TheCenterLane.com

The Lehman Fallout

John Burke — Tue, 16 Mar 2010 06:15:00 GMT

Everyone is speculating about what will happen next. The shock waves resulting from the release of the report by bankruptcy examiner Anton Valukas, pinpointing the causes of the collapse of Lehman Brothers, have left the blogosphere’s commentators with plenty to discuss. Unfortunately, the mainstream media isn’t giving this story very much traction. On March 15, the Columbia Journalism Review published an essay by Ryan Chittum, decrying the lack of mainstream media attention given to the Lehman scandal. Here is some of what he said:

Look, I know that Lehman collapsed a year and a half ago, but this is a major story -- one that finally gets awfully close to putting the crimes in the crisis. I’ll go ahead and say it: If you’ve wanted to know about the Valukas report and its implications, you’ve been better served by reading Zero Hedge and Naked Capitalism than you have The Wall Street Journal or New York Times. This on the biggest financial news story of the week -- and one of the biggest of the year. These papers have hundreds of journalists at their disposal. The blogs have one non-professional writer and a handful of sometime non-pro-journalist contributors.

I’m hardly the only one who has noticed this. James Kwak of Baseline Scenario wrote this earlier today:
Overall, I’m surprised by how little interest the report has gotten in the media, given its depth and the surprising nature of some of its findings.

At the Zero Hedge website, Tyler Durden reacted to the Columbia Journalism Review piece this way:

Only a few days have passed since its release, and already the Mainstream Media has forgotten all about the Lehman Examiner Report, with barely an occasional mention. As the CJR points out, this unquestionably massive story of corruption and vice, is being covered up by powered interests controlling all the major news outlets, because just like in the Galleon case, the stench goes not only to the top, (in this case the NewYork Fed and the SEC), but very likely to various corporations that have vested interests in the conglomerates controlling America’s key media organizations.

One probable reason why the Lehman story is being buried is because its timing dovetails so well with the unveiling of Senator “Countrywide Chris” Dodd’s financial reform plan. The fact that Dodd’s plan includes the inane idea of expanding the powers of the Federal Reserve was not to be ignored by John Carney of The Business Insider website:

Why do we think these are such bad ideas? At the most basic level, it’s hard to see how the expansion of the scope of the Federal Reserve’s authority to cover any large financial institution makes sense. The Federal Reserve was not able to prevent disaster at the firms it was already charged with overseeing. What reason is there to think it will do a better job at regulating a wider universe of firms?

More concretely, the Federal Reserve had regulators in place inside of Lehman Brothers following the collapse of Bear Stearns. These in-house regulators did not realize that Lehman’s management was rebuking market demands for reduced risk and covering up its rebuke with accounting sleight-of-hand. When Lehman actually came looking for a bailout, officials were reportedly surprised at how bad things were at the firm. A similar situation unfolded at Merrill Lynch. The regulators proved inadequate to the task.

Just think: It was only one week ago when we were reading those fawning, sycophantic stories in The New Yorker and The Atlantic about what a great guy “Turbo” Tim Geithner is. This week brought us a great essay by Professor Randall Wray, which raised the question of whether Geithner helped Lehman hide its accounting tricks. Beyond that, Professor Wray emphasized how this scandal underscores the need for Federal Reserve transparency, which has been so ardently resisted by Ben Bernanke. (Remember the lawsuit by the late Mark Pittman of Bloomberg News?) Among the great points made by Professor Wray were these:

Not only did the NY Fed fail to blow the whistle on flagrant accounting tricks, it also helped to hide Lehman’s illiquid assets on the Fed’s balance sheet to make its position look better. Note that the NY Fed had increased its supervision to the point that it was going over Lehman’s books daily; further, it continued to take trash off the books of Lehman right up to the bitter end, helping to perpetuate the fraud that was designed to maintain the pretense that Lehman was not massively insolvent. (see here)

Geithner told Congress that he has never been a regulator.(see here) That is a quite honest assessment of his job performance, although it is completely inaccurate as a description of his duties as President of the NY Fed.
* * *
More generally, this revelation drives home three related points. First, the scandal is on-going and it is huge. President Obama must hold Geithner accountable. He must determine what did Geithner know, and when did he know it. All internal documents and emails related to the AIG bailout and the attempt to keep Lehman afloat need to be released. Further, Obama must ask what has Geithner done to favor his clients on Wall Street? It now looks like even the Fed BOG, not just the NY Fed, is involved in the cover-up. It is in the interest of the Obama administration to come clean. It is hard to believe that it does not already have sufficient cause to fire Geithner. In terms of dollar costs to the government, this is surely the biggest scandal in US history. In terms of sheer sleaze does it rank with Watergate? I suppose that depends on whether you believe that political hit lists and spying that had no real impact on the outcome of an election is as bad as a wholesale handing-over of government and the economy to Wall Street.

It remains to be seen whether anyone in the mainstream media will be hitting this story so hard. One possible reason for the lack of significant coverage may exist in this disturbing point at the conclusion of Wray’s piece:

Of greater importance is the recognition that all of the big banks are probably insolvent. Another financial crisis is nearly certain to hit in coming months -- probably before summer. The belief that together Geithner and Bernanke have resolved the crisis and that they have put the economy on a path to recovery will be exposed as wishful thinking.

Oh, boy! Not good! Not good at all! We’d better change the subject to March Madness, American Idol or Rielle Hunter! Anything but this!

thecenterlane.com

More Damned Lies Than You Can Count

John Burke — Mon, 15 Mar 2010 07:03:00 GMT

Thanks to the great work of Anton Valukas, as court-appointed bankruptcy examiner investigating the collapse of Lehman Brothers, people are finally beginning to realize how significant a role fraud plays on Wall Street. It turned out that the Enron scandal wasn’t the once-in-a-lifetime event people thought it was. Accounting fraud occurs on a regular basis, as does fraudulent stock price manipulation. The 2200-page report prepared by Valukas and his team at Jenner & Block has everyone talking. It’s about time.

Other lies are getting more exposure as well. President Obama justified the bank bailouts with the rationale that giving the money to the banks creates a “money multiplier” effect because banks can loan out 8-10 dollars for every bailout dollar they get, giving the economy more bang for the bailout buck. As I pointed out on September 21, Australian economist Steve Keen published a fantastic report from his website, explaining how the “money multiplier” myth, fed to Obama by the very people who helped cause the crisis, was the wrong paradigm to be starting from in attempting to save the economy. Here’s some of what Professor Keen had to say:

He justified giving the money to the lenders, rather than to the debtors, on the basis of “the multiplier effect” from bank lending:

the truth is that a dollar of capital in a bank can actually result in eight or ten dollars of loans to families and businesses, a multiplier effect that can ultimately lead to a faster pace of economic growth.(page 3 of the speech)

This argument comes straight out of the neoclassical economics textbook. Fortunately, due to the clear manner in which Obama enunciates it, the flaw in this textbook argument is vividly apparent in his speech.

This “multiplier effect” will only work if American families and businesses are willing to take on yet more debt: “a dollar of capital in a bank can actually result in eight or ten dollars of loans”.

So the only way the roughly US$1 trillion of money that the Federal Reserve has injected into the banks will result in additional spending is if American families and businesses take out another US$8-10 trillion in loans.
* * *
If the money multiplier was going to “ride to the rescue”, private debt would need to rise from its current level of US$41.5 trillion to about US$50 trillion, and this ratio would rise to about 375% -- more than twice the level that ushered in the Great Depression.

This is a rescue? It’s a “hair of the dog” cure: having booze for breakfast to overcome the feelings of a hangover from last night’s binge. It is the road to debt alcoholism, not the road to teetotalism and recovery.

Fortunately, it’s a “cure” that is also highly unlikely to work, because the model of money creation that Obama’s economic advisers have sold him was shown to be empirically false over three decades ago.

Now that Australia’s economy is beginning to recover, they have already found it necessary to begin raising interest rates. As I pointed out last September:

If only Mr. Obama had stuck with his campaign promise of “no more trickle-down economics”, we wouldn’t have so many people wishing they lived in Australia.

Michael Shedlock (“Mish”) recently referred to Professor Keen’s debunking of the money multiplier myth in a fantastic essay:

However, conventional wisdom regarding the money multiplier is wrong. Australian economist Steve Keen notes that in a debt based society, expansion of credit comes first and reserves come later.

Indeed, this is easy to conceptualize: Banks lent more than they should have, and those loans are going bad at a phenomenal rate. In response, the Fed has engaged in a huge swap-o-rama party with various banks (swapping treasuries for collateral of dubious value) in addition to turning on the printing presses.

This was done so that banks would remain “well capitalized”. The reality is those excess reserves are a mirage. Banks need those reserves for credit losses coming down the pike, as unemployment rises, foreclosures mount, and credit card defaults soar.

Banks are not well capitalized, they are insolvent, unwilling and unable to lend.

Blogger George Washington recently wrote an extensive, thought-provoking piece about public banking and other potential alternatives to resolve the economic crisis, which appeared at the Naked Capitalism website. The essay began with a discussion of Steve Keen’s work in exposing the “money multiplier” as a sham.

Speaking of shams, former Labor Secretary Robert Reich recently wrote a great essay entitled, “The Sham Recovery”. Reich has exposed the propagandists touting the imaginary economic recovery in his unique, clear style:

Business cheerleaders naturally want to emphasize the positive. They assume the economy runs on optimism and that if average consumers think the economy is getting better, they’ll empty their wallets more readily and -- presto! -- the economy will get better. The cheerleaders fail to understand that regardless of how people feel, they won’t spend if they don’t have the money.

It’s always nice when a big lie gets exposed. It’s even better that we are now learning that the true cause of the financial crisis was plain, old sleaze.

thecenterlane.com

Head For The Hills

John Burke — Fri, 12 Mar 2010 05:25:00 GMT

When a stranger in a tinfoil hat tells me that the sky is falling, I don’t pay attention to him. On the other hand, when credible sources warn of an upcoming economic collapse as a result of our government’s financial ignorance -- I listen.

Simon Johnson is a professor of Entrepreneurship at MIT’s Sloan School of Management. From 2007-2008, he was chief economist at the International Monetary Fund. He recently co-authored an article for CenterPiece with Peter Boone entitled, “The Doomsday Cycle”. Their essay began with this observation:

Each time the system runs into problems, the Federal Reserve quickly lowers interest rates to revive it. These crises appear to be getting worse and worse -- and their impact is increasingly global. Not only are interest rates near zero around the world, but many countries are on fiscal trajectories that require major changes to avoid eventual financial collapse.

What will happen when the next shock hits? We believe we may be nearing the stage where the answer will be -- just as it was in the Great Depression -- a calamitous global collapse. The root problem is that we have let a “doomsday cycle” infiltrate our economic system . . .

The essay contains a number of proposals for correcting this problem. One of them involves tripling the requirement for core capital at major banks to 15-20% of assets. They concluded with this warning:

Last year, we came remarkably close to collapse. Next time, it may be worse. The threat of the doomsday cycle remains strong and growing.

Of course, the fact that scares me is that our government doesn’t give a damn. We aren’t likely to see any changes in capital requirements or anything else that was suggested in that article.

Niall Ferguson is a professor of economic history at Harvard. He recently wrote an article entitled, “Complexity and Collapse -- Empires on the Edge of Chaos”. It was published in the March/April 2010 issue of Foreign Affairs magazine. The piece began with this summary:

Imperial collapse may come much more suddenly than many historians imagine. A combination of fiscal deficits and military overstretch suggests that the United States may be the next empire on the precipice.

Niall Ferguson’s essay inspired Paul Farrell of MarketWatch to write a commentary on Ferguson’s piece, summarizing the highlights, while driving home this message:

Dismiss his warning at your peril. Everything you learned, everything you believe and everything driving our political leaders is based on a misleading, outdated theory of history. The American Empire is at the edge of a dangerous precipice, at risk of a sudden, rapid collapse.
* * *
His message negates all the happy talk you're hearing in today’s news -- about economic recovery and new bull markets, about “hope,” about a return to “American greatness” -- from Washington politicians and Wall Street bankers.
* * *
“The Consummation of Empire” focuses us on Ferguson’s core message: At the very peak of their power, affluence and glory, leaders arise, run amok with imperial visions and sabotage themselves, their people and their nation. They have it all.

Fortunately, Mr. Farrell included some advice for those of us who are wondering about how to survive an economic collapse: Head for the hills. Here’s what he had to say:

At this point, investors are asking themselves: How can I prepare for the destruction and collapse of the American Empire? There is no solution in the Cole-Ferguson scenario, only an acceptance of fate, of destiny, of history’s inevitable cycles.

But there is one in “Wealth, War and Wisdom” by hedge fund manager Barton Biggs, Morgan Stanley’s former chief global strategist who warns us of the “possibility of a breakdown of the civilized infrastructure,” advising us to buy a farm in the mountains.

“Your safe haven must be self-sufficient and capable of growing some kind of food ... well-stocked with seed, fertilizer, canned food, wine, medicine, clothes, etc. Think Swiss Family Robinson.” And when they come looting, fire “a few rounds over the approaching brigands’ heads.”

A reading of Paul Farrell’s article about Barton Biggs from July of 2009, reveals a more comfortable assessment of a crisis which may be 40 or 50 years in the future. Professor Ferguson’s essay has apparently given Mr. Farrell a greater sense of urgency about the disaster ahead. Here’s the assessment Mr. Farrell gave last summer:

But how to invest for the "End of Civilization" coming around 2050? The next 40 years will be confusing: Accelerating struggles between aging populations and disenchanted youth, soaring commodity prices, global warming, peak oil, food shortages, famine, blackouts, rationing, civil disorder, increasing crime, worldwide jihads, riots, anarchy and other dark scenarios of a tomorrow with “warfare defining human life.”

Compare and contrast that view with the concluding remark from Mr. Farrell’s recent piece:

You are forewarned: If the peak of America’s glory was the leadership handoff from Clinton to Bush, then we have already triggered the countdown to collapse, the decade from 2010 until 2020 ... tick ... tick ... tick ...

You have just read the views of some intelligent men who are warning us that a huge disaster may lie just around the corner. Yikes!

thecenterlane.com

Inviting Blowback

John Burke — Thu, 11 Mar 2010 05:17:00 GMT

Is it just a coincidence that “Turbo” Tim Geithner was the subject of back-to-back feature stories in The New Yorker and The Atlantic ? A number of commentators don’t think so.

The March 10 issue of The New Yorker ran an article by John Cassidy entitled, “No Credit”. The title is meant to imply that Getithner’s efforts to save America’s financial system are working but he’s not getting any credit for this achievement. From the very outset, this piece was obviously an attempt to reconstruct Geithner’s controversial public image – because he has been widely criticized as a tool of Wall Street.

The article by Jo Becker and Gretchen Morganson in the April 26, 2009 issue of The New York Times helped clarify the record on Geithner’s loyalty to the big banks at the public’s expense, during his tenure as president of the Federal Reserve of New York. That piece began with a brainstorming session convened by Treasury Secretary Hank Paulson in June of 2008, at which point Paulson asked for suggestions as to what emergency powers the government should have at its disposal to confront the burgeoning financial crisis:

Timothy F. Geithner, who as president of the New York Federal Reserve Bank oversaw many of the nation’s most powerful financial institutions, stunned the group with the audacity of his answer. He proposed asking Congress to give the president broad power to guarantee all the debt in the banking system, according to two participants, including Michele Davis, then an assistant Treasury secretary.

The proposal quickly died amid protests that it was politically untenable because it could put taxpayers on the hook for trillions of dollars.

“People thought, ‘Wow, that’s kind of out there,’” said John C. Dugan, the comptroller of the currency, who heard about the idea afterward. Mr. Geithner says, “I don’t remember a serious discussion on that proposal then.”

But in the 10 months since then, the government has in many ways embraced his blue-sky prescription.

The recent article in The New Yorker defends Geithner’s bank bailouts, with a bit of historical revisionism that conveniently avoids a small matter referred to as Maiden Lane III:

During the past ten months, U.S. banks have raised more than a hundred and forty billion dollars from investors and increased the reserves they hold to cover unforeseen losses. While many small banks are still in peril, their larger brethren, such as Bank of America, Wells Fargo, and Goldman Sachs, are more strongly capitalized than many of their international competitors, and they have repaid virtually all the money they received from taxpayers. Looking ahead, the Treasury Department estimates the ultimate cost of the financial-rescue package at just a hundred and seventeen billion dollars -- and much of that related to propping up General Motors and Chrysler.

Edward Harrison of Credit Writedowns dismissed the NewYorker article as “an out and out puff piece” that Geithner himself could have written:

Don’t be fooled; this is a clear plant to help bolster public opinion for a bailout and transfer of wealth, which was both unnecessary and politically damaging.

The article on Geithner, appearing in the April issue of The Atlantic, was described by Mr. Harrison as “fairly even-handed” although worthy of extensive criticism. Nevertheless, after reading the following passage from the first page of the essay, I found it difficult to avoid using the terms “fawning and sycophantic” to describe it:

In the course of many interviews about Geithner, two qualities came up again and again. The first was his extraordinary quickness of mind and talent for elucidating whatever issue was the preoccupying concern of the moment. Second was his athleticism. Unprompted by me, friends and colleagues extolled his skill and grace at windsurfing, tennis, basketball, running, snowboarding, and softball (specifying his prowess at shortstop and in center field, as well as at the plate). He inspires an adolescent awe in male colleagues.

Gawd! Yeech!

The reaction to the New Yorker and Atlantic articles, articulated by Yves Smith of Naked Capitalism, is an absolutely fantastic “must read” piece. Ms. Smith goes beyond the subject of Geithner. Her essay is a tour de force, describing how President Obama sold out the American public in the service of his patrons on Wall Street. The final two paragraphs portray the administration’s antics with a long-overdue measure of pugilism:

But the Obama administration miscalculated badly. First, it bought the financiers’ false promise that massive subsidies to them would kick start the economy. But economists are now estimating that it is likely to take five years to return to pre-crisis levels of unemployment. Obama took his eye off the ball. A Democratic President’s most important responsibility is job creation. It is simply unacceptable to most Americans for Wall Street to be reaping record profits and bonuses while the rest of the country is suffering. Second, it assumed finance was too complicated to hold the attention of most citizens, and so the (non) initiatives under way now would attract comparatively little scrutiny. But as public ire remains high, the press coverage has become almost schizophrenic. Obvious public relations plants, like Ben Bernanke’s designation as Time Magazine’s Man of the Year (precisely when his confirmation is running into unexpected opposition) and stories in the New York Times that incorrectly reported some Goldman executive bonus cosmetics as meaningful concessions have co-existed with reports on the abject failure of Geithner’s mortgage modification program. While mainstream press coverage is still largely flattering, the desperation of the recent PR moves versus the continued public ire and recognition of where the Administration’s priorities truly lie means the fissures are becoming a gaping chasm.

So with Obama’s popularity falling sharply, it should be no surprise that the Administration is resorting to more concerted propaganda efforts. It may have no choice. Having ceded so much ground to the financiers, it has lost control of the battlefield. The banking lobbyists have perfected their tactics for blocking reform over the last two decades. Team Obama naively cast its lot with an industry that is vastly more skilled in the dark art of the manufacture of consent than it is.

Congratulations to Yves Smith for writing a fantastic critique of the Obama administration’s combination of nonfeasance and misfeasance in responding to both the financial and economic crises.

thecenterlane.com

The Employment Outlook Debate

John Burke — Wed, 10 Mar 2010 05:02:00 GMT

The February non-farm payrolls report from the Bureau of Labor Statistics boosted the optimism of many commentators who follow the unemployment crisis. Nevertheless, predictions about the employment outlook for the remainder of 2010 are extremely conflicting. Surfing around the web will give you completely divergent prognostications, usually depending on the locale. Here are some examples: Los Angeles job outlook expected to improve (Los Angeles Times); Atlanta employers expect to hold payrolls steady -- neither hiring nor firing (Atlanta Journal-Constitution) Boston employers expected to add jobs (The Boston Globe -- quoting a Manpower report); Employers still skittish on hiring (CNNMoney.com); Columbus hiring prospects for upcoming quarter weaken slightly (ledger-inquirer.com).

In an essay for the istockanalyst.com website, Ockham Research began by pointing out that 8.4 million jobs have been lost since the recession began in December of 2007. The fact that the S&P 500 has advanced 70% during this time has encouraged pundits to believe in a jobless recovery. After noting Senator Harry Reid’s odd reaction to the February non-farm payrolls report: “Only 36,000 people lost their jobs today, which is really good” -- the piece continued:

After that blunder, the report on Bloomberg.com struck us in just how optimistic it is towards March’s employment data, thanks in part to temporary hiring for census workers which could add more than 100,000 jobs this month. However, a strategist for Goldman Sachs (GS) estimated 275,000 job gains; another economist predicted “easily” reaching 300,000. Chief US economist at Deutsche Bank (DB) took the prize though, saying that a gain of 450,000 “can’t be ruled out.”

The Ockham Research piece again emphasized that many of the optimistic views are based on the addition of census workers to the rolls of the employed, despite the fact that these are temporary positions, eventually disappearing in mid-summer. Ockham Research was also dismissive of the inclusion of workers added to payrolls simply because of summertime seasonal employment opportunities. They concluded on this note:

Of course, no one can predict the future and predictions about macroeconomic data points are extremely thorny. As much as we would like to believe they are correct and job growth will return in robust fashion, we are a bit skeptical. They have raised the bar for expectations, so it will be extremely interesting to see the market’s reaction when the data comes in.

The Seeking Alpha website featured a posting by David Goldman which began with these remarks:

. . . it would be hard to envision significant declines in payroll employment from already miserable levels. But the sort of things that generate jobs -- venture capital investments, small business expansion, and so forth -- are as dead as the Monty Python parrot.

Mr. Goldman focused on the February Small Business Confidence report by Discover Card, which revealed that America’s small business owners remained cautious about the economy during February as they expected economic conditions to stay largely the same during the coming months. At the close of the piece, we are reminded of its title, “Where Will the Jobs Come From?” --

With the continuing catastrophe in both the residential and commercial real estate markets, small business capital has imploded. And small business surely isn’t getting help from the banking system, where loans still are contracting at the fastest pace on record.

Two economists for the Federal Reserve Bank of San Francisco, Mary Daly and Bart Hobijn, recently published a research paper addressing the surprisingly high unemployment rate for 2009, based on a principle known as Okun’s Law. They explained it this way:

Okun’s law tells us that, for every 2% that real GDP falls below its trend, we will see a 1% increase in the unemployment rate. Since real GDP was almost flat in 2009 while its trend level increased by 3%, the unemployment rate under Okun’s law should have increased by 1.5 percentage points. Instead it rose by 3 percentage points, more than twice the predicted increase.

I will now fast-forward to their conclusion:

The data presented here consistently point to unusually strong productivity growth as the main driver of the departure from Okun’s law in 2009. A key question that remains unanswered by this analysis is whether this pattern will continue in 2010. Most forecasters assume that the economy will return to its historical path this year, following Okun’s two-to-one ratio of changes in GDP and changes in unemployment. Under this scenario, unemployment would begin to edge down this year as the economy recovers and gains momentum. But there are clearly risks to this view. . . .
Anecdotal evidence suggests that efforts to contain costs and remain nimble in the face of uncertainty have become a fixture in business strategy. If productivity keeps on growing at an above-average pace, then unemployment forecasts based on Okun’s law could continue to be overly optimistic.

So there you have it. Pick your favorite prediction and run with it. The Manpower Employment Outlook Survey seems to have a reasonable take on expectations for the second quarter of 2010:

“U.S. hiring activity is still in neutral, but revving toward first gear,” said Jonas Prising, Manpower president of the Americas. “It’s moving in the right direction, but it will take some time, with no major speed bumps, before it can accelerate.”

Let’s just hope the road ahead doesn’t have any sinkholes.

thecenterlane.com

Seeing Reality With Gold Glasses

John Burke — Mon, 08 Mar 2010 08:32:00 GMT

The most recent report from the Bureau of Labor Statistics concerning non-farm payrolls for the month of February has surprised most people and it has left a number of commentators feeling upbeat. Reuters had reported that “The median forecast from the ten most accurate forecasters is for payrolls to fall by 70,000.” Nevertheless, the BLS report disclosed a figure of approximately half that much. Only 36,000 jobs had been lost and unemployment was holding at 9.7%. One enthusiastic reaction to that news came from the Mad Hedge Fund Trader:

While the employment rate for those with no high school diploma is 16%, the kind of worker who lost their manufacturing jobs to China, the jobless rate for those with college degrees is only 4.5%. This is proof that the dying sectors of the US economy are delivering the highest unemployment rates, and that America is clawing its way up the value chain in the global race for economic supremacy. It is what America does best, creative destruction with a turbocharger. There is a third influence here, which could be huge. The BLS only contacts existing businesses for its survey.
* * *
The bottom line is that payroll figures are much better than they appear at first glance.

Prior to the release of that report, many commentators had been expressing their disappointment concerning the most recent economic indicators. I discussed that subject on March 1. On the following day, John Crudele of The New York Post focused on the dramatic drop in the Consumer Confidence Index, released by The Conference Board -- a drop to 46 in February from January’s 56.5. Here is the conclusion Mr. Crudele reached in assessing what most middle-class Americans understand about our current economic state:

Even with the stock market still bubbling and media trying its damnedest to convince us at least a million times a day that there’s an economic recovery, the American public isn’t buying it.
* * *
The economy has stabilized since then, helped greatly by the fact that some wealthy people feel wealthier because of an unbelievable snap back by the stock market during 2009. (And by unbelievable in this context I mean that what happened shouldn’t be believed as either legitimate or sustainable.)

Don Luskin of The Wall Street Journal’s Smart Money blog articulated his dissatisfaction with the most recent economic indicators on February 26. One week later, Luskin presented us with a very informative analysis for understanding the true value of one’s investments. Luskin spelled it out this way:

Consider stocks priced not in money, but in gold. In other words, instead of thinking of stocks as investments you make in order to increase your wealth in dollars, think of them as something to increase your wealth in gold. After all, you don’t want to make money for its own sake -- you want the money for what you can buy with it. Gold is a symbol for all the things you might want to buy.
* * *
It’s easy to track stocks priced in gold because the price of the S&P 500 and the price of an ounce of gold vary closely with one another. As of Thursday’s close, they were only about $10 apart, with the S&P 500 at 1123, and gold at about 1133.

How about a year ago, on the day of the bottom for stocks on March 9? That day the S&P 500 closed at 676.53. Gold closed at 920.85. That means that one “unit” of the S&P could have bought 73% of an ounce of gold.

Today, with stocks and gold each having risen over the last year -- but with stocks rising more -- one “unit” of the S&P can buy 99% of an ounce of gold. All we have to do is compare 73% a year ago to 99% now, and we can see that stocks, priced in gold, have risen 34.9%.

A 34.9% gain for stocks priced in gold is pretty good for a year’s work. But it’s a far cry from the 69.1% that stocks have gained when they are priced in dollars. Do you see what has happened here? Stocks have made you lots of dollars. But the dollar itself has fallen in value compared to the real and eternal value represented by gold.

Here’s the most troubling part. The entire 34.9% gain made by stocks -- priced in gold, that is -- was achieved in just the first five weeks of rallying from the March 2009 bottom. That means for most of the last year, since mid-April, while it has appeared that stocks have been furiously rallying, in reality they’ve just been sitting there. All risk, no reward.
* * *
So why, then, did stocks -- priced in dollars, not gold -- continue so much higher? Simple: We experienced inflation-induced growth. Throw enough stimulus money, an “extended period” of zero interest rates from the Fed, and a big dose of government debt at the economy, and you will get some growth -- and, eventually, lots of inflation.

Luskin concluded the piece by explaining that if stocks move higher while gold moves lower, we will be seeing evidence of real growth. On the other hand, if gold increases in value while stocks go down or simply get stuck where they are, there is no economic growth.

Luskin’s approach allows us to see through all that money-printing and excess liquidity Ben Bernanke has brought to the stock market, creating an illusion of increased value.

Everyone is hoping to see evidence of economic recovery as soon as possible. Don Luskin has provided us with the “x-ray specs” for seeing through the hype to determine whether some of that evidence is real.

thecenterlane.com

Elizabeth Warren To The Rescue

John Burke — Thu, 04 Mar 2010 06:34:00 GMT

We reached the point where serious financial reform began to look like a lost cause. Nothing has been done to address the problems that caused the financial crisis. Economists have been warning that we could be facing another financial crisis, requiring another round of bank bailouts. The watered-down financial reform bill passed by the House of Representatives, HR 4173, is about to become completely defanged by the Senate.

The most hotly-contested aspect of the proposed financial reform bill -- the establishment of an independent, stand-alone, Consumer Financial Protection Agency -- is now in the hands of “Countrywide Chris” Dodd, who is being forced into retirement because the people of Connecticut are fed up with him. As a result, this is his last chance to get some more “perks” from his position as Senate Banking Committee chairman. Back on January 18, Elizabeth Warren (Chair of the Congressional Oversight Panel and the person likely to be appointed to head the CFPA) explained to Reuters that banking lobbyists might succeed in “gutting” the proposed agency:

“The CFPA is the best indicator of whether Congress will reform Wall Street or whether it will continue to give Wall Street whatever it wants,” she told Reuters in an interview.
* * *
Consumer protection is relatively simple and could easily be fixed, she said. The statutes, for the most part, already exist, but enforcement is in the hands of the wrong people, such as the Federal Reserve, which does not consider it central to its main task of maintaining economic stability, she said.

The latest effort to sabotage the proposed CFPA involves placing it under the control of the Federal Reserve. As Craig Torres and Yalman Onaran explained for Bloomberg News:

Putting it inside the Fed, instead of creating a standalone bureau, was a compromise proposed by Senator Bob Corker, a Tennessee Republican, and Banking Committee Chairman Christopher Dodd, a Connecticut Democrat.
* * *
Banking lobbyists say the Fed’s knowledge of the banking system makes it well-suited to coordinate rules on credit cards and other consumer financial products.
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The financial-services industry has lobbied lawmakers to defeat the plan for a consumer agency. JP Morgan Chase & Co. Chief Executive Officer Jamie Dimon called the agency “just a whole new bureaucracy” on a December conference call with analysts.

Barry Ritholtz, author of Bailout Nation, recently discussed the importance of having an independent CFPA:

Currently, there are several proposals floating around to change the basic concept of a consumer protection agency. For the most part, these proposals are meaningless, watered down foolishness, bordering on idiotic. Let the Fed do it? They were already charged with doing this, and under Greenspan, committed Nonfeasance -- they failed to do their duty.

The Fed is the wrong agency for this.

In an interview with Ryan Grim of The Huffington Post, Congressman Barney Frank expressed a noteworthy reaction to the idea:

“It’s like making me the chief judge of the Miss America contest,” Frank said.

On Tuesday, March 2, Elizabeth Warren spent the day on the phone with reform advocates, members of Congress and administration officials, as she explained in an interview with Shahien Nasiripour of The Huffington Post. The key point she stressed in that interview was the message: “Pass a strong bill or nothing at all.” It sounds as though she is afraid that the financial reform bill could suffer the same fate as the healthcare reform bill. That notion was reinforced by the following comments:

My first choice is a strong consumer agency . . . My second choice is no agency at all and plenty of blood and teeth left on the floor.
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“The lobbyists would like nothing better than for the story to be the [proposed] agency has died and everyone has given up,” Warren said. “The lobbyists’ closest friends in the Senate would like nothing better than passing an agency that has a good name but no real impact so they have something good to say to the voters -- and something even better to say to the lobbyists.”

Congratulations, Professor Warren! At last, someone with some cajones is taking charge of this fight!

On Wednesday, March 3, the Associated Press reported that the Obama administration was getting involved in the financial reform negotiations, with Treasury Secretary Geithner leading the charge for an independent Consumer Financial Protection agency. I suspect that President Obama must have seen the “Ex-Presidents” sketch from the FunnyOrDie.com website, featuring the actors from Saturday Night Live portraying former Presidents (and ghosts of ex-Presidents) in a joint effort toward motivating Obama to make sure the CFPA becomes a reality. When Dan Aykroyd and Chevy Chase reunited, joining Dana Carvey, Will Ferrell and Darryl Hammond in promoting this cause, Obama could not have turned them down.

thecenterlane.com