Financial fuckery thread

[Cain]

More on QE2, from Matt Taibbi

http://www.rollingstone.com/politics/matt-taibbi/blogs/TaibbiData_May2010/217520/83512

It's amazing, given the attention the Tea Party allegedly is paying to government waste and government spending, that there hasn't been more controversy about the now-seemingly-inevitable arrival of "QE2" – a second massive round of money-printing cooked up by the Fed to prop up both the government and certain sectors of the economy. A more overtly anticapitalist and oligarchical pattern of behavior than the Fed's "Quantitative Easing" program could not possibly be imagined, but the country is strangely silent on the issue.

What is "QE"? The first round of "quantitative easing" was a program announced by Ben Bernanke last March in response to the financial crisis, ending in March of this year. In what will soon be known as "QE1"(i.e. once QE2 is announced), Bernanke printed over a trillion dollars out of thin air, then used that money to buy, among other things, mortgage-backed securities (MBS) and Treasury Bonds. In other words, the government was printing money to a) lend to itself and b) prop up the housing market, with Wall Street stepping in to take a big cut.

That was QE1. There has long been speculation that another trillion-plus money-printing program called QE2 is coming, but only recently have there been concrete hints from the Fed along those lines. Among other things, New York Fed Vice President Brian Sack just this week squeaked out a comment about how, "In terms of the benefits, balance-sheet expansion appears to push financial conditions in the right direction." Translating into English, "balance-sheet expansion" means the Fed adding to its balance sheet, i.e. printing money to buy stuff – i.e. QE2.

Thanks to that and other hints, most everyone now expects the Fed to announce a new QE program in November. The big banks have now openly begun to predict this, with JP Morgan Chase among others raising its odds of the Fed buying mortgages in the next 6 months from 10% to 50%. Another effect we're seeing is that mortgage originators are hiring again, in anticipation of being able to fork out QE-funded mortgages.

QE is difficult to understand and the average person could listen to a Fed official talk about it for two hours right to his face and not understand even the basic gist of his speech. The ostensible justification for QE is to use a kind of financial shock-and-awe approach to jump-starting the economy, but its effects for ordinary people are hard to calculate. Theoretically the entire country has some sort of stake in this program, as (among other things) U the Homeowner may see your home value stay stable or fall less than it would have thanks to this artificial stimulus. You also may be able to buy a house when you wouldn't before, thanks to declining mortgage rates.

And jobs, I suppose, may theoretically be created by all this dollar meth being injected into the financial bloodstream – although the inflationary effect of printing trillions upon trillions of new dollars would probably wipe out the value of the money you make at that job. When it comes to calculating what QE actually does for you, or how much it harms you, that question is just very hard to answer.

But one thing we know for sure is that big banks and Wall Street speculators are real, immediate beneficiaries of the program, as they suddenly have trillions of printed dollars flowing through the financial system, with endless ways to profit on the new chips entering the casino.

And by an amazing coincidence, many of the biggest players in the financial services industry have a habit of buying up MBS or Treasuries just before these magical money-printing programs of the Fed send their respective values soaring. If you own a big fund, for instance, and you know that the Fed is about to buy a trillion dollars of mortgage-backed-securities through a new Quantitative Easing program, buying a buttload of MBS a few weeks early is a pretty easy way to make a risk-free fortune. One of the worst-kept secrets on Wall Street is that the big bankers and fund managers get signals about the Fed's intentions about things like QE well before they are announced to the rest of us losers in the public.

[Cain]

Your friends died and had debts?  You may now be responsible for them

http://www.upi.com/Business_News/2010/11/22/FTC-tightens-debt-collections-post-mortem/UPI-70761290455960/

WASHINGTON, Nov. 22 (UPI) -- Consumer advocates say the U.S. Federal Trade Commission has asked for trouble by revising rules for collectors chasing debt from people who have died.

The new rules allow for a wider circle of people to be contacted, beyond family members and the legal executor of the estate. There is also the term "spouse" that some advocates say is inaccurate as a marriage ends when one of the partners dies. The Washington Post reported Monday.

Some advocates warn that some debt collectors will press even friends to pay the debts of someone who has died, using a "moral obligation" argument, the Post said.

Robert Hobbs, an attorney with the National Consumer Law Center said the FTC should "strengthen protections for grieving families and friends, not open the door to debt-collection efforts."

"Presumably we're dealing with elderly people at the most vulnerable time that you could imagine," said attorney Richard Rubin, a consumer rights advocate in New Mexico.

"The debt doesn't disappear when the person dies. It's still a valid debt, and the collector can still collect it," said Joel Winston, FTC associate director of financial practices, the Post reported.

"We are determined to ensure that the collectors play by the rules," he said.

The FTC has extended the deadline to Dec. 1 for the public to comment on proposed rule changes.

[AFK]

I can see it now.  A new dating site where you are matched to your ideal mate by credit score. 

[Cain]

The US government has been taking accounting lessons from Arthur Anderson

http://www.economist.com/node/18618589

The definition used in Washington, DC, is "federal government debt held by the public", which stood at 62% of GDP at the end of 2010. But if you instead use Europe's preferred measure—general government gross debt, which also includes the borrowing of state and local governments and Treasury securities held by other government bodies, such as the Social Security Trust Fund—it jumps to 92% of GDP (see left-hand chart). That is on a par with Portugal's level of public debt. Likewise, America's budget deficit of 8.9% of GDP last year would have been 10.6% using Europe's preferred measure.

Emphasis mine.  And there is more

Official figures also flatter America's relative performance on productivity growth. The headline figures compiled by America's Bureau of Labour Statistics are based on output per man-hour in the non-farm business sector. The European Central Bank tracks GDP per worker across the whole economy. By excluding the less efficient public sector, America's productivity growth is bumped up. And by taking output per worker rather than output per hour, Europe's measured productivity growth is reduced because average hours worked have fallen. Between 1995 and 2010 America's real GDP per hour worked rose by an annual average of 2.1%, considerably less than the 2.7% rate in the non-farm business sector although still faster than the 1.1% pace in the euro area.

And even more

European press releases give the increase in GDP during the latest quarter—a rise of 0.9%, say. But Americans annualise quarterly growth, so an identical increase would be announced as a more impressive-sounding growth rate of 3.6%. Much more important, European economies' initial estimates of GDP growth tend to be more cautious than those in America. Kevin Daly, an economist at Goldman Sachs, estimates that during the ten years to 2008, America's quarterly GDP growth rate was, on average, revised down between the first and final published estimates by an annualised 0.5 percentage points. In contrast, GDP figures in the euro area were revised up by an average of 0.3 points. This matters because financial markets and the media focus heavily on the first estimate, but largely ignore revisions several years later.

[Cain]

More bad news

http://crookedtimber.org/2011/06/11/when-will-us-debt-be-downgraded-by-how-much/

The once unthinkable prospect that US government debt might lose its AAA rating has suddenly become a real possibility. In fact, it now seems about as likely as not. The problem is not so much "can't pay" but "won't pay". The US, like quite a few other countries, has some fairly serious fiscal imbalances, but they aren't pressing in the short run, and there is plenty of capacity to raise additional revenue or cut spending so as to stabilise the ratio of debt to GDP at a sustainable level.

The problem is that the total value of outstanding debt keeps growing (this would happen even with a stable debt/GDP ratio) and the US Congress requires periodic votes to approve this. They are usually the occasion for some grandstanding, but this time the Republican majority of the House of Representatives is seriously threatening a refusal, unless the Democrats agree to massive (and still unspecified) spending cuts. The due date for raising the debt ceiling passed a while ago, but an actual default is being staved off by some sharp accounting tricks, which will apparently work until 2 August. The other day, to prove they are serious, the Repubs introduced a motion for an unconditional increase in the debt ceiling, with the express purpose of voting unanimously against it, which they did.

At this point, loud alarm bells have started ringing for the big ratings agencies, Standard&Poors and Moodys. They will have to decide, well before August, whether to downgrade US government debt and if so by how much.


The agencies' problem is essentially political. For anyone who is following the news, the possibility that the US might default is obvious, and there is no reason (especially in view of their appalling performance leading up to the GFC) to think that the ratings agencies have any insights unavailable to the rest of us. But they have to make a choice and that choice will have significant financial, economic and political implications.

If the standard treatment applied to other governments were followed in this case, the downgrade would already have taken place. While it's still more likely than not that some way of avoiding default will be found, the stated positions of the two sides are so far apart that there must be a significant probability, say 10 per cent, that they will fail to agree. A security with a 10 per cent chance of defaulting in the next few months would normally be rated among the worst of junk bonds.

That's not the whole story of course. Most of the time, when bond issuers default, part or all of the bondholders' money is lost for good. It seems nearly certain that even if default took place, the period in default would be short, and the US would pay interest and principal in full. Nevertheless, nearly certain isn't certain, and once something as unprecedented as a default took place, the consequences are impossible to predict.

More importantly, the US government isn't "other governments". The ratings agencies are US firms operating in a US political context, and their actions will be governed by a mixture of concerns, starting with self-preservation, but also including a desire to influence US policy in a way favorable to bondholders as a group. In the medium term, that means support for a rapid return to budget balance or surplus, ideally through cuts in spending on the poor and middle class, but including tax increases if necessary.

The short run picture is more complicated. Avoiding default is presumably the main concern, but if that could be achieved by a Dem capitulation to demands for large spending cuts, so much the better. On the other hand, maintaining any kind of credibility requires a downgrade well before default actually takes place, and probably a series of downgrades as the deadline approaches. Even a single downgrade would throw financial markets into disarray (among other things, investors who are required to hold AAA assets would have to dump Treasuries and, presumably, buy the bonds of other governments). That in turn would place huge pressure on the Republicans. While the idea of "not raising the debt ceiling" polls pretty well, the reality of "destroying the US credit rating" probably won't.

The most likely response seems to be an increasingly loud set of alarms about the need for a short-term agreement on the debt ceiling, combined (both becuase the agencies want it and because they need to placate the Repubs) with warnings about the need for a rapid return to fiscal rectitude. That's not in fact what is needed (rather the US needs more stimulus now combined with a substantial increase in tax revenue in the long term), but it's a message that will play well among the Serious People in Washington.

We're already seeing this, with mid-July mentioned as crunch time. The problem is that the warnings may well not be enough. There's no sign that the Repubs are willing to give an inch on tax increases. Agreeing to the cuts they want, with no tax increases would be politically suicidal for the Dems, which is not to say they won't do it, but must raise the possibility of a breakdown.

[Juana]

What specifically does that mean for the US? I looked up on it a bit, but I don't think that Argentina's situation is going to mirror ours, is it?

[Cain]

It means the debt the US has already accumulated will go up in interest rates and the US will not be able to borrow more money - meaning cuts will be needed instead.

Also, speaking of downgraded debts, Greece's credit rating just became CCC, putting it on a par with Ukraine and Madagascar in terms of finance.  I expect Athens will have been burnt to the ground by tomorrow morning.

[Cain]

Just looked at European bank exposure to Greece.

This is bad.

Germany is the most exposed, of course, but the UK has £10 billion in private investment on the line (plus £6 billion in public money) and France is twice as exposed as the UK.  The longer a bailout is drawn out, the more likely some French and German banks will collapse.  If the firewall around Spain then also goes down the drain....well then, we're looking at a second global economic collapse.

This could all have been avoided if Greece had nukes.

[Jenne]

Well, he's right.  What the Greeks are and do is basically hold historical relevance and a nice sunny place to go on vacation.  And really great olives.

IF you're going to be a country that relies upon the wealth of others to get yourself going and sustain your people, you best be important to those others.  It makes sense to me, though I do feel bad for the Greek citizens caught up in all this. 

[Doktor Howl]

Once again, Cain is 2 weeks ahead:

http://beta.news.yahoo.com/fed-wont-act-soon-weak-economy-041145552.html

[Cain]

It's interesting to note that the Fed doesn't seem to be worried about systemic financial collapse from Greece defaulting.

Interesting because we've been sold a parade of stories in Europe over the past two weeks how if Greece defaults its Lehman Brothers all over again, plagues of locusts, cats living with dogs oh my.

It could just be the Fed are blissfully unconcerned with that due to gross stupidity (a factor I cannot discount), but at the same time, a nation defaulting is not the same as a company collapsing.  Greece will still exist the day after it defaults (lots of it on fire, but nevertheless).  It could be the risk of contagion has been overestimated by certain shrill bailout/austerity supporters, precisely to get people to support their policies.  Equally, it is not like you hear about how London bailing out Northern Ireland is going to ruin the economy, the function of a nation-state is to transfer wealth in order to promote stability.  The problem is the EU refuses to think of itself as a nation-state, for various reasons.

It will be bad for the Eurozone, regardless.  Greece will probably have to leave the Euro and there is no clearly established procedure for doing that.  We're already seeing potential fallout in Turkey, with the recently re-elected government there saying it will take EU criticisms on board, but will not feel beholden to agreeing to them, since membership has been blocked so many times and anyway they're not sure if they want to join the club now.  And once Greece bails, it opens the door to further defections or expulsions.  All of the PIIGS might get thrown out, and I can see the Baltic states being thrown under a bus as well.

[Jenne]

I was going to say--I'm wondering how Turkey and the Baltics will take this--and waitaminnit--Greece is "leaving" or "being thrown out"?  Which is it?

Am not understanding...

[Cain]

Could be either.  There is no set procedure for leaving the EU currently.  They may fall, be pushed, or decide to jump.

So far though, I'm thinking the risk of a default is higher than that, and the Greeks getting their bailout higher than that again. 

Croatia is still looking to join the EU, but Croatia is a fucking backwater anyway (consistently underrated football team, though).

[Jenne]

Huh.  So perhaps a "mutually agreed upon exit"?  I can't imagine THAT is going to go down a treat.

[Cain]

Perhaps.  Or the Big Three shoving Greece out of the treehouse club.  Or Germany picking up it's ball and going home.  Or the Euro being dissolved and national currencies being restored.  Or full political-economic integration.  Or the EU being disbanded.  Or even the UK joining the Euro to boost investor confidence.

All of these rumours are currently circulating, by the way.  In roughly that order of credibility.