Today Paulson gave a very interesting speech in which he stated that it was unclear whether the Fed had the statutory authority to rescue Bear Stearns, and urging reexamination of the scope of the Fed’s authority.  He warned that the markets should not assume that the government will intervene to backstop financial institutions.  He also rejected the “too big to fail” theory:

“Of course, the mere creation of a market stability regulator can increase moral hazard and decrease market discipline. The expectation that a regulator will intervene to protect the system must be limited to the greatest extent possible. In other words, we must limit the perception that some institutions are either too big or too interconnected to fail. If we are to do that credibly, we must address the reality that some are. “

In fact, his entire speech should be required reading.  Here it is:  paulson06192008

These are important.

The figures from Lee Adler:  “The Fed today pulled $8 billion out of the system with a weekend repo of $3.25 billion against expirations of $11.25 billion, bringing the 5 day net drain to $12.35 billion, including the adjustments for reductions in the PDCF and Discount Window borrowings.”

wallstreetexaminer.com 

Despite some variation, average ratio of high risk assets to equity was 188% across these major banks:


Many thanks to Russ Winter for chart and graphic!

From Calculated Risk: ”The composite 10 index (10 large cities) is off 13.6% YoY. (15.8% from peak).  The composite 20 index is off 12.7% YoY. (14.8% from peak).  The Case-Shiller national index will probably be off close to 12% YoY (will be released in earlylate May). Currently (as of Q4) the national index is off 10.1% from the peak.”

The British banking authorities have been “cooperative” with the US financial markets over the last decade, buying up countless questionable derivatives.  Now it seems they are realizing that it may be “every man for himself.”  From Financial Times’ Alphaville blog, this comment on American “dis” of LIBOR:

“They say the only time the British consider themselves European is during the Ryder cup. Also perhaps, when reading the Wall Street Journal: (more…)

With food riots going on all over the world in emerging nations and food scarcities in still more countries, there is a sudden focus on the future of America’s food security.  This attention is also being drawn to the food issue because of the rising prices of food noticed by everyone who goes grocery shopping. 

Because of rising wheat prices, bakeries across the United States have been forced to post signs apologizing for their prices to consumers, and restaurant owners are fearful prices will cause consumers to eat out less.  An article in the Guardian reported that “the last time America’s grain silos were so empty was in the early seventies, when the Soviet Union bought much of the harvest.”  And American officials warn it will only grow worse.  “There’s going to be real food inflation in this country,” said C. Larry Pope, president and chief executive of U.S. beef processor Smithfield Foods (USAToday).  Although analysts have labeled the food crisis a “perfect storm of conditions,” they recognize that it will take more than just good weather and lowering the food prices to stop the continuing shortages—it would involve a reassessment of world policy toward foodstuffs.

Scrap metal thieves are becoming increasingly audacious, with some even stealing from cemeteries and memorials. Now some 1,000 bronze plaques have gone missing from the former concentration camp at Theresienstadt. Semi-precious metal, as it happens, is everywhere. It can be found on church roofs; copper pipes run through many a house wall; and wiring is almost ubiquitous. Scrap metal thieves, though, have recently discovered a valuable new source of copper: Cemeteries and memorials.  This week, a particularly audacious bandit apparently made off with over 1,000 bronze plaques from the Holocaust memorial Theresienstadt just outside of Prague.

“Some investors might think they have had a rough ride on the stock market over the past seven or eight months. But the recent share price gyrations pale into insignificance when compared with the biggest stock market falls of all time.

10) Wall Street 1901-03 -46%
The market was spooked by the assassination of President McKinley in 1901, coupled with a severe drought later the same year. (more…)

As property values drop, look for more of this.  States will be fighting for survival.  “With the General Assembly’s passage of the new 6.25 percent top tax rate on incomes above $1 million, and Gov. Martin O’Malley’s signing of the bill yesterday, Maryland has apparently become the first state to create an actual millionaires’ bracket.” (more…)

The S&P/Case-Shiller home-price index dropped 10.7 percent from January 2007, after a 9 percent year-on-year decrease through December 2007. The gauge has fallen for 13 consecutive months.

Here’s an inflation-adjusted chart of the CSI:

http://calculatedrisk.blogspot.com/2008/03/real-case-shiller-house-price-index.html

http://www.oftwominds.com/blogmar08/financial-centipede.html?ref=patrick.net

“Of course there are zillions more equally juicy lies floating around out there, but we reckon Peter Tasker, a Tokyo-based analyst and occasional author, has come up with some choice specimens - and just in time for a lighthearted, two-minute Easter read:

The top 16 big, fat lies de nos jours

1. Derivatives reduce volatility

2. The BRIC economies are decoupling

3. Inflation is 2 per cent

4. Greenspan was a maestro

5. The Chinese won’t let their market fall in Olympics year

6. (Junichiro) Koizumi reformed Japan

7. The Americans are devoted to free market solutions (more…)

 Jim Rogers’ reaction to Fed moves on Bloomberg  

For a possible payout of $3.00 per pound, people are hauling ladders out to highways and taking down the electrical wiring.  The highways then go dark.  The thieves sell the copper wiring to a recycler, if they survive.  This is a stark example of the true state of our economy:
“Freeways going dark as thieves steal wiring; one man is electrocuted”
Associated Press, March 6, 2008

A Highway Patrol officer urged the public today to report suspicious activity that could point to thieves removing copper wiring from lighting along Southland freeways. Wiring theft has become a plague hitting freeways on the average of once a week, CHP Officer Jennifer Hink said. “They’re blacking out our freeways.” (more…)

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 past 2 days. (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.” 

Full text of the speech: (more…)

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

This is the reality for large numbers of people, and it is wrong.  Why do the neediest have to feed the rich?

http://online.wsj.com/article/SB120277630957260703.html?mod=economy_lead_story_lsc

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:

(more…)

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…)

Here is a copy of Bill Ackman’s latest letter on the monoline mess, dated January 30, 2008,  to the New York State Insurance Department.  AMBAC exposed to $11.61 BILLION losses; MBIA loss exposure $11.65 BILLION.  A “must read.”  →     ackman131ltr.pdf

PORT-AU-PRINCE, Haiti, Jan. 30, 2008

Today IMF released its latest report on global financial markets (well worth a read - see link).  Financial markets have worsened as evidenced by pressure on bank balance sheets, and problems will broaden as credit deterioration widens.  IMF recommends transnational stabilization efforts.  Direct link to report:

    imf01292008.pdf

HUD is offering at least 120 houses in Cleveland for sale at $1 each.  I don’t think fiscal stimulus will fix this, but it does help to answer the question of how low can home prices really go.

http://blog.cleveland.com/metro/2008/01/the_foreclosure_crisis_what_it.html

Interested in a glimpse of things to come?  Cleveland’s housing bust started early - read here Mother Jones’ “Prime Suspect” — a compelling description of life in Cleveland’s Slavic Village area was already like in 2006.  This may be what neighborhoods all over the U.S. will be like as housing prices decline:  http://www.motherjones.com/news/feature/2006/09/prime_suspect.html

Way back when he was “just” a Fed Governor, in 2002, Bernanke gave an amazing speech detailing what he would do to prevent or cure deflation.  I read him as saying that he doesn’t think the U.S. will go into deflation because our financial system (banks and household balance sheets) are so healthy (forget that now!).  The other reason he gives is that the Federal Reserve can itself prevent or cure deflation.  Bernanke gives a list of the steps he would take — and it looks as if he’s already several steps down on the list with the TAF auctions.  But never fear, as a bottom line Bernanke thinks we should all be comforted by the fact that if all else fails, he’s got a printing press (oops, a copy machine) to print lots of dollar bills and reinflate the economy. 

It’s true, and worth another close read: 

http://www.federalreserve.gov/boarddocs/speeches/2002/20021121/#f8

This is the nightmare scenario:  pension funds invested in CDOs and/or other derivatives are swamped by the massive unwinding process underway.   Where then does the money come from to pay retirees? 

This great unwinding has potential consequences not only for U.S. pensioners, but certainly the U.K. and possibly beyond.  Here is a terrific and concise explanation of the relationship between CDO downgrades and U.K. pension funds by Ken Griffin and Jeff Moskowitz: (more…)

(more…)

* Chinese bank earnings will suffer because of subprime crisis and tighter monetary policy and macro-economic controls

(more…)

Update:  What About the Munis?  → good article:   http://wallstreetexaminer.com/blogs/winter/?p=1348

Is the current credit crisis and resulting loss of asset valuation having an impact on pensions and healthcare benefits?

Yes - see two preliminary reports below.

pew.pdf     ← The Pew Center on the States released a report in December 2007 highlighting the perilous footing of  the states’ funding of their long-term retiree benefits (both pension and nonpension).  Click through to full report.  

(more…)

(more…)

comptroller.pdf 

The Honorable David M. Walker, Comptroller General of the United States, has been loud and clear in warning Congress, the administration, academia, and the public that the US economic situation requires urgent and radical measures.  “The status quo is not an option.”   (more…)

Robert A. Kezelis in Capitol Hill Blue 

Tax breaks? No, no, no! a thousand times, NO!

(more…)

Monolines are in deep trouble.  That’s not news -  well-covered by FT Alphaville, Calculated Risk, Reggie Middleton, and Mish’s. 

 FT Alphaville notes today:

In a credit note sent out to clients on Friday, RBS started to outline what it thought was on the horizon for the monolines: (more…)

http://www.huffingtonpost.com/linda-keenan/bernankes-message-to-ame_b_82160.html

A bit of comic relief during a rather nasty day of economic news