Friday the 13th of August

Paralysis at the Fed. Paul Krugman, NYT.

Ten years ago, one of America’s leading economists delivered a stinging critique of the Bank of Japan, Japan’s equivalent of the Federal Reserve, titled “Japanese Monetary Policy: A Case of Self-Induced Paralysis?” With only a few changes in wording, the critique applies to the Fed today.

The real reason banks aren't lending. Marshall Auerback, via Credit Writedowns.

credit growth follows creditworthiness, which can only be achieved through sustaining job growth and incomes. That means embracing stimulatory fiscal policy, not “credit-enhancing” measures per se, such as quantitative easing, which will not work. QE is based on the erroneous belief that the banks need reserves before they can lend and that this process provides those reserves... that is a major misrepresentation of the way the banking system actually operates:

In the U. S., when a bank makes a loan, this loan creates a deposit for the borrower. If the bank then ends up with a reserve requirement that it cannot meet by borrowing from other banks, it receives an overdraft at the Fed automatically (at the Fed’s stated penalty rate), which the bank then clears by borrowing from other banks or by posting collateral for an overnight loan from the Fed. Similarly, if the borrower withdraws the deposit to make a purchase and the bank does not have sufficient reserve balances to cover the withdrawal, the Fed provides an overdraft automatically, which again the bank then clears either by borrowing from other banks or by posting collateral for an overnight loan from the Fed.

The point of all this is that the bank clearly does not have to be holding prior reserve balances before it creates a loan. In fact, the bank’s ability to create a new loan and along with it a new deposit has NOTHING to do with how many or how few reserve balances it is holding.

What is required to drive lending is a creditworthy borrower on the other side of the bank lending officer’s desk, which means an employed borrower, whose income allows him to sustain regular repayments. Absent that, there will be no lending activity. It is pointless to blame the evil bankers for this of state affairs, since they don’t control fiscal policy, which is the remit of the Treasury. For all the talk from policy makers about not repeating the mistakes of Great Depression, we seem to be perilously close to doing precisely that. This is largely based on a poor understanding of the economic dynamics of that period, even by that noted scholar of the Great Depression, Ben Bernanke.

The pause that doesn't refresh. Comstock Partners.

The market has suddenly awakened to the fact that the economy is tanking and that the Fed has used all of its conventional ammunition. Interest rates are near zero, the budget deficit is 10% of GDP and the Fed’s balance sheet has tripled to $2.3 trillion. After some $700 billion of TARP funds, $1.7 trillion of Fed purchases of mortgages and Treasuries, untold billions of dollars of guarantees, the auto industry bailout, cash for clunkers, home purchase credits and mortgage workout programs, the economy still cannot stand on its own....

most economists have reduced their second quarter GDP growth estimate to a range of 1%-1.5%, compared to the previously reported 2.7%. Taken together with a sharp rise in unemployment claims, the disappointing payroll employment number, a continually declining housing market, tepid consumer spending and yet another gloomy report from the small business survey, the economic outlook going into the third quarter does not look promising.

The Only Things That Matter… And No One Talks About. Graham Summers, Phoenix Capital Research.

the stooges are out again in full force proclaiming that the US economy is in trouble again (duh), that the Stimulus high is wearing off (duh again) and that the only solution is to issue more Stimulus and money printing to stop another economic contraction (WHAT!?!). Let’s be honest here. The money printing and Stimulus DIDN’T work last time. All it did was buy time.

so, what does matter? jobs and income

Are you ready for how bad it will get? Phoenix Capital.

yes you could claim we had an economic recovery in the sense that things got less bad for a while, however this recovery took place within the context of a larger economic contraction or Depression. A decent analogy would be to throw a rubber ball off the edge of the Grand Canyon. If the ball hit a ledge on the way down, it might bounce upwards temporarily, but unless it somehow cleared the edge from which you threw it, the ball’s trajectory remains “down.”

Can the Nation Stimulate Its Way to Prosperity? Economic Letter, Federal Reserve Bank of Dallas.

Compared with no stimulus, the stimulus plan in 2009 alone was expected to increase GDP by 1 to 3 percentage points, raise payroll employment by 500,000 to 1 million jobs and lower the unemployment rate by half a percentage point. At first glance, it doesn’t appear the stimulus achieved these objectives.

In the year after the plan’s passage, the labor market continued to hemorrhage jobs and unemployment climbed above 10 percent. Indeed, the unemployment rate is now higher than it was expected to be without the stimulus plan—and has been every month since the plan’s passage

What Made America Great Is Now Killing Her! Gordon Long via zero hedge.

Our political leaders are presently addressing what they perceive as an intractable cyclical recovery problem when in fact it is a structural problem that is secular in nature. Like generals fighting the last war with outdated perceptions, we face a new and daunting challenge. A challenge that needs to be addressed with the urgency and scope of a Marshall plan that saved Europe from the ravages of a different type of destruction. We need a modern US centric Marshall plan focused on growth, but orders of magnitude larger than the one in the 1940’s. A plan even more brash than Kennedy’s plan in the 60’s to put a man of the moon by the end of the decade. America needs to again think and act boldly. First however, we need to see the enemy. As the great philosopher Pogo said: “I saw the enemy and it was I”.....

.... As I said in the beginning the US needs a bold new “Marshall” plan to fight the new destruction of creative destruction. Here is a starting point for public debate:

1 – If we can spend $165B bailing out AIG, then we can spend $100B (4 years of college @ 50K/year X 500,000 students) and guarantee everyone in America a college education to compete in the 21st century. Parents will start to spend immediately instead of presently being almost financially paralyzed with skyrocketing education costs.

2- Obama says we need to be leaders in Energy. OK. Where are the programs? Where are the 50,000 new university teaching and research positions ( 50,000 X 75K = $3.8B)? At $3.8B this is a rounding error compared to the banks TARP program.

3- 99% of all jobs in America are created by small business with less than 500 employees. Stop treating them like they are last on the ‘to help’ list after the banks, financial institutions and S&P 500 but first on the taxation list. S&P 500 paid almost net zero taxes, reduced US hiring, yet received the bulk of the governments bailouts. Small business is the golden goose that every administration seems determine to cook....

5- Make Social Security and Medicare financially sound so Americas can believe and budget that it will be there for them....

6- When did the American people decide to fund military operations in over 130 countries around the world?...

8- Washington and the lobbyists that control it have taken control of our government.

Consensus plays catch-up to the fall in interest rates. BondSquawk.

Gary Shilling is one of those guys that I always try to listen to; the unfortunate part is that his analysis isn't as accessible as is Rosie's or the bloggers I read, or even the likes of Jeremy Grantham and van Hoisington, who at least have quarterly updates that are available to the public; he's more like Meredith Whitney: you catch them when you can, when they're interviewed; in any case, he's been right for a long time, and he's worth paying attention to:
Deflation's Coming, Says Gary Shilling, And It's Going To Clobber The Stock Market. and The Long Workout: Gary Shilling Sees 10 Years of Low Growth + Rising. Yahoo tech ticker video interviews.

Another man's opinion. Bruce Krasting.

We’re digging an ever deeper hole here, the EU problems have not gone away by any means. And after I saw the amount of sov debt the European banks own, I have conviction the EURUSD rally is a headfake. Those banks will go down as they are forced to take the haircuts on the sov debt… unlike in the US, where the gov’t could borrow to bail out the losses on private securitized debt, the Euro banks’ ‘toxic problem’ is the gov’t debt itself… it’s a tight closed loop… or spiral, as it were…

Stocks are nearly out of accounting tricks, imo…. The final demand is not there and won’t be. Trading on fwd P/E when the ‘E’ is pure fantasy will not end well. Everyone seems to say “stocks have gone nowhere in 10 years” as the ultimate sign of how poor stocks have done…. actually S&P is down over 25% in the last 10yrs. And it continues as we de-lever.

If we think fund flows into bonds / out of stocks are significant now, just wait til we get another big leg down in stocks this fall… I think we see banks (and individuals to a lesser, but significant degree) go all in UST… every day there’s less and less hi-quality, non-UST bonds – eventually, if it has not already happened, the
yield premium for taking incremental risk in high-grade f/i over USTs withers to a level that is not meaningful, and the UST bid from banks and mom/pop begins, and then feeds itself… the proverbial towel will be thrown in.

If Deflation Wins, What Will Gold Stocks Do? Jeff Clark via zerohedge.

Feds rethink policies that encourage home ownership. USA Today.

Hidden income in China boosts income of top 10%, fueling speculation, social strains. Yves Smith, naked capitalism.

other fare:

New evidence that matter and antimatter may behave differently. MIT News.

The intelligent universe. maisonneuve.