We now know that for the first time in the history of the United States of America, more than 1 in every 100 adults is imprisoned. That is a big chunk of a potentially productive workforce, as well as a huge ongoing cost to the states. It also means that the U.S. is the #1 ranked country in the world for population behind bars. Is that a first we want? You can read the Pew study “One in 100″ in its entirety here: pew1in100.pdf
Many prisons are operated and/or owned by private companies. It’s a booming business, and apparently Americans are better at it than anyone else. But is it a business you want to invest in? Here is a short video to consider which shows how one private company operates the Hutto ”family” detention center in Texas -
Former Fed Chairman Alan Greenspan, in the Middle East at a financial conference, advised it’s time to end the US Dollar’s peg to the Gulf currencies. Pam Woodall, Asia Economics Editor at The Economist, said that this is the beginning of the end for the US dollar as the currency of choice for foreign exchange reserves. ” Woodall also observed: “If Asian central banks hold today more than 80 per cent of the global foreign exchange reserves, which indicates the shift of the global economy domination towards Asia, it seems quite awkward that the UAE still maintains the peg of its currency to the US dollar.” http://www.zawya.com/Story.cfm/sidZAWYA20080226042726
It seems strange that as an American Greenspan would be advising this, knowing as he does the consequences for the US Dollar when it is no longer tied to petrodollars and when it is not the preferred reserve currency. And that’s not all - he also told the Middle Eastern investors that US growth is at “zero” and “at stall speed.” “He said the longer growth stays at zero, the more likely the world’s largest economy would start to contract. Greenspan also said a boom in oil prices could ‘go on forever’. http://www.abudhabinews.net/story/331147
”Sometimes, and only rarely, markets discover that what they had believed to be a miracle cure was, in fact, a placebo. The crisis is so serious that there is little or no response to the easing of policy; in these circumstances panic is followed by capitulation. Seven months into the credit crunch, we have now arrived at the fork in the road.
As ever, the assumption is that the world economy will take the road to rapid recovery. History suggests that this is a reasonable assumption, since few slowdowns end in recession, and recessions that turn into slumps are once in a lifetime occurrences. It is a sign of how serious the current situation is that those who argue that there is a risk of a 1930s-style slump are no longer treated as stark, staring mad. Indeed, the argument in the US is not over whether there is going to be a recession, but how long and deep the recession will be.” Read column (2/25 Guardian): http://www.guardian.co.uk/business/2008/feb/25/economics
Hunger line during 1930s ”There’s no way like the American way. World’s highest standard of living”
Those who are suspicious of bank nationalization schemes have more to work with. While sticking UK taxpayers with the bill for Northern Rock’s bad money management, the government cannot explain why an offshore group of the bank’s highest higher quality mortgages worth£40 billion was left out of the nationalization. ”Yesterday, senior peers, including the former chancellor Lord Lawson, expressed astonishment that ministers were at a loss to explain at the outset of the Lords debate the contractual relationship between Granite and the Rock. In the Commons David Cameron accused Gordon Brown of showing “less openness than Fidel Castro.”
Henry C. K. Liu in the Asia Times explains the inflation/deflation issue in the best summary I’ve seen lately. The bottom line: Using monetary policy (”printing money”) to keep up the current debt bubble will not work, and will cause hyperinflation. The alternative is to allow the credit bubble to burst, an unavoidable reality in the long term anyway. Liu’s article gives an accurate, highly readable and concise summary of the inflation/deflation debate as it has unfolded until now. (more…)
Der Spiegel reports that Germany is facing its worst banking crisis since 1931, with the government fearing the domino effects of allowing the insolvent banks to fail. For now, capital infusions keep coming and instantly vanishing into thin air. Included in the report is a very interesting story on WestLB, a bank that was insolvent and which was initially turned away at the door when it went begging for capital to stay afloat. This shows how ugly can get: “ In a crisis meeting two weeks ago, the two savings and loan associations in North Rhine-Westphalia that own half of WestLB had to admit that they were unable to come up with €1 billion in fresh capital for the ailing bank. They insisted that it was up to the state to cover another €3 billion in risks. (more…)
Via John Crudele at the NY Post, serious consideration is being given to Bove’s idea: give homeowners new mortgages at 1% for 30 years guaranteed by a federal agency, a la Section 8 housing: “Let’s get back to the simple problem, i.e. too many people cannot pay their mortgages,” says Bove. “The simple solution is to find a mechanism to pay the mortgages.” Once that happens, he says, the securities these mortgages went into will be able to trade again. And all the other layers of securities built upon these mortgages will also start to regain their value. What mechanism can be used to pay the mortgages? (more…)
The Yard (Fall/Winter 2007) “Many social scientists believe this sudden rebirth of economic inequality is the biggest news of the last half-century,” Robert Putnam notes in a recent Harvard faculty roundtable discussion. (more…)
In a big win for the insurance companies (read: big defeat for property owners who had paid their premiums all these years), the U.S. Supreme Court rejected Katrina victims’ flood insurance case today. The Supreme Court has refused to offer help to Hurricane Katrina victims who want their insurance companies to pay for flood damage to their homes and businesses. The justices on Tuesday rejected appeals from Xavier University and 68 other individuals and businesses seeking to allow their lawsuits against the insurers to go forward. Xavier asked the court to step in after the 5th U.S. Circuit Court of Appeals ruled that the policies did not cover damage from floods, even those that resulted from man-made failures such as the collapsed levees in New Orleans.
Oil derivatives and petrochemical products will be traded initially on the exchange, Ali Akbar Hashemian, director general of Iran’s Mercantile Exchange Co., said. Crude oil contracts will be added after a review, Iran’s Oil Minister Gholamhossein Nozari said, without giving a specific date. Iran had been expected to start its own oil-trading market in 2005. Since then, Dubai has launched the Persian Gulf’s first bourse to trade sour crude oil futures. http://www.bloomberg.com/apps/news?pid=20601087&sid=amcLG_E_EuyI&refer=home
Interesting that Goldman Sachs seems to be part of everything these days, including the nationalization of a big UK bank. “The government and the financial regulators have refused to reveal information about the role investment bank Goldman Sachs played in nationalising Northern Rock, despite the taxpayer’s money that is being used to prop up the Newcastle-based bank. <snip> (more…)
A controversial website that allows whistle-blowers to anonymously post government and corporate documents has been taken offline in the US. Wikileaks.org, as it is known, was cut off from the internet following a California court ruling, the site says. The case was brought by a Swiss bank after “several hundred” documents were posted about its offshore activities.
What is going on in the Middle East/Asia around this Valentine’s Day? Over a period of just 48 hours, events seem to be moving fast, and not in a good direction. Increasing tensions are also relevant to worldwide petroleum supply and prices. Collected here for your perusal is a listing of some of the troubling events of the past2 days.(more…)
CHICAGO (Reuters) - The credit crunch driven by the U.S. housing crisis appears to have hit another engine of the American economy — small businesses. After years of fast and loose lending, major banks have begun tightening standards for loans to small businesses — often described as the backbone of the jobs market. (more…)
”Iraqi bank fire may be arson” A massive fire that destroyed the records of Iraq’s Central Bank last week, while causing no fatalities, is being investigated as a possible arson, two American officials familiar with the case tell NBC News. The fire on January 28 was reported to have killed no one, but it consumed large parts of the Central Bank building in Baghdad, and destroyed key records. (more…)
On Feb. 13, 1933 President Hoover exhorted the nation to stay on the gold standard. Is anything he said relevant today? How about his observations about the manipulation of fiat currencies for political purposes:
“In all the welter of discussion over these problems we find some who are maintaining that the world has outgrown the use of gold as a basis of currency and exchange. We can all agree that gold as a commodity of universal exchange has not worked perfectly in the face of this great economic eruption. But we have to remember that it is a commodity the face value of which is enshrined in human instincts for over 10,000 years. The time may come when the world can safely abandon its use altogether for these purposes, but it has not yet reached that point. It may be that by theoretically managed currencies some form of stability may be found a score or two years hence, but we have no time to wait. They are subject to great human fallibilities. Sooner or later political pressure of specific groups and interests will direct their use.”
Ours is a consumer driven economy. Household spending accounts for about 70% of our GDP. Graph:
Since 1999, American households have been spending more money than they have. We are running our own deficit spending programs. Isn’t it beyond obvious that when the credit runs dry, GDP will collapse? See charts and analysis of household deficit spending:householddeficit.pdf
Iran has been planning to start trading petroleum products on its own bourse located on the island of Kish. After repeated delays, Iran announces it will open imminently. It will not accept payments in US dollars. Iran has also recently persuaded Turkmenistan a former Russian state to begin accepting payments for natural gas in Euros instead of dollars.
On February 13, 2008, Iran’s Oil Minister Gholam-Hossein Nozari said the long-awaited Iranian Oil Bourse will be inaugurated next Sunday. The inauguration ceremony of the bourse will be attended by Minister of Economic Affairs and Finance Davoud Danesh Ja’fari, who will appoint the head of the Iranian Oil Bourse. Ja’fari earlier stated that the Oil Bourse will be located on the Persian Gulf island of Kish and the official trade currency will be the Iranian rial. The bourse will act as a trading platform for oil, petrochemical and gas products.
Experts say the success of an oil bourse would largely depend on cooperation with other OPEC members as well as a much-needed consensus from Persian Gulf states. Iran’s annual revenue from oil will be $63 Billion (USD) as of the end of its fiscal year on March 20, 2008. Iran halted all of its oil deals in dollars in December 2007.
On February 12, the head of Iran’s National Gas Company said Tehran and Ashgabat will soon finalize an agreement to pay for future gas deals in euros. Reza Kasaizadeh said Iran had earlier called for a switch from dollar to euro in its payments for imported gas from Turkmenistan, adding, “They were not initially interested, but they finally agreed.” He said a draft agreement has been prepared in this regard which will soon be signed by the two countries.
Reality in South Africa, as told to Jim Kunstler, perhaps offers a glimpse of a future U.S. scenario and the surprising complacency of the general public in the midst of it:
“SOUTH AFRICA IN THE PREMATURE LONG EMERGENCY”
February 4, 2008
” It began with a few potholes in the roads, the odd interruption to the water supply in the suburbs, a couple of days with strike action preventing the delivery of municipal services – no garbage collection, protest action disrupting the mining industry and picketing & toy toying at shopping malls…It continued over the next couple of years, largely with disregard for the disruptions, a little irritation to daily commercial and home life by the lack of service provision in food, gas, water and power.”
‘Crack-Keno’ has revitalized the Michigan Lottery. Is Ohio next?
Gus Chan/The Plain DealerM.T. Loonies, a bar just north of Toledo, draws most of its business from customers who play the Keno numbers that flash on screens overhead.
LaSalle Township, Mich. — If she had her way, waitress Heather Doom would lower the boom on Michigan’s wildly popular Club Keno gambling game. “I can’t stand it,” Doom complained over lunch at a tavern called Trapperz in this southeastern-Michigan hamlet. “We were better off without it.” The fast-paced, saloon-based numbers game, which Ohio Gov. Ted Strickland proposes bringing to the Buckeye State, is a scourge that should’ve never been allowed into Michigan, Doom said. She calls it “crack-Keno,” and blames it for creating addicts and ruining lives. Doom suffers personally, working hard at another nearby bar to accommodate game-playing patrons who then gamble away money that would’ve been her tip income, she said. And she sees no benefit, as the region’s fiscally devastated schools — the lottery’s nominal beneficiaries — keep closing.
Homeowners aren’t alone in experiencing buyers’ remorse in today’s troubled marketplace. Private-equity firms, too, are finding out their recent investments might not be worth what they paid for them. Gone are the days when buyout shops could purchase a company, pile on debt for an initial fat payout for themselves and then quickly flip it for a big profit. The credit crisis has put a freeze on debt-laden dealmaking and is causing bond investors to shun the risky debt used to finance the takeovers.
That could jeopardize the returns seen on some deals — which isn’t just the buyout firms’ problem. Investors from pension funds to endowments to financial institutions have plunged big money into private-equity funds. It’s also a problem for the banks that are stuck with billions of dollars in loans clogging their books that they’ve been unable to sell. (more…)
A swimsuit left at a Swedish pool by Australian movie star Nicole Kidman has been sold at auction to buy cows for poor families in India. The suit’s previous owner, Zlatko Nedanovski, 32, says the swimsuit sold for enough to buy nine cows.
“The swimsuit went to the highest bidder for 16,200 kronor ($3,270),” he said. A day into the week-long auction, Mr Nedanovski said he hoped to raise enough to buy five cows, or around 9,000 kronor, as part of a project run by the Swedish aid organisation Erikshjaelpen.
Locking your boss in his factory for 48 hours while the entire staff stand guard might seem like a radical new take on industrial relations. But in Devecey, in eastern France’s manufacturing heartlands, 40 factory staff have been hailed as heroes for taking their English boss hostage this weekend when they discovered he was trying to move the business to cheaper Slovakia without telling them. Mike Bacon, head of the BRS car-parts company, is the second British boss to be locked up by angry French workers in recent weeks. On January 15 police stormed an ice-cream factory in Saint-Dizier to free manager Prakash Patel, who had been held hostage by workers seething over job cuts. At least 14 staff were injured trying to stop police liberating him.
<snip>
The factory staff won huge media support amid a mood of fear that “Anglo-Saxon” free-trade ideas are spurring the closure of French factories as bosses relocate to cheap labour markets. Bacon said French workers cost him five times more than Slovakians per hour. Link to article → http://www.guardian.co.uk/g2/story/0,,2252979,00.html
Among other issues, this 2/6/08 analysis addresses economists who claim that the decrease in the current account deficit is a good thing - and demonstrates they should be careful what they wish for.
Celebrity Real Estate Losers Dorothy Pomerantz02.06.08, 6:00 AM ET LOS ANGELES -
“Even Hollywood’s rich and famous can’t avoid the housing downturn that’s sweeping the nation. In Los Angeles, only 4,430 homes were sold in December, down 48% from the previous year. And prices fell 11% to an average $470,000.
Of course, celebrity homes cost much more than that. An entry-level house for an up-and-coming star costs at least $1.4 million in L.A., say experts. Realtor Barry Sloane of Sotheby’s International Realty says it’s the owners trying to sell homes in the $3 million to $6 million range that are having the most trouble.
Johnny Carson’s former sidekick has struggled to sell his Mulholland Drive Mediterranean estate. He put it on the market in July 2006 for $7 million, but there were no takers. He re-listed it in February 2007 for $6.7 million, and even after another $1 million reduction, the six-bedroom home is still on the market.”
RECORD HIGH: Arab bank assets to hit $2 trillion this year. (Getty Images)
Arab bank assets for the first time top $2 trillion at the end of December 2007 as Middle East and North African economies expand, and the banks lender more, the Union of Arab Banks said.
Combined, lenders from Morocco to Oman are likely to post a 25% increase in profit this year to $32 billion, Adnan Yousif, chairman of the union, told reporters in Dubai on Wednesday.
“The banks are doing very well because of liquidity, and the growth and expansion of economies,” said Yousif. “You have to have cash for this.” The union, whose members include 400 financial institutions, coordinates activities between Arab financial services firms and acts as a consultant to the industry. (Reuters)
Interesting observations from the floor of the American Securitization convention courtesy of Housingwire, including analysts who believe that it will be sometime in the 2012 - 2015 time period before housing will recover:
“Much of the the Zelman presentation had data I’ve not seen discussed before, as well. Perhaps the most interesting was a discussion of how birth rates correlate with homeownership as a predictor of overall housing market demand. In particular, weak birth rates in 1991 - 1997 were predicted to correspond to poor housing starts during 2009-2015, confounding any recovery in the overall housing market.
“The economy has yet to feel the full repercussions of the housing downturn,” McGill concluded. (more…)
The ISM Non-Manufacturing Business Activity Index measures the services part of the U.S. economy; this sector is important because our manufacturing base has been eroding. Today the index for January 2008 was released early due to a possible breach of information. It seems that the release of this number is waking CNBC and others up to the reality of the recession.
The index is down significantly for January (41.9% versus 54.4 % in prior month). Here’s a look at the detail behind the number. [Spoiler: the only industries reporting increased business activity in January 2008 were Utilities and Educational Services.] → (more…)
Much has been written about income disparity and the concentration of wealth in the U.S. I happen to believe that this phenomenon is a a major contributor to the unstable Goldilocks economy we’re living in. Congress has been looking into this problem and has released its first report. Ever wonder how a CEO of a company that’s losing money ends up getting huge raises? The Congressional report shows that executives are paying consultants millions of dollars to issue opinions to the corporations’ boards — and the “compensation consultants” tell the board to increase the CEO’s compensation. This report is thus far the only place you can see this data: “The information provided to the Committee represents the best — and only —comprehensive information currently available on the extent of conflicts of interest among executive compensation consultants. An analysis of this information shows that in 2006, over 100 Fortune 250 companies used compensation consultants that provided both executive compensation advice and other services to the company at the same. In many cases, the consultants hired to provide executive compensation advice were paid millions of dollars by the executives whose pay they were supposed to assess.” Read the entire report here → ceocompensationushouse.pdf
Look at this chart showing the latest retail CEO compensation compared to underlying corporate performance — look at the 100% or more pay raises compared to the lousy underlying results - very interesting (from the National Retail Federation) → ceopay08update.pdf
Others said Iran was unaffected. Still others reported having no information on the scope of the disruption there.
The cables were not severed by a ship. From BBC News 2/4/08:
A submarine cable in the Middle East has been snapped, adding to global net problems caused by breaks in two lines under the Mediterranean on Wednesday. The Falcon cable, owned by a firm which operates another damaged cable, led to a “critical” telecom breakdown, according to one local official. The cause of the latest break has not been confirmed but a repair ship has been deployed, said owner Flag Telecom. (more…)
Turmoil in the financial markets has resulted in more attention being given to the banking system. Many are familiar with the FRB data recently showing bank’s non-borrowed reserves dropping.
So, what about the reserve requirements for banks? A layperson would think that a bank has to keep a percentage of its total deposits as actual cash, actually available on demand. But these days it seems that’s an old-fashioned passe attitude. In actuality, banks are able to avoid the reserve requirements to an amazing extent. That way they can devote much more of your deposit accounts to suprime lending!
Curious exactly how its done? The FDIC (which is funded by the banks) published a study explaining it. Among other techniques, banks are using ”sweeping” rules to decrease the amount of cash reserves they must actually hold. One bank “successfully” used sweeps to “reduce its required reserves from $788,000 in August 2000 to $48,000 in August 2001, a period when deposits at the institution rose by $36 million.”
“An additional impetus to establishing sweep accounts is the dollar amount required to meet a bank’s reserve requirements. All depository institutions must reserve an amount equal to between 3 percent and 10 percent of the funds they have in interest-bearing and noninterest-bearing checking accounts. The total required to be held in reserve is determined relative to the total deposits held in the qualifying accounts at each bank. Once the amount of the reserve is determined, banks may choose to hold their reserves in the form of cash (vault cash) or in an account at a Federal Reserve Bank (FRB) (sterile reserves), but in either case the funds are nonincome producing. As a result, a key strategy of bank liability management has been to discover ways of building a bank’s deposit base while keeping required reserves to a minimum.”
In the context of an ordinary checking or savings account (”retail demand deposit account”), the study explains the reserve requirement on these monies can actually be zero, and explains exactly how it works:
“. . . when newly designed computer software enabled a bank to analyze its depositors’ use of their transaction accounts, sweeps became one of the main tools used to minimize a bank’s required reserves: any funds deemed by the bank to be excess were automatically transferred into MMDAs. (As a result of these transfers, a bank’s required reserve ratio could go from 10 percent to zero). And in 1994, when the Federal Reserve Board authorized banks to use this software to reclassify any transaction-account, retail sweep programs developed as banks notified their customers when they opened an account that “your deposit may be reclassified for purposes of compliance with Federal Reserve Regulation D. . . .” Banks began initiating sweeps without the customers’ explicit approval, and the volume of transfers occurring between transaction accounts and MMDAs increased dramatically.
The MMDA used in a retail sweep program operates as a “shadow” account that is visible only to the depository institution. The bank reduces its required reserves while leaving unchanged the transaction deposits that are available to the depositor. A bank’s level of transaction accounts decreases sharply, whereas the depositor’s view of the account appears unaffected. Just as this transfer occurs without the depositor’s explicit approval or knowledge, so, too, any profits that the bank earns are not generally shared; in addition, banks also can choose how the funds will be invested.”
Bottom line: the bank may be operating a shadow account under your checking account, sweeping the money out, using it, and keeping the profits - and you’ll never know. Read the study here → fdicbankliability.pdf
