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news aggregatorVI.H Preview: What Canada Can Teach the US About MortgagesThe United States and Canada have two very different housing finance systems; the U.S. system is much riskier, but both countries have virtually identical home-ownership rates. In fact, Canada's home-ownership rate is currently higher than the rate in the United States, despite a lack of government-subsidized housing finance. This difference calls into question the longstanding U.S. beliefs about the relationship between government-subsidized housing finance and home ownership. – Alex Pollock1 The draft transcript Sub VI Hotel for AEI's Feb 18th seminar "Canadian versus U.S. Housing Finance: Comparison and Implications" is now finished except for a final run-through and finishing touches. So perhaps it's appropriate that on Thursday seminar chair Alex Pollock's "lessons learned" memo was published in the Wall Street Journal. If you go to the WSJ version you'll see that the last paragraph's assertion is something Doomers have been hearing from me off and on for a long time. Let's remember that the original sin of making Fannie a GSE in 1968 was to get it off the federal budget so the deficit looked smaller. Canada in this respect looks superior to the U.S. in candor as well as credit performance. For the slightly younger Doomers out there who might have slept through that unit in History class, we're talking about the deficit including costs of the Vietnam War. And guess what? That chicken's still out there along with its friends AF & IQ, as represented by that $5 trillion or so of Fannie and Freddie debt which is still not quite on Uncle Sam's balance sheet. Those chickens may not have quite come home to roost yet, but they're certainly scratching at the door. ——————- [1]: "Why Canada Avoided a Mortgage Meltdown", by Alex J. Pollock, WSJ / AEI, March 18, 2010.
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Bank Failure Update
There have been 205 bank failures in this cycle (starting in 2007):
FDIC Bank Failures by Year 200732008252009140201037Total205 Click on graph for larger image in new window. The first graph shows bank failures by week in 2008, 2009 and 2010. The FDIC started fast in 2010, but slowed down when the snow storm hit D.C. - now it looks like the pace is picking back up again. My (easy) prediction is the FDIC will close more banks in 2010 than in 2009 (more than 140), but fewer banks than in 1989 - peak of the S&L crisis (534 banks). The second graph shows bank failures by year since the FDIC was started. The 140 bank failures last year was the highest total since 1992 (181 bank failures). For those interested in bank failures by number of institutions and assets, the December Congressional Oversight Panel’s Troubled Asset Relief Program report through Nov 30th for 2009 (see page 45).
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Jeeman InterviewJeeman was gracious enough to let us tour his new residence in Rancho Santa Fe – but then he sat down for a conversation about his homebuying experience:
It is rare that anyone will go on camera to talk about their own personal choices and decisions. My experience of Jeeman is that he is a humble guy, yet he was willing to expose himself and describe how he managed buying a home in this uncertain environment – with nothing to gain but the hope of helping others who are grappling with the same decisions. THANK YOU JEEMAN!!!
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Brain Drain
In response to High Tech Research Moves From U.S. To China, I received this Email from Mark N. ...
Hello Mish, Great article about High Tech research moving to China. This, unfortunately, fits in with my personal observations. Many of my daughter's friends who are graduating college this year plan on beginning their careers in other countries. The schools they are graduating from include Harvard Business School, MIT, Colorado School of Mines, St. John's College and Stanford. They will be starting their careers in New Zealand, France, South Africa, Canada, Brazil and England. Even my daughter's job choice will probably have her traveling to Italy and Germany on a regular basis. It was startling to see that many bright young people so willing to leave this country. I don't know how many of those young men and women will actually retain their U.S. citizenship. Some really didn't seem to care one way or the other. From my conversations with them, it is my understanding that they are very aware of what is happening in this country, as well as the world, and just wish to keep their options open. This anecdotal observation, combined with conversations with other parents and articles that I've read, leads me to believe that the U.S. is about to encounter a "brain drain" of the next generation. Very concerned about the ramifications of current U.S. policies and humbly yours, MarkBlog Comments Of Note Malencid Writes: In my science department 20 years ago the graduate students were 80% American, 20% foreign, mostly European and Japaneese. They all returned to their countries of origin. The INS was on their case 10 days after graduation. Today the ratio is 85% Chinese 15% Americans. None of the Chinese I've known ever return to China. All the support is ultimately coming from grants awarded to the Principal Investigator. These funds are all Federal.Fedwatcher Writes:This is Great Depression II papered over by programs created in Great Depression I so that the government's GDP figures hide the fact. Wake Up America! Silicon Valley's lust for indentured servants, H1-Bs, has morphed into the mechanism to transfer Silicon Valley to China and India. The train has left the station and anyone paying on an $800,000.00 mortgage on a $1,000,000.00 Silicon Valley house will in as little as five years see themselves 50% underwater and their wages declining. We need to immediately give a green card to every H1-B worker and end the H1-B program. If we need them, why should we ask them to leave? We either need them or we don't need them. As for foreign hard science Masters candidates, a green card, as for foreign hard science PhD candidates, a fast track to citizenship. But let us end this "indentured servitude" that harms the American worker and the H1-B worker. I don't want them to leave, I want them to be free to stay and not be exploited. This would take away the corporation's ability to cheat and game the system. Many of the successful start-ups in Silicon Valley were started by former (that is green card carrying) H1-Bs who latter became citizens. The incentives today are for them to go "home" and start businesses there. We need to reverse that trend. For those of you not familiar with Applied Materials, they are the ones who make the secret sauce that transforms a silicon wafer into a product that drives technology. There are two firms that hold the keys to this kingdom: Applied Materials and KLA-Tencor. Now with Applied Materials moving to China, we have at most 5 years to fix things before it is "Game Over".Hang10-In-Panama Writes:I'll offer a few observations that have provided some context for me during a 20 year career as an engineer and corporate executive. 1 - I'm an American-born/raised, formally trained engineer (Registered Professional Engineer in Mechanical Engineering [FL]), trained at a top 10 engineering college here in the US. Many of the graduate students at the school I attended (casual observation suggests a majority) were either Indian or Chinese nationals, who were: * very bright * hard working * multilingual * self-motivated * willing to travel wherever in the world their services were required * did not have any sort of entitlement attitude - they worked strictly in a meritocracy 2) In my career of more than 20 years, I have worked with a number of individuals who were outstanding engineers (mostly field engineers as opposed to research engineers) who had no "formal" college-level engineering training. They were simply people with high levels of intellectual curiosity, and innate mechanical aptitude. 3. At present I'm engaged in systems-oriented work, and am working here in the US with two gentlemen from India who speak 4 languages, have Master's Degrees in Computer Science, are willing to travel away from their families for months at a time, do outstanding work (nights/weekends included) and are eager for the opportunity to apply themselves. All this for $32/hr US, which is roughly $64K/yr US (excluding benefits). My personal response to the changing landscape is to have learned a foreign language (Spanish in my case), and gravitated towards work in areas that are less susceptible to globalized wage equilibrium. Specifically, those areas that outsourcing can't easily overcome, as the competitive advantage is related to geographic proximity. Things like domestic transportation/distribution optimization and strategic inventory management. Even so, there are large regulatory headwinds in even these areas that are a competitive disadvantage (ever try managing hazmat and/or CARB related items in California?)... The next few years will be very interesting to watch in terms of where production and technical talent migrate, and more telling, what portion of the flux is driven by regulatory and bureaucratic considerations. Should make for good fun watching from the sidelines as an expat in Panama...Meanwhile Back In The U.S. Here is an article that typifies job hunting at its finest. Please consider Scores of job seekers vie for 75 positions A line of hopeful job applicants snaked Friday through the parking lot of a grocery store that will open May 7 in Thousand Oaks. Throughout the morning, a steady stream of people kept arriving in the hope of finding work at Sprouts Farmers Market, which has taken over the former Circuit City location at Lynn Road and West Hillcrest Drive. “I expect we’ll have about 1,000 to 1,200 applicants if it keeps up like this,” predicted Norv Rivera, who is overseeing the two-day job fair held all day Friday and again today from 9 a.m. to 2 p.m. Rivera, the California human resources manager for the Arizona-based Sprouts, said that in the current slow economy, applicants are coming from all walks of life, with only about 15 percent having any direct retail experience. “We have folks coming from the construction industry. We had an actor come by, and there are a lot of folks coming in from non-retail backgrounds,” he said.There are many interesting anecdotes in the above story. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post ListMike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.
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IHB News 3-20-2010Today's featured property is a Woodbridge dreamer hoping to cash out in our re-inflated housing bubble.
Irvine Home Address ... 23 EMERALD Irvine, CA 92614
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I'll speak a little louder
Oh I... Fleetwood Mac -- Everywhere IHB NewsThe Irvine Housing Blog saw tremendous reader traffic this week. Four posts were picked up by Patrick.net:
Swiss Central Bank Openly Discourages Mortgage Lending (irvinehousingblog.com) Calculated Risk also made us a feature of the post: Squatter Stimulus: No Mortgage Payment for Three Years and Counting. Where does IHBs traffic come from? The numbers below are from IP addresses Clicky can identify their locations. The raw numbers do not mean much, but you get some idea of the geographic concentration of our readers. Below is a graphic of the last 500 visitors taken on Friday evening. Jack Otremba When I lived in Florida, I became very close friends with Chris and Sharon Otremba. Two years ago, they nearly lost their first child as he was born prematurely at a birth weight of one pound one ounce. He was given a 10% chance of survival. Over the last two years, I have been following this story closely. It is difficult to imagine what it is like to have your baby undergo multiple life-threatening surgeries and accept a difficult prognosis of future problems. This family knows love like few others. Jack recently celebrated his second birthday, and he keeps defying the odds. As he continues to grow and develop, his prognosis continues to improve as well. He is poised to live a normal life but with a unique life story. Link to Video on Jack Otremba. Matthew John GilmerSince I brought up babies, I also want to congratulate my cousin Kathryn and her husband Steve who announced the delivery of their first child on March 16th. My Aunt Pat needs to master emailing photos.... Housing Bubble News from Patrick.net
US House Prices Decline 1.9% in January (calculatedriskblog.com)
Irvine Home Address ... 23 EMERALD Irvine, CA 92614
Guys, do you have this much stuff? Perhaps I am too Spartan.
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Bits Bucket For March 20, 2010Post off-topic ideas, links and Craigslist finds here. Please visit the HBB Forum.
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How a million-dollar home sold in Costa MesaA $1.25 million home has sold in Costa Mesa, the priciest sale in that city since mid-summer. (Click on photos above for larger images!) Since we at Insider Q&A don’t think of Costa Mesa as a million-dollar town — probably just our fault! — we asked the agent who handled the deal, Valerie Torelli, to tell us how it went down … Us: Detail on the listing … Valerie: The home was originally listed in October 2009 for $1,199,000 and the sellers put it on hold because they could not find a replacement home. The reason for selling was to downsize both in size and monthly payment. We were contacted by an out-of-area agent who was working with a buyer who specifically wanted a home in this particular area of Costa Mesa. The area is called Mesa Verde, and the home is located in the Upper Bird Streets near Tanager Park. Us: Who was the buyer? Valerie: The buyer wanted to be near relatives in the area and was willing to pay all cash. Us: What did you sell? Valerie: The home is located in the Mesa Verde area of Costa Mesa, specifically in a section known as the Upper Bird Streets near Tanager Park. It is 4,108 Sq Ft., 4 bedrooms, 4 bathrooms, was originally built in 1974 and was totally remodeled down to the studs in 2008. The home overlooks a neighborhood park. I am attaching a flyer for the home. Us: How has Costa Mesa been selling lately? Valerie: We have more buyers then sellers. In Mesa Verde, (as of Thursday) the total inventory of homes for sale is 24 single family — of which 16% are short sales. The median price on homes for sale is $658,000 and 16 homes are in escrow. Mesa Verde is fairly representative of the Costa Mesa market. In all of Costa Mesa the total inventory of single family homes is 132 of which 21% are of short sale status. The median price for all single family residences for sale is $649,000 — and there are 112 properties in escrow. Us: What might this say about Costa Mesa home market? Valerie: This shows that the demand for solid homes is still there when the owners can deliver title in a timely manner. Also, prices in the lower ranges — under $500,000 — have bottomed out are are very difficult to find. The only exceptions are if the home needs work, it’s a short sale — in which the price may or may not be realistic — or the home is in an area that is not as desirable. Insider Q&As: How a million-dollar home sold in Costa Mesa is a post from: Lansner on Real Estate
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Links 3/20/10Flat-headed cat of southeast Asia is now endangered BBC Night Riders: Afghan Atrocity and American Values Chris Floyd Ground Zero workers settlement unfair: judge Raw Story Some Arguments on Resolution Authority Mike Konczal The Mason-Dixon Line in Health Care Reform: Economists Edition Menzie Chinn Oh no … Bernanke is loose and those greenbacks are everywhere billy blog A Ruinous Meltdown Bob Herbert, New York Times Sarkozy Opposes IMF Greek Loan, Widens German Rift Bloomberg (hat tip reader Swedish Lex) A bad day for the Fed: Federal Reserve Must Disclose Bank Bailout Records Bloomberg Fed Told to Hand Over Friedman Documents Wall Street Journal. Recall that Friedman, as chairman of the New York Fed, bought Goldman stock during his tenure, a real no-no. Reader John Moore notes with some skepticism that this tidbit was released on a Friday evening… Problems in an NYT Column Columbia Journalism Review Leipzig in legal wrangle with banks over CDS Financial Times Lehman Brothers’ golden girl, Erin Callan: through the glass ceiling – and off the glass cliff Guardian Dodd calls for Lehman inquiry Financial Times. Full text of letter here (hat tip reader Crocodile Chuck) Antidote du jour:
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Parenteau: The Hyperinflation HyperventalistsBy Rob Parenteau, CFA, sole proprietor of MacroStrategy Edge, editor of The Richebacher Letter, and a research associate of The Levy Economics Institute who writes at New Deal 2.0 After a slugfest on fiscal deficits, I find that the question of hyperinflation now demands an answer. And here it is: fiscal deficit spending may be a necessary condition of hyperinflation, but it is hardly a sufficient condition. Think this is yet another rant against the “deficit errorists?” Think again. Paul Krugman treated this question in his March 18th New York Times column: Hyperinflation is actually a quite well understood phenomenon, and its causes aren’t especially controversial among economists. It’s basically about revenue: when governments can’t either raise taxes or borrow to pay for their spending, they sometimes turn to the printing press, trying to extract large amounts of seignorage – revenue from money creation. This leads to inflation, which leads people to hold down their cash holdings, which means that the printing presses have to run faster to buy the same amount of resources, and so on. Krugman locates the source of hyperinflation in what is termed the “monetization” of fiscal deficit spending. He then attributes its perpetuation to shifts in the liquidity preferences of people — that is, the share of their portfolio that households and firms wish to hold in cash or cash like investment instruments (think Treasury bills, or money market mutual funds, for example). Krugman’s logic means that even the liberal wing, or the saltwater contingent, of the economics world has a touch of deficit errorism. We would invite Paul to take a closer look at the UBS research on public debt to GDP ratios and inflation first released last summer, reprinted in a FT Alphaville note, and discussed on Naked Capitalism. The story of inflation and fiscal deficits is more ambiguous, or at least more complex than the deficit errorists would have you believe. Coincidentally, an investment manager friend forwarded me a letter that Ebullio Capital Management* allegedly sent to its clients after February’s investment results, which took them down nearly 96% for the year – virtually wiping out their stellar gains of the prior two years. The letter reveals that Ebullio was so ebullient about the possibility (inevitability?) of hyperinflation emerging from recent policy excesses that they bet the ranch on hyperinflation plays in the commodity corner of the investing world (metals), and lost big time. While we still have questions as to whether this is a spoof or not, there are undoubtedly people sitting around in gold wondering whether the old yellow dog is going to get up and bark again anytime soon. Although hyperinflation hyperventilation has been catching on in recent months, especially amongst the deficit errorists, gold has been dead money since late November 2009. What gives? As a piece I wrote in the July issue of The Richebacher Letter explains, hyperinflation requires extreme conditions not just on the demand side, but on the supply side as well. A month after the Richebacher piece, Bill Mitchell published a similar conclusion. To summarize our findings: on the demand side, in order for household spending power to keep up with rising prices, household nominal incomes or credit access must be ratcheted up in synch with price hikes. Otherwise, the price hikes will not stick. Households will have to pull back less-essential spending areas to afford the same quantity of goods in essential items. So your gas, home heating oil, health care, or food bill goes up, and you cut back on your restaurant and entertainment spending, unless your paycheck also increases, or you can tap more credit. That is why hyperinflation episodes need more than just deficit spending. It is true, as Marshall Auerback and I explained in a recent New Deal 2.0 post, that fiscal deficits increase the net cash flow for the household sector as a whole. But we also usually observe some sort of escalator clauses or cost of living adjustment mechanisms built into wage contracts that allow this ratcheting up of household income pari passu with the inflation hikes. Take that element away — and it is a recurring theme in historical episodes of hyperinflation — and households cannot keep up with hyperinflation. The higher prices cannot get validated by higher consumer spending. The hyperinflation flares out. Beyond this demand side component, which is scarcely to be found in the US wage contracts these days (although we must mention it is built into some government benefit programs like social security), there is the supply side issue. Productive capacity must be closed or abandoned in order for the hyperinflation to really rip. There is a built-in dynamic that encourages this. As the hyperinflation gets recognized, entrepreneurs eventually figure out that they would be much better off speculating in commodities (like Ebullio), buying farmland, chasing gold and other precious metals, or more generally, repositioning their portfolios and reinvesting their profits in tangible assets with relatively fixed supplies. That is, goods that are fairly nonreproducible become stores of value, as it is their prices that tend to rise most swiftly, since higher prices cannot, by definition, elicit any new supplies. Hence, those of you who lived through the ‘70s (and still remember what you were doing) will recall high net worth households were busy hoarding ancient Chinese ceramics while the middle class was chasing residential real estate, and the stock market basically went sideways. In the case of the Weimar Republic following WWI, and Zimbabwe most recently, remember that war (civil or international), has an impeccable way of destroying productive capacity in a nation, or rerouting it to the production of war material. In the Weimar episode, the final back-breaking run up in hyperinflation accompanied the occupation by the French of the Ruhr Valley, which held a fair concentration of German production facilities. In solidarity with the workers who struck those plants in response, the Weimar Republic continued to pay the workers through fiscal measures. Cut production, but continue income flows, and you have the recipe for the kind of unresolved distributional conflict that often lies at the heart of the inflation process. Mainstream economics and popular lore refuse to see this. Suffice it to say that hyperinflation takes a very special set of conditions. It is not, contra Paul Krugman, all about fiscal deficits, nor is it only about fiscal deficits. That is why we do not see hyperinflation breaking out all over the place on any given day, despite the fact the governments have to first create the money that you and I use to pay taxes or buy Treasury bonds (because even though we “make” money, we cannot create it, without risking a spell in jail for counterfeiting). Know your history. Try not to pass out with the hyperventilating hyperinflationistas: they are a particularly virulent wing of the deficit errorists, and they may simply leave you in a state similar to the one alleged to have been experienced by Ebullio Capital Management’s clients.
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Unofficial Problem Bank List increases to 653
This is an unofficial list of Problem Banks compiled only from public sources. Changes and comments from surferdude808: Publication of actions issued by the OCC and OTS contributed to an increase in the number of institutions and aggregate assets on the Unofficial Problem Bank List this week.
This week the list includes 653 institutions with assets of $332.0 billion, up from 640 institutions with assets of $325.6 billion last week. The list increased despite the FDIC best efforts closing seven institutions of which five were on last week's list. The removals because of failure include Advanta Bank Corp. ($1.6 billion Ticker: ADVNQ), Appalachian Community Bank ($1.0 billion Ticker: APAB), First Lowndes Bank ($137 million), American National Bank ($70 million), and State Bank of Aurora ($28 million). There were 18 institutions with assets of $9.3 billion added to the list this week. Additions include Los Alamos National Bank, Los Alamos, NM ($1.7 billion); NCB, FSB, Hillsboro, OH ($1.6 billon); Citizens First National Bank, Princeton, IL ($1.3 billion Ticker: PNBC); First Chicago Bank & Trust, Itasca, IL ($1.2 billion); and Norstates Bank, Waukegan, IL ($626 million Ticker: NSFC). Other changes for institutions already on the list include Prompt Corrective Action Orders issued by the OTS against Savings Bank of Maine ($892 million); Inter Savings Bank, FSB ($701 million); and Woodlands Bank ($388 million).The list is compiled from regulator press releases or from public news sources (see Enforcement Action Type link for source). The FDIC data is released monthly with a delay, and the Fed and OTC data is more timely. The OCC data is a little lagged. Credit: surferdude808. See description below table for Class and Cert (and a link to FDIC ID system). For a full screen version of the table click here. The table is wide - use scroll bars to see all information! NOTE: Columns are sortable - click on column header (Assets, State, Bank Name, Date, etc.) Class: from FDIC The FDIC assigns classification codes indicating an institution's charter type (commercial bank, savings bank, or savings association), its chartering agent (state or federal government), its Federal Reserve membership status (member or nonmember), and its primary federal regulator (state-chartered institutions are subject to both federal and state supervision). These codes are:
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PNWHS & REBarCamp Audio PencastsFor anyone who is interested in listening to some straight audio from yesterday’s PNWHS event and one session from today’s REBarCamp event, I present the pencasts below. Lennox Scott’s rousing main talk begins on page three of session 2. Float over the number in the lower-right of a pencast to jump between pages, then click the top-left text on a page to begin playing the audio for that page (you may have to wait a minute for the audio to stream to your computer). Enjoy. PNWHS Session1brought to you by Livescribe PNWHS Session2 brought to you by Livescribe PNWHS Breakout Session brought to you by Livescribe Spencer Rascoff of Zillow at REBarCamp brought to you by Livescribe
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Really? Risk does not equal rewardReal estate news and views from around the globe that make you go, “Really?” What some blogs are saying …
Really? Risk does not equal reward is a post from: Lansner on Real Estate
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High Tech Research Moves From U.S. To China
Goodbye Silicon Valley, hello Xi’an China. Applied Materials will do new cutting edge research on solar panels in Xi’an.
Please consider China Drawing High-Tech Research From U.S. XI’AN, China — For years, many of China’s best and brightest left for the United States, where high-tech industry was more cutting-edge. But Mark R. Pinto is moving in the opposite direction. Mr. Pinto is the first chief technology officer of a major American tech company to move to China. The company, Applied Materials, is one of Silicon Valley’s most prominent firms. It supplied equipment used to perfect the first computer chips. Today, it is the world’s biggest supplier of the equipment used to make semiconductors, solar panels and flat-panel displays. In addition to moving Mr. Pinto and his family to Beijing in January, Applied Materials, whose headquarters are in Santa Clara, Calif., has just built its newest and largest research labs here. Last week, it even held its annual shareholders’ meeting in Xi’an. It is hardly alone. Companies — and their engineers — are being drawn here more and more as China develops a high-tech economy that increasingly competes directly with the United States. A few American companies are even making deals with Chinese companies to license Chinese technology. Xi’an — a city about 600 miles southwest of Beijing known for the discovery nearby of 2,200-year-old terra cotta warriors — has 47 universities and other institutions of higher learning, churning out engineers with master’s degrees who can be hired for $730 a month. On the other side of Xi’an from Applied Materials sits Thermal Power Research Institute, China’s world-leading laboratory on cleaner coal. The company has just licensed its latest design to Future Fuels in the United States. The American company plans to pay about $100 million to import from China a 130-foot-high maze of equipment that turns coal into a gas before burning it. This method reduces toxic pollution and makes it easier to capture and sequester gases like carbon dioxide under ground. Future Fuels will ship the equipment to Pennsylvania and have Chinese engineers teach American workers how to assemble and operate it. Small clean-energy companies are headed to China, too. Locally, the Xi’an city government sold a 75-year land lease to Applied Materials at a deep discount and is reimbursing the company for roughly a quarter of the lab complex’s operating costs for five years, said Gang Zou, the site’s general manager. The company has taken measures, including sealing its computers’ ports here, to prevent the easy use of flash drives to record data. Employees are not allowed to take computers from the building without special permission, and an elaborate system of computer passwords and electronic door keys limits access to certain technological secrets. But none of that changes the sense that tectonic shifts are under way. When Xie Lina, a 26-year-old Applied Materials engineer here, was asked recently whether China would play a big role in clean energy in the future, she was surprised by the question. “Most of the graduate students in China are chasing this area,” she said. “Of course, China will lead everything.” Applied Materials, a Silicon Valley company that supplies equipment used to manufacture semiconductors and solar panels, built its newest research lab in Xian, China. Click here for a Slideshow On China’s Role in Clean Energy There is much more in the article and slideshow that is worth a look. Here is one key sentence from above "Xi’an has 47 universities and other institutions of higher learning, churning out engineers with master’s degrees who can be hired for $730 a month." Think that is not deflationary? Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post ListMike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.
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Rodrigue Tremblay: Economic Bubbles and Financial Crises, Past and PresentWhen GM ran into financial troubles due to the recession and a drop in car sales, the value of GM bonds should have declined, allowing GM to buy them back at a lowered discount and enabling it to reduce its debt load and survive. But this time, thanks to the new securitization finance, more appropriately called “Ponzi-scheme finance”, an imprudent and possibly criminal type of finance in my opinion, things did not work out that way. GM's debts had been placed in packaged CDOs that were impossible to untangled, just as individual housing mortgages had been merged and packaged in sausage-like mortgage CDOs that could not be untangled if something were to go wrong. … // … the GM bankruptcy was less a normal bankruptcy than a financial assassination. Ever wonder what René Lévesque's top economic minister would have thought of today's crisis? Well make yourself a TALL mug of cocoa and dig right into the good professor's analysis. "Economic Bubbles and Financial Crises, Past and Present" by Rodrigue Tremblay"It is well enough that people … do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning." Henry Ford, American industrialist
"It seems to me that Europe, especially with the addition of more countries, is becoming ever-more susceptible to any asymmetric shock. Sooner or later, when the global economy hits a real bump, Europe's internal contradictions will tear it apart." Milton Friedman, American economist
"The normal functioning of our economy leads to financial trauma and crises, inflation, currency depreciations, unemployment and poverty in the middle of what could be virtually universal affluence-in short … financially complex capitalism is inherently flawed." Hyman Minsky, American economist
I have spent some fifty years studying economic cycles and teaching international finance, but I had never seen the likes of what we witnessed and experienced over the last three years. That's because such financial crises seem to happen 60 to 75 years apart.
—It is a fact that the outbreak of this severe worldwide financial crisis two years ago was a surprise to many people. For instance, it was widely thought that financial crises, and the severe economic recessions and sometimes depressions they provoked, were really a thing of the past thanks to the protective net of financial regulations that was designed in the 1930s to prevent a repeat of such financial collapses.
—But here we are again, mired in the most severe economic crisis since the 1930s. We may ask why?
The main reason is that the U.S economy, but also most of the world economy, has been subjected to a financial experiment, over the last some 10 years, which has turned sour. In fact, it has turned into a financial fiasco.
Indeed, it must be understood that a completely new type of banking finance was invented; but all the risks involved had not been properly assessed. For a while, the debt pyramid was allowed to grow, but it collapsed when its shaky and unsound foundation disintegrated.
—Of course, there have been similar financial collapses in the past, (notably in 1873, in 1907 and in 1931) and the overall cause is always the same: the financial sector takes too much risk and becomes overextended, creating in the process a debt load for the economy that is unsustainable.
Let's consider a striking fact of today financial situation: The debt load imposed on the economy is even higher today than it was in the 1930s when total total debt reached the level of some 300% of the annual production or GDP.
Well, today, the ratio of total debt to the U.S. Gross Domestic Product (GDP) is close to 400 percent. Keep in mind that it took nearly 20 years to bring this ratio down to about 140, in 1952.
What this means is that today it takes about $4.00 of debt to create one dollar of economic activity while it took only $1.40 of debt in the early 1950s to create one dollar of GDP activity. This shows how complex the financial system has become. The question that remains to be answered is whether it will take 20 years to lower the debt ratio from 400% to, say, 200%!
This all shows how this can be devastating for the real economy when financial flows are disrupted and when credit becomes difficult to obtain.
—Sadly, this is our situation today: Investors and producers have a lot of problems financing their new investment projects. This is a big monkey on the back of the economy and it is an important cause of current, and possibly future, economic stagnation.
But before looking into the future, let's review quickly the main reasons why financial crises arise. Why, in other words, the financial tail is sometime allowed to wag the economic dog.
1. First, the question of deregulation. Too much optimism, overconfidence or simple naiveté sometimes allow the development of some form of risky Ponzi-scheme finance. And, this is pretty much what we have seen over the last 10 years. —Under the old traditional financial rules, a bank or a credit union would collect deposits or borrow in the open market, lend this money to investors, keep reserves for contingencies, and would hold onto the loans until maturity.
For big banks, at least, this is no longer the model. With the merging of investment banking and commercial banking after 1999, traditional financial rules were pushed aside and they were replaced with the rules of asset securitization through which large banks ceased being banks to become brokers, that is they ceased being lenders to become sellers of sophisticated new securities. More about that later.
Under these new rules, a bank still accepts deposits or borrows in the open market, but it does not hold on to the loans it makes. Rather, it takes a bunch of heterogeneous loans made by itself or by others, repackages and slices them up, and sells them as investment vehicles to third parties. That's what is called the “securitization” process; it is a sort of sausage machine that takes one type of securities at one end and transforms it into another type of securities, a more risky one, at the other end. —Large Banks have become large financial sausage makers!
In other words, the financial chain has been made longer, much longer; but, as with all chains, its overall strength is not better than the strength of its weakest link. And the new financial products turned out to be the weakest links. They were toxic financial products.
2. Why were such new banking rules adopted? Why were they so risky and dangerous? And how did they lead to the near complete collapse of the credit system in the fall of 2008? These are fundamental questions.
And, as for most questions, there are short answers and there are long answers.
I have four short answers:
-First, they were very profitable to the mega-banks for a while because the banks raked in large fees on the new financial products. -Second, the politicians were persuaded to let them “innovate” with the new leverage finance by removing most regulation that would have prevented the banks from doing what they were doing. -Third, it led to irresponsible lending because the lenders were no longer risking their own money but the money of far away investors. -And, fourth, the moral dimension cannot be neglected. Indeed, it took a lot of corruption and a lot of greed to create such a mammoth crisis. —[Greed was even glorified in the 1987 movie “Wall St.” in which Michael Douglas—playing the character of financier Gordon Gekko—says: “Greed is good, Greed is right. Greed Works.” This was the prevailing ideology at the time.]
(This is an issue that I explain more fully in my new book The Code for Global Ethics.)
For a financial crisis of this magnitude to occur, it takes two kinds of corruption or fraud. —(I don't delve here into the kind of intellectual corruption that supported the ideology that markets can do no wrong or that they are always “efficient”. In fact, markets are very imperfect; they are often under the control of monopolies or cartels, and sometimes, they do not function at all.)
In the first place, politicians have either to make mistakes or worse, to be in the banks' pockets and do what people with money (who want more money) tell them what to do.
For instance, as far back as 1977, the Carter administration and the U.S. Congress prepared the ground for the future crisis: It passed the Community Reinvestment Act, by which the Federal Housing Administration loosened down-payment standards for marginal borrowers. —Twenty-five years later, in 2003, President George W. Bush also signed “The American Dream Downpayment Act” into law. This reinforced the pressure on large banks to provide subprime mortgages to needy borrowers incapable of making down payments.
The public financial deregulation stampede that took place between 1999 and 2007 was therefore an extension of this philosophy that special lending rules could and should apply to housing finance.
The string of specific financial deregulation steps taken by the politicians that have paved the way for the current era of irresponsible Ponzi-scheme finance and casino-like leverage banking practices is very long, and I don't want to burden you with too many details.
As a reminder, however, here are the most important ones:
1. In 1999, the Clinton administration and the Republican-dominated U. S. Congress passed the Gramm-Leach-Bliley Act (GLBA) that, in effect, abolished most of the 1933 Glass-Steagall Act. — In the past, that law had prevented the unregulated investment banking from merging with the regulated and government-insured commercial banking sector.
2. Then, in 2000, the U. S. reintroduced legalized gambling into the financial sector, a prohibition that had been in place since after the 1907 financial crisis, when President Theodore Roosevelt (1858 –1919) was in office. It adopted the Commodity Futures Modernization Act of 2000, which specifically exempted financial gambling from state gaming laws. This move paved the way for inventing new risky financial instruments.
3. In 2004, the Securities and Exchange Commission (SEC) removed the ceiling on the level of risk that the largest American investment banks (Goldman Sachs, Morgan Stanley, Lehman Brothers, Merrill Lynch, Bear Stearns) could take on so-called securitized loans and their hedge fund operations.
4. In 2005, bankruptcy laws were changed in the United States at the request of the banking industry. This made it more difficult for federal bankruptcy judges to restructure mortgages before resorting to foreclosures, under Chapter 7 of the U.S. bankruptcy code. [N.B.: According to the Center for Responsive Politics, the banking industry spent over $100 million in lobbying efforts to have bill S-256 passed].
5. Finally, in July 2007, only weeks before the subprime financial crisis went into full gear the SEC removed the “uptick” rule for short selling stocks in a panic. (The President of CITI Group, Mr. Vikram Pandit, testified before the Congressional Oversight Committee that short-sellers played a big role in bringing his bank, the largest in the world, close to bankruptcy.)
3. The second type of irresponsibility, and even of fraud, was the one that bankers themselves committed.
-First, they embraced subprime lending, by selling adjustable-rate (ARMs), or interest-only or even negative-amortization subprime mortgages, with minimal or no down payments, to borrowers they knew could not pay them back if anything went wrong.
Today, about eight million foreclosures have already taken place. And it is expected that in 2010-11, the number of foreclosure filings could rise to another 3.5 to 4 million.
Why were banks irresponsible in their lending? Essentially, besides willing to please the politicians, it's because they thought they were not at risk for their own irresponsibility. Indeed, with the new practice of financial securitization, banks were not worried by the possible insolvency of borrowers, because they knew they could sell those risky subprime mortgages to other banks which ultimately sold them down-stream as some commercial-like paper to unaware investors. It was a form of “pass-the-buck” lending.
In the end, many of the primary and secondary mortgage lenders such as Countrywide Financial, Washington Mutual, IndyMac, and ultimately Bear Stearns and even Wachovia, collapsed. And the two largest players in the U. S. mortgage market Fannie Mae and Freddie Mac, as insurers and secondary mortgage lenders, came very near to total collapse before the U.S government came to their rescue and invested $400 billion in them.
4. A few more words about the main culprit products in this fiasco, the famous or rather infamous so-called “credit derivatives”, that disintegrated in the fall of 2008. Those were the weak links in the financial chain. And that's where I will limit my comments.
Credit derivatives come in acronyms like an alphabet soup, but the most basic ones are:
-The synthetic subprime collateralized debt obligations (CDOs), (or slices or tranches of amalgamated pools of subprime loans based on mostly interest-only second-handed mortgages, but also on other types of debts, such as credit card debts). CDOs are basically illiquid financial products because they usually can be bought or sold only through the entity that created them. -And, the Credit Default Swaps. CDSs are insurance credit protection contracts offering protection against default on the interest or principal payments of a loan.
More than one trillion and a half dollars ($1 500 000 000 000) of these asset-backed financial products were sold, not only in the U.S., but all over the world.
The problem was those who sold this type of financial insurance—large investment banks and above all the largest insurance company in the world, American International Group (AIG) —were not regulated and kept very little reserves behind it.
Creating CDOs (i.e. packaging different debts together) was very profitable for banks, for some insurance companies that insured them by issuing CDSs, while holding very little reserves, and for the credit agencies (Moody's, Standard & Poor's and Fitch) that rated them.
But CDSs are very dangerous products.
-First, although they are really insurance contracts, they are not typically written by insurance companies but by financial firms or subsidiaries. This means that they are not regulated under insurance laws, state or federal.
-Second, one does not need to have an insurable interest to purchase CDS insurance. (For example, it is not allowed to buy life insurance on a person with whom the buyer is not closely related. The same for a fire insurance policy on a home; one must be an owner to qualify).
But with CDSs, one may be an outsider, that is a speculator or a hedger, who has nothing to insure but is only interested in holding the CDS contract for financial gain. As a consequence, the total amount of CDS contracts issued can be much larger than the value of the insured security, four or five times larger. At that point, CDSs become casino chips whose ultimate value is only backed only by the issuer.—And this has consequences. In fact, the invention of CDSs has made the debt default crisis much worse by artificially maintaining the value of debts at a high level, thus creating bankruptcies all around. It is as if a system of fire insurance had resulted in increasing the insidence of fire. This is an example of a very dangerous and bad financial innovation.
Essentially, the CDS (credit default swap) market is an opaque and thinly traded over-the-counter market that is easily open to manipulation. At any moment in time, nobody really knows who owns or owes what to everybody else. Speculators buy those CDSs as if they were put options on the underlying bonds. When their prices go up, the price of the underlying bonds goes down, and a financial crisis ensues for the bond-issuing company or government. Together, CDOs and CDSs can make for a very toxic cocktail. —This is a clear case where the speculative financial tail moves everything else. Speculators are in control.
In fact, let me say that this is what drove General Motors into bankruptcy. Speculators killed General Motors, not the recession and low car sales. GM could have survived the recession as it had in the past. But this time, there were the CDSs.
—Why is this so? —Essentially because banks had transformed normal GM bonds into collateralized debt obligations (CDOs) by merging them with other debts, and because these bonds had been insured against default with CDSs issued mainly by the Financial Products unit of the large insurance company American International Group (AIG). Speculators bought these CDSs on the hope that the underlying CDOs that incorporated GM bonds would fall if GM were to fail. In essence, the speculators were betting that GM would fail and they were helping it to fail at the same time by selling short the very CDOs that incorporated GM debt while buying on leverage the CDSs on those CDOs.
When GM ran into financial troubles due to the recession and a drop in car sales, the value of GM bonds should have declined, allowing GM to buy them back at a lowered discount and enabling it to reduce its debt load and survive. But this time, thanks to the new securitization finance, more appropriately called “Ponzi-scheme finance”, an imprudent and possibly criminal type of finance in my opinion, things did not work out that way. GM's debts had been placed in packaged CDOs that were impossible to untangled, just as individual housing mortgages had been merged and packaged in sausage-like mortgage CDOs that could not be untangled if something were to go wrong.
CDS holders against CDO- GM bonds, both legitimate and gambling speculators, were insured against losses by AIG. And, as I will explain later, the Bush-Paulson administration guaranteed the value of all CDSs issued by AIG against CDO bonds, so the value of those bonds could not decline as they should have, and as they have in the past during an economic downturn. Besides, there are no open market for those CDOs, so nobody could know their real value.
—This is what forced General Motors to file for bankruptcy. This is the same cause that provoked eight million plus home foreclosures in the U.S. while there are much fewer foreclosures in Canada. [For example, in the first quarter of 2008, 1.6 per cent of mortgages issued by Canada's top three sub-prime lenders were behind by at least three months. The equivalent rate was about 16 per cent in the U.S. As a consequence, house prices in Canada have been stable or rising.] —In this light, the GM bankruptcy was less a normal bankruptcy than a financial assassination.
—Please note that by salvaging General Motors, the U.S. government paid twice: It paid in full the banks and the speculators who held CDSs on CDO-GM bonds; and it later paid to keep GM operating.
Mind you, the same thing that the new securitization finance did to U.S. homeowners and to GM is being done these days to Greece. Greece's government debt has been transformed into derivative products, insured with CDSs. Speculators are buying those Greek CDSs in the hope that the government of Greece will default on its debt.—This is the main reason behind the drop in the euro and of pound sterling in the last few weeks. There is a fear of a domino effect, with many European countries to default if speculators begin attacking one country after another. This could even bring down the euro monetary union.
—This is a crazy and immoral system. The plot thickens even more with the rumor that AIG has been a major issuer of Greek CDSs. If this were true, this would mean that the U.S. taxpayers are paying for AIG's losses on Greek CDSs with U.S. bail-out funds, thus financing the possible collapse of the euro monetary zone! —This cannot be allowed to go on. There should be an international conference to stop that madness.
-This the reason I wrote here on my international blog (www.TheNewAmericanEmpire.com/blog) that the international financial system has been transformed nowadays into a gigantic unregulated Casino that allows all types of Ponzi schemes to go on.
5. You all know that the U. S. government, following the ideology of “too-big-to-fail” for the large banks or the large insurers, has rescued the biggest among them.
It poured trillions of dollars into AIG, Fannie Mae and Freddie Mac and the five or six largest Wall St. Banks, essentially by buying their toxic assets at full price and by underwriting their gambling losses. With this massive recapitalization of the large banks through government subsidy, the crisis has somewhat subdued, for the time being.
In the meantime, however, the larger banks have become even larger, the bonuses received by their CEOs are still in the tens of millions, their huge pensions are intact, but bank loans to the economy have declined. The biggest winners of the financial crisis are precisely those who created it. —This is truly something that historians will have to explain to future generations.
(Without a doubt, the single bank that profited the most from the overall public rescue program was Lloyd Blankfein's Goldman Sachs, a bank that Secretary Henry (Hank) Paulson led until he became Treasury Secretary in 2006. —It can also be said that Treasury Secretary Henry Paulson and his deputy, investment banker Neel Kashkari, were in a mammoth financial conflict of interest when they engineered the banking bailout program, especially as $180 billion was pumped into AIG in order to pay out in full the gambling bets made by Goldman Sachs, their previous employer, and other speculators. It was a bailout of Wall Street by Wall Street while in control of the U.S. government. )
Meanwhile, and because of this bailout money, the largest American banks are getting larger. For example, in 2006, the combined assets of the U.S. six biggest banks (Citigroup, JPMorgan Chase, Bank of America, Wells Fargo, Goldman Sachs, and JP Morgan) totaled 55 percent of U.S. GDP. In 2010, this ratio stands at 63 percent (it was only 17 percent of GDP in 1995). Consider also another measure: In 2007, the four largest U.S. banks — (Citigroup, JPMorgan Chase, Bank of America and Wells Fargo) — held 32 percent of all deposits in FDIC-insured institutions. As of June 30, 2009, it was 39 percent.
Therefore, since the banking structural problems have not been solved but rather made worse, the crisis could flare up again anytime, either here, as a lot of commercial loans (office buildings, malls, hotels…etc) are on the brink of default and will likely default in the coming years, or elsewhere, with many European governments having their own subprime crisis and being attacked by CDS gamblers.
I want to be clear here. —It would have been better if the problem had been avoided with more prudent government policies and banking practices. However, in the fall of 2008, the U.S. government had a responsibility, especially after the failure of Lehman Brothers on September 15, 2008, to stabilize the financial system and to avoid a deeper and wider financial crisis. After all, it was a series of government policies and deregulation steps that paved the way to the housing bubble and to the meltdown, to the emergence of risky financial products and to the resulting financial crisis.
—It is how this was done that borders on the scandalous, if it was not outright fraud in some cases, not the goal itself of averting the financial crisis from spiraling out of control. —For example, there was no need to pay billions of dollars to banks and speculators at 100 cents on the dollar for toxic and illiquid securities that were worth much, much less.
Presently, I think that we are in the eye of the hurricane regarding financial problems. I see five additional economic threats for the near and not so near future:
• A major sovereign debt crisis in many parts of the world, especially in southern Europe;
• A major commercial debt crisis and small bank crisis in the United States;
• The historical high level of income inequality in the United States and elsewhere;
• The aging of the population in the United States and elsewhere and a concomittent slowdown in private consumption.
• The over-heating Chinese economy, its undervalued currency and a possible financial crisis in that country.
These factors and the ongoing difficulty in obtaining credit for investment will exert a drag on the economy over the coming years.
Indeed, history teaches us that a serious structural worldwide financial crisis sooner or later results in sovereign debt defaults by some countries. This has happened in 1833-37, 1870-90, 1932-1945, and it is to be expected that the number of countries that will renege on their foreign debt will increase in the coming years. A global debt bomb is hanging over Europe and other parts of the world. The euro zone itself may not survive the coming crisis. And, I would not exclude some U. S. states from this default scenario, not even the U. S. federal government, with its trillion + dollar deficits, fiscal deficits for as long as we can see, even though it has the power to print dollars which are still accepted around the world. That is the reason why I expect the other financial shoe to drop in 2011-13. —A major financial crisis, a major U.S dollar crisis (and the concommittent rise in the price of gold) and major bond and stock market crashes have a good chance to unfold in that time period.
6. Conclusions
It seems to me that the U.S. financial system, and even the world financial system, have to be profoundly reformed, if they are to serve the real economy, rather than the contrary. If such a reform does not come about, however, I am afraid that we have entered a period of economic difficulties that may last many, many years. In fact, I think that the world economy stands today at the hedge of a large precipice.
What type of reform? First and for all, the packaging of different debts in impossible to untangle CDOs should be outlawed. These products are financial time-bombs waiting to explode for the real economy, not only in the United States, but around the world. Second, CDS insurance products should be issued only against insurable securities and not issued as casino chips in values much larger than the value of the insured securities (i.e. no so-called naked CDSs). In order words, the entire innovation of securitization finance has to be reviewed and reigned in before it does further damage. These two reforms could be implemented immediately if politicians really understood the problems or if they were not in the banks' pockets.
However, if the U.S. Congress feels that this is too big a problem to tackle on its own, for different reasons, my third recommendation would be for the Obama administration and the EU to call for an international finance conference, preferably a G-20 conference, to have coordinated actions and have legislation implemented to that effect.
So far, the steps taken to study the problem and to reform the system have been slow in coming and very timid. For example, House Speaker Nancy Pelosi intends to create a congressional panel (rather than an outside commission of inquiry) to investigate the causes of the US 2007-09 financial crisis. This would seem to me to be an inadequate and insufficient response to a crisis of this magnitude and severity.
Fourth, for the longer run, and regarding the toxic financial products that precipitated the crisis, one wonders why new medication pills or drugs have to be approved by the U.S. Food and Drug Administration (FDA) in order to make sure that they do not hurt the human body, while no similar requirements of the sort exist for new financial products to make sure that they are not going to be very harmful to the real economy.
There seems to be two different standards applied here. I personally think that there is a need for a Financial Products Administration (FPA) in order to make sure that possibly toxic financial products are not made available to the public before having been fully tested for their absence of toxicity. It should be mandatory that risky financial products be tested and approved before being sold to the public.
And fifth and last, as to deposit-taking banks and investment banks, I happen to believe that the Glass-Steagal law should be brought back in full. It was a wise and prudent law that stabilized financial markets for three quarters of a century. Its near complete elimination in 1999 opened the floodgates of irresponsible financial gambling that nearly brought down the demise of the entire U.S. economy. I do not think the contemplated “Volcker rule” to prevent banks from operating their own hedge funds goes far enough, considering the magnitude of the problem.
—I was amazed when the Glass-Steagal act was de facto repealed in 1999, and I am still amazed that the very economist who was most instrumental in that repeal is currently President Obama's principal economic adviser (Larry Summers).
—As a general principle, it should be reaffirmed that finance is there to serve the needs of the real economy, and not the reverse.
—Finally, I would say that in economics, as in medicine, it is never too late to do the right thing. But if you don't, the disease may become progressively worse and it may become irreversible. I think that is where we stand today regarding the necessity to reform the financial system.
* Drawn from notes for a conference by Dr. Rodrigue Tremblay at the Renaissance Academy (Florida Gulf Coast University FGCU), Florida, Friday, March 19, 2010
Rodrigue Tremblay is professor emeritus of economics at the University of Montreal and can be reached at rodrigue.tremblay@yahoo.com. Further end-matter can be found at the original posting site here.
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And now for something completely different
It's not exactly clear what this is or why it's been sitting in the draft folder for the last week, but now seemed to be as good a time as any to throw it up.
The young girl certainly seems talented, but, since I don't understand the language and didn't watch this all the way to the end, it's not exactly clear what she's talented at.
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Bank Failures #34 through #37: Busy Day at FDIC
March banking madness
Bair's team dominate the boards Four more fall today by Soylent Green is People From the FDIC: Community & Southern Bank, Carrollton, Georgia, Assumes All of the Deposits of Appalachian Community Bank, Ellijay, Georgia ...As of December 31, 2009, Appalachian Community Bank had approximately $1.01 billion in total assets and $917.6 million in total deposits. ... The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $419.3 million. .... Appalachian Community Bank is the 34th FDIC-insured institution to fail in the nation this year, and the fourth in Georgia. The last FDIC-insured institution closed in the state was Century Security Bank, Duluth, earlier today.From the FDIC: Citizens South Bank, Gastonia, North Carolina, Assumes All of the Deposits of Bank of Hiawassee, Hiawassee, Georgia As of December 31, 2009, Bank of Hiawassee had approximately $377.8 million in total assets and $339.6 million in total deposits. ... The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $137.7 million. ... Bank of Hiawassee is the 35th FDIC-insured institution to fail in the nation this year, and the fifth in Georgia. The last FDIC-insured institution closed in the state was Appalachian Community Bank, Ellijay, earlier today.From the FDIC: First Citizens Bank, Luverne, Alabama, Assumes All of the Deposits of First Lowndes Bank, Fort Deposit, Alabama As of December 31, 2009, First Lowndes Bank had approximately $137.2 million in total assets and $131.1 million in total deposits.... The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $38.3 million. ... First Lowndes Bank is the 36th FDIC-insured institution to fail in the nation this year, and the first in Alabama. The last FDIC-insured institution closed in the state was New South Federal Savings Bank, Irondale, on December 18, 2009.From the FDIC: Northern State Bank, Ashland, Wisconsin, Assumes All of the Deposits of State Bank of Aurora, Aurora, Minnesota As of December 31, 2009, State Bank of Aurora had approximately $28.2 million in total assets and $27.8 million in total deposits. ... The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $4.2 million. ... State Bank of Aurora is the 37th FDIC-insured institution to fail in the nation this year, and the fourth in Minnesota. The last FDIC-insured institution closed in the state was 1st American State Bank of Minnesota, Hancock, on February 5, 2010.Seven down today. Probably more to come ...
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RSF Covenant BuyJeeman was nice enough to allow bubbleinfo to tour his recently purchased home in the Covenant of Rancho Santa Fe. His purchase is the lowest ranch-style in the Covenant this year – congratulations Jeeman!
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Bank Failures #32 & #33: Georgia and Utah
An Oxymoron?
Century Security Or a Paradox? Utah's Advanta A mirage in the desert Phantom worth now gone. by Soylent Green is People From the FDIC: Bank of Upson, Thomaston, Georgia, Assumes All of the Deposits of Century Security Bank, Duluth, Georgia Century Security Bank, Duluth, Georgia, was closed today by the Georgia Department of Banking and Finance, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. ... As of December 31, 2009, Century Security Bank had approximately $96.5 million in total assets and $94.0 million in total deposits.... The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $29.9 million. ... Century Security Bank is the 32nd FDIC-insured institution to fail in the nation this year, and the third in Georgia. The last FDIC-insured institution closed in the state was Community Bank and Trust, Cornelia, on January 29, 2010.From the FDIC: FDIC Approves the Payout of the Insured Deposits of Advanta Bank Corp., Draper, UtahThe Federal Deposit Insurance Corp. (FDIC) approved the payout of the insured deposits of Advanta Bank Corp., Draper, Utah.... As of December 31, 2009, Advanta Bank Corp. had approximately $1.6 billion in total assets and $1.5 billion in total deposits. ... Advanta Bank Corp. is the 33rd FDIC-insured institution to fail this year and the third in Utah since Centennial Bank, Ogden, was closed on March 5, 2010. The FDIC estimates the cost of the failure to its Deposit Insurance Fund to be approximately $635.6 million. That makes three today - and another payout (no buyer) in Utah.
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Guest Post: German Central Bank Admits that Credit is Created Out of Thin AirPreface: Most people think that banks lend solely from their base of deposits. Some also know that with fractional reserve banking, they can loan out many times more than they actually have in reserves. But very few people – with the exception of those in the banking industry and financial experts – know where credit really comes from. Many Naked Capitalism readers are in the banking industry or financial experts, so this may seem obvious. I apologize if my populist tone is over-the-top. I am not trying to needlessly slam any type of business people, simply trying to advocate on behalf of a more sustainable system that will benefit the most people. Finally, as usual, any incorrect information in this essay is mine alone, and not Yves’ or the site’s. Germany’s central bank – the Deutsche Bundesbank (German for German Federal Bank) – has admitted in writing that banks create credit out of thin air. As the Bundesbank states in a publication entitled “Money and Monetary Policy” (pages 88-93; translation provided by Google translate, but German speaker and NC reader Festan von Geldern confirmed the basic translation): 4.4 Creation of the banks money Money is created by “money creation”. Both [central banks] and private commercial banks can create money. In the euro monetary system [money creation] arises mainly through the granting of loans, as well as the fact that central banks or commercial banks to buy assets such as gold, foreign currencies, real estate or securities. If the central bank granted a loan from a commercial bank and crediting the amount in the account of the bank at the central bank, created “central bank money.” *** Money creation by commercial banks The commercial banks can create money itself, the so-called bank money. The money creation process through which commercial banks can be explained by the related postings: If a commercial bank to a customer a loan, they booked in its balance sheet as an asset against a loan receivable the client – for example, 100,000. At the same time, the bank writes down the customer’s checking account, which is run on the liabilities of the bank’s balance sheet, 100,000 euros good. This credit increases the deposits of customers on its current account – it creates deposit money, which increases the money supply. In other words, money is created as book-entry by purchasing assets or entering credits on the left side of the balance-sheet and corresponding deposits on the right side. In other words, credit is created out of thin air. Frontiers of money creation The above description might leave the impression that the commercial banks are able to draw an infinite amount of money in bank accounts. If this were really so, this could be inflationary. The central bank therefore takes effect on the extent of lending and money creation. It requires commercial banks to hold the reserve. As I’ve previously pointed out, the Federal Reserve is taking the same tack, creating conditions that guarantee that American banks will have huge excess reserves so as to prevent inflation. Back to the publication: Central banks, commercial banks can typically obtain only by the fact that the central bank granted them credit. For these loans, commercial banks have to pay the central bank interest rate. Increase this rate, the central bank, the “prime rate”, the commercial banks usually raise their part, the rates at which they lend themselves. There will be a general rise in interest rates. This, however, dampens the tendency of businesses and households, the demand for loans. By raising or lowering the key interest rate the central bank can thus influence the business sector demand for credit – and thus on Lending and bank money creation. The commercial banks need central bank money to cover not only for the reserve, but also to the cash needs of its customers. Each bank customer may be credit in the bank account into cash to pay off. If the stocks of the banks in cash to be in short supply, the central bank can create only remedy. Because only they are permitted to bring additional notes in circulation. To meet the cash needs of its clients, the commercial bank must therefore include, where appropriate, with the central bank for a loan. This leads to the creation of central bank money. The so-purchased assets for central bank money can pay off the commercial bank in cash let. Thus, the cash is in circulation: from the central bank to commercial banks and from these to the bank customers. Central Bank money is also to cover the non-cash payments are required: a customer transfers money from its credit to a customer at another bank, this results in many cases led to the sending bank central bank needs to transfer money to the receiving bank. The central banks then moves from one bank to another. *** The commercial banks can use the surplus of central bank money and to award additional credits to businesses and households. As previously described, arises from the award of additional credits additional demand for central bank money – which can be covered in this special situation of great uncertainty among banks by the existing excess liquidity. The abundant supply of liquidity relief, a bank that wants to provide a loan, from the traditional consideration of how much money they need after the award of credit is, how it is constituted, and at what cost. Using the so-called money creation multiplier can be estimated how large the potential for additional Credit limit is. Do you get it now? Private banks don’t make loans because they have extra deposits lying around. The process is the exact opposite: (1) Each private bank “creates” loans out of thin air by entering into binding loan commitments with borrowers (of course, corresponding liabilities are created on their books at the same time. But see below); then (2) If the bank doesn’t have the required level of reserves, it simply borrows them after the fact from the central bank (or from another bank); (3) The central bank, in turn, creates the money which it lends to the private banks out of thin air. It’s not just Bernanke … the central banks and their owners – the private commercial banks – have been running the printing presses for hundreds of years. Of course, as I pointed out Tuesday, Bernanke is pushing to eliminate all reserve requirements in the U.S. If Bernanke has his way, American banks won’t even have to borrow from the Fed or other banks after the fact to have reserves. Instead, they can just enter into as many loans as they want and create endless money out of thin air (within Basel I and Basel II’s capital requirements – but since governments are backstopping their giant banks by overtly and covertly throwing bailout money, guarantees and various insider opportunities at them, capital requirements are somewhat meaningless). The system is no longer based on assets (and remember that the giant banks have repeatedly become insolvent) It is based on creating new debts, and then backfilling from there. It is – in fact – a monopoly system. Specifically, only private banks and their wholly-owned central banks can run printing presses. Governments and people do not have access to the printing presses (with some limited exceptions, like North Dakota), and thus have to pay the monopolists to run them (in the form of interest on the loans). At the very least, the system must be changed so that it is not – by definition – perched atop a mountain of debt, and the monetary base must be maintained by an authority that is accountable to the people. Hat tip to Festan von Geldern. Note 1: When I receive a better translation I will post it.
Categories: Other bubble bloggers
Bank Failure #31: American National Bank, Parma, Ohio
Spring is in the air
What's this other thing I smell? Fail, from Ohio by Soylent Green is People From the FDIC: The National Bank and Trust Company, Wilmington, Ohio, Assumes All of the Deposits of American National Bank, Parma, Ohio American National Bank, Parma, Ohio, was closed today by the Office of the Comptroller of the Currency, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. ... As of December 31, 2009, American National Bank had approximately $70.3 million in total assets and $66.8 million in total deposits.... The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $17.1 million. ... American National Bank is the 31st FDIC-insured institution to fail in the nation this year, and the first in Ohio. The last FDIC-insured institution closed in the state was AmTrust Bank, Cleveland, on December 4, 2009.Ohio is on the map. I'm thinking Puerto Rico and Illinois ...
Categories: Other bubble bloggers
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