Japan Caught In Deflationary Spiral; Exports Plunge, Prices To Follow

Recessions have taken their toll on Asia exporters. Inquiring minds are reading Japan Exports Drop Record 49% as Global Slump Deepens.

Japan’s exports plunged a record 49.4 percent in February as deepening recessions in the U.S. and Europe sapped demand for the country’s cars and electronics.

Shipments to the U.S., the country’s biggest market, tumbled an unprecedented 58.4 percent from a year earlier, the Finance Ministry said today in Tokyo. Automobile exports slid 70.9 percent.

The collapse signals gross domestic product may shrink this quarter at a similar pace to the annualized 12.1 percent contraction posted in the previous three months, the sharpest since 1974. Prime Minister Taro Aso is compiling his third stimulus package as companies from Toyota Motor Corp. to Panasonic Corp. fire thousands of workers.

Sharpest Since 1980

Last month’s drop in exports was the sharpest since at least 1980, when the government started to keep comparable data. Economists predicted a 47.6 percent decline.

Toyota, forecasting its first net loss in 59 years, yesterday said overseas shipments plunged 69 percent in February.

Demand fell across all regions. Exports to Europe dropped a record 54.7 percent, shipments to Asia declined 46.3 percent and goods sent to China slumped 39.7 percent.

Imports fell a record 43 percent, helping Japan post its first trade surplus in five months. The 82.4 billion yen ($842 million) surplus was still 91.2 percent lower than the same month a year earlier.

Sentiment among Japan’s largest manufacturers probably fell to a 33-year low this month, economists predict the Bank of Japan’s Tankan survey will show next week.

Finance Minister Kaoru Yosano said on March 22 that a new stimulus package of as much as 20 trillion yen, double the amount pledged since October, is “not out of line” as the world’s second-biggest economy heads for its worst recession since 1945. The spending would add to public debt already estimated at 170 percent of gross domestic product.

Japan's Public Debt Nightmare

Japan' public debt is 170 percent of GDP, the highest in the G20. Increased debt is all that has been accomplished by Keynesian silliness and Monetarist nonsense. Meanwhile the debate in the US between Krugman in the Keynesian camp and Mankiw in the Monetarist camp has shifted.

Both now think that quantitative easing is a good thing. The only difference is that Krugman wants to call it qualitative easing. Please see Krugman's $200 Billion Lunch for details.

Central Bank Interest Rates Idiocy In Japan

Japan's interest rates is .1%. Amazingly Deputy Governor Hirohide Yamaguchi somehow sees the need to announce BOJ Won’t Rule Out Further Rate Cuts.

The Bank of Japan won’t rule out additional reductions to the benchmark 0.1 percent interest rate, Deputy Governor Hirohide Yamaguchi said.

“It’s not as if there’s absolutely no room for further rate cuts,” Yamaguchi, 58, told reporters today in Otaru, northern Japan. “This option isn’t completely ruled out at this stage.”

Yamaguchi said the policy board would need to assess the impact of further rate reductions on money-market trading. [Meanwhile BOJ Governor] Shirakawa has repeatedly said lowering the overnight lending rate to zero percent should be avoided because it would make trading in short-term markets unprofitable.

Governor Shirakawa said in parliament today that there’s no immediate risk of a deflationary spiral.

When all you have room to cut is .1%, it is ridiculous to be pretending there is "room for cuts" or those cuts could possibly accomplish anything.

Japan's Deflationary Spiral

Please consider Japan’s Consumer Prices Probably Stalled for a Second Month.

Japan’s consumer prices were probably unchanged for a second month in February as the nation’s recession deepened.

A record drop in exports is forcing companies to fire workers, depressing wages and consumption and pushing the nation closer to its worst recession since 1945. Prices will probably start falling as soon as next month and their declines will accelerate, analysts said.

“Core prices are already on the verge of slipping into negative territory,” said Seiji Adachi, a senior economist at Deutsche Securities Inc. in Tokyo. “Prices are definitely southbound and the risk of deflation warrants caution.”

The world’s second-largest economy contracted at an annualized 12.1 percent in the three months ended Dec. 31, the fastest pace since 1974.

“The rapid deterioration in the economy will continue to widen the supply and demand gap further, adding downward pressure on prices,” said Yoshiki Shinke, a senior economist at Dai-Ichi Life Research Institute in Tokyo.

One board member said consumers’ attempts to cut living costs and companies’ discounting may exercise “further downward pressure” on prices.

Aeon Co., Japan’s largest supermarket operator, last week said it will reduce prices of 5,100 items this month, attempting to lure cash-strapped households. Rivals Ito-Yokado Co. and Seiyu Ltd. already cut prices of food, clothing and household products this month.

The article above continually refers to deflation as falling prices. As I have pointed out many times that is a poor definition. See Humpty Dumpty On Inflation if you need a refresher course on what inflation really is. That done, it is clear Japan is already back in deflation, along with the US and UK.

Note that years of quantitative easing did not prevent Japan's deflation from reoccurring, nor did years of Keynesian building of bridges to nowhere.

Yet Geithner says "This plan will work. This plan because of the authority provided not just by Congress but the treasury and the Fed gives us broad ability to do what you need to do to get through a financial crisis like this. It just requires will; It's not about ability. We just need to keep at it. We just need to work with Congress to make sure we do this on a scale that will make it work."

Supposedly Geithner's will is more powerful than the markets. Ability is not even needed. If willpower doesn't work, Geithner solution is to scale up until it does. See Geithner's Arrogance Knows No Bounds for details.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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America's Abandoned Cities

Flint Michigan typifies the plight of inner city urban decay. Inquiring minds are wondering what if anything can be done. MLive explores that issue in an article discussing what to do with abandoned neighborhoods in Flint.

The view through an abandoned house's broken window looks out on a boarded-up house across the street on East Russell Avenue in Flint.



Look in any direction from Bianca Bates' north Flint home, and you'll see graffiti-covered siding, boarded-up windows and overgrown lots.

About half of the homes on her block are burned out or vacant magnets for drug dealers and squatters. It isn't where she thought she'd end up, but it's all she can afford to rent.

Property abandonment is getting so bad in Flint that some in government are talking about an extreme measure that was once unthinkable -- shutting down portions of the city, officially abandoning them and cutting off police and fire service.

Temporary Mayor Michael Brown made the off-the-cuff suggestion Friday in response to a question at a Rotary Club of Flint luncheon about the thousands of empty houses in Flint.

City Council President Jim Ananich said the idea has been on his radar for years.

The city is getting smaller and should downsize its services accordingly by asking people to leave sparsely populated areas, he said.

"It's going to happen whether we like it or not," he said. "We'd have to be creative about it, but it's something worth looking into. We're not there yet, but it could definitely happen."

The concept of "shrinking cities" isn't new to urban areas similar to Flint.

Last year, the city of Youngstown, Ohio, proposed incentives to encourage people to move out of nearly empty blocks and relocate to more populated areas closer to the heart of the city. Some people were offered upward of $50,000, according to news reports.

The idea was to shut down entire streets and bulldoze abandoned properties so the city could discontinue services such as police patrols and street lighting, according to a CNN report.

Razing sections of Flint, Detroit, Youngstown, and anywhere else where abandoned buildings blight neighborhoods arguably makes more sense than Obama's idea of pouring money into schools to make them more energy efficient. Moreover, this is something that could easily start today, without a lot of effort or planning. However, it might require changes in state law for cities to take over such properties.

Isolated lots would be of little commercial use but at least the gangs and drug pushers would be kicked out. Larger areas would have commercial use and could be sold to the highest bidder. Even the small lots would be of use for the neighboring houses as vegetable gardens. Anything to get the properties back on the tax rolls would be a good thing.

Bear in mind I am not a proponent of the broken window fallacy. Rather, I am proposing that razing these buildings is a better thing to do with money, and will have a better stabilizing effect on neighborhoods than most of the housing plans coming from Washington and elsewhere.

Cleaning up blight will do more to raise home prices in a non-artificial way than any plan I have seen to date.

What's interesting to me is the number of plans already on the books to take care of this blight but nothing seems to get done. The reason nothing gets done is these are not the homes banks or the wealthy care about.

Banks are far more interested in reinflating the price of $500,000 homes now fallen to $300,000 than taking care of urban blight. However, reinflating home prices cannot work because home prices needs to fall to levels that are affordable.

Homes in Flint and other such areas, have indeed fallen to their true value (less than zero). No one wants them at any price. Moreover there's little incentive for anyone to do anything about this. Thus the discussion involves "shutting down portions of Flint, officially abandoning them and cutting off police and fire service."

Our throw-away society has effectively reached a new level of efficiency: the throw-away city.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Geithner's Arrogance Knows No Bounds

Inquiring minds are listening to Geithner explain to Congress how his plan works. Here is a transcript of a conversation between Rep Gresham Barrett and Treasury Secretary Geithner.

Rep Gresham Barrett: "The last question I have guys, which is the $64 million question or I guess I should say $64 trillion question is: What's the backup plan? If everything fails what do we do? Where do we go from here?"

Treasury Secretary Geithner: "Congressman this plan will work. This plan because of the authority provided not just by Congress but the treasury and the Fed gives us broad ability to do what you need to do to get through a financial crisis like this. It just requires will; It's not about ability. We just need to keep at it. We just need to work with Congress to make sure we do this on a scale that will make it work."



Someone needs to get this Jon Stewart on the Daily show. I think he will have a field day with "It [The Plan] just requires will; It's not about ability." Unfortunately, Geithner's attitude is more scary than it is funny.

Geithner Seeks Expanded Power

It would be hard for Geithner to screw up more badly or to say dumber things. Yet, his counterattack is to seek still more power. Please consider Geithner Seeks Expanded Power to Seize Firms.

The Obama administration is considering asking Congress to give the Treasury secretary unprecedented powers to initiate the seizure of non-bank financial companies, such as large insurers, investment firms and hedge funds, whose collapse would damage the broader economy, according to an administration document.

The government at present has the authority to seize only banks.

Giving the Treasury secretary authority over a broader range of companies would mark a significant shift from the existing model of financial regulation, which relies on independent agencies that are shielded from the political process. The Treasury secretary, a member of the president's Cabinet, would exercise the new powers in consultation with the White House, the Federal Reserve and other regulators, according to the document.

Besides seizing a company outright, the document states, the Treasury Secretary could use a range of tools to prevent its collapse, such as guaranteeing losses, buying assets or taking a partial ownership stake. Such authority also would allow the government to break contracts, such as the agreements to pay $165 million in bonuses to employees of AIG's most troubled unit.

The Treasury secretary could act only after consulting with the president and getting a recommendation from two-thirds of the Federal Reserve Board, according to the plan.

Unlimited Plan For Unlimited Arrogance

Notice that the "plan" does not require approval of Congress or the President only a "consultation". What good is that? And why should Congress grant this authority to such an arrogant fool?

Geithner even asks for powers that are unconstitutional such as the ability to break any contract. Getting 2/3 approval from the Fed is no big deal as the Fed and the treasury are in cahoots to rob taxpayers.

And speaking of robbing taxpayers, note that the request would allow the Treasury to guarantee losses, buy assets, or take ownership stakes in whatever it damn well pleased.

Fed Uncertainty Principle

Geithner's actions were called in advance by me, before he was even appointed. Please consider the Fed Uncertainty Principle, written April 3, 2008. Simply substitute "Fed and Treasury" where I previously said "Fed".

Uncertainty Principle Corollary Number Two

The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.

Inquiring minds referring to the article will note that corollaries three and four pertaining to illegal actions and repeating past mistakes, also apply.

In Geithner's Galling (and Dangerous) Plan For Bad Bank Assets I said "Tim Geithner is the most dangerous man in America, and Obama is too blind to see it."

If you did not believe it then, hopefully it is obvious now.

Congress Needs To Censure Geithner

Congress should not just deny Geithner's request, Congress ought to Censure Geithner and ask Obama to accept Geithner's resignation.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Krugman's $200 Billion Lunch

Paul Krugman frequently proposes solutions straight out of the "free lunch" handbook. However, in one recent case, Krugman actually managed to put a price tag on the lunch. That price is $200 billion.

Please consider Fiscal aspects of quantitative easing (wonkish).

The big policy news [last] week has been the Fed’s decision to buy $1 trillion of long-term bonds, going beyond the normal policy of buying only short-term debt. Good move — but it’s probably worth pointing out that yes, this does expose the Fed, and indirectly the taxpayer, to some risks. And in so doing, it blurs the line between fiscal and monetary policy.

Now, the Fed isn’t taking on any serious default risk.

The Fed is, however, creating a new liability: the monetary base it creates to buy these bonds. In effect, it’s printing $1 trillion of money, and using those funds to buy bonds. Is this inflationary? We hope so! The whole reason for quantitative easing is that normal monetary expansion, printing money to buy short-term debt, has no traction thanks to near-zero rates. Gaining some traction — in effect, having some inflationary effect — is what the policy is all about.

But here’s the rub: if and when the economy recovers, it’s likely that long-term interest rates will rise, especially if the Fed’s current policy is successful in bringing them down. And this also means that selling the bonds at market prices won’t be enough to withdraw all the money now being created.

My back of the envelope calculation looks like this: if the Fed buys $1 trillion of 10-year bonds at 2.5%, and has to sell those bonds in an environment where the market demands a yield to maturity of more than 5%, it will take around a $200 billion loss.

I’m not complaining; I think quantitative easing (it’s really qualitative easing, but I give up on trying to fix the terminology) is the right way to go. But we should go into it with our eyes open.

Fatally Flawed Thinking

I commend Krugman for attempting to put a price tag on his lunch. However, his analysis of the costs and the benefits of that lunch is fatally flawed.

For starters the Fed cannot force long term interest rates down without committing an unlimited amount of purchases, and perhaps not even then. Simply put, the Fed cannot change the primary trend. If long-term interest rates are headed higher there is little the Fed can do about it.

Japan proved that currency manipulation does not work, and I see little reason for open intervention in the treasury market to work either.

Yes, there was a huge treasury rally on the announcement. Was this because of the news or was the market ready to rally anyway? I think the latter. The long bond rallied as did the 10-year treasury, the latter right at a 50% retrace of the move down from mid-October. It was an oversized move but treasuries have sold off three consecutive days since the announcement.

Prices Set At The Margin

Barring short term manipulative disruptions, yields are going to go where they were going to go in the absence of intervention.

Prices of commodities, treasuries, currencies, etc. are set at the margin. And as soon as the massive marginal buyer (the Fed) stops buying, rates will go back to where they were going without the intervention. So committing $1 trillion will not do a damn thing as soon as the money is used up.

Moreover, as long as the Fed is willing to buy assets at inflated prices, there will be an endless supply of sellers. Given enough time and enough dollar commitment, eventually no one would own treasuries but the Fed. Imagine the complications unwinding that.

Fed Can Exaggerate, Not Change The Trend

While the Fed cannot change the trend, it can exaggerate it. Thus if interest rates are not ready to go down on their own accord, attempts to force them down will fail, but unwinding them might cause a bigger problem than Krugman thinks.

Does Quantitative Easing Even Work?

For the sake of argument let's assume by some miracle the Fed can force down rates to where they would not go on their own accord. Would that stimulate anything?

To answer that question let's turn to Japanese Lessons.

“The [Japanese] central bank's implementation of quantitative easing at a time of zero interest rates was similar to a shopkeeper who, unable to sell more than 100 apples a day at Y100 each, tries stocking his shelves with 1,000 apples, and when that has no effect, adds another 1,000. As long as the price remains the same, there is no reason consumer behaviour should change – sales will remain stuck about 100 even if the shopkeeper puts 3,000 apples on display. This is essentially the story of quantitative easing, which not only failed to bring about economic recovery, but also failed to stop asset prices from falling well into 2003.”

- Richard Koo, "The Holy Grail of Macro Economics: Lessons from Japan's Great Recession" (John Wiley 2008).

Richard Koo is particularly good at pointing out that the monetarist Emperor has no clothes. Cutting interest rates to zero in post-bubble Japan had little impact because in a balance sheet recession, when companies are determined to pay down debt to stay alive, they will not borrow at any price.

In Koo‟s words, “Quantitative easing was the twenty-first century's greatest monetary non-event.”

When your investment case essentially rests on nothing more substantial than "greater fool theory" and a somewhat magical process whereby the Treasury issues debt which is immediately bought back by the central bank, it is probably time to look to a less heavily manipulated market.

On the likely impact of quantitative easing in the UK, Richard Koo again:

“At the risk of belabouring the obvious, imagine a patient in the hospital who takes a drug prescribed by her doctor, but does not react as the doctor expected and, more importantly, does not get better. When she reports back to the doctor, he tells her to double the dosage. But this does not help either. So he orders her to take four times, eight times, and finally a hundred times the original dosage. All to no avail. Under these circumstances, any normal human being would come to the conclusion that the doctor's original diagnosis was wrong, and that the patient suffered from a different disease. But today's macroeconomics assumes that private sector firms are maximizing profits at all times, meaning that given a low enough interest rate, they should be willing to borrow money to invest.

In reality, however, borrowers – not lenders, as argued by academic economists – were the primary bottleneck in Japan's Great Recession.”

Krugman might counter that forcing long-term rates down will lower rates on mortgages. It will do no such thing. Mortgage rates long ago disconnected from the 10-year treasury, primarily because of rising default risk. This is why the Fed has a separate facility dealing specifically with mortgage rates.

Given all the Fed and Fed-sponsored lending facilities, the Fed is pretty much the lender of only resort across the board. In this case, if you were a bank would you want to commit to holding a 30 year mortgage when the only reason rates were low was because the Fed manipulated them that low (assuming once again the Fed could do such a thing)?

In Passing the Buck economist Greg Mankiw was the one arguing for quantitative easing while challenging Krugman who argued for deficit spending. This caused a bit of a spat at the time and they have been arguing about many things ever since .

For the record, both are now wrong because quantitative easing did not accomplish a damn thing for Japan nor will it accomplish a damn thing for the US. What it will do however, is distort the economic picture while creating an expense unwinding something that should never have been wound up in the first place.

Moreover, Krugman is doubly wrong because of his Keynesian "hangover theories" as noted in Krugman Still Wrong After All These Years.

At least we have a price tag for this lunch proposal. It's a start. Now all we need is for Krugman to come to the realization that the benefits are negative. After all, $200 billion lunches that provide no benefit are rather expensive indeed.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Geithner's Galling (and Dangerous) Plan For Bad Bank Assets

The long awaited details of Geithner's "plan" for dealing with bad bank assets is finally out. Githener's plan is disingenuous at best. If people want to be outraged at something, it should be over Geithner's plan.

The Wall Street Journal has the story in Timothy Geithner: My Plan for Bad Bank Assets.

The American economy and much of the world now face extraordinary challenges, and confronting these challenges will continue to require extraordinary actions. No crisis like this has a simple or single cause, but as a nation we borrowed too much and let our financial system take on irresponsible levels of risk.

My Comment: Actually the root cause is simple to understand, micro-mismanagement of interest rates by the Fed, Fractional Reserve Lending, and Congressional spending run rampant.

The depth of public anger and the gravity of this crisis require that every policy we take be held to the most serious test: whether it gets our financial system back to the business of providing credit to working families and viable businesses, and helps prevent future crises.

Today, we are announcing another critical piece of our plan to increase the flow of credit and expand liquidity. Our new Public-Private Investment Program will set up funds to provide a market for the legacy loans and securities that currently burden the financial system.

The Public-Private Investment Program will purchase real-estate related loans from banks and securities from the broader markets. Banks will have the ability to sell pools of loans to dedicated funds, and investors will compete to have the ability to participate in those funds and take advantage of the financing provided by the government.

The funds established under this program will have three essential design features. First, they will use government resources in the form of capital from the Treasury, and financing from the FDIC and Federal Reserve, to mobilize capital from private investors. Second, the Public-Private Investment Program will ensure that private-sector participants share the risks alongside the taxpayer, and that the taxpayer shares in the profits from these investments. These funds will be open to investors of all types, such as pension funds, so that a broad range of Americans can participate.

Third, private-sector purchasers will establish the value of the loans and securities purchased under the program, which will protect the government from overpaying for these assets.

My Comment: The Government has agreed to finance 93% of the loan, and it is a no recourse loan. This provision is in place for one reason only: To insure that investors overpay for bad bank assets, at taxpayer expense.

Please see Geithner's Plan, a Gigantic Confidence Game for more details.

The new Public-Private Investment Program will initially provide financing for $500 billion with the potential to expand up to $1 trillion over time, which is a substantial share of real-estate related assets originated before the recession that are now clogging our financial system. Over time, by providing a market for these assets that does not now exist, this program will help improve asset values, increase lending capacity by banks, and reduce uncertainty about the scale of losses on bank balance sheets. The ability to sell assets to this fund will make it easier for banks to raise private capital, which will accelerate their ability to replace the capital investments provided by the Treasury.

My Comment: The PPIP will not do anything for the value of bad assets on bank books. Moreover, if PPIP is "successful" all that really will have taken place is to offload risk (swindle) taxpayers, for the benefit of Geithner's banking buddies. For comparison purposes, this swindle makes the Savings and Loan Scandal look like a picnic in the park.

Our approach shares risk with the private sector, efficiently leverages taxpayer dollars, and deploys private-sector competition to determine market prices for currently illiquid assets. Simply hoping for banks to work these assets off over time risks prolonging the crisis in a repeat of the Japanese experience.

My Comment: The government (taxpayer) is taking 93% of the risk. In my opinion that makes claims of sharing the risk a blatant lie.

Moving forward, we as a nation must work together to strike the right balance between our need to promote the public trust and using taxpayer money prudently to strengthen the financial system, while also ensuring the trust of those market participants who we need to do their part to get credit flowing to working families and businesses -- large and small -- across this nation.

My Comment: Geithner and Bernanke clearly do not understand the problem. The reality is are few credit worthy borrowers to lend to and therefore no reason for banks to lend. Moreover, with rampant overcapacity and a slowing economy there is no good reason for credit worthy borrowers to borrow.

Thus, the idea that credit will start flowing again if bad assets are removed from bank balance sheets is patently false.

This requires those in the private sector to remember that government assistance is a privilege, not a right. When financial institutions come to us for direct financial assistance, our government has a responsibility to ensure these funds are deployed to expand the flow of credit to the economy, not to enrich executives or shareholders.

My Comment: Looking at the details of the program, one might easily assume the sole plan was to enrich executives and shareholders at taxpayer expense.

We cannot solve this crisis without making it possible for investors to take risks. While this crisis was caused by banks taking too much risk, the danger now is that they will take too little.

My Comment: This is more disingenuous nonsense. The real danger now is the Fed or Congress forces banks into more reckless lending.

Our nation deserves better choices than, on one hand, accepting the catastrophic damage caused by a failure like Lehman Brothers, or on the other hand being forced to pour billions of taxpayer dollars into an institution like AIG to protect the economy against that scale of damage.

Our goal must be a stronger system that can provide the credit necessary for recovery, and that also ensures that we never find ourselves in this type of financial crisis again. We are moving quickly to achieve those goals, and we will keep at it until we have done so.

What Our Nations Deserves

Our nation deserves the Fed, the Treasury, and Congress to stop acting like socialist fools. That's what taxpayers deserve. Geithner's galling plan is as far removed from that ideal as possible.

Details on Public Private Partnership Investment Program

The Treasury Department has Details on Public Private Partnership Investment Program. Inquiring minds are looking at one of the examples.

Sample Investment Under the Legacy Loans Program

• Step 1: If a bank has a pool of residential mortgages with $100 face value that it is seeking to divest, the bank would approach the FDIC.
• Step 2: The FDIC would determine, according to the above process, that they would be willing to leverage the pool at a 6-to-1 debt-to-equity ratio.
• Step 3: The pool would then be auctioned by the FDIC, with several private sector bidders submitting bids. The highest bid from the private sector – in this example, $84 – would be the winner and would form a Public-Private Investment Fund to purchase the pool of mortgages.
• Step 4: Of this $84 purchase price, the FDIC would provide guarantees for $72 of financing, leaving $12 of equity.
• Step 5: The Treasury would then provide 50% of the equity funding required on a side-by-side basis with the investor. In this example, Treasury would invest approximately $6, with the private investor contributing $6.
• Step 6: The private investor would then manage the servicing of the asset pool and the timing of its disposition on an ongoing basis – using asset managers approved and subject to oversight by the FDIC.

The example shows that taxpayers are on the hook for $78 out of every $84, in other words 93%, slightly better than the 97% number floating around yesterday.

Financial Stability Website.

The website FinancialStability.Gov is loaded with links to fact sheets, white papers, and FAQs that inquiring minds may wish to investigate.

Geithner's Plan "Extremely Dangerous

Economist Galbraith Says Geithner's Plan "Extremely Dangerous".

Tim Geithner has finally revealed his plan to fix the banking system and economy. Paul Krugman, James Galbraith, and others have already trashed it.

[We spoke with noted economist Galbraith this morning. In the accompanying segment, he calls the Treasury Secretary’s plan “extremely dangerous.”]

Why?

In short, because the plan is yet another massive, ineffective gift to banks and Wall Street. Taxpayers, of course, will take the hit.

We think Geithner is suffering from five fundamental misconceptions about what is wrong with the economy.

Five Misconceptions

• The trouble with the economy is that the banks aren't lending. The reality: The economy is in trouble because American consumers and businesses took on way too much debt and are now collapsing under the weight of it.
• The banks aren't lending because their balance sheets are loaded with "bad assets" that the market has temporarily mispriced. The reality: The banks aren't lending (much) because they have decided to stop making loans to people and companies who can't pay them back.
• Bad assets are "bad" because the market doesn't understand how much they are really worth. The reality: The bad assets are bad because they are worth less than the banks say they are.
• Once we get the "bad assets" off bank balance sheets, the banks will start lending again. The reality: The banks will remain cautious about lending, because the housing market and economy are still deteriorating. So they'll sit there and say they are lending while waiting for the economy to bottom.
• Once the banks start lending, the economy will recover. The reality: American consumers still have debt coming out of their ears, and they'll be working it off for years.
  

The above link above has a video of James Galbraith trashing the plan and more details on the five misconceptions.

Clusterstock is also talking about Geithner's Five Big Misconceptions. The key addition to Clusterstock's version of "misconceptions" is the addition of two charts that show how dire the situation really is. I will show one of the charts (annotations in red by me).

The two charts below from Ned Davis illustrate the real problem: An explosion of debt relative to GDP. The first is Nonfinancial Debt To GDP. The second is Total Debt To GDP.

In Geithner's plan, this debt won't disappear. It will just be passed from banks to taxpayers, where it will sit until the government finally admits that a major portion of it will never be paid back.

Total Credit Market Debt vs. GDP


click on chart for sharper image

The above chart is similar to those detailed in Fiat World Mathematical Model. Here is the ending snip on psychology that is at the heart of the matter.

Political Will vs. Consumer Psychology

What happens next depends somewhat on the political will of the central banks and politicians. However, it depends more on the psychology of the borrowers. If consumers and businesses refuse to spend and instead pay back debts (or default on them along with rising unemployment), the picture simply is not inflationary, at least to any significant decree.

The credit bubble that just popped exceeded that preceding the great depression, not just in the US but worldwide. Thus, it is unrealistic to expect the deflationary bust to be anything other than the biggest bust in history. Those looking for hyperinflation or even strong inflation in light of the above, are simply looking at the wrong model.

At some point the market value of credit will start expanding again, but that is likely further down the road, and weaker in scope than most think.

Henry Blodget's Five Misconceptions are another way of looking at the psychology of the situation. The sad reality is that both Geithner and Bernanake are trapped in academic wonderland with failed models about what happened in the Great Depression and why.

Geithner said "Simply hoping for banks to work these assets off over time risks prolonging the crisis in a repeat of the Japanese experience." I agree. Unfortunately, Geithner's solution is to Zombify the taxpayer instead. What needs to happen is for banks to write off the bad debts. The Fed pleaded with Japan to do just that. Now Bernanke and Geithner refuse to follow that advice.

Bear in mind this insanity is just round 1. When it does not spur lending for reasons stated above, Geithner will be back at it begging for more taxpayer funds to bailout the banks. By the way, is this even legal? Offering no collateral loans is a handout. Many on the Fed, including Bernanke have stated the Fed can provide liquidity not capital. What is a no-recourse loan but capital? Of course the Fed is offering these guarantees via the FDIC.

FDIC Seeks $500 Billion Borrowing Power

Flashback March 6, 2009 Bill Seeks to Let FDIC Borrow up to $500 Billion.

Senate Banking Committee Chairman Christopher Dodd is moving to allow the Federal Deposit Insurance Corp. to temporarily borrow as much as $500 billion from the Treasury Department.

The Connecticut Democrat's effort -- which comes in response to urging from FDIC Chairman Sheila Bair, Federal Reserve Chairman Ben Bernanke and Treasury Secretary Timothy Geithner -- would give the FDIC access to more money to rebuild its fund that insures consumers' deposits, which have been hard hit by a string of bank failures.

Now We Know

Now we know the true purpose of that $500 billion. The intent never was to "rebuild its fund that insures consumers' deposits".

The intent all along was to swindle taxpayers to the tune of $500 billion dollars. Rest assured this will not be temporary. It is a permanent swindle. Is there any taxpayer swindle that Senator Dodd is not part of?

The Answer Is Still Deflation

Once again the hyperinflationists will be screaming at the top of their lungs over this plan. The plan is certainly worth screaming about, but not because it will cause hyperinflation.

Indeed, the real danger is that Geithner's plan will prolong the agony further zombifying taxpayers by saddling them with debt that cannot be paid back, while doing nothing to spur lending.

The chart above in conjunction with changing consumer attitudes toward debt, ensures that hyperinflation is not remotely in the picture. All Geithner is doing is making the problem worse. Tim Geithner is the most dangerous man in America, and Obama is too blind to see it.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Geithner's Plan, a Gigantic Confidence Game

In case you missed this weekend's top story about Geithner's much anticipated plan to save the financial world via smoke and mirrors, please consider Toxic Asset Plan Foresees Big Subsidies for Investors

The Treasury Department is expected to unveil early next week its long-delayed plan to buy as much as $1 trillion in troubled mortgages and related assets from financial institutions, according to people close to the talks.

Although the details of the F.D.I.C. part were still being completed on Friday, it is expected that the government will provide the overwhelming bulk of the money — possibly more than 95 percent — through loans or direct investments of taxpayer money.

The hope is that such a generous taxpayer subsidy will attract private investors into the market and accelerate the recovery of the country’s banks.

The key protection for taxpayers, according to people briefed on the plan, is that the private investors will bid in auctions against each other for the assets. As a result, administration officials contend, the government will be buying the troubled loans of the banks at a deep discount to their original face value.

Because the government can hold those mortgages as long as it wants, officials are betting the government will be repaid and that taxpayers may even earn a profit if the market value of the loans climbs in the years to come.

To entice private investors like hedge funds and private equity firms to take part, the F.D.I.C. will provide nonrecourse loans — that is, loans that are secured only by the value of the mortgage assets being bought — worth up to 85 percent of the value of a portfolio of troubled assets.

The remaining 15 percent will come from the government and the private investors. The Treasury would put up as much as 80 percent of that, while private investors would put up as little as 20 percent of the money, according to industry officials. Private investors, then, would be contributing as little as 3 percent of the equity, and the government as much as 97 percent.

Private Public Partnership Details Emerging

Yves Smith at Naked Capitalism is sounding concerns about Geithner's Private Public Partnership Details.

If this isn't Newspeak, I don't know what is. Since when is someone who puts 3% of total funds and gets 20% of the equity a "partner"?

And notice the utter dishonesty: a competitive bidding process will protect taxpayers. Huh? A competitive bidding process will elicit a higher price which is BAD for taxpayers!

Dear God, the Administration really thinks the public is full of idiots. But there are so many components to the program, and a lot of moving parts in each, they no doubt expect everyone's eyes to glaze over.

Zombies Win

I seldom agree with Paul Krugman. Yet I am essentially in agreement with Krugman on Geithner's bailout plan.

Krugman is in Despair over financial policy.

The Geithner plan has now been leaked in detail. It’s exactly the plan that was widely analyzed — and found wanting — a couple of weeks ago. The zombie ideas have won.

The Obama administration is now completely wedded to the idea that there’s nothing fundamentally wrong with the financial system — that what we’re facing is the equivalent of a run on an essentially sound bank. As Tim Duy put it, there are no bad assets, only misunderstood assets. And if we get investors to understand that toxic waste is really, truly worth much more than anyone is willing to pay for it, all our problems will be solved.

Krugman Followup

More on the Geithners' bank plan.

Why was I so quick to condemn the Geithner plan? Because it’s not new; it’s just another version of an idea that keeps coming up and keeps being refuted. It’s basically a thinly disguised version of the same plan Henry Paulson announced way back in September.

Why am I so vehement about this? Because I’m afraid that this will be the administration’s only shot — that if the first bank plan is an abject failure, it won’t have the political capital for a second. So it’s just horrifying that Obama — and yes, the buck stops there — has decided to base his financial plan on the fantasy that a bit of financial hocus-pocus will turn the clock back to 2006.

Bear in mind I am not exactly a proponent of the "Swedish Solution", rather I am favor of letting failed banks fail. Nonetheless, Krugman is absolutely correct when it comes to the heart of this story: Geithner's plan is sheer hocus-pocus idiocy.

Brad DeLong’s defense of Geithner

Amazingly, I find myself in agreement with a third Krugman article in rapid succession. I promise this will not be habit forming but for now please consider Brad DeLong’s defense of Geithner.

Brad gives it the old college try. But he shies away, I think, from the central issue: the non-recourse loans financing 85 percent of the purchases.

Brad treats the prospect that assets purchased by public-private partnership will fall enough in value to wipe out the equity as unlikely. But it isn’t: the whole point about toxic waste is that nobody knows what it’s worth, so it’s highly likely that it will turn out to be worth 15 percent less than the purchase price.

You might say that we know that the stuff is undervalued; actually, I don’t think we know that. And anyway, the whole point of the program is to push prices up to the point where we don’t know that it’s undervalued.

Confidence Game

There have been a lot of intelligent comments by Yves Smith, CalculatedRisk, and Krugman. So far no one has said what I think the plan is: a gigantic confidence game.

This is similar in nature to fraudulent schemes that promise "what's inside the bag is worth $1 million, unless you open the bag".

In this case there may be a few "good bags" similar in nature to salting the mine schemes, but for the most part everyone knows what's in the bag is toxic garbage. What really makes no sense whatsoever is why the government would risk 97% with shared "upside" instead of just buying it all.

Somehow, Geithner (and Obama by implication) believes that igniting a bidding war between hedge funds and private equity over a bag of cow manure will inspire confidence that there's gold in the bag. Such insanity cannot possibly work, which means it won't.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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How Citigroup Incompetence Squanders Taxpayer Money

Inquiring minds are reading Banks Selling Properties in Bulk for Cheap.

Mar. 19--Lenders have become so overwhelmed by the foreclosure crisis that they are starting to unload properties in bulk to investor groups at steep discounts. Investors then flip the properties for a profit without necessarily improving the home.

For example, a unit of Citigroup, the troubled financial giant, sold a foreclosure in Temecula to an Arizona investment firm for $139,000 when comparable homes in the area were selling for $240,000 to $260,000.

The firm listed the home for $249,000, received multiple offers and the property has entered escrow, said Amber Schlieder, the real estate agent who handled the listing.

The Temecula foreclosure was first listed for sale by Citigroup in May 2007 for $420,000, according to Multi-Regional Multiple Listing Service, a real estate posting site used by real estate agents.

The property was listed on the site for 19 months before selling to the investors in a bulk sale in December 2008. The lowest price it was listed for was $314,000.

"It should have been listed for less," said Craig Finlayson, a real estate agent in the area who listed the property for Citigroup. "But it would have sold for more than 139 (thousand); 139 was a giveaway price."

CR Capital was the firm that flipped the Temecula foreclosure property, an investment group based in Tucson, Ariz. Calls to CR Capital were not immediately returned.

Incompetence In Pricing

The house never sold because Citigroup had it priced way above market. That is incompetence, lack of concern, an overworked unit or a combination of the above. I vote for the latter.

In Banks Leaving Money on the Table "All Day Long" Calculated Risk said "Citi just left $100,000 on the table. I hear stories like this all the time."

Debt Guarantees

Debt guarantees are another piece of the puzzle. Flashback February 4, 2009 Triage For Troubled Assets.

In November, the government agreed to limit Citigroup's losses on a portfolio of $301 billion of troubled assets. Last month, the government issued a similar guarantee to Bank of America covering $118 billion in troubled assets. In both cases, the companies agreed to absorb an initial increment of losses -- about $30 billion for Citigroup and $10 billion for Bank of America -- with the government absorbing 90 percent of any subsequent losses.

When taxpayers are guaranteeing 90% of the losses above $30 billion, a figure that was no doubt reached months ago, there is only a 10% incentive to do a job well.

Clearly this opens the door for allegations of graft, corruption, kickbacks, and sweetheart deals. Did any of that take place with this firesale of assets? Who knows?

What we do know is that Geithner worked out a sweetheart deal with the banks, and that deal gives the banks every incentive to get this stuff behind them, regardless of cost to taxpayers.

Pandit's Compensation

Think Progress is asking Did Citigroup CEO Vikram Pandit lie to Congress about his compensation?

As ThinkProgress noted, in February, bailed-out Citigroup CEO Vikram Pandit told a House committee that he received only $1 million in salary and “no bonus” in 2008:

"PANDIT: My compensation was for the year 2008 was my salary, which was a million dollars. I received no bonus. And as I stated earlier, I plan to take a dollar per year salary and no bonus until we return to profitability."

Pandit Receives $10.8 Million

The Huffington Post is reporting Pandit Told Congress Compensation Was $1 Million, But Bank Filing Shows $10.8 Million.

Citigroup Chief Executive Vikram Pandit received nearly $11 million of compensation in 2008.

A month earlier, he testified to Congress that his compensation for 2008 was just $1 million. "My compensation for the year 2008 was my salary, which was $1 million," he told the House Committee on Financial Services on February 11, failing to mention his sign-on and retention awards, as well as stock and option awards.

At the same hearing, Pandit pledged to accept a salary of just $1 a year and no bonus until Citibank once again posted a profit.

The $10.82 million in total compensation for 2008 consisted of $7.73 million in sign-on and retention awards, a $958,333 salary, $9.84 million of stock and option awards and $16,193 of other compensation.

Citigroup Reports Profit

Flashback Tuesday, March 10, 2009: Another Bear Market Rally or Something More?

In a letter sent to employees Monday, Citi Chief Executive Vikram Pandit said the first-quarter performance so far has been the bank's best since the third quarter of 2007 -- the last time it recorded net income for a full period. Based on historical revenue and expense rates, Citi's projected earnings before taxes and one-time charges would be about $8.3 billion for the full quarter.

Pandit declined to say how large credit losses and other one-time items have been that would at least partially offset profit.

What Really Happened?

Citigroup reported a profit. Hallejuah! Pandit can start receiving a salary and bonus. Of course Pandit is playing with semantics. An "operating profit" is not the same as a profit.

This is what I said at the time:

So Citigroup has a profit, excluding what?

Who knows? Pandit did not say.

In other news, I am announcing I have $10 billion in my bank account except for the portion of the $10 billion I do not have.

Is dumping assets at fire sale prices at enormous taxpayer expense helping Pandit get his bonus restored? Is there any integrity at a high level anywhere? If there is, how could we possibly know or believe it?

What We Know

Pandit was not truthful to Congress.
Geithner is the architect of this madness.
Obama supports Geithner.
Taxpayers are getting screwed.
Greed at the top is still insatiable.
Geithner is incompetent.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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