump­tion that peo­ple act ratio­nally in their own self-inter­est, are under intel­lec­tual siege.

April 16, 2009: China growth fiz­zles. John Gar­naut, Bei­jing, SMH.

Update China has posted the low­est annual GDP growth in at least 17 years thanks to a 20% con­trac­tion in exports dur­ing March quar­ter.

But China still recorded growth of 6.1% despite eco­nomic con­trac­tion across the world as the government’s stim­u­lus flowed through to higher invest­ment in roads, rail­ways, power gen­er­a­tors, min­ing and real estate.

April 15 2009: US econ­omy goes back to 1955 as defla­tion returns.

The con­sumer price index fell at an annual rate of 0.4% in March, the first decline since August 1955, fig­ures from the US labour depart­ment showed today. It was big­ger than the 0.1% drop expected by econ­o­mists.

April 15 2009: Finan­cial opti­mism ‘delu­sional’, ana­lyst says. Stephen Long, ABC PM

A  promi­nent Amer­i­can risk ana­lyst says opti­mism about eco­nomic recov­ery is delu­sional because the eco­nomic growth in Amer­ica and much of the world was a mirage built on debt.

In Jan­u­ary and Feb­ru­ary, real dol­lar sales were still tens of bil­lions of dol­lars below the lev­els of late 2007 — to mid 2008.

Risk ana­lyst and author Sat­jayit Das says despite the rate of change, the aggre­gate total dol­lar amounts are still 10 to 15 per cent lower.

That’s 10 to 15 per cent of demand that doesn’t exist in the con­sumer sec­tor which trans­lates into lower invest­ments and there­fore lower growth,” he said.

April 2009: Good­bye, homo eco­nom­i­cus. Ana­tole Kalet­sky, prospect.

The eco­nom­ics pro­fes­sion must bear a lot of the blame for the cur­rent cri­sis. If it is to become use­ful again it must undergo an intel­lec­tual revolution—becoming both broader and more mod­est.

The scan­dal of mod­ern eco­nom­ics is that these two false theories—rational expec­ta­tions and the effi­cient mar­ket hypothesis—which are not only mis­lead­ing but highly ide­o­log­i­cal, have become so dom­i­nant in acad­e­mia (espe­cially busi­ness schools), gov­ern­ment and mar­kets them­selves. While nei­ther the­ory was totally dom­i­nant in main­stream eco­nom­ics depart­ments, both were found in every major text­book, and both were impor­tant parts of the “neo-Key­ne­sian” ortho­doxy, which was the end-result of the shake-out that fol­lowed Mil­ton Friedman’s attempt to over­throw Keynes. The result is that these two the­o­ries have more power than even their adher­ents realise: yes, they under­pin the think­ing of the wilder fringes of the Chicago school, but also, more sub­tly, they under­pin the analy­sis of sen­si­ble econ­o­mists like Paul Samuel­son.

April 14, 2009: Real Estate/Credit Bub­ble Defla­tion 18: Tick-Tick-Tick, by Steve Moyer, Safe­haven

To restore the wealth lost in the cur­rent finan­cial cri­sis, the Trea­sury would have to mon­e­tize some $30 tril­lion of toxic assets, almost ten times what the Gei­th­ner Trea­sury is cur­rently con­tem­plat­ing, and twice the size of cur­rent U.S. annual GDP. Add to that about $10 tril­lion of value lost in the col­lapse of com­mod­ity prices and another $10 tril­lion in real prop­erty val­ues, and we have a wealth loss of $50 tril­lion.” ~ Henry Liu, Asia Times via Mike Whit­ney

April 14, 2009 : Retail and Price Data Show Con­tin­u­ing Eco­nomic Weak­ness, New York Times.

The 1.1 per­cent monthly drop in retail sales dis­played the fragility of some recent “glim­mers of hope” in the econ­omy cited by Pres­i­dent Obama and other pol­icy mak­ers as they press the administration’s eco­nomic agenda…

Retail sales were down 10.7 per­cent from last March, many of the declines stem­ming from a 34 per­cent drop in gaso­line prices and a 23.5 per­cent drop in vehi­cle sales…

The pro­ducer price index fell a sea­son­ally adjusted 1.2 per­cent in March, reflect­ing a sub­stan­tial slide in energy prices from a month ear­lier. Pro­ducer prices declined3.5 per­cent from the same period in 2008, their largest yearly drop in more than 50 years, reflect­ing the decline in oil prices from more than $100 a bar­rel in March 2008.

April 14, 2009: Retail sales fall unex­pect­edly in March. yahoo Finance

WASHINGTON (AP) — Retail sales fell unex­pect­edly in March, deliv­er­ing a set­back to hopes that the economy’s steep slide could be bot­tom­ing out.

The Com­merce Depart­ment said Tues­day that retail sales dipped 1.1 per­cent in March. It was the biggest decline in three months and a much weaker show­ing than the 0.3 per­cent increase that ana­lysts expected.

April 14, 2009: Finan­cial engi­neers tarred and feath­ered but still seek­ing fees on road to obliv­ion. Ian Ver­ren­der, SMH.

Just as it is dif­fi­cult to con­ceive why sane peo­ple through­out Europe staked their for­tunes on tulips in the late 1630s, heads will one day shake at the naivety of those who were seduced into putting their money into heav­ily indebted trust struc­tures that nom­i­nally owned toll roads, air­ports and the like.

In the past decade, infra­struc­ture became the fod­der for a Ponzi scheme — an elab­o­rately con­structed and com­plex one, but a Ponzi scheme just the same. BrisCon­nec­tions was merely one of the last and more brazen, and the one to implode most spec­tac­u­larly.

The idea was fairly sim­ple. Buy some­thing, any­thing, for a ridicu­lous amount of money, using a raft of overly opti­mistic assump­tions stretch­ing out for decades. Bor­row almost all the pur­chase price. Sell it into a tax-effec­tive trust. The higher the price, the big­ger the fees. When the busi­ness doesn’t gen­er­ate enough income to cover the inter­est, bor­row even more so you can pay investors a div­i­dend and main­tain inter­est pay­ments.

April 14, 2009: Relax dole test, urges wel­fare net­work. Stephanie Peatling, SMH.

The main change that the wel­fare net­work wants intro­duced is a reduc­tion in the num­ber of jobs unem­ployed peo­ple must apply for to con­tinue receiv­ing their wel­fare pay­ments. “The Gov­ern­ment should review in the cur­rent eco­nomic cli­mate whether it is still rea­son­able for job seek­ers to look for 10 jobs a fort­night,” Mr Thomas said.

April 14, 2009: Car indus­try doomed with Holden first to go, expert says.

Edi­tor of the car buy­ers Dog & Lemon Guide, Clive Matthew-Wil­son, said the Aus­tralian car man­u­fac­turer is poised to shut down for good because it can no longer com­pete in the global mar­ket.

Australia’s car fac­to­ries are los­ing money on every vehi­cle they make,” Mr Matthew-Wil­son said in a state­ment.

”No amount of incen­tives from the state and fed­eral gov­ern­ments can solve this basic prob­lem.

”It’s not a mat­ter of whether they close down, but when they close down.”

He said Holden would be the first to go, fol­lowed by Ford and then Toy­ota.

”Peo­ple falsely believe that Ford is doing OK. That’s not true,” he said.

”Amer­i­can Ford’s sales are down 43% in the first quar­ter of this year.

”Ford is los­ing bil­lions just like GM; it’s just that Ford arranged pri­vate sec­tor finance before the reces­sion, so it’s not quite so obvi­ous how seri­ous things are.”

April 13, 2009: Cheap rent tax break is push­ing up house prices. Jes­sica Irvine Eco­nom­ics Writer, SMH.

SMALL investors are being encour­aged to cash in on a Rudd Gov­ern­ment scheme offer­ing tax ben­e­fits of up to $8000 a year on invest­ment prop­er­ties, pro­vided they are leased at 20 per cent below mar­ket rent.

But ana­lysts warn that the scheme, intended to increase the sup­ply of cheap rental accom­mo­da­tion, is con­tribut­ing to a boom in house prices under $500,000, mak­ing home pur­chase more expen­sive.

April 12, 2009: How a joker sent Battman to the res­cue, Chris Berg, The Age. Chris Berg is a research fel­low at the Insti­tute of Pub­lic Affairs and edi­tor of the IPA Review. [This is another first–putting a fea­ture from an IPA Fel­low on my Gems page…]

CONFIDENT that the Prime Min­is­ter can steer us out of the finan­cial cri­sis? Don’t be. Every pol­icy announce­ment, every job-cre­ation pro­gram, every plan to fix the econ­omy point to one thing: The Government’s just makin’ it up.

Want proof? The team at the Depart­ment of the Prime Min­is­ter and Cab­i­net have devel­oped www.economic stimulusplan.gov.au to tout all the ways they’re fight­ing the down­turn. And the first, most promi­nent, mea­sure listed on the web­site is a sub­sidy to home insu­la­tion.

April 12, 2009: Think your credit card inter­est rate is steep? Try 48 per cent. James Kirby, The Age.

Amaz­ing Loans can’t claim the same level of suc­cess as Cash Con­vert­ers.

In fact with a weak stock price it has announced it will be delist­ing in July.

But before stock­mar­ket investors wave good­bye to the lender that calls itself “fast, fair and friendly”, it’s worth hear­ing what it has been up to recently. The Con­sumer Action Law Cen­tre recently started legal action against the lender over a case where a woman went to bor­row $2000 from Amaz­ing Loans and walked out with a deal where her total bill came to $4422.08.

The inter­est rate on the Amaz­ing Loans deal did not sound too bad — 17 per cent (on a par with a credit card) — it was the $1600 “loan and admin­is­tra­tion” fee that was, yes, amaz­ing.

April 11, 2009: Mr. Soddy’s Eco­log­i­cal Econ­omy. ERIC ZENCEY, New York Times

Fred­er­ick Soddy, born in 1877, was an indi­vid­u­al­ist who bowed to few con­ven­tions, and who is described by one biog­ra­pher as a dif­fi­cult, obsti­nate man. A 1921 Nobel lau­re­ate in chem­istry for his work on radioac­tive decay, he fore­saw the energy poten­tial of atomic fis­sion as early as 1909. But his dis­quiet about that power’s poten­tial wartime use, com­bined with his revul­sion at his discipline’s com­plic­ity in the mass deaths of World War I, led him to set aside chem­istry for the study of polit­i­cal econ­omy — the world into which sci­en­tific progress intro­duces its gifts. In four books writ­ten from 1921 to 1934, Soddy car­ried on a quixotic cam­paign for a rad­i­cal restruc­tur­ing of global mon­e­tary rela­tion­ships. He was roundly dis­missed as a crank.

He offered a per­spec­tive on eco­nom­ics rooted in physics — the laws of ther­mo­dy­nam­ics, in par­tic­u­lar. An econ­omy is often likened to a machine, though few econ­o­mists fol­low the par­al­lel to its log­i­cal con­clu­sion: like any machine the econ­omy must draw energy from out­side itself. The first and sec­ond laws of ther­mo­dy­nam­ics for­bid per­pet­ual motion, schemes in which machines cre­ate energy out of noth­ing or recy­cle it for­ever. Soddy crit­i­cized the pre­vail­ing belief of the econ­omy as a per­pet­ual motion machine, capa­ble of gen­er­at­ing infi­nite wealth — a crit­i­cism echoed by his intel­lec­tual heirs in the now emer­gent field of eco­log­i­cal eco­nom­ics.

April 11 2009: Easy lend­ing to ‘hurt’ young home buy­ers. Brid­get Carter, The Aus­tralian.

FIRST-HOME buy­ers are being warned that gen­er­ous loan cri­te­ria could land them in finan­cial stress, after rev­e­la­tions that the top four banks will lend up to $465,000 to a pur­chaser on a salary of $70,000 a year.

A sur­vey by The Week­end Aus­tralian, which sought pre-approval inter­views with bank man­agers, revealed West­pac would lend $465,000, the Com­mon­wealth Bank was will­ing to lend $444,000 and the National Aus­tralia Bank would approve a $380,000 mort­gage to a first-home buyer on $70,000 a year and a credit card with an $8000 limit.

The loan offers were made on the pro­viso the bor­rower paid mort­gage insur­ance, which is a one-off cost as high as $10,000.

The ANZ’s loan cri­te­ria was much tighter, requir­ing a 10 per cent deposit for a loan, as well as mort­gage insur­ance.

The other three banks have recently tight­ened loan cri­te­ria to first-home buy­ers, requir­ing a min­i­mum deposit of 5 per cent, includ­ing a min­i­mum of 3 per cent saved over sev­eral months, and mort­gage insur­ance.

But the survey’s find­ings defy the gen­eral belief that banks have become stricter on first-home-buyer lend­ing due to the global finan­cial cri­sis.

A $444,000 loan from the CBA would require some­one on $70,000 to spend 62 per cent of their monthly income on mort­gage repay­ments, which amounted to $2827 a month. Real Estate Buy­ers Agents Asso­ci­a­tion of Aus­tralia pres­i­dent Byron Rose said a loan of more than $400,000 for some­one on $70,000 a year was “absolutely too much”.

April 11: US profit sea­son key to fate of mar­ket rally. Clancy Yeates, SMH.

Against such glim­mers of hope, bears point to intractable prob­lems at the heart of the cri­sis — the bank­ing sector’s bad debts.

For exam­ple, a US bank­ing ana­lyst who cor­rectly pre­dicted the sever­ity of the woes, Mered­ith Whit­ney, said banks will have to retain a higher share of earn­ings until next year because they were under­es­ti­mat­ing the slump in house prices. Ms Whit­ney said banks were assum­ing a fall of about 35 per cent from peak to trough, but the fall could be as much as 50 per cent…

The head of invest­ment mar­kets research at Colo­nial First State, Stephen Hal­mar­ick, said investors’ hopes may fade because lower con­sumer spend­ing and indus­trial trade would dam­age cor­po­rate earn­ings.

The sharp rise in US unem­ploy­ment — which has soared to a 25-year high of 8.5 per cent — had taken a large source of spend­ing out of the econ­omy, Mr Hal­mar­ick said.

I just worry that the eco­nomic environment’s actu­ally worse than the mar­ket may have priced in given the rally over the past few weeks.”

April 11, 2009: Good news for renters in sought-after sub­urbs. Jes­sica Irvine Eco­nom­ics Writer SMH.

THE tide has turned on Sydney’s upper rental mar­ket, as prop­er­ties lie vacant and land­lords are forced to slice ask­ing prices by as much as 20 per cent.

Job losses, over-stretched bud­gets and a flood of unsold invest­ment prop­er­ties con­tributed to sig­nif­i­cant falls in median new rents in some well-located sub­urbs in the inner-west and north over the final three months of last year, Hous­ing NSW fig­ures show.

While rents con­tinue to rise across Syd­ney as a whole, the median weekly rent on a one-bed­room unit slumped 12.5 per cent in Bal­main to $350 a week, 9.6 per cent in Stan­more to $260 and 9.1 per cent in Glebe to $300…

Mean­while, sup­ply of new rental prop­er­ties had increased, Mr Christo­pher said, and a lot of investors were try­ing to sell and fail­ing. “What they’re try­ing to do to get some cash flow out of it is putting them into the rental mar­ket.”

April 11, 2009: Trapped in the bub­ble: life’s tough for real estate vir­gins. Joel Gib­son, SMH.

It’s 9 o’clock on a Sat­ur­day. The reg­u­lar crowd shuf­fles in. There’s a young cou­ple stand­ing next to me, won­der­ing how they’d get their din­ing table in. I’ve been singing that tune every week­end, more or less, for the past two months, swept along in the first home buy­ers’ bum­rush.

It’s been a weekly run­ning of the bulls since gov­ern­ments began offer­ing up to $24,000 to help with the process and the Reserve Bank began whit­tling away at inter­est rates. There’s no ques­tion there is a first home buy­ers bub­ble, and we are well and truly in it — but increas­ing calls for the bub­ble to be pricked are unfair and, at times, down­right patro­n­is­ing…

I’ve been told mort­gage cen­tres and val­uers are behind and can­not keep up with the pace of paper­work com­ing across their desks. I’ve even heard agents say they’ve given out 70 con­tracts for one prop­erty and have no idea what oth­ers are worth — utter­ing those dreaded words, “in this mar­ket”, like they’re sell­ing apart­ments on Mars…

Even if low inter­est rates are the main car­rot dri­ving us to buy, there must be a lull after June because at least some will have brought for­ward their pur­chase, just in case. Prices will drop or slow, and if job losses increase, as many expect them to, there is a real risk that things could turn sour. Or so I’ve been told by every­one who has an opin­ion on the mat­ter in the past week. And when it comes to prop­erty, every­one has an opin­ion on the mat­ter.

But what’s a first home buyer sup­posed to do about it? A few years ago we were ask­ing how the kids would ever be able to afford a home in Syd­ney. Now that they can, we are ask­ing whether it’s really for the best. I’ll bet those preach­ing cau­tion don’t have to seek their landlord’s per­mis­sion before drilling a hole in their lounge room wall.

April 11, 2009: Timed to make the most of $14,000. Jes­sica Irvine, SMH.

Mr Mil­lett has cal­cu­lated the repay­ments on the new house, for which they paid $569,000, will cost $1200 more a month than they had been pay­ing in rent.

But it is worth it for a foot in the prop­erty mar­ket door and a big­ger house, he said.

April 11, 2009: Retirees left in cold with frozen incomes. Annette Samp­son, SMH

They’re the for­got­ten vic­tims of the finan­cial cri­sis. More than 250,000 investors — many of them retirees — have been unable to access their sav­ings for the past six months. They invested in prod­ucts they were told were safe and would pro­vide a reli­able income, but instead their money is locked away and likely to remain that way until next year at the ear­li­est.

April 9, 2009: A Game of Credit Cost Smoke and Mir­rors at Wells Fargo? By PAUL JACKSON, HousingWire.com.

The shocker was that they only had only $3.3 bil­lion [in] charge offs,” said Whit­ney Tilson of hedge fund man­ager T2 Part­ners, in a CNBC inter­view Wednes­day after­noon. “It’s weird, because in Q4 Wachovia and Wells Fargo together had $6.1 bil­lion in charge-offs, and then in a quar­ter in which things were ter­ri­ble, those charge offs fell by 50 per­cent … They’re going to have a lot of losses over the next cou­ple of years, [and] any­one baselin­ing at $3.3 bil­lion in charge offs per quar­ter is crazy.”…

If the Fast Money crew had any desire to do basic analy­sis before run­ning their col­lec­tive mouths, they might have been able to pull up this chart — which should speak vol­umes about the value of skep­ti­cism here:

This shows the ratio of loan loss reserves/total loans at the four major U.S. banks still stand­ing. Wells Fargo is in white. Notice any­thing? You know, like which bank is com­par­a­tively weak­est on reserv­ing activ­ity against its loan book?

This chart doesn’t include updated Q1 num­bers for Wells, as the bank did not pro­vide an updated loan total on Wednes­day — mean­ing it doesn’t include Wachovia. His­tor­i­cally, Wells has jus­ti­fied its lower reserves by main­tain­ing a com­par­a­tively higher-qual­ity loan book; can the same argu­ment really be made now? With Wachovia’s option ARMs lurk­ing? Because there’s an ugly truth about credit costs: they come home to roost even­tu­ally, irre­spec­tive of any games played with loss reserves in the interim.

April 09 2009: Clarke and Dawe on the major banks. The 7.30 Report

JOHN CLARKE: I can explain — do you under­stand how the econ­omy works?

BRYAN DAWE: Yes, of course. I mean, every­one works their guts out and then the finan­cial insti­tu­tions gam­ble hun­dreds of bil­lions of dol­lars of other people’s money and it all goes down the toi­let.

JOHN CLARKE: A crude analy­sis, I would’ve thought.

BRYAN DAWE: It may be crude, but how are the banks going at the moment?…

April 08 2009: Num­ber of grown-up chil­dren return­ing to live with par­ents triples amid reces­sion, Daily Tele­graph UK.

The num­ber of 18–34 years olds liv­ing rent free with fam­ily and friends has more than tripled as the reces­sion bites, new fig­ures sug­gest.

Num­bers have risen to 1.6 mil­lion, up from 500,000 this time last year, accord­ing to the find­ings by Abbey Mort­gages. A fur­ther 300,000 peo­ple aged 35 to 54 also find them­selves in this posi­tion, with the South being the hotspot for so-called Kidults.

April 09, 2009: Amer­i­cans Were “Liv­ing in a Fool’s Par­adise” That’s Gone For­ever, Soros Says. Yahoo Tech Ticker.

If noth­ing else, the credit cri­sis of the past 18 months has debunked the notion of finan­cial mar­ket being an all-know­ing, self-cor­rect­ing mech­a­nism that per­fectly allo­cates cap­i­tal. Even Alan Greenspan admit­ted as much. 

As a result of the burst­ing of that the­o­ret­i­cal bub­ble, Amer­i­cans’ lives have been inex­orably changed and “there’s no way to go back to where we came from,” says George Soros, chair­man of Soros Fund Man­age­ment.

Amer­i­cans were “liv­ing in a fool’s par­adise” based on the “false promise” of the “mar­ket magic,” and the idea debt-fueled con­sump­tion was a sus­tain­able and legit­i­mate eco­nomic pol­icy, the bil­lion­aire spec­u­la­tor says.

April 10, 2009: We, the peo­ple, need to know what goes on behind the prison fence. Chris­tine Rau, SMH

Here we go again. Just when we think we have woken up to cor­po­rate shenani­gans with the global finan­cial cri­sis, and ditched plans to pri­va­tise NSW energy sup­plies and acknowl­edged that pri­va­tised road tolls place finan­cial bur­dens on some dri­vers, jails become the sub­ject of non­sen­si­cal ideas.

We will save money by out­sourc­ing them, the politi­cians say.

Bullt­wang. It will cost more, lead to less qual­i­fied staff and cut­ting every cor­ner, includ­ing food and edu­ca­tion for pris­on­ers. Worse still, it will reduce account­abil­ity.

April 10, 2009: How Madoff’s vic­tims fell for his $92b scam. Andrew Clark, SMH

An intrigu­ing insight comes in an email sent three days before Madoff’s arrest by Jef­frey Tucker, the co-founder of Fair­field. Madoff’s house of cards was begin­ning to col­lapse as investors, spooked by the finan­cial cri­sis, pulled out large sums known as redemp­tions. Mad­off wanted Fair­field to replace the out­flow of money.

Tucker wrote to Fairfield’s exec­u­tive com­mit­tee: “Just got off the phone with a very angry Bernie who said if we can’t replace the redemp­tions for 12/31 he is going to close the account. His traders are ‘tired of deal­ing with all these hedge funds’ and there are plenty of insti­tu­tions who can replace the money.”

Shortly after mid­day on Decem­ber 8, Tucker signs off: “I believe he is sin­cere.”

The last sen­tence is telling. Tucker — who, iron­i­cally, is a for­mer Secu­ri­ties and Exchange Com­mis­sion offi­cial — fell for Madoff’s bul­ly­ing. It was a load of non­sense — there were no other insti­tu­tions will­ing to pro­vide money, and Mad­off con­fessed 72 hours later that his busi­ness was rid­dled with lies…

Lipton’s sub­se­quent inter­view with reg­u­la­tors is worth repro­duc­ing:

Q. How did you deter­mine they had hun­dreds of clients?

A. That’s what the part­ner said on the phone to me.

Q. Did you cor­rob­o­rate it in any way?

A. No.

Q. How did you deter­mine that they were well respected in the local com­mu­nity?

A. That’s what our con­ver­sa­tion — my con­ver­sa­tion with one of the part­ners at Friehling & Horowitz — that’s what was told to me.

Hardly the due dili­gence skills of Her­cule Poirot, are they?

April 10, 2009: Truck­load of trou­ble for US car mak­ers: Can America’s car mark­ers turn around or is this the end of the world? Jacob Saulwick, SMH

Like US banks, car mak­ers dined out on easy credit in the years after 2001. This had two main effects. First, it made it easy to shift cars, so car mak­ers could boost sales. “By the mid-2000s, the aver­age dura­tion of a US car loan was 62 months — five years and two months — and the aver­age per­cent­age advanced was 95 per cent,” says Williams. If neg­a­tive equity is rife among home­own­ers, it is endemic to car-own­ers.

Sec­ond, it changed the prof­itabil­ity of the indus­try, which used prof­its from financ­ing to cover up prob­lems in man­u­fac­tur­ing. “The Amer­i­can indus­try hasn’t made money out of cars for the past 15 years or so,” says Kim Ren­nick from indus­try con­sul­tants autopo­lis. “What money they have made has been out of financ­ing or per­haps rebuild­ing the car.”

April 9, 2009: Job­less rate hits 5.7%. Chris Zap­pone, SMH.

UPDATE: More Aus­tralians lost their jobs last month in yet another sign that the global eco­nomic slow­down is drag­ging on the local econ­omy.

”The rise in the unem­ploy­ment is remark­able,” said JP Mor­gan econ­o­mist Helen Kevans. ”It’s the high­est since 2003 and a sign of things to come.”

Ms Kevans said the job­less rate could jump as high as 6% in April, out­pac­ing ear­lier fore­casts.

Last month 38,900 full time jobs were lost, fol­low­ing February’s shock loss of 53,800 full time posi­tions, the most since July 1991.

The econ­omy cre­ated 4200 part time jobs, down from the 55,600 gain in part time posi­tions in Feb­ru­ary, as more work­ers were pushed onto reduced sched­ules. In March, 34,700 jobs were lost. 

 

7 April 2009: The Finan­cial War Against Ice­land, by Michael Hud­son.

Ice­land is under attack – not mil­i­tar­ily¬ but finan­cially. It owes more than it can pay. This threat­ens debtors with for­fei­ture of what remains of their homes and other assets. The gov­ern­ment is being told to sell off the nation’s pub­lic domain, its nat­ural resources and pub­lic enter­prises to pay the finan­cial gam­bling debts run up irre­spon­si­bly by a new bank­ing class. This class is seek­ing to increase its wealth and power despite the fact that its debt-lever­ag­ing strat­egy already has plunged the econ­omy into bank­ruptcy. On top of this, cred­i­tors are seek­ing to enact per­ma­nent taxes and sell off pub­lic assets to pay for bailouts to them­selves…

In Ice­land – but nowhere else – home mort­gages have a uniquely bad twist. Cred­i­tors have man­aged to pro­tect the weight of their claims on debtors by index­ing mort­gage loans to the nation’s con­sumer price infla­tion (CPI) rate. Each month the debt prin­ci­pal is increased by the CPI increase – and so is the inter­est charge. Dur­ing 2008 that index rose by 14.2%, so a 100,000-euro mort­gage at the start of 2008 would have grown to 114,230 euros by yearend. These monthly adjust­ments also would added an entire per­cent­age point onto the inter­est pay­ment – an extra 100 euros to be paid to cred­i­tors monthly, in addi­tion to the grow­ing prin­ci­pal to be amor­tized. Talk about mak­ing money with­out effort …!

Such heavy debt charges would shrink any econ­omy, and that is what is hap­pen­ing in Ice­land. Prices for real estate declined by an esti­mated 21 per­cent for hous­ing in 2008. So in the above exam­ple, the mar­ket price of the house worth 100,000 euros at the begin­ning of the year would have been worth only 79,000 at yearend, while the mort­gage would have grown by 14% to 114,230. This would have plunged the home­owner 35,000 euros into neg­a­tive equity – a remark­able 35% change.

 

6 April 2009: A Tale of Two Depres­sions, by Barry Eichen­green and Kevin H. O’Rourke.

This is an excel­lent statistical/graphical com­par­i­son of the sever­ity of this cri­sis ver­sus the Great Depres­sion. On almost every met­ric, this one is much worse–as I’ve been argu­ing here for some time, with the cause (exces­sive debt lev­els rel­a­tive to GDP) at least twice as bad as last time, the dis­ease will in all prob­a­bil­ity be at least as bad–allowing that per­haps “Big Gov­ern­ment” will soften the blow to some degree, as Min­sky used to argue.

Often cited com­par­isons – which look only at the US – find that today’s cri­sis is milder than the Great Depres­sion. In this col­umn, two lead­ing eco­nomic his­to­ri­ans show that the world econ­omy is now plum­met­ing in a Great-Depres­sion-like man­ner. Indeed, world indus­trial pro­duc­tion, trade, and stock mar­kets are div­ing faster now than dur­ing 1929–30. For­tu­nately, the pol­icy response to date is much bet­ter…”

April 8, 2009: Toxic debt may hit $US4 tril­lion. Lucy Bat­tersby, SMH.

There is wide­spread spec­u­la­tion the Inter­na­tional Mon­e­tary Fund will increase its esti­mate of global toxic debt to $US4 tril­lion in two weeks, which would pro­long credit freezes around the world and may force gov­ern­ments to increase bail-out pack­ages.

Apr. 7, 2009: How Bear Mar­kets End. Henry Blod­get, Clus­ter­stock (ani­ma­tions).

Doug Short has taken a detailed look at the 10 bear mar­kets and bear-mar­ket-recov­er­ies since 1950.  You can click through a slideshow show­ing each of these peri­ods in detail here..

Impor­tantly, Doug’s charts do not include the hor­rific bear mar­ket of 1929–1932, which puts all of these to shame.  To get a more detailed sense of how that one “bot­tomed,” click through to the last slide, which over­lays our cur­rent bear mar­ket on top of the three nas­ti­est ones in the last cen­tury.

April 8, 2009: Banks hold back rate cuts as new squeeze felt. Eric John­ston, SMH.

For weeks NAB’s chief exec­u­tive, Cameron Clyne, has been soft­en­ing up cus­tomers not to expect the full effect of a rate cut, but few expected NAB to claw back the entire dif­fer­ence…

Since Octo­ber NAB has paid as much as 150 basis points above the bank bill swap rate for term deposits, more than 10 times pre-credit crunch rates.

April 8, 2009: Irish min­is­ters to quit en masse in cost-cut­ting exer­cise.

A WHOLE tier of Irish min­is­ters will resign after Easter so that the Pre­mier, Brian Cowen, can reduce their num­ber as part of cost-sav­ing mea­sures con­tained in an emer­gency bud­get aimed at sav­ing the republic’s econ­omy.

April 8: We’re in reces­sion: Reserve gov­er­nor. Jacob Saulwick and Eli­cia Mur­ray, SMH.

GLENN STEVENS has con­firmed the Reserve Bank believes the econ­omy is in reces­sion, and warned it was “too early to judge” whether the ten­ta­tive signs of sta­bil­ity in the world econ­omy would hold…

There are ten­ta­tive signs of sta­bil­i­sa­tion in sev­eral coun­tries, includ­ing China, though it is too early yet to judge how durable these will prove to be,” Mr Stevens said.

April 07, 2009: Soros “Very Con­cerned” About Ris­ing Global Unrest, But Sees Pos­i­tive Signs in Rus­sia, Yahoo Tech Ticker (video).

Very often an eco­nomic cri­sis rein­forces inter­nal polit­i­cal divi­sions,” Soros says. “It could lead to gov­ern­ments los­ing con­trol.”

April 07, 2009: Soros: “Dan­ger of Col­lapse Has Passed,” But Stock Rally Not Sus­tain­able, Yahoo Tech Ticker (video).

The real dan­ger of col­lapse has passed,” says leg­endary financier George Soros. But the “fall­out of the col­lapse” of the bank­ing sys­tem “will linger.”

In the wake of Lehman Broth­ers’ bank­ruptcy on Sept. 15, 2008, author­i­ties were forced to put the finan­cial sys­tem remains on “arti­fi­cial life sup­port, which is where it is now,” says Soros, the chair­man of Soros Fund Man­age­ment and author of sev­eral books, includ­ing most recently The Crash of 2008 and What It Means.

APRIL 6, 2009: From Bub­ble to Depres­sion? STEVEN GJERSTAD and VERNON L. SMITH, Wall Street Jour­nal.

Excel­lent ana­lytic overview of the cri­sis by a non-ortho­dox win­ner of the Nobel Prize in Eco­nom­ics.

Bub­bles have been fre­quent in eco­nomic his­tory, and they occur in the lab­o­ra­to­ries of exper­i­men­tal eco­nom­ics under con­di­tions which — when first stud­ied in the 1980s — were con­sid­ered so trans­par­ent that bub­bles would not be observed.

We econ­o­mists were wrong: Even when traders in an asset mar­ket know the value of the asset, bub­bles form depend­ably. Bub­bles can arise when some agents buy not on fun­da­men­tal value, but on price trend or momen­tum. If momen­tum traders have more liq­uid­ity, they can sus­tain a bub­ble longer.

But what sparks bub­bles? Why does one large asset bub­ble — like our dot-com bub­ble — do no dam­age to the finan­cial sys­tem while another one leads to its col­lapse? Key char­ac­ter­is­tics of hous­ing mar­kets — momen­tum trad­ing, liq­uid­ity, price-tier move­ments, and high-mar­gin pur­chases — com­bine to pro­vide a fairly com­plete, sim­ple descrip­tion of the hous­ing bub­ble col­lapse, and how it engulfed the finan­cial sys­tem and then the wider econ­omy.

In just the past 40 years there were two other hous­ing bub­bles, with peaks in 1979 and 1989, but the largest one in U.S. his­tory started in 1997, prob­a­bly sparked by ris­ing house­hold income that began in 1992 com­bined with the elim­i­na­tion in 1997 of taxes on res­i­den­tial cap­i­tal gains up to $500,000. Ris­ing val­ues in an asset mar­ket draw investor atten­tion; the early stages of the hous­ing bub­ble had this usual, self-rein­forc­ing fea­ture.

The 2001 reces­sion might have ended the bub­ble, but the Fed­eral Reserve decided to pur­sue an unusu­ally expan­sion­ary mon­e­tary pol­icy in order to coun­ter­act the down­turn…

The causes of the Great Depres­sion need more study, but the claims that losses on stock-mar­ket spec­u­la­tion and a mon­e­tary con­trac­tion caused the decline of the bank­ing sys­tem both seem inad­e­quate. It appears that both the Great Depres­sion and the cur­rent cri­sis had their ori­gins in exces­sive con­sumer debt — espe­cially mort­gage debt — that was trans­mit­ted into the finan­cial sec­tor dur­ing a sharp down­turn.

What we’ve offered in our dis­cus­sion of this cri­sis is the back story to Mr. Bernanke’s analy­sis of the Depres­sion. Why does one crash cause min­i­mal dam­age to the finan­cial sys­tem, so that the econ­omy can pick itself up quickly, while another crash leaves a dev­as­tated finan­cial sec­tor in the wreck­age? The hypoth­e­sis we pro­pose is that a finan­cial cri­sis that orig­i­nates in con­sumer debt, espe­cially con­sumer debt con­cen­trated at the low end of the wealth and income dis­tri­b­u­tion, can be trans­mit­ted quickly and force­fully into the finan­cial sys­tem. It appears that we’re wit­ness­ing the sec­ond great con­sumer debt crash, the end of a mas­sive con­sump­tion binge.

 

April 6, 2009: Jobs fund, mort­gage relief to help ease pain. Mark Metherell, SMH.

KEVIN RUDD has announced mea­sures “for the dark and dif­fi­cult times that lie before us” — a $650 mil­lion com­mu­nity jobs fund and a 12-month reprieve on mort­gage repay­ments for peo­ple who lose their jobs.

The banks were pre­pared to con­sider extend­ing the period of the mort­gage con­tract and reduc­ing the amount of each pay­ment due and even waiv­ing fees in hard­ship cases. Inter­est would be cap­i­talised into the loan, mean­ing it would still need to be paid in the long run [SK: This is a step in the right direc­tion, but it will need amend­ment when (a) hordes of ben­e­fi­cia­ries don’t find work by the time the exten­sion expires and (b) those that do face crush­ing debt repay­ments via the cap­i­tal­i­sa­tion of unpaid inter­est]. Mr Rudd said the banks would make assess­ments based on the bor­row­ers’ abil­ity to meet new con­trac­tual oblig­a­tions in the long term.

April 4, 2009: First-home rush keeps prices on boil.

AS FIRST-HOME buy­ers rush to take advan­tage of the increased Fed­eral Gov­ern­ment grant scheme, some agents are warn­ing that peo­ple are pay­ing too much for their prop­er­ties.

Robyn Har­ri­son, of Laing and Sim­mons Annan­dale, said the surge of first-home buy­ers was dri­ving up prices by tens of thou­sands of dol­lars, well beyond the sav­ings offered by the grant.

We had three units in the same block, and two sold late last year for $409,000 and $415,000. But just last month a third unit there sold for $445,000,” she said.

They’ve inflated their own mar­ket. My advice to peo­ple is just to calm down.”

Fri­day April 3, 2009: Job­less rate jumps to 8.5 per­cent, high­est since late 1983; pay­rolls drop 663,000.

WASHINGTON (AP) — The nation’s unem­ploy­ment rate jumped to 8.5 per­cent in March, the high­est since late 1983, as a wide swath of employ­ers elim­i­nated 663,000 jobs. It’s fresh evi­dence of the toll the reces­sion has inflicted on America’s work­ers, and econ­o­mists say there’s no relief in sight.

If part-time and dis­cour­aged work­ers are fac­tored in, the unem­ploy­ment rate would have been 15.6 per­cent in March, the high­est on records dat­ing to 1994, accord­ing to Labor Depart­ment data released Fri­day.

The aver­age work week in March dropped to 33.2 hours, a new record low. Since the reces­sion began in Decem­ber 2007, the econ­omy has lost a net total of 5.1 mil­lion jobs, with almost two-thirds of the losses occur­ring in the last five months.

Fri­day April 3, 2009: Bailed-out banks may buy toxic assets.

Spencer Bachus, the top Repub­li­can on the House finan­cial ser­vices com­mit­tee, told the paper that he would intro­duce leg­is­la­tion to stop finan­cial insti­tu­tions “gam­ing the sys­tem to reap tax­payer-sub­si­dized wind­falls.”

Bachus added it would mark “a new level of absur­dity” if finan­cial insti­tu­tions were “col­lud­ing to swap assets at inflated prices using tax­pay­ers’ dol­lars,” accord­ing to the paper.

April 3, 2009: Banks, prop­erty and mark-to-mar­ket: eggshells all round. Michael Pas­coe, SMH. Here’s another first–an item by Michael Pas­coe appear­ing on my Gems page. Michael’s pre­vi­ous entry on Debt­watch was a clas­sic Brick­bat (Econ­o­mists lin­ing up to dis­agree with Steve Keen, Crikey  23 OCTOBER 2008); this is a very good analy­sis of the per­ils fac­ing the com­mer­cial prop­erty mar­ket.

But the Han­cock Tower sale is actu­ally worse than it looks at first blush — much worse. (And remem­ber that this is a mar­quee prop­erty with 95% occu­pancy.)

As a Mor­gan Stan­ley analy­sis of the trans­ac­tion makes clear, that head­line halv­ing of the property’s value takes no account of the value of the financ­ing the buyer now assumes.

The pur­chaser, Nor­mandy Real Estate Part­ners, is only putting up $US20 mil­lion as it takes over the exist­ing $US640.5 mil­lion mort­gage on the prop­erty at an inter­est rate of 5.6%. The Mor­gan Stan­ley ana­lyst asks the ques­tion: What is the value of being able to get a 97% LTV loan at 5.6% these days?

Work­ing out that value is entirely hypo­thet­i­cal as it sim­ply couldn’t be done, but the ana­lyst goes through the num­bers and makes a very rea­son­able case that the financ­ing was worth about $US190 mil­lion — which means that the real clear­ing level for the top com­mer­cial prop­erty in Boston was only $US470 mil­lion — a crash of 65% from 2006 lev­els and 50% from 2003.

The main take­away: prop­erty val­ues are down A LOT more than peo­ple think, espe­cially when con­sid­er­ing the implied value of financ­ing. Caveat Emp­tor,” con­cludes Mor­gan Stan­ley…

Thurs­day, 2 April 2009: Home­track: We have enough houses, By Agnes Gajew­ska.

Going against pop­u­lar opin­ion, hous­ing intel­li­gence busi­ness, Home­track, has dis­missed pop­u­lar claims that the Aus­tralian hous­ing mar­ket is under­sup­plied.

Our analy­sis indi­cates Aus­tralia may already have an excess of hous­ing.  We esti­mate there are at least 10 mil­lion dwellings in Aus­tralia com­pared with ABS data show­ing occu­pied dwellings of 8.3 mil­lion. The extra one to two mil­lion dwellings con­sists of a mix­ture of hous­ing await­ing sale or devel­op­ment, vacant dwellings, sec­ond homes, and aban­doned homes,” he said.

He went on to say that the ABS method for cal­cu­lat­ing the ratio of peo­ple per dwellings is based on ABS cen­sus data which in turn is based upon occu­pied dwellings. How­ever, he said, Home­track analy­sis which is based on postal address data indi­cates that Australia’s cur­rent level of hous­ing rel­a­tive to its pop­u­la­tion is in line with other Anglo economies.

Fol­low­ing on from this, Darcy said that when looked at in the con­text of pop­u­la­tion growth, total res­i­den­tial build­ing approvals have been run­ning above demand.

April 2, 2009: G20 pro­test­ers strike at London’s heart. Paola Totaro, SMH.

He came, he cov­ered his face, he shim­mied up a two-storey Corinthian col­umn — and con­quered the mighty Bank of Eng­land.

And when the protester’s black-and-white ban­ner unfurled over the stone scroll­work, read­ing ‘Stop Trad­ing on our Future’, the spon­ta­neous roar and cheer of thou­sands  said more than a mil­lion essays.

Beneath a sea of graf­fiti, politely scrawled over the Bank’s walls in wash­able black­board chalk — ‘Built on Blood’, ‘Left is Right’ — London’s finan­cial heart trans­formed into a mas­sive, naughty teenager’s street party eerily guarded by a full-scale army of bounc­ers in police riot gear.

April 2, 2009: Michael Moore hails GM’s chief ‘stun­ning’ ouster.

Oscar-win­ning film­maker and long­time polit­i­cal activist Michael Moore Wednes­day hailed the his­toric deci­sion by Pres­i­dent Barack Obama to dis­miss Gen­eral Motors chief Rick Wag­oner.

I sim­ply can’t believe it. This stun­ning, unprece­dented action has left me speech­less for the past two days,” Moore said.

I keep say­ing, ‘Did Obama really fire the chair­man of Gen­eral Motors? The wealth­i­est and most pow­er­ful cor­po­ra­tion of the 20th cen­tury? Can he do that?’” Moore, a native of GM’s home­town of Flint, wrote in an e-mail to friends and posted on his web­site.

April 2, 2009: Toxic debts could bring the house down. Clancy Yeates, SMH.

THEY were once potent sym­bols of a superpower’s eco­nomic might, but now the US car mak­ers threaten to unleash a fresh bout of tur­moil through their mas­sive debt lia­bil­i­ties, and the fall-out will surely spread to Aus­tralia.

Amid grow­ing doubts over the future of Gen­eral Motors, Ford and Chrysler, finan­cial mar­kets are fret­ting over $US250 bil­lion ($360 bil­lion) in total debt owed by the com­pa­nies.

The debt — scat­tered through­out the world finan­cial sys­tem — dwarfs their com­bined mar­ket value of about $US17 bil­lion. About $US80 bil­lion of the debt is held in bonds sliced up and repack­aged in com­plex finan­cial prod­ucts.

April 2, 2009: Retail­ers pray for a reprieve — more money from heaven. Eliz­a­beth Knight, SMH.

There is a lot rid­ing on the High Court deci­sion on Fri­day about whether the Fed­eral Gov­ern­ment has the con­sti­tu­tional power to pay the cash bonus promised to 7.7 mil­lion Aus­tralians.

The retail sales fig­ures for Feb­ru­ary released by the Bureau of Sta­tis­tics yes­ter­day pro­vide stark evi­dence that the pub­lic has rad­i­cally curbed its spend­ing since December’s cash bonus washed through the sys­tem.

Retail spend­ing fell 2 per cent from Jan­u­ary — four times more than econ­o­mists were pre­dict­ing.

April 2, 2009: Retail spend­ing crashes. “Sales dropped 2 per cent for the month, the largest fall since the intro­duc­tion of the GST and well below the expec­ta­tions of mar­ket econ­o­mists, accord­ing to fig­ures released by the Bureau of Sta­tis­tics yes­ter­day.”

April 2, 2009: Lon­don call­ing as anar­chists get ready to rum­ble. Paola Totaro, SMH.

Now, with the globe firmly in the grip of a cat­a­strophic eco­nomic cri­sis, anar­chy has returned to Britain and Europe.

Last night, British police seized an armoured car, at least one police uni­form and arrested eight peo­ple as thou­sands of pro­test­ers gath­ered in Lon­don ahead of the Group of 20 meet­ing. Police esti­mated up to four thou­sand peo­ple had gath­ered out­side the Bank of Eng­land, with some chant­ing “Abol­ish money”.

We don’t have to man­u­fac­ture anger the way we did in the past, the anger is out there with­out us … since the reces­sion, there is the feel­ing that free mar­ket cap­i­tal­ism can’t deliver what you want,’ Bone tells the Her­ald after a 24-hour dance of texts and emails to try and meet. “At the moment, it has no polit­i­cal expres­sion … hope­fully it will man­i­fest on the streets in the next few days.

April 1, 2009: Hold on to your home. Eli­nore Mar­tel, SMH.

A lot of peo­ple think mort­gage insur­ance pro­tects them but it only pro­tects the bank,” he says. That means con­trol is passed to a “face­less man in an office tower who doesn’t know the bor­rower and doesn’t want to”.

In Mendelson’s expe­ri­ence, they look at the val­u­a­tion. “If they think they will lose money or are a risk, they will insist that the lender calls in the loan and puts it up for sale,” he says.

Asso­ciate Pro­fes­sor Steve Keen of the Uni­ver­sity of West­ern Syd­ney believes the grants for first home­buy­ers will make the cri­sis worse. “It’s just defer­ring and mak­ing worse the inevitable,” he says.

March 25, 2009: Call for help: Postal chief says agency crash­ing, Yahoo Finance.

The finan­cially strapped U.S. Postal Ser­vice will run out of money this year with­out help from Con­gress, Post­mas­ter Gen­eral John Pot­ter warned on Wednes­day.

We are fac­ing losses of his­toric pro­por­tion. Our sit­u­a­tion is crit­i­cal,” Pot­ter told a House sub­com­mit­tee.

The agency lost $2.8 bil­lion last year and is look­ing at much larger losses this year said Pot­ter, who is seek­ing con­gres­sional per­mis­sion to reduce mail deliv­ery from six days to five days a week.

March 25, 2009: Jin­gle mail for zom­bie banks, Jes­sica Irvine, SMH.

The global finan­cial cri­sis may be destroy­ing life sav­ings, but it’s also giv­ing birth to a new vocab­u­lary. This gal­lows humour, bred of tough times, includes “zom­bie bank”, “ninja loan” and a strange con­di­tion called “brickor mor­tis”. The new lex­i­con allows us to poke fun at what is a scary and lit­tle under­stood cri­sis engulf­ing the global econ­omy.

As finan­cial mar­kets digest the details of the lat­est US bail-out of its trou­bled bank­ing sys­tem, a recap of the best of these “credit crunch-isms” pro­vides a use­ful start to under­stand­ing the causes of, and poten­tial solu­tions to, the cur­rent mess.

Here is my top 10:

 But the biggest moti­vat­ing fear behind all attempts to clean up the finan­cial sys­tem is the fear of the exis­tence of a …

10. Zom­bie bank A half-dead crea­ture that lives off tax­payer hand­outs. A zom­bie bank is one whose lia­bil­i­ties exceed its assets. The term was first coined in the late 1980s and 1990s to describe the sit­u­a­tion in Japan when the burst­ing of dual real estate and share­mar­ket bub­bles wreaked havoc with its bank­ing sys­tem. The Japan­ese gov­ern­ment con­tin­ued to pump money into its banks to try to bring them back to life, but these attempts are often cited as being partly respon­si­ble for pro­duc­ing Japan’s “lost decade” in the 1990s. Instead of being left to suck the lifeblood out of the finan­cial sys­tem, some argue that zom­bie banks should just be shot in the head.

March 23, 2009: “Happy Talk” Won’t Solve Cri­sis, Gal­braith Says: Much More Govt. Action Needed, Yahoo Finance Tech Ticker.

From Obama to Gei­th­ner to Bernanke, pol­i­cy­mak­ers are like doc­tors deal­ing with a “mildly ill” patient vs. treat­ing one who is “gravely” ill, says James Gal­braith, Uni­ver­sity of Texas pro­fes­sor and author of The Preda­tor State.

The econ­o­mist fears the econ­omy is in ter­mi­nal con­di­tion requir­ing much more inter­ven­tion than already pre­scribed. He believes gov­ern­ment “doc­tors” are engaged in a lot of “happy talk” about recov­ery based on a “fun­da­men­tally flawed model,” hinged on the idea the econ­omy is self-heal­ing and only needs a booster shot before it “nat­u­rally” returns to trend growth and unem­ploy­ment in the 5% range.

March 23 2009: Gal­braith says Geither’s Plan “Extremely Dan­ger­ous”. Part I of an excel­lent inter­view with Pro­fes­sor James Gal­briath by Henry Blod­get and Aaron Task on Yahoo’s Tech Ticker (video).

We think Gei­th­ner is suf­fer­ing from five fun­da­men­tal mis­con­cep­tions about what is wrong with the econ­omy.  Here they are:

The trou­ble with the econ­omy is that the banks aren’t lend­ing.  The real­ity: The econ­omy is in trou­ble because Amer­i­can con­sumers and busi­nesses took on way too much debt and are now col­laps­ing under the weight of it…

The banks aren’t lend­ing because their bal­ance sheets are loaded with “bad assets” that the mar­ket has tem­porar­ily mis­priced.  The real­ity: The banks aren’t lend­ing (much) because they have decided to stop mak­ing loans to peo­ple and com­pa­nies who can’t pay them back…

Bad assets are “bad” because the mar­ket doesn’t under­stand how much they are really worth.  The real­ity: The bad assets are bad because they are worth less than the banks say they are…

Once we get the “bad assets” off bank bal­ance sheets, the banks will start lend­ing again.  The real­ity: The banks will remain cau­tious about lend­ing, because the hous­ing mar­ket and econ­omy are still dete­ri­o­rat­ing…

Once the banks start lend­ing, the econ­omy will recover.  The real­ity: Amer­i­can con­sumers still have debt com­ing out of their ears, and they’ll be work­ing it off for years…

March 23, 2009: Gal­braith Inter­view Part II: Gei­th­ner, Obama Kow­tow­ing to “Mas­sively Cor­rupted” Banks, Gal­braith Says.

Like it or not, many peo­ple seem to be resigned to the idea there’s no alter­na­tive to the pub­lic-pri­vate invest­ment fund scheme Trea­sury Sec­re­tary Gei­th­ner detailed this morn­ing. (Click here for part one of our dis­cus­sion of the plan.) 

That’s hog­wash, says Uni­ver­sity of Texas pro­fes­sor James Gal­braith, author of The Preda­tor State. Of course there’s an alter­na­tive: FDIC receiver­ship of insol­vent banks.

March 24, 2009: Mak­ing a mint as inquiry founders. Ian Ver­ren­der, SMH.

Yes­ter­day, ASIC banned a 32-year-old stock­bro­ker from Bondi for allegedly send­ing 32 emails to his clients on Sep­tem­ber 17 last year about a run on the Mac­quarie Cash Man­age­ment Trust.

The bro­ker, per­haps unwisely, pre­dicted Mac­quarie shares would halve overnight. He was right even­tu­ally. Mac­quarie shares did indeed halve, although it took until Feb­ru­ary 24 this year…

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