Home » The Watercooler for 10/28/09 5:00 PM
The Watercooler for 10/28/09 5:00 PM
DFA's home for a free form, open-ended discussion of what matters most to committed progressive activists.
Watercooler resets everyday at 1am, 9am and 5pm. Past threads can be found in the Watercooler Archive
Thank you for that touching love story. Do you want to be Tara or Bella? :-)
Fixing the economy!!!!
This is from an article in the St. Petersburg Times Newspaper on Sunday. The Business Section asked readers for ideas on "How Would You Fix the Economy?" I think this guy nailed it!
Dear Mr. President,
Please find below my suggestion for fixing America's economy. Instead
of giving billions of dollars to companies that will squander the money
on lavish parties and unearned bonuses, use the following plan. You can
call it the Patriotic Retirement Plan:
There are about 40 million people over 50 in the work force. - Pay them
$1 million apiece severance for early retirement with the following
stipulations:
1) They MUST retire. Forty million job openings - Unemployment fixed.
2) They MUST buy a new American CAR. Forty million cars ordered - Auto
Industry fixed.
3) They MUST either buy a house or pay off their mortgage - Housing
Crisis fixed.
It can't get any easier than that!
P.S. If more money is needed, have all members in Congress and their
constituents pay their taxes...
If you think this would work, please forward to everyone you know. If
not, please disregard.
makes sense except for the buy a home part. If forced to purchase one at 50 and assuming you don't already own one, in some parts of the country the cost of the home could leave a balance insufficient for retirement.
I like it though:)
brilliant idea. My sister would be so jealous ;)
this was a double post.
Jo, At least it's a plan everyone can understand!
Go Yankees!!!..... Though I'm not sure the game will ever start, or finish tonight. It's been a very rainy day and early evening here, 100 mi. North of NYC.
He introduced the phrase, "the new normal" referring to a coming lower GDP for the U.S. for some time. [I]n a New Normal economy (1) almost all
assets appear to be overvalued on a long-term basis, and, therefore,
(2) policymakers need to maintain artificially low interest rates and
supportive easing measures in order to keep economies on the “right
side of the grass.” Let me start out by summarizing a long-standing PIMCO thesis: The
U.S. and most other G-7 economies have been significantly and
artificially influenced by asset price appreciation for decades.
Stock and home prices went up – then consumers liquefied and spent the
capital gains either by borrowing against them or selling outright.
Growth, in other words, was influenced on the upside by leverage,
securitization, and the belief that wealth creation was a function of
asset appreciation as opposed to the production of goods and services... My point: Asset prices are embedded not
only in our psyche, but the actual growth rate of our economy. If they
don’t go up – economies don’t do well, and when they go down, the
economy can be horrid. To some this might seem like a chicken
and egg conundrum because they naturally move together... if long term
profits match nominal GDP growth then theoretically stock prices should
too.
Not so. What has happened is that our
“paper asset” economy has driven not only stock prices, but all asset
prices higher than the economic growth required to justify them... [L]et me introduce Chart 2 a PIMCO
long-term (half-century) chart comparing the annual percentage growth
rate of a much broader category of assets than stocks alone relative to
nominal GDP. Let’s not just make this a stock market roast, let’s
extend it to bonds, commercial real estate, and anything that has a
price tag on it to see if those price stickers are justified by
historical growth in the economy. To read the full post, click here. (also introduced the phrase, "shadow-banking system")
shadow banks. What are they, where did they come from, and how did they operate?
We have to appreciate that we are writing history as it is being made so these are provisional theories. I'm really hoping that there will be a big congressional inquiry and we'll find out the facts of the matter, if only for future historians.
The shadow banking system was built up alongside the traditional banking system, using some of these tools of modern finance we were just talking about like interest rate swaps and credit default swaps. The idea was to make credit cheaper for the ultimate borrower and more available, but also to separate the credit system from the payment system. A lot of the regulation we have on the traditional banking system is there to protect the payment system, to make sure that when you write a check on your deposit account, that money actually gets transferred.
The idea of the shadow banking system was in some way, not only tolerated by regulators, but encouraged by regulators. They thought, "Let's get some of these risks off the balance sheet of the traditional banking system. Let's get interest rate risk off the balance sheet of the traditional banking system. Let's get credit risk off the balance sheet of the traditional banking system."
They thought that would be a good thing. The traditional banks became an originator of loans which they packaged, securitized, and then sold to the shadow banking system, which then raised funds in the money market from mutual funds and asset-backed commercial paper that they issued to whomever. It was avoiding the traditional banking system entirely in this regard, and also avoiding all the regulation of the traditional banking system as well as all the regulatory support of the traditional banking system.
But of course it had the same risks. You aren't actually getting rid of liquidity risk or getting rid of solvency risk; you are just moving them into a different place.
Let's look at a specific example of how a shadow bank would use a prime AAA collateralized debt obligation (CDO) tranche -- that is, the highest rated portion of the security.
Because these things were rated AAA, or if they weren't they got AIG to insure them and make them AAA, they were able to borrow almost 100% of the value of the CDO tranche in the overnight repo market at low overnight rates and were able to make money on the difference. They were trying to do the funding piece of Fischer's idea, and get rid of all the other risks by selling them off. They were taking advantage of what they understood to be their access to low-cost funds and leveraging them up.
So that explains how the shadow banks evolved. Now where did the weaknesses start to show up?
There's some controversy about this. It is certainly true that problems in subprime started to create some anxiety as to whether or not these assets were really AAA or not. But I don't think that this can be sustained, the notion that this was just a housing bubble that collapsed. Because if it was, we'd be done already. As many people said at the beginning of the crash, "oh [the problem is] just subprime, there's only, say, $400 billion of that stuff out there, it is not big enough to undermine the entire financial system." The fact that crisis continues shows that it isn't just a crisis of subprime, but a crisis of the whole securitization structure, that everything came into question.
The way this played out is the following. Once there is any concern about the value of the collateral you are putting up in an overnight borrowing situation, the first thing the lender does is to alter the deal, to say "Ok, we'll continue to lend. But just to be on the safe side, instead of giving you 99 cents on the dollar we'll give you 95 cents on the dollar." That immediately creates a problem for the shadow bank that is borrowing. Where are they going to get that other 4%? The way that plays out is that there is a downward spiral of the collateral because no one knew what these assets were really worth, so they looked to where these assets were traded. Where can we find a market price? And there was no market price.
So what they used as a proxy for a market price was the Asset Backed Securities (ABX) index, which was an index of 20 CDO tranches. This was a traded index. They looked at the price on this index as an indication of the value of the underlying. As that index fell the collateral value was marked down. You couldn't borrow as much as you used to in order to carry the underlying security. This became a self-fulfilling prophesy on the way down, something I refer to as a "liquidity-solvency downward spiral."
I've told my students for a decade that this new system would inevitably get tested by a crisis. And when it got tested it was inevitable that it was going to break. We didn't know where it was going to break, and the important thing now is to identify where it broke and to fix it so it doesn't break there again.
Who was selling all this credit default swap protection?
Many people were selling protection on tranches along the way. Lehman Brothers was selling protection, but it was also buying protection. They were net buyers of protection in fact. The net sellers of protection were insurance companies like AIG. They were thinking of this as an extension of their regular line of business into a new profitable area.
The math geeks on Wall Street supposedly had built ironclad formulas that could model incredibly complex risk to help bankers make complicated investments that would boost their profits. But it seems to me that these models didn't take into consideration the issue of this liquidity risk -- that is, the chance that you will be not be able to trade an asset before taking a loss.
This mindset assumes that these markets are continuous. That liquidity is a free good. And you assume that in building the theory. But when we start to think of the actual mechanics of trading, liquidity does matter, and needs to be paid attention to.
The assumption that liquidity will always be there is just an assumption.
So now "Joe The Bummer" is poised to single handedly kill the Public Option? What a Traitor! Can you believe Al Gore picked this guy for his running mate back in 2000? The Dem party needs to lose this deadbeat! After campaigning for McCain instead of Obama, now this? If I was a Connecticut resident, I wouldn't vote this guy for local dog catcher now that we see his true colors!
"The Dem party needs to lose this deadbeat!"
They did. Lieberman's no Democrat. He just caucuses with them so he can keep his precious committee chairmanship.
In 2008, Gov. Dean suggested in a Huffington Post article by Nico Pitney and Sam Stein that this was a shrewd move by the party, saying:
[T]he fact is, [Lieberman] does vote 90 percent of the time with the Democrats. And no, he shouldn't have said all those things. But why not clean the slate? Why not start all over again? Why not allow him to vote with us on the 90 percent of the stuff? He will be a good vote on climate change -- and this matters. He may be a good vote on election reform, which I hope we will get to. So, you know, he may end up - though it is a little against the odds -- he may end up being the vote that allows us to conduct business when Mitch McConnell decides we shouldn't.
regulation are being addressed/reviewed.
Don't be on securitization going away entirely, though.
mho.
at 8770 was a safe place to short.
bbl after the game
NBA, baseball, BCS Hawkeyes it doesn't get any better and on Sunday Brett returns to Lambeau
Unless you favor a reprise of the Clinton debacle, there is not a single good reason for the administration to be publicly involved at this juncture.
Past history is no guarantee of future performance. (or whatever it is that's said about investments.)
A lot of progressive dems would disagree with you, Tom. They're doing so in public.
Progressives to Obama: Time to Step Up
by Glenn Thrush and Carrie Budoff Brown
It's time for your close-up, Mr. President.
Democratic senators and House members didn't need to shift their attention to 1600 Pennsylvania Ave.: They have been grumbling for weeks that Obama needs to step up.
"I hope the president speaks out strongly for the public option - this health care bill really becomes his at this point," said Sen. Sherrod Brown (D-Ohio), one of about 30 Democrats who have pressured Reid to back the controversial option.
"[Reid] took the temperature of his caucus and found that he had to go with the public option," added Brown. "And now it's the president's turn. ... He needs to speak out strongly on a number of issues ... affordability ... the subsidy question - really on the whole package."
Darcy Burner, executive director of the American Progressive Caucus Policy Foundation, which favors a robust public plan, said the fact that the White House was "hands off" has forced Reid and other leaders to take political risks they otherwise might not have incurred.
"They have not played a strong leadership role in this fight," she said.
more
www.philly.com/philly/sports/phillies/20091028_Manhattan_wasn_t_worth__24.html
No wonder George Washington abandoned New York many years later during the Battle of Long Island. Sure it made strategic sense at the time, but I suspect he simply didn't want to spend another day in New York. (The hotel rates are outrageous.)
According to David McCullough's brilliant book 1776 - which I highly recommend - Washington's ragtag revolutionaries were trying to hold off a large force of British troops that arrived from England in late August of that year. It didn't go well. The Americans suffered heavy casualties - more than 1,000 men, including 700 who were taken prisoner (compared with fewer than 400 losses for the British). Under the cover of thick fog, Washington and his soldiers retreated across the East River to Manhattan and later fled from there, too.
Some 13 years later, long after the last Union Jack was folded up and shipped back to not so merry old England, Washington returned to New York to be sworn in as the first president of this fine land. Saving N.Y.C. from imperial rule was arguably his biggest mistake. He should have just let the Brits have it.
Lee pitched a six-hitter to outduel CC Sabathia, Utley homered twice and the Phillies beat the New York Yankees 6-1 in a misty Game 1 on Wednesday night.
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Videos of some of the 64 House Healthcare Heroes standing strong for a public health insurance option
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- Baseball... World Series... THE FALL CLASSIC...
By Luther Biggs on Oct 28, 2009 5:19 PM EDTIf I may indulge... the start of baseball in the spring suggests the beginning of the new... hope... faith... youth... longer brighter days... the end of the season ushers in the winter... dark... cold ...unpleasant... the end... Long Live Baseball - some of what baseball means to me .
Go Phillies... May the Force be with you...