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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (101766)	9/9/2009 3:14:58 PM
From: axial	2 Recommendations Respond to of 116555

Almost all of the players responsible for development of huge economic and financial risks have denied their own culpability - especially Greenspan. Globally, the damage has been enormous. Trillions have been lost, millions disadvantaged. If the denials of Greenspan and others are correct then why the rush to install new systemic risk regulators? Greenspan's approach to economic risk was "Que sera, sera!" as he fed more fuel to the fire. His refusal to accept responsibility for his part in the tragedy confirms that even now, he still doesn't get it. He's not alone, but no matter what he says he's certainly not innocent. Jim

To: mishedlo who wrote (101766)	9/9/2009 4:37:10 PM
From: Amark$p	Read Replies (1) \| Respond to of 116555

Mish, if you get time, would appreciate an article on mortgage cram downs and bankruptcy. mortgagenewsdaily.com How would such actions impact Total US Debt to GDP Ratio? Would assume such actions would be extremely deflationary to housing prices... Such actions would certainly reduce debt but at the risk of bankrupting the banks... _____________ BANKRUPTCY REVISION BILL THREATENED Lawmakers expressed frustration at the slow progress as unemployment-driven foreclosures rise and threatened to revive so-called "cram-down" legislation that would allow bankruptcy judges to reduce mortgage loan amounts owed. "I am disappointed at the pace of this program," said Rep. Barney Frank, chairman of the Financial Services Committee. The House last year passed a cram-down bill but it was defeated in the Senate, which at the time had a narrower Democratic majority. "The best lobbyists we have for getting bankruptcy legislation passed are the servicers who are not doing a very good job of modifying mortgages," said Frank. "If they do not improve their performance, then they improve the chances of that legislation." Barr said President Barack Obama supports the idea of allowing bankruptcy judges to alter mortgage terms, but "the first and best answer has got to be 'let's figure out a way of keeping people in their home with a modification' and that's where we're focused." A Federal Reserve economist, however, said that an effective plan to mitigate foreclosures must deal with rising unemployed borrowers. "Thirty one percent of an unemployed person's income is often nothing. And a payment of zero will never be attractive to a lender," Boston Federal Reserve Bank senior economist Paul Willen told the hearing.

To: mishedlo who wrote (101766)	9/9/2009 7:46:26 PM
From: axial	4 Recommendations Read Replies (1) \| Respond to of 116555

Why some economists could see the crisis coming ft.com From the beginning of the credit crisis and ensuing recession, it has become conventional wisdom that “no one saw this coming”. Anatole Kaletsky wrote in The Times of “those who failed to foresee the gravity of this crisis” – a group that included “almost every leading economist and financier in the world”. Glenn Stevens, governor of the Reserve Bank of Australia, said: “I do not know anyone who predicted this course of events. But it has occurred, it has implications, and so we must reflect on it.” We must indeed. Because, in fact, many had seen it coming for years. They were ignored by an establishment that, as the former Federal Reserve chairman Alan Greenspan professed in his October 2008 testimony to Congress, watched with “shocked disbelief” as its “whole intellectual edifice collapsed in the summer [of 2007]”. Official models missed the crisis not because the conditions were so unusual, as we are often told. They missed it by design. It is impossible to warn against a debt deflation recession in a model world where debt does not exist. This is the world our policymakers have been living in. They urgently need to change habitat. I undertook a study of the models used by those who did see it coming.* They include Kurt Richebächer, an investment newsletter writer, who wrote in 2001 that “the new housing bubble – together with the bond and stock bubbles – will [inevitably] implode in the foreseeable future, plunging the US economy into a protracted, deep recession”; and in 2006, when the housing market turned, that “all remaining questions pertain solely to [the] speed, depth and duration of the economy’s downturn”. Wynne Godley of the Levy Economics Institute wrote in 2006 that “the small slowdown in the rate at which US household debt levels are rising resulting from the house price decline, will immediately lead to a sustained growth recession before 2010”. Michael Hudson of the University of Missouri wrote in 2006 that “debt deflation will shrink the ‘real’ economy, drive down real wages, and push our debt-ridden economy into Japan-style stagnation or worse”. Importantly, these and other analysts not only foresaw and timed the end of the credit boom, but also perceived this would inevitably produce recession in the US. How did they do it? Central to the contrarians’ thinking is an accounting of financial flows (of credit, interest, profit and wages) and stocks (debt and wealth) in the economy, as well as a sharp distinction between the real economy and the financial sector (including property). In these “flow-of-funds” models, liquidity generated in the financial sector flows to companies, households and the government as they borrow. This may facilitate fixed-capital investment, production and consumption, but also asset-price inflation and debt growth. Liquidity returns to the financial sector as investment or in debt service and fees. It follows that there is a trade-off in the use of credit, so that financial investment may crowd out the financing of production. A second key insight is that, since the economy’s assets and liabilities must balance, growing financial asset markets find their counterpart in a growing debt burden. They also swell payment flows of debt service and financial fees. Flow-of-funds models quantify the sustainability of the debt burden and the financial sector’s drain on the real economy. This allows their users to foresee when finance’s relation to the real economy turns from supportive to extractive, and when a breaking point will be reached. Such calculations are conspicuous by their absence in official forecasters’ models in the US, the UK and the Organisation for Economic Co-operation and Development. In line with mainstream economic theory, balance sheet variables are assumed to adapt automatically to changes in the real economy, and can thus be safely omitted. This practice ignores the fact that in most advanced economies, financial sector turnover is many times larger than total gross domestic product; or that growth in the US and UK has been finance-driven since the turn of the millennium. Perhaps because of this omission, the OECD commented in August 2007 that “the current economic situation is in many ways better than what we have experienced in years . . . Our central forecast remains indeed quite benign: a soft landing in the United States [and] a strong and sustained recovery in Europe.” Official US forecasters could tell Reuters as late as September 2007 that the recession in the US was “not a dominant risk”. This was well after the Levy Economics Institute, for example, predicted in April of that year that output growth would slow “almost to zero sometime between now and 2008”. Policymakers have resisted inclusion of balance sheets and the flow of funds in their models by arguing that bubbles cannot be easily identified, nor their effects reliably anticipated. The above analysts have shown that this is, in fact, feasible, and indeed essential if we are to “see it coming” next time. The financial sector is just as real as the real economy. Our policymakers, and the analysts they rely on, ignore balance sheets and the flow of funds at their peril – and ours. Jim