MaxedOutMama

Orders for U.S. durable goods unexpectedly rose in February on a rebound in demand for machinery, computers and defense equipment.
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Combined with reports showing improvements in retail sales, residential construction and home resales, the figures indicate the economy is stabilizing after shrinking last quarter at the fastest pace in a quarter century. Stepped-up efforts by the Obama administration and Federal Reserve to ease the credit crunch may help revive growth later this year.

U.S. electricity prices are likely to rise 15 to 30 percent if a national cap on carbon dioxide emissions is instituted, according to a report by Moody's Investors Service.
And "the vast majority" of the burden of those higher costs will be borne by residents as large industrial users are likely to be successful in lobbying U.S. lawmakers for special rates and tariffs, the report dated March showed.
If carbon dioxide (CO2) emissions are priced at $20 per metric ton, it would add about $48 billion in costs for the electric utility sector, Moody's said.

The basic plan, as has been well-rehearsed by now, is for the government to provide generous loans to private investors for buying the banks' depressed, mortgage-related assets.
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The banks will want to unload their bad, mortgage-related assets even if they have to sell them at a discount relative to where they currently value them. The banks will do this, assuming the discount isn't too great, because hanging onto the assets is creating uncertainty about the amount of capital they have, and the uncertainty is discouraging them from making loans. (Better to take a small, certain loss and be done with it than to keep facing the prospect of a very large loss later on.) Of course, this will still leave the banks undercapitalized. But, without the prospect of large future losses hanging over them (which the Treasury program will have eliminated), private investors might be more willing to provide banks with capital. More plausibly, having demonstrated to American taxpayers that it can manage something tricky like getting the bad assets off the banks' books, Treasury will find it easier to get more money from Congress to recapitalize them.

If Obama has his way, he will manage to worsen (continue to worsen) our recession and increase international instability at the same time. In Scott Johnson's phrasing, Barack Obama may well combine "infantile leftism and adolescent grandiosity" in a perfectly dysfunctional whole. Only someone steeped in the academic culture can continue to believe in infantile leftism after they have begun to actually pay their own bills. But that is no reason for despair; in fact I would suggest that despite all the damage that Barack Obama and the infantile leftists can do in the next 4 years, he is also offering a marvelous opportunity that, if squandered, will be our loss, not his.

The American center and right have slowly been drawn into the orbit of the "nanny state." George W. Bush perfectly captured this ethos with his "Compassionate Conservatism." The Republicans, prior to the capture of the Congress by the Democrats, became indistinguishable form Democrats in their propensity to spend without any particular concerns about actually paying for their wish list. Our entire country has been living beyond our means with the unstated infantile fantasy that "someone" will rescue us for our profligacy. Reality is painful, yet we see signs that the sleeping giant of America may be waking up. The "Tea Parties" have evoked an interesting response.

If a bank has a pool of residential mortgages with $100 face value that they are seeking to divest,
the bank would approach the FDIC. The FDIC would determine, according to the above process, that they would be willing to leverage the pool at a 6-to-1 debt-to-equity ratio. The pool would then be auctioned by the FDIC, with several private buyers submitting bids. The highest bid from the private sector – in this example, $84 – would define the total price paid by the private investors and the Treasury for the mortgages. Of this $84 purchase price, the Treasury and the private investors would split the $12 equity portion. The new PPIF would issue debt for the remaining $72 of the price and the debt would be guaranteed by the FDIC. This guarantee would be secured by the purchased assets. The private investor would then manage the servicing of the asset pool and the timing of its disposition on an ongoing basis – using asset managers approved and subject to oversight by the FDIC. Through transactions like this, the Legacy Loans Program is designed to use private sector pricing to cleanse banks’ balance sheets of troubled assets and create a more healthy banking system.

However, any private investor, even those who do not partner with Treasury under the Public-Private Investment Program, will also be able to access the TALF to purchase legacy securities.
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Through this expansion of the TALF, non-recourse loans will be made available to investors to fund purchases of legacy securitization assets. Eligible assets are expected to include certain non-agency residential mortgage-backed securities (“RMBS”) that were originally rated AAA, and outstanding and commercial mortgage-back securities (“CMBS”) and ABS that are rated AAA. Borrowers will need to meet certain eligibility criteria. Haircuts will be determined at a later date and will reflect the riskiness of the assets provided as collateral.

Under this program, private investment managers will have the opportunity to apply for qualification as a Fund Manager (“FM”). Applicants will be pre-qualified based upon criteria that are expected to include a demonstrable historical track record in the targeted asset classes, a minimum amount of assets under management in the targeted asset classes, and detailed structural proposals for the proposed Legacy Securities PPIF. Treasury expects to approve approximately 5 FMs and may consider adding more depending on the quality of applications received. Approved FMs will have a period of time to raise private capital to target the designated asset classes and will receive matching equity capital from Treasury. FMs will be required to submit a fundraising plan to include retail investors, if possible. Treasury equity capital will be invested on a fully side-by-side basis with these private investors in each PPIF.

Furthermore, FMs will have the ability, to the extent their fund structures meet certain guidelines, to subscribe to Treasury for senior debt for the PPIFs in the amount of up to 50% of a fund’s total equity capital, and Treasury will consider requests for senior debt for the PPIFs in the amount of up to 100% of a fund’s total equity capital subject to further restrictions on asset level leverage, redemption rights, disposition priorities, and other factors Treasury deems relevant. This senior debt will have the same duration as the underlying fund and will be repaid on a pro-rata basis as principal repayments or disposition proceeds are realized by the PPIF. These senior loans will be structurally subordinated to any financing extended by the Federal Reserve to these PPIFs via the TALF.

This is more than disappointing. In fact, it fills me with a sense of despair.
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But the Geithner scheme would offer a one-way bet: if asset values go up, the investors profit, but if they go down, the investors can walk away from their debt. So this isn’t really about letting markets work. It’s just an indirect, disguised way to subsidize purchases of bad assets.
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But the real problem with this plan is that it won’t work. Yes, troubled assets may be somewhat undervalued. But the fact is that financial executives literally bet their banks on the belief that there was no housing bubble, and the related belief that unprecedented levels of household debt were no problem. They lost that bet. And no amount of financial hocus-pocus — for that is what the Geithner plan amounts to — will change that fact.

The deliberate opacity of the credit and derivative markets (which is being addressed behind the scenes in places such as the Counterparty Risk Management Policy Group) makes the current credit excesses potentially dangerous, especially given the unfathomable size of the markets (derivatives are $300-400 trillion in notional value).

The big speculators in these markets ultimately expect to get bailed out, yet once again, should their overly leveraged trades ever blow up in their faces, e.g. as they have been going all the way back to the Latin American debt crises of the 1980s, through the S&L crsis, the Mexican bond crisis, Asian financial crisis, Russian default crisis, Brazil and Argentive crises, and ultimately the TMT equity crash, in the last case through Greenspan's negative real interest rates for three years igniting a global real estate boom and Japan's zero rates funding speculative global "carry trades." Yes, it'a long list, and these bailouts have been a bipartisan political policy.

This combination of enormous gains on opaque private trades with the public providing implicit insurance against economically-destabilizing losses (the "too big to be allowed to fail syndrome," a la the LTCM precedent in October 1998) is blatantly NOT fair and honest and creates immense "moral hazard" which greatly distorts global capital flows into speculative activity and away from real productive uses.

The structure of our economy will doubtless change in the years ahead. In particular, our analysis of economic developments almost surely will need to deal in greater detail with balance sheet considerations than was the case in the earlier decades of the postwar period. The determination of global economic activity in recent years has been influenced importantly by capital gains on various types of assets, and the liabilities that finance them. Our forecasts and hence policy are becoming increasingly driven by asset price changes.

The steep rise in the ratio of household net worth to disposable income in the mid-1990s, after a half-century of stability, is a case in point. Although the ratio fell with the collapse of equity prices in 2000, it has rebounded noticeably over the past couple of years, reflecting the rise in the prices of equities and houses.

Whether the currently elevated level of the wealth-to-income ratio will be sustained in the longer run remains to be seen. But arguably, the growing stability of the world economy over the past decade may have encouraged investors to accept increasingly lower levels of compensation for risk. They are exhibiting a seeming willingness to project stability and commit over an ever more extended time horizon.

The lowered risk premiums--the apparent consequence of a long period of economic stability--coupled with greater productivity growth have propelled asset prices higher.5 The rising prices of stocks, bonds and, more recently, of homes, have engendered a large increase in the market value of claims which, when converted o cash, are a source of purchasing power. Financial intermediaries, of course, routinely convert capital gains in stocks, bonds, and homes into cash for businesses and households to facilitate purchase transactions.6 The conversions have been markedly facilitated by the financial innovation that has greatly reduced the cost of such transactions.

Thus, this vast increase in the market value of asset claims is in part the indirect result of investors accepting lower compensation for risk. Such an increase in market value is too often viewed by market participants as structural and permanent. To some extent, those higher values may be reflecting the increased flexibility and resilience of our economy. But what they perceive as newly abundant liquidity can readily disappear. Any onset of increased investor caution elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher asset prices. This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums.

6. Capital gains do not add to GDP. The higher prices of plant and equipment and homes are reflected in an economy's cost structure, which directly or indirectly increases prices of goods and services, leaving real output largely unaffected. Capital gains, of course, cannot supply any of the saving required to finance gross domestic investment.

If Robespierre were to ascend from hell and seek out today’s guillotine fodder, he might start with a list of those with three incriminating initials beside their names: MBA. The Masters of Business Administration, that swollen class of jargon-spewing, value-destroying financiers and consultants have done more than any other group of people to create the economic misery we find ourselves in.

From Royal Bank of Scotland to Merrill Lynch, from HBOS to Leh-man Brothers, the Masters of Disaster have their fingerprints on every recent financial fiasco.

I write as the holder of an MBA from Harvard Business School – once regarded as a golden ticket to riches, but these days more like scarlet letters of shame.

Yes, free the president from his flacks, fixers and goons -- his posse of smirky smart alecks and provincial rubes, who were shrewd enough to beat the slow, pompous Clintons in the mano-a-mano primaries but who seem like dazed lost lambs in the brave new world of federal legislation and global statesmanship.

Heads should be rolling at the White House for the embarrassing series of flubs that have overshadowed President Obama's first seven weeks in office and given the scattered, demoralized Republicans a huge boost toward regrouping and resurrection. (Michelle, please use those fabulous toned arms to butt some heads!)

As early as 2004, in a Strategic Analysis subtitled Why Net Exports Must Now Be the Motor for U.S. Growth,2 we argued that continued growth in net lending to the private sector was an impossibility, and that at some stage there would have to be a collapse both in lending and in private expenditure relative to income. We also argued that it would not be possible to save the situation by applying another fiscal stimulus (as in 2001) because that would increase the budget deficit to about 8 percent of GDP, implying that the public debt would then be hurtling toward 100 percent of GDP, with more to come. These processes were allowed to continue nonetheless, and we perforce had to bring the short-term prospect into sharper focus. As the turnaround in net lending eventually became manifest, we predicted in our November 2007 analysis3—without being too precise about the timing— that there would be a recession in 2008.
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As illustrated in the extreme right-hand section of Figure 1, the implication of these assumptions, taken together, is that GDP will fall about 12 percent below trend between now and 2010, while unemployment will rise to about 10 percent.

China's biggest terminal operator has predicted zero growth in container throughput in 2009 for the first time ever as demand peters out in the mainland's key export markets.
China Merchants (Holdings) Inter-national has a 34 percent share of the mainland container market, which company chairman Fu Yuning said would remain at 129 million TEUs this year.
"This is the first time in history it will remain unchanged over the previous year," Fu told delegates at the Transpacific Maritime conference in downtown Los Angeles.