Joseph Stiglitz: Why Corporate America Is So Messed Up!

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Interview Transcript: Joseph Stiglitz, Oct. 20, 2010
By Sam Gustin and Michael Rainey

Prof. Joseph Stiglitz is University Professor at Columbia University and Chair, Columbia University Committee on Global Thought. He teaches classes at the Columbia Business School, the Graduate School of Arts and Sciences (Department of Economics) and the School of International and Public Affairs. Stiglitz was awarded the 2001 Nobel Prize in Economics and served as Chief Economist of the World Bank from 1997-2000. (Main article here.)

DailyFinance: Over the last three years, the U.S. economy has experienced the worst crisis in decades. Is the worst over?
Joseph Stiglitz: No. You might say the worst if you thought of the worst as the immediate weeks following the collapse of Lehman Brothers where we didn't know where the bottom would be; we've pulled back from the brink. But in terms of most Americans, the question is, are they likely to be able to get a job? One of six Americans who would like a full-time job right now cannot get one. Are things going to be better than that in the next year or two? The answer is probably not. It might get a little better, but there's also a substantial risk that it could get worse.

Do you anticipate a "double dip" recession, where the economy returns to two consecutive quarters of negative growth?
I think there's a possibility, but in some ways that's not the key issue. The key issues for most Americans are two-fold right now. One is, is it likely that the economy will be growing fast enough to create enough jobs for the new entrants to the labor force so that the jobs deficit gets reduced? The answer is almost no one sees growth in 2010, 2011 and even into 2012 at that rate. So we are going to maintain this gap of 15 million unemployed, 26 million Americans who would like a full-time job that can't get one. That situation is likely to be maintained. And it is possible that it might get a little worse; it might get a little better.

The second thing that is weighing down on most Americans is the threat of losing their home. The fact is that one out of four Americans with a mortgage are now underwater. They owe more money on their home [than the value of their home]. The bubble in the housing market crashed in 2007, and we're beyond three years now since that happened and there is no recovery in sight. The housing market might get a little better. There's a greater likelihood it will get a little bit worse. But going back to where they can say their home is their reserve for retirement or paying for college education? The likelihood of that happening is just very low.

What should be done about all of these people whose mortgages are underwater? Should there be a suspension of foreclosures?
Stopping the foreclosures is a palliative. It's a temporary measure. We have to understand that the problems have been festering for years, not just the last three years. In the years prior to the breaking of the bubble, the financial industry was engaged in predatory lending practices, deceptive practices. They were optimizing not on producing mortgages that were good for the American families but in maximizing fees and exploiting and predatory lending. Going and targeting the least educated, the Americans that were most easy to prey on.

We've had this well documented. And there was the tip of the iceberg that even in those years the FBI was identifying fraud. When they see fraud, it's really fraud. But beneath that surface, there were practices that really should have been outlawed if they weren't illegal.

So now, we have the legacy of that, plus all kinds of practices that are designed to get people out of their homes, to take advantage. It's not just the things that have been exposed, the robo-signers and that kind of thing. There are temporary judges hired in to process millions and millions of Americans losing their homes. The system was not designed for dealing with a failure of this magnitude.

Are we talking about widespread illegality or simply exploitative, but technically legal, practices? Where do you draw the line between outright criminality and mere exploitation?
It's very hard to draw the line, and that's almost a lawyer's issue rather than an economist's, but I think what we can say is there was a considerable amount of what was done should have been illegal if it wasn't.

This is a really important point to understand from the point of view of our society. The legal system is supposed to be the codification of our norms and beliefs, things that we need to make our system work. If the legal system is seen as exploitative, then confidence in our whole system starts eroding. And that's really the problem that's going on.

Because people are being told, "Well, you signed this." Well, if you have a legal system that encourages, allows, that kind of predatory behavior, something is wrong. And we know that something is wrong. Because the banks used their political power to make sure they could get away with this. There were a lot of people pointing out the predatory behavior. There were some initiatives to try to restrain the banks from doing it. And they used all their political muscle to ensure that they could continue engaging in these kinds of predatory behaviors.

Is this an argument for trying to restrain the influence of major banks and corporations on our political system?
Oh, very clearly. Look at the regulatory reform that got passed. It was an intense battle. And you had on one side a few banks. And on the other side you had 300 million people, American people. And it was really right in balance. Five or six banks equal to 300 million people. And in the end we got what you might call an unsatisfactory compromise. We moved a little bit in the right direction. For instance there was an agency set up to try to protect consumers.

But they made huge exemptions and exceptions so that, for instance, a lot of the predatory practices in automobile loans are going to be able to be continued. Why is it OK to engage in bad lending in automobiles and not in the mortgage market? Is there any principle? We all know the answer to that. No, there's no principle. It's money. It's campaign contributions, lobbying, revolving door, all of those kinds of things.

How do you respond to the argument that trying to restrict corporate political donations is somehow infringing on the free speech of corporations?
Corporations are a legal entity. We create them. And when we create them, we create all kinds of rules. They can go bankrupt. And that means they owe more money and they get away scot-free. They can create an environmental disaster, and then go bankrupt and again go away scot-free. So, as legal entities we have the right to make the rules that govern them. As individuals we have certain basic rights. We aren't created by the law. We exist by nature. But corporations are man-made. They are supposed to serve our interest, our society's interests. And we are creating them with powers that are not serving our society's interests.

Let me give you an example of something I think we ought to do, part of the way we have to deal with the consequences. Corporations are supposed to be owned by the shareholders. If you hired somebody to go do some work for you and you gave them some money, you would say that you have the right to make sure that they spend the money you gave them the way you tell them to. You should have the right to look at their books.

Right now, the shareholders, who are supposed to be the owners, have no say in pay. They have no say in the decision about how much their CEOs get paid. In some countries there is a sense of corporate responsibility. There's a sense that the shareholders own it, and the owners should have the right to vote, at least in an advisory sense.

If you're going to rob your shareholders, shouldn't they have the right to say I don't like this? And yet in America, the corporations have been resisting this. I think it's the same thing in the area of advertising and campaign contributions. As a shareholder, I should have the right to make sure the corporation that works for me, that I own, doesn't go against my interest. For instance, as a shareholder in BP -- I'm not, but if I were -- I want them to have safety, I don't want them to pollute the country. And I'm going to say they should act in a socially responsible manner and a responsible way. Shouldn't we have that right?

What do you think it is about the U.S. that makes it so hard to achieve corporate responsibility?
I think it's basically a vicious cycle in which we've gotten ourselves, because the corporate executives control the corporations. The corporations have the right to give campaign contributions. So basically we have a system in which the corporate executives, the CEOs, are trying to make sure the legal system works not for the companies, not for the shareholders, not for the bondholders – but for themselves.

So it's like theft, if you want to think about it that way. These corporations are basically now working now for the CEOs and the executives and not for any of the other stakeholders in the corporation, let alone for our broader society.

You look at who won with the excessive risk-taking and shortsighted behavior of the banks. It wasn't the shareholder or the bondholders. It certainly wasn't American taxpayers. It wasn't American workers. It wasn't American homeowners. It was the CEOs, the executives. And they use all kinds of language that quite honestly is deceptive. So they talk about incentive pay. We all believe in incentives as economists, it's the one thing we talk about. And who could object to incentivizing people to work harder? Sounds good. But if you look at the details of the incentive pay, it was incentives to act not in the interest of the shareholders and bondholders, but in the interest of the CEOs and the executives.

Explain how those incentives around compensation were motivating executives to act in a way that was contrary to their shareholders' interests.
Let me give you two examples. They got more pay when they got stock options. When the value of the stock goes up, they get the upside. But when it goes down, they don't have to share the losses. When you have a system like, you have an incentive to gamble because you get the upside, but somebody else bears the losses. So that's an example of incomplete sharing inducing excessive [risk-taking].

But it's even worse than that, because if your pay is related to the stock market performance, then you have an incentive to try to deceive the stock market. In the long run, information may get out, but you have a short term, and so if you can deceive them for a few years, get your stock options, sell out before the news strikes, then you walk off with a lot of money. And that's what they've done.

So you ask the question, why did they move so much of the risky activity off balance sheet? Now, partly it was to deceive the regulators, let's be fair. Partly some of this was to deceive the tax collector. But a major part was to deceive the shareholders, so it looked like they were doing much better than they were. Share prices go up, their bonuses go up. Some time down the line, the truth will come out. But by then, they've cashed in.

A good example of that might be [former Countrywide CEO] Angelo Mozillo, who recently paid tens of millions of dollars in fines, a small fraction of what he actually earned, because he earned hundreds of millions.
The system is designed to actually encourage that kind of thing, even with the fines.

During the S&L crisis, people actually went to jail. Do you think there's any chance that's going to happen with the mortgage crisis.
I know so many people who say it's an outrage that we had more accountability in the '80's with the S&L crisis than we are having today. Yeah, we fine them, and what is the big lesson? Behave badly, and the government might take 5% or 10% of what you got in your ill-gotten gains, but you're still sitting home pretty with your several hundred million dollars that you have left over after paying fines that look very large by ordinary standards but look small compared to the amount that you've been able to cash in.

So the system is set so that even if you're caught, the penalty is just a small number relative to what you walk home with.
The fine is just a cost of doing business. It's like a parking fine. Sometimes you make a decision to park knowing that you might get a fine because going around the corner to the parking lot takes you too much time.

Are there any steps regulators can now take to make the penalties more painful?
I think we ought to go do what we did in the S&L [crisis] and actually put many of these guys in prison. Absolutely. These are not just white-collar crimes or little accidents. There were victims. That's the point. There were victims all over the world. What worries me is that the Dodd-Frank bill, the regulatory bill that we passed a few months ago, gives responsibility to a set of regulatory bodies – the bill itself has all kinds of holes and exceptions – but the regulatory agencies, in many cases, are the same people that were in charge as we pushed to the brink.

So do we have any confidence that these guys who got us into the mess have really changed their minds? Actually we have pretty [good] confidence that they have not. I've seen some speeches where they said, "Nothing was really wrong. We didn't get things quite right. But our understanding of the issues is pretty sound." If they think that, then we really are in a sorry mess.

What happens when fines and other penalties lose their deterrent value in preventing or deterring people from committing crime?
There are many aspects of this. Economists focus on the whole notion of incentives. People have an incentive sometimes to behave badly, because they can make more money if they can cheat. If our economic system is going to work then we have to make sure that what they gain when they cheat is offset by a system of penalties.

And that's why, for instance, in our antitrust law, we often don't catch people when they behave badly, but when we do we say there are treble damages. You pay three times the amount of the damage that you do. That's a strong deterrent. Unfortunately, what we've been doing now, and more recently in these financial crimes, is settling for fractions – fractions! – of the direct damage, and even a smaller fraction of the total societal damage. That is to say, the financial sector really brought down the global economy and if you include all of that collateral damage, it's really already in the trillions of dollars.

But there's a broader sense of collateral damage that I think that has not really been taken on board. And that is confidence in our legal system, in our rule of law, in our system of justice. When you say the Pledge of Allegiance you say, with "justice for all." People aren't sure that we have justice for all. Somebody is caught for a minor drug offense, they are sent to prison for a very long time. And yet, these so-called white-collar crimes, which are not victimless, almost none of these guys, almost none of them, go to prison.

Can we draw a direct line from the outsize influence of the executives and the bankers -- because these skewed incentives and penalties out of whack didn't just arise out of a vacuum. How did we get to where we are?
It's clearly the influence of campaign contributions and lobbyists. Let me give you another example of where the legal system has gotten very much out of whack, and which contributed to the financial crisis.

In 2005, we passed a bankruptcy reform. It was a reform pushed by the banks. It was designed to allow them to make bad loans to people to who didn't understand what was going on, and then basically choke them. Squeeze them dry. And we should have called it, "the new indentured servitude law." Because that's what it did.

Let me just tell you how bad it is. I don't think Americans understand how bad it is. It becomes really very difficult for individuals to discharge their debt. The basic principle in the past in America was people should have the right for a fresh start. People make mistakes. Especially when they're preyed upon. And so you should be able to start afresh again. Get a clean slate. Pay what you can and start again. Now if you do it over and over again that's a different thing. But at least when there are these lenders preying on you should be able to get a fresh start.

But they [the banks] said, "No, no, you can't discharge your debt," or you can't discharge it very easily. They have a right, now, to take 25% of your before-tax income. Now imagine what that means. Let's assume that you wound up, as it's not that hard to do, with a debt equal to 100% of your income. You're making $40,000, and your debt is $40,000. You have to turn over to the credit card company, to the bank, $10,000 of your before-tax income every year. But, the banks can now charge you 30% interest.

So what does that mean? At the end of the year, you've paid the bank $10,000, a quarter of your income. But what you owe the bank has gone from $40,000 to an even larger number because they're charging you 30%. So you're debt is larger. So the next year you have to give a quarter of your income again to the bank. And the year after. Until you die.

This is indentured servitude. And we criticize other countries for having indentured servitude of this kind, bonded labor. But in America we instituted this in 2005 with almost no discussion of the consequences. But what it did was encourage the banks to engage in even worse lending practices.

We've made it so difficult for individuals to discharge their debt and have this fresh start, and yet it is just taken for granted that a corporation or a company can blow up and then they can file for bankruptcy and then they can start over.
We give rights to corporations that we don't give to ordinary Americans. One of my proposals in my book Freefall -- one of the ways to deal with this foreclosure problem, the fact that one out of four Americans who have a mortgage are underwater: They owe more money on their home than the value of their home. Their home used to be what they used as the reserve for paying their kids college education, for their retirement. Now it's a liability, not an asset.

So what I've argued is, we have these laws called Chapter 11 to give a fresh start to corporations. We say it's very important to be able to do this quickly, we want to keep jobs, we want to keep the corporation going as an ongoing enterprise.

Families are as important as corporations. Keeping kids in school, not forcing them out of their home, keeping the community together, is certainly as important as keeping a corporation alive. So what I've called for is a homeowner's Chapter 11. So what you do is you write down the mortgage, what they owe, to the value of the house. And you convert the debt into, make [the bank], in a sense, the new equity owner. And when they, sometime in the future, sell the home, if there is a capital gain they share that with the bank. That's the way the bank is protected. Nobody would do this just to escape; there is accountability here. But it gives homeowners a fresh start and it would deal with a significant part of our foreclosure problem.

It sounds like that would be a reasonable and actually quite popular plan. Do you think there's any chance that would be enacted?
Not as long as our banks have the kind of political influence they have today. There were some people in Congress that were pushing for a variant of this idea, and the banks came down really, really hard, for an obvious reason. The banks want to pretend that they did not make bad loans. They don't want to come into reality. The fact that they were very instrumental in changing the accounting standards, so that loans that are impaired where people are not paying back what they owe, are treated as if they are just as good as a well-performing mortgage.

So the whole strategy of the banks has been to hide the losses, muddle through and get the government to keep interest rates really low. So the Fed lends to the banks at zero interest rate, or almost zero interest rate. We wish we could borrow at that [rate] – if we could borrow at that [rate] we would also solve the foreclosure problem. So the government is basically giving money to the banks at very low interest rates, and then they're lending it on at much higher interest rates, and that's recapitalizing the banks. Money [is also] being paid out in bonuses -- not all of it is going to recapitalization, some of it goes into the pockets of the bankers.

The result of this is, as long as we keep up this strategy, it's going to be a long time before the economy recovers, because that huge spread between what they can get money from the government and what they can lend is dampening the economy.

Who Has Lost Their Marbles? US Fed Tells Public To Ignore Bloggers Without Econ PHD!

On the Uk Telegraph, Ambrose Evans-Pritchard lashes out against Kartik Athreya who had condemned economic bloggers as chronically stupid and a threat to public order!

Time to shut down the US Federal Reserve?

• Like a mad aunt, the Fed is slowly losing its marbles.
  
  Kartik Athreya, senior economist for the Richmond Fed, has written a paper condemning economic bloggers as chronically stupid and a threat to public order.
  
  Matters of economic policy should be reserved to a priesthood with the correct post-doctoral credentials, which would of course have excluded David Hume, Adam Smith, and arguably John Maynard Keynes (a mathematics graduate, with a tripos foray in moral sciences).
  
  Adam Smith didn't have an economics PhD
  
  “Writers who have not taken a year of PhD coursework in a decent economics department (and passed their PhD qualifying exams), cannot meaningfully advance the discussion on economic policy.”
  
  Don’t you just love that throw-away line “decent”? Dr Athreya hails from the University of Iowa.
  
  “The response of the untrained to the crisis has been startling. The real issue is that there is an extremely low likelihood that the speculations of the untrained, on a topic almost pathologically riddled by dynamic considerations and feedback effects, will offer anything new. Moreover, there is a substantial likelihood that it will instead offer something incoherent or misleading.”
  
  You couldn’t make it up, could you?
  
  “Economics is hard. Really hard. You just won’t believe how vastly hugely mind-boggingly hard it is. I mean you may think doing the Sunday Times crossword is difficult, but that’s just peanuts to economics. And because it is so hard, people shouldn’t blithely go shooting their mouths off about it, and pretending like it’s so easy. In fact, we would all be better off if we just ignored these clowns.”
  
  I hold my hand up Dr Athreya and plead guilty. I am grateful to Bruce Krasting’s blog for bringing this stinging rebuke to my attention.
  
  However, Dr Athreya’s assertions cannot be allowed to pass. The current generation of economists have led the world into a catastrophic cul de sac. And if they think we are safely on the road to recovery, they still fail to understand what they did.
  
  Central banks were the ultimate authors of the credit crisis since it is they who set the price of credit too low, throwing the whole incentive structure of the capitalist system out of kilter, and more or less forcing banks to chase yield and engage in destructive behaviour.
  
  They ran ever-lower real interests with each cycle, allowed asset bubbles to run unchecked (Ben Bernanke was the cheerleader of that particular folly), blamed Anglo-Saxon over-consumption on excess Asian savings (half true, but still the silliest cop-out of all time), and believed in the neanderthal doctrine of “inflation targeting”. Have they all forgotten Keynes’s cautionary words on the “tyranny of the general price level” in the early 1930s? Yes they have.
  
  They allowed the M3 money supply to surge at double-digit rates (16pc in the US and 11pc in euroland), and are now allowing it to collapse (minus 5.5pc in the US over the last year). Have they all forgotten the Friedman-Schwartz lessons on the quantity theory of money? Yes, they have. Have they forgotten Irving Fisher’s “Debt Deflation causes of Great Depressions”? Yes, most of them have. And of course, they completely failed to see the 2007-2009 crisis coming, or to respond to it fast enough when it occurred.
  
  The Fed has since made a hash of quantitative easing, largely due to Bernanke’s ideological infatuation with “creditism”. QE has been large enough to horrify everybody (especially the Chinese) by its sheer size – lifting the balance sheet to $2.4 trillion – but it has been carried out in such a way that it does not gain full traction. This is the worst of both worlds. So much geo-political capital wasted to such modest and distorting effect.
  
  The error was for the Fed to buy the bonds from the banking system (and we all hate the banks, don’t we) rather than going straight to the non-bank private sector. How about purchasing a herd of Texas Longhorn cattle? That would do it. The inevitable result of this is a collapse of money velocity as banks allow their useless reserves to swell.
  
  And now the Fed tells us all to shut up. Fie to you sir.
  
  The 20th Century was a horrible litany of absurd experiments and atrocities committed by intellectuals, or by elite groupings that claimed a higher knowledge. Simple folk usually have enough common sense to avoid the worst errors. Sometimes they need to take very stern action to stop intellectuals leading us to ruin.
  
  The root error of the modern academy is to pretend (and perhaps believe, which is even less forgiveable), that economics is a science and answers to Newtonian laws.
  
  In any case, Newton was wrong. He neglected the fourth dimension of time, as Einstein called it, and that is exactly what the new classical school of economics has done by failing to take into account the intertemporal effects of debt – now 360pc of GDP across the OECD bloc, if properly counted.
  
  There has been a cosy self-delusion that rising debt is largely benign because it is merely money that society owes to itself. This is a bad error of judgement, one that the intuitive man in the street can see through immediately.
  
  Debt draws forward prosperity, which leads to powerful overhang effects that are not properly incorporated into Fed models. That is the key reason why Ben Bernanke’s Fed was caught flat-footed when the crisis hit, and kept misjudging it until the events started to spin out of control.
  
  Economics should never be treated as a science. Its claims are not falsifiable, which is why economists can disagree so violently among themselves: a rarer spectacle in science, where disputes are usually resolved one way or another by hard data.
  
  It is a branch of anthropology and psychology, a moral discipline if you like. Anybody who loses sight of this is a public nuisance, starting with Dr Athreya.
  
  As for the Fed, I venture to say that a common jury of 12 American men and women placed on the Federal Open Market Committee would have done a better job of setting monetary policy over the last 20 years than Doctors Bernanke and Greenspan.
  
  Actually, Greenspan never got a Phd. His honourary doctorate was awarded later for political reasons. (He had been a Nixon speech-writer). But never mind.

Now who is this Kartik Athreya?

Well Tyler has featured an article on him and Kartik's article in full can be read in his article, The Fed Has Lost It; Publishes Essay Bashing Bloggers, Tells General Public To Broadly Ignore Those Without An Econ PhD

• Some Fed economist (with a hard-earned Ph.D mind you) named Kartik Athreya (who lasted at Citigroup as an associate Vice President for a whopping 7 months before getting sacked in 1998 only to find solace for his expiring unemployment benefits in the public sector) has written the most idiotic "research" piece to come out of the Federal Reserve since 1913, and the Fed has written a lot of idiotic research since then - after all you don't destroy 98% of the dollar's purchasing power in 97 years with non-idiotic research. But this just takes the cake. In "Economics is Hard. Don’t Let Bloggers Tell You Otherwise" Kartik says: "I argue that neither non-economist bloggers, nor economists who portray economics —especially macroeconomic policy— as a simple enterprise with clear conclusions, are likely to contribute any insight to discussion of economics and, as a result, should be ignored by an open-minded lay public." Alas, all Kartik achieves is to convince the general public that feeding Fed "economists" alcohol after midnight and letting them directly upload their resultant gibberish to the Fed's broad RSS feed the second they think they have a coherent thought , is generally a disastrous idea. In his piece, which has no other intention than to discredit and outright malign bloggers such as Matt Yglesias, John Stossel, Robert Samuelson, and Robert Reich, Athreya says: "In what follows I will argue that it is exceedingly unlikely that these authors have anything interesting to say about economic policy. This sounds mean-spirited, but it’s not meant to be, and I’ll explain why." Instead in what follows, the Fed presents 4 pages of thoughts so meandering, that the author's blood alcohol level must have certainly been well above the legal norm for the duration of the writing of this ad hominem pamphlet.

• Before I continue, here’s who I am: The relevant fact is that I work as a rank-and-file PhD economist operating within a central banking system. I have contributed no earth-shaking ideas to Economics and work fundamentally as a worker bee chipping away with known tools at portions of larger problems.
• Why should anyone accept uncritically that Economics, or any field of human endeavor, for that matter, should be easy either to process or contribute to? To some extent, people don’t. Would anyone tolerate the equivalent level of public discussion on cancer research? Most of us readily accept the proposition that Oncology requires training, and rarely give time over to non-medical-professionals’ musings. Do we expect advances in cell-biology to be immediately accessible to anyone with even a college degree? Science journalists routinely cite specific studies that have appeared in specific journals. They generally do not engage in passing their own untrained speculations off as insights. But economic blogging and much journalism largely does not operate this way. Naifs write books, and sell many of them too. People as varied as Matt Ridley and William Greider make book-length statements about economics. I’ve never done that, and this is my job. This is, to say the very least, bizarre.
• So far, I’ve claimed something a bit obnoxious-sounding: that writers who have not taken a year of PhD coursework in a decent economics department (and passed their PhD qualifying exams), cannot meaningfully advance the discussion on economic policy.
  You might say, “you’re telling us to leave everything to the experts, so why should I believe you are adequately policed?” This is a fair question, but as someone who has worked for a decade to publish in leading academic journals (with some, but hardly overwhelming, success), I now have the referee reports to prove that I live in a world where people are not falling over themselves to believe my assertions. The reports are often scathing, but usually very insightful, and have over the years pointed out all manner of incoherence in my work. The leading journals have rejection rates in the neighborhood of 80%, and I’ve had my share of them.
• How can this be changed? A precondition for the market delivering this is a recognition by the general public that they are simply being had by the bulk of the economic blogging crowd. I hope to have alerted you to the giant disconnect that exists between the nuanced discussion that occurs between research economists and the noise (some of it from economists!) that one sees in the web or the op-ed pages of even the very best newspapers of the US. As a result, my hope is that the broader public will ask for a slightly higher bar when it comes to economics, rather than self-selecting into blogs that merely confirm half-baked views that might have been acquired from elsewhere.

And this punchline:

• For my part, seventeen years after my first PhD coursework, I still feel ill at ease with my grasp of many issues, and I am fairly confident that this is not just a question of limited intellect.

ROFLMAO!

Yeah babe. I wonder who has their marbles!

Oh... here is the link to Kartik's paper: Economics is Hard

Do You Really Believe That This Economy Recovery Is Real

Here's another interesting posting.

25 Questions To Ask Anyone Who Is Delusional Enough To Believe That This Economic Recovery Is Real

1. In what universe is an economy with 39.68 million Americans on food stamps considered to be a healthy, recovering economy? In fact, the U.S. Department of Agriculture forecasts that enrollment in the food stamp program will exceed 43 million Americans in 2011. Is a rapidly increasing number of Americans on food stamps a good sign or a bad sign for the economy?
2. According to RealtyTrac, foreclosure filings were reported on 367,056 properties in the month of March. This was an increase of almost 19 percent from February, and it was the highest monthly total since RealtyTrac began issuing its report back in January 2005. So can you please explain again how the U.S. real estate market is getting better?
3. The Mortgage Bankers Association just announced that more than 10 percent of U.S. homeowners with a mortgage had missed at least one payment in the January-March period. That was a record high and up from 9.1 percent a year ago. Do you think that is an indication that the U.S. housing market is recovering?
4. How can the U.S. real estate market be considered healthy when, for the first time in modern history, banks own a greater share of residential housing net worth in the United States than all individual Americans put together
5. With the U.S. Congress planning to quadruple oil taxes, what do you think that is going to do to the price of gasoline in the United States and how do you think that will affect the U.S. economy?
6. Do you think that it is a good sign that Arnold Schwarzenegger, the governor of the state of California, says that “terrible cuts” are urgently needed in order to avoid a complete financial disaster in his state?
7. But it just isn’t California that is in trouble. Dozens of U.S. states are in such bad financial shape that they are getting ready for their biggest budget cuts in decades. What do you think all of those budget cuts will do to the economy?
8. In March, the U.S. trade deficit widened to its highest level since December 2008. Month after month after month we buy much more from the rest of the world than they buy from us. Wealth is draining out of the United States at an unprecedented rate. So is the fact that the gigantic U.S. trade deficit is actually getting bigger a good sign or a bad sign for the U.S. economy?
9. Considering the fact that the U.S. government is projected to have a 1.6 trillion dollar deficit in 2010, and considering the fact that if you went out and spent one dollar every single second it would take you more than 31,000 years to spend a trillion dollars, how can anyone in their right mind claim that the U.S. economy is getting healthier when we are getting into so much debt?
10. The U.S. Treasury Department recently announced that the U.S. government suffered a wider-than-expected budget deficit of 82.69 billion dollars in April. So is the fact that the red ink of the U.S. government is actually worse than projected a good sign or a bad sign?
11. According to one new report, the U.S. national debt will reach 100 percent of GDP by the year 2015. So is that a sign of economic recovery or of economic disaster
12. Monstrous amounts of oil continue to gush freely into the Gulf of Mexico, and analysts are already projecting that the seafood and tourism industries along the Gulf coast will be devastated for decades by this unprecedented environmental disaster. In light of those facts, how in the world can anyone project that the U.S. economy will soon be stronger than ever?
13. The FDIC’s list of problem banks recently hit a 17-year high. Do you think that an increasing number of small banks failing is a good sign or a bad sign for the U.S. economy?
14. The FDIC is backing 8,000 banks that have a total of $13 trillion in assets with a deposit insurance fund that is basically flat broke. So what do you think will happen if a significant number of small banks do start failing?
15. Existing home sales in the United States jumped 7.6 percent in April. That is the good news. The bad news is that this increase only happened because the deadline to take advantage of the temporary home buyer tax credit (government bribe) was looming. So now that there is no more tax credit for home buyers, what will that do to home sales?
16. Both Fannie Mae and Freddie Mac recently told the U.S. government that they are going to need even more bailout money. So what does it say about the U.S. economy when the two “pillars” of the U.S. mortgage industry are government-backed financial black holes that the U.S. government has to relentlessly pour money into?
17. 43 percent of Americans have less than $10,000 saved for retirement. Tens of millions of Americans find themselves just one lawsuit, one really bad traffic accident or one very serious illness away from financial ruin. With so many Americans living on the edge, how can you say that the economy is healthy?
18. The mayor of Detroit says that the real unemployment rate in his city is somewhere around 50 percent. So can the U.S. really be experiencing an economic recovery when so many are still unemployed in one of America’s biggest cities?
19. Gallup’s measure of underemployment hit 20.0% on March 15th. That was up from 19.7% two weeks earlier and 19.5% at the start of the year. Do you think that is a good trend or a bad trend?
20. One new poll shows that 76 percent of Americans believe that the U.S. economy is still in a recession. So are the vast majority of Americans just stupid or could we still actually be in a recession?
21. The bottom 40 percent of those living in the United States now collectively own less than 1 percent of the nation’s wealth. So is Barack Obama’s mantra that “what is good for Wall Street is good for Main Street” actually true?
22. Richard Russell, the famous author of the Dow Theory Letters, says that Americans should sell anything they can sell in order to get liquid because of the economic trouble that is coming. Do you think that Richard Russell is delusional or could he possibly have a point?
23. Defaults on apartment building mortgages held by U.S. banks climbed to a record 4.6 percent in the first quarter of 2010. In fact, that was almost twice the level of a year earlier. Does that look like a good trend to you?
24. In March, the price of fresh and dried vegetables in the United States soared 49.3% - the most in 16 years. Is it a sign of a healthy economy when food prices are increasing so dramatically?
25. 1.41 million Americans filed for personal bankruptcy in 2009 – a 32 percent increase over 2008. Not only that, more Americans filed for bankruptcy in March 2010 than during any month since U.S. bankruptcy law was tightened in October 2005. So shouldn’t we at least wait until the number of Americans filing for bankruptcy is not setting new all-time records before we even dare whisper the words “economic recovery”?

Regarding Point 7: "Dozens of U.S. states are in such bad financial shape" ...

How about this article from http://www.economicpolicyjournal.com/2010/05/32-states-have-borrowed-from-treasury.html

• EconomicPolicyJournal.com has learned that 32 states have run out funds to make unemployment benefit payments and that the federal government has been supplying these states with funds so that they can make their payments to the unemployed. In some cases, states have borrowed billions.......

32 out of 50 states have run out of funds????

Think about that.

Citigroup And Deutschbe Bank Probed, Mutual Fund Outflows and US Budget Deficit Soars!

On Fox Business Charlie Gasparino reports: Government Probe into Wall Street Sales Widening

• ... Sources tell FOX Business that after the SEC initially requested information from all the firms when it began its probe last year, it came back and subpoenaed Citigroup and Deutsche Bank for additional documents, underscoring a heightened level of interest. In the case of Citigroup, the SEC has conducted depositions of senior executives there, these people tell FOX Business. Ironically, the SEC has not asked Morgan Stanley for the same type of additional information since its initial request, even as the Justice Department has begun evaluating the firm's CDO sales.
  
  As of today, neither Citi, Deutsche Bank nor Morgan Stanley have received so-called Wells Notices issued to either firm. A Wells Notice indicates that the commission’s enforcement staff is recommending to the full commission that the firms should be charged with civil securities fraud.
  
  That said, people with knowledge of the matter say the probes are ongoing.
  
  The SEC’s increased interest would also signal that the Justice Department’s probe of the sale of CDOs is actually wider than the two firms in the news as preliminary targets of federal prosecutors, Goldman Sachs and Morgan Stanley. The SEC regularly refers to the Justice Department cases which it considers significant.
  
  The wider interest by the government increases the chances that Wall Street and federal officials may ultimately reach a “global settlement” with the securities industry as it finds a pattern of allegedly improper conduct in the sale of these so-called structured products. In such a settlement, each firm will pay a fine based on the level of alleged misconduct....

Oooo... according to sources. :P However, as far as I can recall Charlie's sources had been fairly spot on.

And how about the issue of best fit news?

On WSJ I saw this news clip: ICI: Inflows To Long-Term Mutual Funds $7.85B In Latest Week

Before reading the article, ie based on the article headline, what's your assumption on what this article is about? ICI or Investment Company Institute is saying inflows to long term mutual funds was 7.85 Billion. Sounds rather positive, yes? I mean, don't you get the impression that money is flowing into mutual funds. Which is great yes?

Here is the WSJ article:

• Long-term mutual funds had inflows for the latest week on continued strength for bond funds, although U.S. equity funds posted outflows as markets were rattled late last week on European sovereign-debt issues, according to the Investment Company Institute.
  
  Total estimated inflows were $7.85 billion the week ended May 5. For more than a year, the lion's share of investment in mutual funds has gone to bonds, which typically thrive in a lower interest-rate environment. Meanwhile, stock funds have failed to consistently attract new investment despite the equity market's sharp rally.
  
  Equity funds had outflows of about $1.25 billion in the latest week, compared with inflows of $1.88 billion a week earlier. U.S. equities had outflows of $2.24 billion, while $988 million was added to foreign funds.
  
  At the same time, bond funds took in $8.57 billion, up from $7.26 billion the previous week, said the ICI. Taxable funds had inflows of $7.76 billion, while municipal funds added $808 million.
  
  Investors also put $525 million into hybrid funds, compared with $952 million the previous week. Such funds can invest in both stock and fixed-income assets.

But then I remember Zero Hedge had a short piece on the mutual fund flows. Retail Investors Flee From Market Even Before Record Market Crash, YTD Domestic Flows Into Stocks Are Negative

Hmmm.. Zero Hedge is contradicting what WSJ is saying. What is happening here?

• The weekly ICI number for long-term domestic mutual fund flows is out, and not surprisingly, retail investors were bailing out in droves from the stock market even before the massive flash crash of May 6. In fact, in the week ended May 5, retail investors had pulled a massive $2.235 billion out of the market, after the S&P had dropped a mere 5% or so from the prior week. We are positive that when the number for the current week comes out, the outflows will be stunning now that investors have no faith left in the rigged casino "capital markets." Of course, this is simple to explain: with everyone and their grandmother habituated to a market that can only go up, at the first sign of jitteriness everyone and their grandmother bails, although only the big institutions really get to exit: everyone else has to hope the SEC will not cancel their trades the next day. And now that the market has been thoroughly discredited, the primary dealers have no choice but to ramp it up on no volume yet again, in hopes of pulling in the momos and the housewives into it as usual, courtesy of the CNBC cheerleaders, just to pull the rug a few days before the next trillion dollar bail out is needed and "justified." Oh, and whoever cares, retail domestic flows into stocks year to date are negative by $1.5 billion. Tells you all you need to know about who is buying this "market" - momo emptor

So who is correct? Or whose pants is on fire? LOL!

Here is the ICI article: Long-Term Mutual Fund Flows

I will just highlight the table posted.

The WSJ just reported the numbers as it is. And yes it did mention the outflows but Tyler focused on the issue that more Americans pulled money OUT of the market.

And yeah, did you notice that less foreigners put money into the American market.

How would you want to interpret these facts?

And the American pie is getting poorer or perhaps some would say more bankrupt. Federal budget deficit hits April record

• The federal budget deficit hit an all-time high for April as the government kept spending to aid the recovery while revenue fell sharply.
  
  The Treasury Department said Wednesday the April deficit soared to $82.7 billion. That was significantly higher than last year's April deficit of $20 billion and the largest imbalance for that month on record. April's record deficit was higher than it would normally be because about a third of the increase resulted from benefits for May that were paid on the last day in April, analysts note. That was because May 1 fell on a Saturday.
  
  The government normally runs surpluses in April as millions of taxpayers file their income tax returns. However, income tax payments were down this April, reflecting the impact of the recession which has pushed millions of people out of work.
  
  Total revenues for April were down 7.9 percent from a year ago...

Less Americans filed income tax returns. Made sense cos hey more and more people are unemployed. So what do you expect? But I am in awed. Last April deficit was 20 Billion. This April deficit is 82.7 Billion. Holy moly!

Paul Krugman: That 1937 Feeling

Here's an interesting opinion from Paul Krugman posted on NY Times: That 1937 Feeling

• Here’s what’s coming in economic news: The next employment report could show the economy adding jobs for the first time in two years. The next G.D.P. report is likely to show solid growth in late 2009. There will be lots of bullish commentary — and the calls we’re already hearing for an end to stimulus, for reversing the steps the government and the Federal Reserve took to prop up the economy, will grow even louder.
  
  But if those calls are heeded, we’ll be repeating the great mistake of 1937, when the Fed and the Roosevelt administration decided that the Great Depression was over, that it was time for the economy to throw away its crutches. Spending was cut back, monetary policy was tightened — and the economy promptly plunged back into the depths.
  

The great mistake of 1937? Here's why..

• Which brings us to the still grim fundamentals of the economic situation.
  
  During the good years of the last decade, such as they were, growth was driven by a housing boom and a consumer spending surge. Neither is coming back. There can’t be a new housing boom while the nation is still strewn with vacant houses and apartments left behind by the previous boom, and consumers — who are $11 trillion poorer than they were before the housing bust — are in no position to return to the buy-now-save-never habits of yore.

• What’s left? A boom in business investment would be really helpful right now. But it’s hard to see where such a boom would come from: industry is awash in excess capacity, and commercial rents are plunging in the face of a huge oversupply of office space.
  
  Can exports come to the rescue? For a while, a falling U.S. trade deficit helped cushion the economic slump. But the deficit is widening again, in part because China and other surplus countries are refusing to let their currencies adjust.
  
  So the odds are that any good economic news you hear in the near future will be a blip, not an indication that we’re on our way to sustained recovery. But will policy makers misinterpret the news and repeat the mistakes of 1937? Actually, they already are.
  
  The Obama fiscal stimulus plan is expected to have its peak effect on G.D.P. and jobs around the middle of this year, then start fading out. That’s far too early: why withdraw support in the face of continuing mass unemployment? Congress should have enacted a second round of stimulus months ago, when it became clear that the slump was going to be deeper and longer than originally expected. But nothing was done — and the illusory good numbers we’re about to see will probably head off any further possibility of action.
  
  
  

More Bankrupt Americans

Here's another 'pessimistic' article.

Strange. Why can't one read it as it is, instead of branding? Why the need of branding such as pessimist and optimist? Unless of course one is A Mind Less Open...

Anyway the following report caught my attention.

• OCTOBER CONSUMER BANKRUPTCY FILINGS REACH NEW HIGHS, UP 28 PERCENT OVER LAST YEAR
  
  November 4, 2009 Alexandria, Va. — The 135,913 consumer bankruptcy filings in October represented a 27.9 percent increase over last October's monthly total of 106,266, according to the American Bankruptcy Institute (ABI), relying on data from the National Bankruptcy Research Center (NBKRC). The October 2009 consumer filings represented an 8.9 percent increase from the September 2009 total of 124,790. Chapter 13 filings constituted 28.5 percent of all consumer cases in October, a slight increase from the September rate.
  
  "The nearly 9 percent increase in consumer bankruptcy filings in October, together with a 7 percent jump reported in business cases, demonstrates the sustained stress on the U.S. economy," said ABI Executive Director Samuel J. Gerdano. ABI forecasts that total bankruptcies this year will exceed 1.4 million, the highest number since 2005.

Another interesting issue?

Flashback: Warren Buffett's Comments On US Economy

• "I am not sure about exact quarters or anything of the sort. Who knows about next week or next month? We made enormous progress since a year ago. We had a real panic. And if you didn’t panic, you didn’t understand what was going on. What happened in September and October of 2008 will particularly be remembered for a long, long time. And while the governmental authorities malign things sometimes, they fortunately did some very right things, very important things. They did them properly, and they kept us from going over the cliff. The fallout from that financial panic hit the regular economy in the fourth quarter like a ton of bricks. We are coming back from that. The patient really went into the emergency room and it won’t come out of the hospital entirely for a while."

Oh.. and I hope folks won't start branding Warren as a pessimist!

And the question most is asking is why isn't the Amercian on the street being bailout?

In the posting: Doomed To Fail Again!

• Wall Street is bailed out; Main Street is not. Efforts to subsidize the incomes and balance sheets of failing firms have been massive and were implemented with minimal debate, requirements, or oversight; efforts to shore up taxpayer incomes and balance sheets have been comparatively minimal, subject to extensive debate and tinkering, highly selective, and incomplete.

And the impact of such policy?

Consider this news article: Orlando shooting suspect had recently filed for bankruptcy

• Orlando, Florida (CNN) -- The suspect in Friday's shooting of six people in a downtown high-rise is a 40-year-old man with economic woes that include a recent bankruptcy filing, federal records show.
  
  In his filing last May for Chapter 7 bankruptcy, under which he sought to have his assets liquidated and his debts discharged, Jason S. Rodriguez listed his assets at $4,675 and his liabilities at $89,873.31.
  
  His 2002 Nissan XTerra with 110,000 miles represented $4,000 of those assets. His personal property filing described the vehicle as having body damage on the right side, an air conditioner that did not work and a transmission that was slipping
  
  
  

Is America Out Of Recession?

On UK Telegraph: The grim reality is that America is not out of recession

• The grim reality is that America is not out of recession
  
  By Liam Halligan, Economic Agenda
  Published: 6:28PM GMT 31 Oct 2009
  
  So I was pleased last week when I heard that, after four successive quarters of contraction, America's economy grew by an impressive 3.5pc between July and September, compared to the quarter before. "The US is out of recession" numerous newspaper headlines screamed. No wonder share prices surged.
  
  As ever, the numbers warrant a closer look. For one thing, this is annualised data. So the US economy actually expanded by only 0.9pc during the third quarter – a fact most newspaper reports ignored. What growth we did see resulted from a 3.4pc annualised rise in US consumption between July and September, which was in turn caused by a 22.3pc spike in spending on consumer durables.
  
  That increase, though, was largely driven – quite literally – by last-minute vehicle purchases under the soon-to-expire "cash for clunkers" scheme. The much-trumpeted rise in residential construction – the first in four years – was also dependent on a temporary tax credit for first-time buyers. In other words, this latest US growth spasm stemmed from one-off government "giveaways" – with the public only able to take advantage of such gimmicks by going deeper into debt. The rise in US consumption coincided with a 3.4pc fall in household disposable income and a plunging savings rate too. With government and household debt spiralling anew, America's so-called "return to growth" is nothing but a return to higher leverage.
  
  Consumer spending makes up 70pc of the US economy. So we should all be concerned that after a "euphoric" third quarter, the mood darkened significantly this month. The respected Conference Board measure of consumer confidence just plunged to a 26-year low, which is hardly surprising. US unemployment, now at its highest since the early 1980s, is still rising fast.
  
  Extremely weak consumer sentiment is a stark reminder of how fragile the world's largest economy remains, not least as the "bold" stimulus measures subside. The grim reality is that America isn't out of recession, whatever your stockbroker tells you. Over the last 40 years, all US slumps have been interrupted by at least one quarter of positive growth, followed by a renewed downturn.
  
  America hasn't yet recovered and it won't anytime soon – not unless President Obama finds the courage to hose down his friends in the banking sector and force them to start lending.

Warren Buffett's Comments On US Economy

On CNBC: http://www.cnbc.com/id/33404047

• "I am not sure about exact quarters or anything of the sort. Who knows about next week or next month? We made enormous progress since a year ago. We had a real panic. And if you didn’t panic, you didn’t understand what was going on. What happened in September and October of 2008 will particularly be remembered for a long, long time. And while the governmental authorities malign things sometimes, they fortunately did some very right things, very important things. They did them properly, and they kept us from going over the cliff. The fallout from that financial panic hit the regular economy in the fourth quarter like a ton of bricks. We are coming back from that. The patient really went into the emergency room and it won’t come out of the hospital entirely for a while."

A Forclosure Filing Every 13 Seconds?!

On Star Business: Every 13 seconds there is a foreclosures filing in US

• Friday October 9, 2009
  Every 13 seconds there is a foreclosures filing in US
  
  MIAMI: Every 13 seconds in America, there is another foreclosure filing.
  
  That’s the rhythm of a crisis that threatens to choke off hopes for a recovery in the US housing market as it destroys hundreds of billions of dollars in property values a year.
  
  There are more than 6,600 home foreclosure filings per day, according to the Centre for Responsible Lending, a non-partisan watchdog group based in Durham, North Carolina. With nearly two million already this year, the flood of foreclosures shows no sign of abating any time soon.
  
  If anything, the country’s worst housing downturn since record-keeping began in the late 19th century may only get worse since foreclosures, which started with subprime borrowers, have now moved on to the much bigger prime loan market on the back of mounting unemployment.
  
  In congressional testimony last month, Michael Barr, the Treasury Department’s assistant secretary for financial institutions, said more than six million families could face foreclosure over the next three years.
  
  “The recent crisis in the housing sector has devastated families and communities across the country and is at the centre of our financial crisis and economic downturn,” Barr said.
  
  A September report by a foreclosure taskforce appointed by Florida’s Supreme Court pointed to a shift in the root cause of foreclosures.
  
  “People are no longer defaulting simply because of a change in the payment structure of their loan. They are defaulting because of lost jobs or reduced hours or pay,” it said.
  
  Florida had the country’s highest rate of homes – 23% – that were either in foreclosure or delinquent on mortgage payments in the second quarter, and the report said: “The latest news for Florida is horrifying.”
  
  A recent pickup in sales and home prices in some regions has been heralded as a sign that the crisis in residential real estate may be close to bottoming out, after the steepest price decline since at least 1890.
  
  But nearly half of recent sales have been attributed to foreclosures or “short sales” at bargain-basement prices.
  
  Even as the US economy seems to be recovering from its worst recession since the Great Depression, mortgage delinquencies continue to rise. And that adds risk to any relatively upbeat assessment, since foreclosures depress the value of nearby properties while eroding the net worth of homeowners and the tax base for communities nationwide.
  
  The Centre for Responsible Lending says foreclosures are on track to wipe out US$502bil in property values this year.
  
  That spillover effect from foreclosures is one reason why Celia Chen of Moody’s Economy.com says nationwide home prices won’t regain the peak levels they reached in 2006 until 2020.
  
  In states hardest-hit by the housing bust, like Florida and California, the rebound would take until 2030, Chen predicted.
  
  “The default rates, the delinquency rates, are still rising,” Chen said. “Rising joblessness combined with a large degree of negative equity are going to cause foreclosures to increase.”
  
  Anyone doubting that the recovery in US real estate prices would be long and hard should take a look at Japan, Chen said. Prices there are still off about 50% from the peak they hit 15 years ago.
  
  Jay Brinkmann, chief economist with the Mortgage Bankers Association, said foreclosures were expected to peak in the second half of 2010. But that forecast is based on a projection that unemployment will begin falling after topping out “barely in double digits by the middle of next year.”
  
  Last week, the Labour Department reported the unemployment rate rose to a 26-year high of 9.8% in September, in the latest evidence that a turnaround in the jobs market is the missing link in the economic recovery.
  
  Since the start of the recession, the number of unemployed people has soared 7.6 million to 15.1 million. In Florida, unemployment is hovering at a nearly 40-year high of 10.7%, led by a steep decline in construction jobs.
  
  Modifications and ‘monsters’
  
  Mortgage modifications, the centrepiece of a plan unveiled by the Obama administration in March to help as many as nine million struggling borrowers hold onto their homes, have gotten off to a sluggish start.
  
  The Office of the Comptroller of the Currency, which regulates US banks, said in a Sept 30 report that banks and loan services stepped up efforts to help distressed homeowners in the second quarter, more than tripling the loan modifications that reduced principal.
  
  “This trend represents a significant shift from earlier quarters, when the vast majority of loan modifications either did not change monthly payments or increased them,” it said.
  
  Only a relatively small number of homeowners have seen financial relief from so-called “loan workouts” so far, however, and government officials acknowledge that far more is needed to reverse the national tide of foreclosures.
  
  Help would be more than welcome in areas like Miami Gardens where there is a pervasive sense of anger about banks and the blight caused by foreclosures in a city that once boasted one of the highest home-ownership rates in the country.
  
  A predominantly African-American community of 111,000 people, just north of Miami, it now has a 13% foreclosure rate – the second highest in Florida – and a glut of shuttered or boarded-up homes.
  
  “The banks were bailed out first. We all assumed that they were going to turn around and help other people but that didn’t happen,” said Ruby Milligan, 61, a teacher who took early retirement after suffering a mild stroke several years ago.
  
  Milligan received a foreclosure notice from Deutsche Bank in August last year, but still lives in her Miami Gardens home, fearing a knock on the door with an eviction order any time.
  
  Her retiree income is considered insufficient to qualify her for any modification of the adjustable-rate home-equity loan that she took out when the property was worth far more than it is today, she says.
  
  “I feel that the banks should write these mortgages down,” Milligan said. “They wrote these bad mortgages, they created these monsters.”
  
  One way of easing the crisis would be so-called “cramdowns”, a measure giving bankruptcy judges authorisation to write down the principal on homeowners’ mortgages.
  
  A similar measure helped curtail family farm foreclosures in the 1980s, but Representative Brad Miller, a North Carolina Democrat, said the banking lobby killed it when it came up for approval by Congress earlier this year.
  
  “We fought that fight before and lost it,” Miller said. “The industry will continue to oppose it.” — Reuters

The saddest part was the following quote:

• “The banks were bailed out first. We all assumed that they were going to turn around and help other people but that didn’t happen,” said Ruby Milligan, 61, a teacher who took early retirement after suffering a mild stroke several years ago.

Sigh! Help the rich and screw the poor? Sigh!

And it does not help when the poor reads how many millions in bonuses the bankers will receive!

Yeah, rewarded for doing what???

How?

Worse is over? Or worse is yet to come?

Georgian Bank: Yet Another Failed Bank!

On Bloomberg News: Banks Have Us Flying Blind on Depth of Losses: Jonathan Weil

The first few passages were rather 'shocking'...

• Oct. 1 (Bloomberg) -- There was a stunning omission from the government’s latest list of “problem” banks, which ran to 416 lenders, a 15-year high, as of June 30. One outfit not on the list was Georgian Bank, the second-largest Atlanta-based bank, which supposedly had plenty of capital.
  
  It failed last week.
  
  Georgian’s clean-up will be unusually costly. The book value of Georgian’s assets was $2 billion as of July 24, about the same as the bank’s deposit liabilities, according to a Federal Deposit Insurance Corp. press release. The FDIC estimates the collapse will cost its insurance fund $892 million, or 45 percent of the bank’s assets. That percentage was almost double the average for this year’s 95 U.S. bank failures, and it was the highest among the 10 largest ones.

Makes you wonder.

The bank was supposedly to have plenty of capital.

It was not ON THE PROBLEM BANK list!

But yet... if failed!!!

• How many other seemingly healthy multibillion-dollar community banks are out there waiting to implode? That’s impossible to know, which is what’s so unsettling about Georgian’s sudden downfall. Just when the conventional wisdom suggests the banking crisis might be under control, along comes a reality check that tells us we’re still flying blind.
  
  The cost of Georgian’s failure confirms that the bank’s asset values were too optimistic. It also helps explain why the FDIC, led by Chairman Sheila Bair, is resorting to extraordinary measures to replenish its battered insurance fund.
  
  Georgian, which had five branches catering to local businesses and wealthy individuals, was chartered in 2001. By 2003, the closely held bank had raised $50 million from an investor group led by a longtime local banker, Gordon Teel, who remained chief executive officer until last July. It grew at a breathtaking pace, fueled by the real-estate bubble.
  
  Triple Play
  
  From 2004 to 2007, total assets almost tripled to $2 billion from $737 million. Annual net income rose seven-fold to $18.3 million. The bank touted its philanthropy, including a $1 million pledge to a local children’s hospital, and boasted of a growing art collection showcasing Georgia painters.
  
  As recently as its March 31 report to regulators, Georgian said it met the FDIC’s requirements to be deemed “well capitalized.” By June 30, that had dropped to “adequately capitalized,” after a $45 million second-quarter net loss.
  
  Georgian also reported a 12-fold jump in nonperforming loans to $306.4 million from $24.7 million three months earlier, mostly construction loans. Georgian’s numbers made it seem as if the surge arose from nowhere. On its March 31 report, the bank said just $79.1 million of its loans were 30 days or more past due. That included the loans it had classified as nonperforming.
  
  Survival Mode
  
  Georgian’s new CEO, John Poelker, downplayed any concerns. “Whether there is enough capital for the bank to be a survivor isn’t an issue,” he told Bloomberg News for an Aug. 5 article.
  
  What wasn’t made public until Sept. 25, the day it closed, was that Georgian Bank had agreed to a cease-and-desist order with the FDIC on Aug. 31 after flunking an agency examination. The 19-page order described various “unsafe or unsound banking practices and violations of law and/or regulations,” including failing to record loan losses in a timely manner. Georgian neither admitted nor denied the allegations. ( My comments: It flunked the FDIC test on Aug 31st... and yet... it was not disclosed until Sept 25!!! Where is the transparency??? )
  
  The FDIC updates the public about the number of banks on its problem list once a quarter. An FDIC spokesman, David Barr, said Georgian was added to the FDIC’s internal list in July. He said the agency adds banks to the list based on exam ratings, not the data in their financial reports.
  
  As for the 416 banks on the list as of June 30, up from 305 a quarter earlier, the FDIC said their combined assets were $299.8 billion. (The FDIC didn’t name the banks, per its usual practice.) If Georgian’s experience is any guide, the real-world value of those assets probably is much less.
  
  Rising Losses
  
  That might help explain why the FDIC keeps increasing its estimates for the losses it’s anticipating from future bank failures. In May, the agency said it was expecting $70 billion of losses through 2013. This week, it bumped that to $100 billion. The agency also said its insurance fund would finish the third quarter with a deficit, meaning liabilities exceed assets.
  
  The FDIC, backed by the full faith and credit of the U.S. government, will get whatever money it needs to protect depositors. For now, it plans to raise $45 billion by collecting advance payments from the banking industry. Those payments will cover the next three years of premiums that the banks owe.
  
  In effect, the FDIC is taking out a massive, no-interest loan to cover its bills. Borrowing from the future won’t improve its insurance fund’s capital, however, only its liquidity.
  
  The big question is what the FDIC will do next time, should its loss estimates keep rising -- and there’s no reason to believe they won’t. By statute, the insurance fund is supposed to be funded solely by the banking industry. The FDIC could keep borrowing from the banks, directly or through more advances.
  
  The agency could tap its $500 billion credit line with the U.S. Treasury. It still would have to pay back the money with fees from the industry, assuming the banks can’t persuade their minions in Congress to change the law. As it stands, the only way to boost the fund’s capital immediately is by charging the banks a lot more money for their insurance premiums.
  
  Given the odds that other surprises like Georgian Bank are lurking, the FDIC will have to bite this bullet eventually.
  

Yet another indicator that the so-called economic revovery is not sustainable?

The Sustained Economic Rebound May Be Elusive!

On the Washington Post: New Data Raise Fears of a Post-Stimulus Hangover

• By Ylan Q. Mui
  Washington Post Staff Writer Friday,
  October 2, 2009
  The fragile economic recovery has relied heavily on government stimulus spending, but new data show that as the money runs out, a sustained rebound may be elusive.
  
  The dramatic decline in sales reported Thursday by the Big Three automakers suggested the extent to which the stimulus act has propped up the economy. The government's wildly popular "Cash for Clunkers" program drove consumer spending to its highest level in eight years in August. But after it ended, so did the growth in auto sales.
  
  General Motors' sales plunged 36 percent in September compared with August. Ford plummeted 37 percent. Chrysler dove 33 percent.
  
  Cash for Clunkers "was a one-time boost of sales followed by a crater," said Ben Herzon, an economist at Macroeconomic Advisers. The firm forecast that the program was likely to have no effect as a stimulant for national economic output.
  
  Other economic data released Thursday showed that the deep wounds of the recession have yet to heal. Weekly jobless claims rose more than expected, a sign that businesses are still concerned about the future. The monthly unemployment rate, scheduled for release Friday, is expected to rise, albeit at a slower rate. Consumer loan delinquencies remain at record highs, and manufacturing growth has slowed.
  
  "It is a warning not to take the near-term strength of the economic recovery for granted," said Paul Dales, U.S. economist for Capital Economics.
  
  The major stock market indexes tumbled Thursday as investors seemed to lose confidence in the nascent recovery. The Dow Jones industrial average, which in recent days seemed poised to break 10,000 for the first time in about a year, dropped 2 percent to 9,509. The broader Standard & Poor's 500-stock index fell 2.6 percent. The tech-heavy Nasdaq declined 3.1 percent.
  
  The most robust of the economic data also benefited from stimulus money. A surprising 6.4 percent jump in pending home sales in August to the highest level since March 2007 was boosted by consumers rushing to take advantage of the federal $8,000 tax credit for first-time home buyers, which will expire next month.
  
  The index increased in every region of the country. In the South, including the Washington region, pending sales rose 0.8 percent. The index measures the period after a buyer has signed a contract but has not yet closed on the deal. It is viewed as a forward-looking indicator of home sales.
  
  Consumer spending -- which accounts for more than two-thirds of the gross domestic product -- also rose more than expected in August, up 1.3 percent from the previous month.
  
  But much of that rise was driven by the government clunkers program that ended in August and gave consumers a credit of up to $4,500 for trading in their old cars for new, more fuel-efficient ones. It remains unclear whether those sales were merely borrowed from other months or will represent a net increase.
  
  Economists took some comfort in August's 1 percent increase in the sales of nondurable goods, including clothing, food and fuel, following a 0.3 percent dip in July. Still, August is the peak of the back-to-school shopping season, and many states held sales-tax holidays to encourage consumers to spend -- another temporary government stimulus.
  
  "A continued but gradual recovery in consumer spending seems the most likely course," said Nigel Gault, chief U.S. economist for IHS Global Insight.
  
  Overshadowing those gains were reports that showed manufacturing growth slowed in September and more people filed for unemployment benefits last week.
  
  The Institute for Supply Management's index of business activity fell to 52.6 in September, the second consecutive month the reading has been above 50, the benchmark for growth, but August's reading was a more encouraging 52.9.
  
  Thirteen of the 18 industries surveyed in the index reported growth, led by the wood- and paper-product sectors and apparel. In addition, 30 percent of businesses said they expected their industry to benefit from the government's stimulus package.
  
  But economists' bigger concern is that many Americans are out of work, and their ranks continue to increase. That puts them in poor position to pay off the mounds of debt accumulated during the boom times.
  
  Weekly jobless claims rose to 551,000 last week, up 17,000 from the previous week and more than forecast. Though the weekly figures tend to be volatile, the increase is a sign that companies are still cutting back on labor and remain cautious about the prospects for recovery.
  
  Economists are hoping a clearer picture will emerge Friday when the monthly unemployment rate is slated for release. It is expected to rise slightly, and many economists believe it will eventually top 10 percent, dampening the prospect of a consumer recovery.
  
  Throughout the recession, shoppers have cut back their spending to build their savings and pay down debt, bringing the personal savings rate to its highest level in about a decade. But many consumers are still burdened with heavy loans taken out during more prosperous times.
  
  Delinquency rates hit record highs during the second quarter for home equity loans and lines of credit as well as bank cards, according to the American Bankers Association. Home equity loan delinquencies -- defined as accounts that are 30 days or more overdue -- rose from 3.52 percent in the first quarter to 4.01 percent of accounts in the second quarter, the ABA reported Thursday. Bank card delinquencies rose from 4.75 percent in the first quarter to 5.01 percent of accounts in the second quarter.
  
  The ABA also reported increases in delinquencies on personal loans.
  
  "Falling behind on debt payments is an unfortunate side effect of high unemployment and a frozen job market," said ABA chief economist James Chessen. "The picture won't change until the labor market improves and the economy picks up steam. This is going to take time."