October 7

QOTD:

There is lots of instability caused in part by the flood of liquidity from the Fed and the ECB. The irony is that the Fed is creating all this liquidity with the hope that it will revive the U.S. economy. It is doing nothing for the U.S. economy and causing chaos for the rest of the world --- Joseph Stiglitz

Adam Posen discusses the dangers of insufficient stimulus. Peterson Institute for International Economics.

Our situation (in the U.K., the U.S., and arguably in most of the major Western economies) is one where policy makers face a long uphill battle, in which monetary ease has an ongoing role to play, even if it may not deliver recovery on its own. Insufficient monetary action risks turning sustained low growth and near deflation into a self-fulfilling prophecy. This happened in Japan in the 1990s, and in U.S. and Europe in the 1930s. I don’t think things will be “that bad” in the sense of an outright depression, but we face a real risk of long-term stagnation with some distracting upward blips and slowly eroding capacity....
The short-term blips in the economy are no way to judge whether we are coming out of this state of the world. We saw similar starts and stops in the Great Depression and in Japan

The market believes in QE2. Paul Krugman notes the pickup in inflation expectations. (also perhaps evidenced by the steepening in the 10s-30s curve)

Asha Bangalore expects pick-up in bank credit, the lack of which so far has been "the major culprit behind the lackluster recovery."

excellent review of why CRE is a major problem:
Consumer deleveraging = commercial real estate collapse. Jim Quinn, via naked capitalism.

DC waking up to escalating foreclosure train wreck: Grayson calls for FSOC to examine foreclosure fraud as systemic risk. naked capitalism.

In a new period of instability, Obama becomes Hoover. Chris Whalen, Reuters.

the avalanche of mortgage defaults now hitting Bank of America, Wells Fargo and other large lenders could force these banks to seek new government bailouts in 2011, an outcome that will expose the Obama Administration’s incompetence for all to see.

tomorrow's non-farms payroll report will also provide an initial estimate on revisions to historical data through March:
Job losses in 2009 likely bigger than thought. Reuters.
by the by, initial jobless claims were once again a bit better than expected, but, for the 23rd time in the last 24 weeks, there were upward revisions to past data


The U.S. Is In A "Race To The Fiscal Bottom. David Stockman, Business Insider.

The two parties are in a race to the fiscal bottom to see which one can bury our children and grandchildren deeper in debt....
We are not in a conventional business cycle recovery, so stimulus is futile and just adds needlessly to the $9 trillion of Treasury paper already floating dangerously around world financial markets. Instead, after 40 years of profligate accumulation of public and private debt, and reckless money-printing by the Fed, we had an economic crash landing, which left us with an enduring structural breakdown, not just a cyclical downturn. In effect, we undertook a national leveraged buyout, raising total credit market debt to $52 trillion which represented a 3.6X leverage ratio against national income or GDP....
The only solution is a long period of debt deflation, downsizing and economic rehabilitation, including a sustained downshift in consumption and corresponding rise in national savings. And a key element of the latter is a drastic reduction in government dis-savings through spending cuts and tax increases — and these measures need to start right now. Keynesian policymakers who say wait for the midterms to address the deficit are like battleship admirals: They are fighting the last war with the same failed strategy that gave rise to our current predicament......
After the abomination of the Bush/Paulson bailout of the big banks, the state has no boundaries whatsoever. So fiscal policy is now just a fiscal food fight....
Obama’s presidency is a profound disappointment. So far, he’s proven that when Republican’s start elective wars, Democrats can’t end them; when Republicans empty the Treasury, Democrats can’t replenish it; when Republicans put a middle-class destroying money printer at the head of the Fed, Democrats reappoint him; and when the Republicans unleash an orgy of dangerous speculation on Wall Street, Democrats pass a contentless, 2,300 page, enabling act which will do nothing to protect Main Street from another financial meltdown, even as it keeps K Street fully employed.