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Guest Post: What Do We Have to Show After a Year of “Extend and Pretend”?

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By Gonzalo Lira, a novelist and filmmaker (and economist) currently living in Chile

In 1982, many of the banks hit by the Latin American debt crisis were effectively insolvent. Paul Volcker, as the then-Chairman of the Federal Reserve—charged with overseeing the banking system—effectively cast a blind eye on this banking insolvency.

Volcker’s reasoning seems to have been that the US banks were not broke—they were just getting temporarily squeezed. Volcker seems to have concluded that time would heal the balance sheet wounds caused by the Latin American defaults. Therefore, to hold the banks to the letter of the accounting rules would likely drive one or more of them broke, to no useful purpose—and it could potentially cause a bank panic and general financial crisis. But to pretend (for a while) that all was right with the US banks would avoid a potential panic—so long as the crisis sorted itself out and the banks repaired themselves by writing off and renegotiating their toxic Latin American debt.

Volcker gambled, and won: The US banks indeed took the Latin American debt hit, but grew their way out of their hole. None of the large American banks were pushed to bankruptcy in 1982, and by 1983, the worst had passed. By 1984, the biggest chunks of Latin American debt had either been renegotiated or written off—so far as the American banking system was concerned, the crisis was over, with not a single name bank going broke. And most importantly, stability and calm reigning all the while.

Score for Volcker and what we could say was the Volcker Call.

In 2008, when Lehman went bankrupt because of all the “toxic assets” on its balance sheet, the severe credit crisis that happened as a result was because everyone realized that Lehman was the canary in the coal mine. All of the American banking system was insolvent, for more or less the same reason: Assets on their books simply were not worth anything close to their nominal value. These assets were clustered around CDO’s, mostly in the real estate and commercial real estate markets.

To relieve the credit crunch that peaked in September, 2008, the Federal Reserve Board opened the money spigots—all kinds of lending windows were opened, with a dizzying array of acronyms, all of them doing basically the same thing: Lending out wads of cash at zero interest to the American banking system, all in an effort to keep it from going broke.

Between September, 2008, and March 2009, the Fed backstopped the entire US banking system—but it still wasn’t enough. The losses were too great, the holes in the balance sheets too big.

So on April 2, 2009, a key FASB rule was suspended: Specifically, rule 157 was suspended, related to the marking of assets to market value—the so-called “mark to market” rule.

Essentially, the mark-to-market rule means marking an asset to the value it can fetch in the open market at the date of the accounting period. If I own a share of XYZ stock which I purchased at $100, but today it’s quoted at $60, I mark it on my books at today’s market price—$60—not at the purchase price—$100. The reason is obvious: By marking the asset to market value, I’m giving a realistic picture of the financial shape of my company or bank.

However, ever since April 2, 2009, when the FASB rules were suspended, the American banking system has been floating on nothing by air. By suspending rule 157, none of the banks have had to admit that they’re insolvent. With the suspension of mark-to-market, accounting rules are now basically mark-to-make-believe.

Why was FASB rule 157 suspended?

Geitner, Bernanke and Summers seem to have been trying to duplicate what Volcker did so successfully in 1982. This period since March 15, 2009, when the suspension of the rule went into effect, has been called “extend and pretend”.

Has it worked?

Prima facie, it would seem so. The banks seem to be stable, and have been raking in the big bucks ever since the rule was suspended. The markets—from their March ’09 lows—have rocketed onward and upward. In fact, Citigroup stock has quadrupled, Goldman Sachs has doubled—everything is wonderful! Nothing hurts!

However, the basic problems in the banking system remain: The banks are still broke, because of the same reason—the toxic assets on their books.

The banks have taken “extend and pretend” to heart—they have lobbied to extend the suspension of FASB, while they have pretended to repair their balance sheets, when in fact, they have not.

In fact, compared to the write-off mania of ’08, the banks have not written off any of these non-performing assets. They sit like dead weight on the balance sheets of the banks—we still do not have a clear grasp of even how much of this garbage is still lurking out there, like turds in the Venice canals, because of the obfuscation of the basic accounting rules—an obfuscation which the banks insist on perpetuating.

The banks still have the holes in their balance sheets which caused the crisis in 2008.

But then, how have the banks made such staggering profits during the last year?

By trading. Instead of being banks, since March of ’09, the Big Six US banks have effectively become hedge funds. They have been trading themselves into profitability. Worst of all, these banks qua hedge funds have been making money by trading with each other. Price-to-earnings ratios bear this out—their general upward trend, across sectors and industries, even as the economy has been severely weakened, is indicative of a speculative bubble. A massive bubble—the kind that makes the Hindenburg look puny.

All of the markets have risen from their March ’09 lows because of what I would term musical chair trading—everyone makes money so long as the music doesn’t stop. The “music” of this metaphor is a combination of Uncle Ben’s easy money, relative calm in the world, and good ol’ “extend and pretend”, courtesy of FASB.

But when the music does stop, the banks are going to realize that it’s not that there’s one less chair in the circle. There are no chairs left.

That when the next crisis will hit—when the music stops, and everyone rushes to get out of their musical chair trading positions.

To continue with the analogy, when will the music stop? When will everyone rush to find a seat—and find that there are none left? My guess is, it will be something from left field, something in-and-of itself not particularly earthshattering: A punitive Israeli airstrike against Iran, say, or Somali pirates sinking a big oil tanker. A lousy consumer sentiment number, or a surprise burst of unemployment.

Why hasn’t Team Obama’s version of the Volcker Call worked? Simple—because Paul Volcker made it clear to the banks in ’82 that he would declare them insolvent, if they didn’t repair their balance sheets. Volcker scared the bankers, scared them enough to make then do what was necessary—which was to clean up their balance sheets.

What did Team Obama do 27 years later? Did they twist bankers’ arms, and force them to write off the garbage on their balance sheets?

No they did not. Instead, they bowed and scraped at the banksters, as if they were truly Masters of the Universe, instead of what they really are—scum of the earth dressed up in really nice suits.

In 1982—unlike 2009—the banks had a reason to try to renegotiate and write off the bad Latin American loans: Volcker was breathing down their collective necks, and the banks were scared of him. Volcker had a credibility then that Team Obama today does not have now—Volcker showed himself willing to bring the entire US economy to a halt, in order to purge inflation. What was putting a few big banks out of business, compared to that? Nothing—catnip for Volcker.

But Geitner, Bernanke and Summers have shown themselves willing to do anything for the banks—they’ve become twisted around, and come to think of the banks as ends-in-themselves, rather than means-to-ends, within the economy.

What should have happened starting in March of ’09 was for the banks to take the suspension of mark-to-market and used it to purge their balance sheets of all the crap they are still carrying.

But they did not. Nor will they. Because no one is forcing them to. No one forced them in April of ’09, no one is forcing them now in April of ’10.

Therefore, once the era of Musical Chair Trading ends with some ridiculous non-event that will send everyone panicking, the banking sector will be right back where it was on Septmber 18, 2008—the only difference, of course, being that Bernanke has already shot his wad, and politically, it will be impossible to pass another TARP.

That’s when the world ends—the second crisis will be loads worse than the one in the fall of ’08. Loads worse, even, than ’29.

When will it happen? I don’t know. Then again, I don’t know when the Yankees will next win the Pennant—but I’m pretty sure it’ll happen.

“Extend and pretend” could have been used to do what Volcker did in ’82—the Volcker Call. But Geitner, Bernanke, Summers, and ultimately Obama himself lacked the will or the gumption to force the banks to do what needed to be done—clean up their balance sheets. Write off all that crap.

So get ready: The countdown to oblivion was paused by “extend and pretend”—but it wasn’t suspended, much less averted. I don’t know if the end will be hyper-inflationary or mega-deflationary—all I know is that it’s gonna really suck.

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88 comments

  1. rootless_e

    Oh come on, Obama/Geithner found themselves on a much larger keg of gunpowder than Volker and on a much more fragile base economy. The banks are bigger, a lot bigger. Their accounting is more screwed up. And they don’t have the IMF available to squeeze blood out of the creditors. Do you really advocate that the US population endure a lost decade of massive impoverishment like Latin America was made to endure http://www.uiowa.edu/ifdebook/ebook2/contents/part1-V.shtml ? What kind of economics is that? Let’s fix the banks by turning 1/2 the US population into prostitutes and chiclet salesmen?

    Furthermore, 30 years of right-wing dominated economics has hollowed out the non-bubble economy. I don’t think that many financial analysts understand what the 60billion auto bailout bought. For the life of me, I cannot understand the appeal of the Volker credit squeeze for supposedly “left of center” analysts or the desire to “analyze” on the basis of the supposed character flaws of the famous actors.

    The fact is that the collapse of Wall Street banks now would be endured by the “main street” economy far better than 2 years ago. And that’s why only now do we see, e.g. Fannie/Freddie start to return crappy paper to the banks.

    1. Yves Smith Post author

      With all due respect, are you old enough to have been reading the financial press and statistics in 1980 and 1981? Read William Greider on this (I happen to have lived through it). Volcker nearly did break the financial system with his short term rate increases. He had to back off because he looked at risk of not only taking out the US banking system, but countries with dollar denominated debt (meaning the Latin American banking crisis was one aspect of even wider spread pain and dislocation).

      And you are incorrect re the merits of forbearance. The IMF released a study of 124 banking crises. “Forbearance” which is regulator-speak for extend and pretend, results in higher ultimate costs of banking system resolution (the banks abuse their privileges and continue to make risky investments) AND increase real economy costs too.

      The economy stronger now? Really? With 17% U6 unemployment and small businesses, the engine of hiring, starved for credit?

      This economy is running on government life support. The equity markest are heavily manipulated right now (I hear this from virtually every institutional investor I know, including ones at the top of large and respected firms). The bond vigilantes are demanding a cutback in the Fed/fiscal welfare programs. Kicking the can down the road a couple of years has merely wasted the opportunity to address some of the real problems. I hate invoking Rahm Emanuel, but this crisis went utterly to waste, and the next phase will not be pretty.

      1. DownSouth

        I actually agree with what rootless_e says, up until his conclusion.

        Neoliberalism has been compared to a parasite. First it infects its host, but eventually ends up killing its host, along with itself.

        But another appropriate metaphor would be that it’s like a drug. There is the adrenalin rush of that first credit injection. But successive injections don’t give the same high. And even though there are still highs and lows, the trend is one of lower highs and lower lows—-the curve is inexorably downward.

        For someone living in Chile, Lira’s analysis is parochial. “Volcker gambled, and won,” Lira tells us of Volcker’s early 1980s performance. Well the US may have “won,” temporarily that is. And US banks might have “won.” But the rank and file people of Mexico certainly didn’t “win,” nor did those of Argentina. A careful reading of Mexican and Argentine history shows the crisis of the early 80s was pivotal in the march to the neoliberal inferno. But Argentina and Mexico are now about sucked dry. When your economic paradigm is predicated on rape and plunder, as is neoliberalism, there is only so much you can suck out of your victim until it dies, falling into social chaos.

        So if we look at the global organism, and not just the US organism, the disease of neoliberalism is far more advanced now than it was in 1980. The global economic body is much weaker. Mexico is a basket case, and neoliberalism is looking for other organs—-Greece, Spain, Portugal, Italy—-to exploit and destroy. So Lira’s implication that what worked in the 1980s, when the patient was still relatively healthy, could work now, may not be true.

        But rootless_e’s conclusion—that the cure for neoliberslism is just a stronger injection of the neoliberal drug—-is absolute insanity.

          1. DownSouth

            The massive transference of debt from the private sector to the public sector that Team Bush-Obama facilitated over the past two years is neoliberalism writ large.

            Like I said, I was completely on board with your comment up until you said: “The fact is that the collapse of Wall Street banks now would be endured by the ‘main street’ economy far better than 2 years ago.”

            While the banks may be in better shape now than they were 2 years ago—-they have, after all, dumped trillions of dollars of toxic waste on the government at highly inflated values—-I don’t see how this has helped main street. Quite the opposite, it only makes main street’s situation more precarious.

          2. rootless_e

            Responding to :
            DownSouth says:
            April 4, 2010 at 12:34 pm

            Since there is no reply button next to that post.

            “The massive transference of debt from the private sector to the public sector that Team Bush-Obama facilitated over the past two years is neoliberalism writ large.”

            Sorry, but I disagree. The $60B invested in the largest unionized industrial sector of the US economy, plus a forced 90%+ writedown on bonds is in no way neoliberalism.
            The stimulus funded investment in Wind Energy is not either. It’s remarkable how little attention “left” critics pay to what team Obama is doing at the Department of Labor too. If you look at what Treasury is doing with TARP funds now, you will find precious little support for neoliberal policies. The funding for health centers in the new HCR bill is another interesting non-neo-liberal effort.

            The fact is that the Obama administration has limited room for action because finance dominates the US power structure. But within the confines of what is possible, they are doing some very positive things. Certainly their efforts at reviving industrial policy make a lot more sense than proposals to impose the Volker squeeze (from a Chilean, no less – the standard of living in Chile in the 1980s dropped like a rock) or to replay the Resolution Trust (proposed by Krugman) or other finance-centric solutions.

        1. kievite

          Actually the next series of victims of neoliberalism fared equally bad: parts of Eastern Europe and post Soviet states like Ukraine are now a new Latin America with huge unsustainable foreign debts, rampant unemployment, deindustrialization, mass poverty, unsafe environment, crumbling infrastructure (in many cities water is just several hours a day, electricity also is being rationed), prostitution, gangsters, corruption and all other Argentina-style consequences of rape and pillaging by international banks.

          1. Sid Finster

            As someone who also lives in Kiev, in all fairness Ukraine’s problems are not the result of “rape by international banks.”

            The banks that really got out of hand in the boom times and then went spectacularly bust (Nadra, Podvoennyi, Delta, Ukrprom, Alfa, Rodovid, etc.) are all Ukrainian. The international or semi-international banks: Raiffeisen-Aval, Ukrsots, OTP, Calyon, etc. have acted in a slightly more responsible fashion.

            For that matter, most of Ukraine’s problems are local in nature, as in local politicians and local businessmen, most of whom are pretty parochial in their outlook.

        2. john bougearel

          DS,

          Hold that thought about neoliberalism looking for more organ donors for its almost dead but still prevalent ideology. I like the analogy, please elaborate on that in further discussions elsewhere.

          Neoliberalism may still rule the world today, but it is possible to flip the regime as it runs out of organ donors and the rest of the world dismisses its ruling ideology altogether in favor of being ruled by the heart and the spirit, intangibles that do not belong to the world of material values

      2. rootless_e

        Let’s try again because I was probably unclear.
        1) Part of the resolution of the Latin American debt crisis as far as I know was due to a massive impoverishment of Latin American working people via IMF imposed “austerity”. Banks recovered partially by forcing cuts in social welfare programs and taking food from the mouths of the poor. Of course, we could do the same here, and that is the Republican plan, but is that really what you propose? Do you disagree that IMF “austerity” helped recover bank $$$ from the LA crisis?
        2) I believe the IMF like Stiglitz does – which is to say NOT. They are the collections agency for international banks and they have a viewpoint totally focused on the revenue needs of financiers.
        3) If the Obama team can kick the can down the road long enough for US manufacturing to revive, their position is far far stronger than in a 100% Ponzi scheme economy which is where we were headed. You may argue that the crisis was wasted, but what we have out of it is the largest public works program in 50 years, and a major public investment in green energy, and a government funded restructure of the auto industry to rescue it in the last stages of being bled to death by finance. The ability of the Obama/Ravitch team to tell the bondholders of GM/Chrysler to take a hike was a welcome surprise. I do not think there is a financial regulatory way out of the mess unless the “real economy” starts breathing again.

        Finally, I’m always puzzled by veneration for “mark to market”. The market is irrational and often perverse. Especially for long term mortgages, market valuation has been shown to range from manic to panicked and to ignore long-term revenue. People made a lot of money buying securities and debt that had a low market value. Valuation often depends on herd thinking, on the forecasts of wall street analysts which have been proven to be nonsense, and on the economic theories of right wing ideologues.

        1. DownSouth

          rootless_e,

          You say: “Part of the resolution of the Latin American debt crisis as far as I know was due to a massive impoverishment of Latin American working people via IMF imposed ‘austerity’.”

          That’s a big part of it—-social programs have to be greatly curtailed, if not entirely eliminated, so that the bankers can be repaid. But what comes before that, and what lies at the heart of neoliberalism, is the proliferation of debt. And it matters not a scintilla whether that debt is private or public.

          The other key policy prescriptions of neoliberalism are:

          • The wholesale transference of debt from the private sector to the public sector during times of crisis.

          • The selling off of state-owned industries.

          • The liberalization of trade and the concomitant deindustrialization of the economy.

          • The accommodation of international capital—-no restrictions on capital flows.

          • An obsession with stamping out dissent in general, but especially among organized workers.

          • The elimination or disembowelment of any and all regulation on the banking and other sectors. Mexico is notorious for its telephone monopoly, which catapulted its principle owner, Carlos Slim, to the dubious title of “world’s richest man.” But the banking sector (almost entirely foreign-owned) also fucks rank and file Mexicans like heel-tied goats every day, as this article sets out in great detail:
          http://www.corpwatch.org/article.php?id=15356

        2. Costard

          “1) Part of the resolution of the Latin American debt crisis as far as I know was due to a massive impoverishment of Latin American working people via IMF imposed “austerity”. Banks recovered partially by forcing cuts in social welfare programs and taking food from the mouths of the poor. Of course, we could do the same here, and that is the Republican plan, but is that really what you propose? Do you disagree that IMF “austerity” helped recover bank $$$ from the LA crisis?”

          Social welfare made possible – funded – by the proliferation of latin american debt. It is, frankly, disingenuous to ignore the Latin American side of the equation: autocratic governments, rampant socialism and a dearth of productive industry. The currency situation in this country during the 70′s – a product of inflationary policies – brought about a hunt for high yield and capital flight. Volker’s squeeze and the IMF did not impose “austerity”, but rather a return to reality. This debt would never have been paid and the west would have been foolish to continue to feed what was essentially a foreign credit bubble.

          “3) If the Obama team can kick the can down the road long enough for US manufacturing to revive, their position is far far stronger than in a 100% Ponzi scheme economy which is where we were headed. You may argue that the crisis was wasted, but what we have out of it is the largest public works program in 50 years, and a major public investment in green energy, and a government funded restructure of the auto industry to rescue it in the last stages of being bled to death by finance. The ability of the Obama/Ravitch team to tell the bondholders of GM/Chrysler to take a hike was a welcome surprise. I do not think there is a financial regulatory way out of the mess unless the “real economy” starts breathing again.”

          What we have in my city, courtesy of stimulus and “public works”, is the addition of sidewalk wheelchair ramps at every street corner in the city. Massive traffic jams, longer commutes, awful for everyone. Kicker is that the sidewalks are in such a state that no handicapped person could conceivably use them. How much is being spent on this, that WON’T be spent on productive jobs or the manufacture of things that people actually want? The beneficial effects of green investment are by no means certain. 5 years ago the craze was ethanol, a flame fanned by government subsidies and fuel mandates… how much money was poured into what we know realize is a dead end, and one with deleterious effects on everything from Mexican food prices to deforestation of the Amazon? And finally, do not forget that the GM/Chrysler debacle was itself the result of a long history of auto bailouts, in the form of subsidies, tariffs and pension rescues.

          “Finally, I’m always puzzled by veneration for “mark to market”.”

          Let me put it this way. The (free) market is the entity with the least interest in self-delusion. Competition, alternatives, and flow of information will tend to insure that any industry stay grounded with respect to reality – meaning, what consumers want. Again, this is in a market free from government protections and mandates and money. Any single market participant, however, will have a vested interested in circumventing the market for their gain, and this is where government comes in. I would offer that it is not wise to federally insure a bank and then allow it to fudge its assets. If there is no market, then the asset is worthless in terms of liquidity.

          I would also suggest that this point vis a vis self-deception is the reason so many idealists have nothing but contempt for markets. Dreamers do not appreciate their dreams being given such short shrift, and they prefer to blame evil or corruption where the real culprit is mere common sense.

          1. rootless_e

            “Let me put it this way. The (free) market is the entity with the least interest in self-delusion”

            Good God. The triumph of ideology over empiricism.

          2. DownSouth

            Costard: “Social welfare made possible – funded – by the proliferation of latin american debt.”

            That’s a nice sound bite for neoliberal diehards, but has no basis in factual reality. Take the case of Argentina for example:

            Since the mid-1970s an important role was assigned to foreign indebtedness and to local and international financial interests, a strategy that increasingly diverged from the industrial exports strategy concocted in the early years of the decade.

            [...]

            Foreign indebtedness became a core aspect of the economic policies adopted during the military dictatorship, which led to a restructuring of the economy. Ninety percent of the new indebtedness corresponded to finance activities, that is, operations not associated with imports or exports of commodities or capital goods. From the end of 1976 to the end of 1983 total foreign debt increased by almost US$39 billion, and interest on foreign debt rose from US$515 million in 1976 to US$ 5.4 billion in 1983. The mass of accumulated interest in this period amounted to US$19 billion, most of which was paid while only a minor proportion was rolled over.

            [...]

            Most of private foreign indebtedness in this period was endorsed or guaranteed by government, permitting local companies to have access to international loans at lower interest rates. As a matter of fact this was one of the
            reasons for the substantial indebtedness in this period. The government eventually paid many of the private loans that were not honored.

            [...]

            This enormous indebtedness had nothing to do with industrialization or investments; on the contrary, it was contracted in a context of overall stagnation and deindustrialization. It was used: a) to finance military and repressive expenditures and operations; b) for the construction of several highways and a gas pipeline; c) to finance the 1978 world football cup played in Argentina; and
            d) the bulk of this indebtedness was used to finance speculative financial activities and capital flight.

            http://www.hawaii.edu/hivandaids/Rise_and_Collapse_of_Neoliberalism_in_Argentina__The_Role_of_Economic_Groups.pdf

          3. DownSouth

            Costard,

            Or in other words, you assert:

            “autocratic governments, rampant socialism and a dearth of productive industry,”

            That, in order to have any truth to it, should read:

            “autocratic governments, rampant neoliberalism and a dearth of productive industry.”

          4. Externality

            1) Latin America externalized many of their social welfare costs by encouraging mass immigration to the United States. In addition to alleviating their unemployment problems, Latin American countries are not forced to bear the cost of treating poor people with expensive medical problems.

            Here in the US, one is always reading of migrant workers and illegal immigrants who cannot be deported because dialysis or some other expensive procedure is unavailable in their country. IMF-mediated austerity is always easier when there is a convenient externality such as emigration of poor and angry people.

            3) I concur that the stimulus seems to be funding a large number of construction projects of marginal or negative utility. San Francisco’s Golden Gate Park, for example, has areas where simple projects (e.g., trail repair) have turned into enormous projects where areas are clear cut and regraded with heavy equipment.

        3. windy

          Must take issue with your reference to Obama’s wind energy investment. The stimulus program changed the production tax credit, which was related to actual power production, into an outright grant for overall construction costs for windfarms. 60% of wind farm revenue is subsidy of one kind or another. This has resulted in a rush to build any damn project without reference to its production value or proximity to load. Windfarms are built where they are politically possible. The NY state attorney general has issued a code of conduct to try to stem the rampant corruption in wind development and the public service commission is forcing developers to prove the windfarm does not hamper other renewables- as seems to be happening in northern NY, where wind is blocking hydro’s access to the grid with some frequency. Additionally, it is a familar cast of characters-Goldman Sachs was a key player, taking Zilka energy, changing its name to Horizon and selling out at the top of the market. Morgan Stanley, JPM and the others too. It is a scam infested industry that relies on bribing small town officials by various means to approve questionable projects (google NYT articles on wind corruption). At its core it is about money, not energy.

          1. rootless_e

            “At its core it is about money, not energy.”

            I’m shocked to see money being a driver of business in this establishment. Shocked.

      3. rootless_e

        One more comment. The dominance of neo-liberal economic ideology is so thorough that the “left” critiques of Obama/Geithner seem to accept all sorts of dubious neo-liberal concepts on faith. Mark-to-market veneration assumes that market valuations are based on something sensible – often untrue. The essential role of the banks as economic engines is also dubious. Is the economy on life support or are we seeing efficient and sensible public finance of essential economic activity that is inherently too unprofitable to attract the interest of casino style investment banks? What’s wrong with the government as a major source of finance?

        1. joecostello

          What’s the difference between neoliberalism, liberalism, libertarianism, or communism if underneath they all share a simple inability to account? No difference, they’re headed for disaster.

          “If the Obama team can kick the can down the road long enough for US manufacturing to revive.” That’s the plan is it? So the people who have spent a quarter century profiting off the dismantling of the American industrial base are now going reverse directions a 180 degrees? — keep believing friend.

        2. windy

          Perhaps I wasn’t clear. The subsidies are not subject to any sort of proof of performance and corruption is widespread. This is a formula for fraud/abuse, not a foundation for USA recovery. Again.

      4. Cosmoskitten

        Could someone kindly provide a link to the IMF study on 124 banking crises, and a link to a digest that is easier to understand for a layman?

        How settled is this issue, when you look at good studies?

        1. rootless_e

          The hidden issue is the success criteria. Japanese living standards have remained high while Japan has failed to resolve its banking crisis. OTOH, Chile resolved its financial issues in the 1980s at the expense of farm and factory workers.

          1. Yves Smith Post author

            These are so NOT comparable that it is hard to know where to begin.

            Japan has had 20 years of stagnation, so its relative GDP/capita has fallen by IIRC 30% or more. Japan started out as an advanced economy, remember?

            And it continued to have a robust export sector all this time because the US tolerated Japan keeping its yen cheap. We didn’t want to push Japan into economic collapse.

            Japan also used its high savings to spend a ton on infrastructure. That too has masked the appearance of decline.

            The Japanese are very strongly of the view that the reason they are still mired in stagnation is the failure to clean up their banking system early in the crisis.

      5. carol

        “The equity markest are heavily manipulated right now (I hear this from virtually every institutional investor I know, including ones at the top of large and respected firms).”

        Indeed! So why were so many outraged in March ’09 (and still today) about abolishing mark-to-market-accounting?
        It has been suggested (unproven) that some at Wall Street manipulated to market down in Feb. and early March last year to scare the hell out of team Obama so as to obtain what they wanted.
        If not, then it was a panic sell-off (i.e. also not a suitable basis for accounting).

        Pension funds, insurance companies and honest investors — i.e. all in the market with a long term perspective — have gradually found these market places taken over by intra-second traders. Whereas these traders claim to be beneficial liquidity providers, they are just speculators/gamblers/manipulators, with no benefits for society at large.

        Isn’t the fact that the markets are rigged a much bigger issue than an accounting rule?

        1. john bougearel

          not at all Carol, both have been long-standing points of facts. It behooves the investor/trader to acknowledge both of these inputs when making investment decisions.

    1. psychohistorian

      Nice posting but I want what this guy is smoking….How is it that extend and pretend is ever a good idea?

      Maybe it is because all the rich have all their money sheltered now and arrangements are complete to screw the public thoroughly. Good shit filtering out of that smoke!

    2. Ishmael

      “Furthermore, 30 years of right-wing dominated economics has hollowed out the non-bubble economy.”
      —————————————————-
      Oh it is the typical blame it on the Republican argument, not that they did not contribute.

      I believe during this period the Democrats have controlled both houses the majority of the time and had the presidency 12 years (8 Clinton and 4 Carter).

      The source of the problems starts with the US not coming to grips that it will not always be 50% of the world GDP under Johnson and Nixon. Secondly, the statistics coming out of the government have long concealed the problem starting with the Unified Budget games out of Johnson. Add to this the Ponzi schemes like Social Security, Medicare and union pension plans as well as an ever expanding nonproductive sectors such as government and the legal profession.

      Then there was the siren of making easy money from the FIRE economy versus the difficulty of making money out of the manufacturing industry.

      Then there is the Fed who believes it can offset growing structural imbalances in the economy through monetary policy and keep the economy growing. Their continual cutting and raising of interest rates has helped lead to this situation.

      I am sure there are a few other factors over the last 30 plus years that has resulted in the United States as well as other developed western countries being in this situation.

      There are only two ways out. One — hyperinflation which will save the speculative borrower and lendors but punish everyone else or deflation which will do just the opposite.

      In addition, the government at all levels needs to get their house in order and stop blowing ponzi bubbles. A law needs to be passed that all liabilities need to be funded in the year incurred. Actuarial assumptions of returns need to be taken to 0 to 1%. That keeps politicans from rewarding people but expecting the next generation from paying for it. FDR and LBJ pulled the biggest cons on the American people in the history of the United States.

      1. rootless_e

        I specifically picked a time frame that goes back through Clinton but should have added a couple to take us back to Carter who started us on a “deregulation” mania, as if healthy markets can exist without sensible rules.

  2. attempter

    Speaking of the politics of terms, I wish people would stop using the term profits for what are obviously only fraudulent “profits”.

    The intelligent but otherwise uninitiated reader may get confused when he sees the banks referred to as “insolvent” and yet still said to have “profits”. It’s bad enough that the MSM systematically progagates that Big Lie; the blogs shouldn’t temporize with it as well.

    How can banks still be insolvent yet report “profits”? Every explanation (I do like the true “every bank is now a hedge fund” frame) must start and end with, “They are not profitable, they are bankrupt, but they’re looting taxpayer money to play casino games and give themselves bonuses.”

    Meanwhile, mark-to-market is yet another example of the fundamental falsity of the whole system right down to its intellectual basis, since we see how anything and everything is always heads-I-win-tails-you-lose.

    Mark-to-market is great while the bubble is inflating. Then everybody including the vile academics supported it. But the second the bubble pops, it’s suddenly terrible and has to be abolished.

    Always remember, regarding anyone who supports anything about this system, every single word he says, every idea, is nothing but a lie.

    1. i on the ball patriot

      Ah yes, the ‘Orwell Watch’. Well let’s get to the nub of it. Its not a ‘banking system’. Its a ‘control system’. It controls; exploitation, enslavement, distribution of resources, and who gets to live or die.

      And, under the distribution of resources category, it controls the loudness of its own Orwellian voice, always making sure that it overpowers, and attenuates by divisiveness, the miniscule voices of those that it controls.

      Beyond all of the Orwellian voodoo economics crapola what needs to be recognized is that it is not only all about control but how well planned and intentional it all is.

      The control masters (the bankers for those who do not speak Orwell) are elite scum bags who would fuck their own mothers and then sell them for pennies.

      Deception is the strongest political force on the planet.

    2. rootless_e

      There’s nothing banker specific in this. Consider the accounting of the health insurance companies or the creative bookkeeping that allowed the right wing radio conglomerates and shopping mall companies to grow themselves on mountains of debt and power point revenue projections.

      1. attempter

        Of course. I haven’t seen a story in circa 2 years about a reported “profit” which sounded kosher. (I especially like the notion that cutting jobs and otherwise gutting the works means that the money freed up is “profit”.)

        But the post is about banks, so I wrote about banks.

    3. monday1929

      Any bonuses paid to any bankers should be held in escrow until criminal investigations are completed on the multi-trillion dollars thefts.
      There also seems to be NO call by anyone to claw back the fraudulent “profits” from the last ten years of looting.

  3. Rick

    This is excerpt for article entitle; “Timothy Geithner is a Sniveling Scamster”, by Mike Whitney.

    “being that Bernanke has already shot his wad, and politically, it will be impossible to pass another TARP.”

    The backdoor:
    Subprime-mortgage securities are rising at an accelerating pace as the U.S. begins to encourage reductions to homeowners’ balances, which may lead to fewer foreclosures and a quicker end to the housing slump….Senior-ranked bonds tied to borrowers with poor credit will mostly benefit after the Treasury Department said for the first time it would seek to cut the size of mortgages, reducing the likelihood that loan modifications will fail, according to JPMorgan Chase & Co., Morgan Stanley and Barclays Plc. (Bloomberg)

    What does it mean? It means that Obama’s mortgage modification extravaganza has touched-off a gold rush in toxic paper. Subprime securitizations, which had been worth next to nothing, are now the hottest trade on Wall Street. It’s a subprime bonanza! The investment sharpies are scarfing up all the crummy MBS they can get their hands on, because they know they can trade it in for Triple A FHA-backed loans when the program get’s going. It’s another swindle cooked up by Treasury Secretary Timothy Geithner to keep the brokerage clan in the clover. Here’s how a Wall Street veteran explained it to me:

    “It looks like the investors in securitizations will be swapping underwater real estate for govt-insured paper… I think the scam here is just to provide some cover so the hedge funds and other high net worth individuals can trade their low grade paper for Triple AAA mortgages insured by the FHA at the taxpayer expense.”

    That’s it, in a nutshell. The faux-foreclosure prevention program has nothing to do with helping homeowners. That’s just diversionary gibberish to confuse the public. The real objective is to create a government landfill (aka–FHA) where the banks and other financial institutions can dump their toxic MBS-sludge and walk away with gov-backed loans. Get a load of this:
    (Bloomberg) — The Federal Reserve’s completion this week of its program to buy $1.25 trillion in mortgage bonds probably won’t mean significantly higher U.S. home loan rates as investors return to the market, replacing the Fed…

    “What we are seeing is an effective handoff occurring between the Fed and industry buyers such as banks and pension funds,” said Christopher Sebald, chief investment officer for Advantus Capital Management in St. Paul, Minnesota..”

  4. RueTheDay

    It will be interesting to see how the mortgage market goes now that the Fed has ended its $1.25 Trillion purchase of MBS.

  5. Questioner

    To be technically accurate, FAS 157 was not suspended. In fact the SEC recommended against the suspension of FAS 157 (Dec 30, 2008 report to Congress). Now, the ability to classify assets as Level 2 or Level 3 and ignore distressed sales may be what you are referring to as a suspension, but the valid question remains as to how do you value something if there is no significant trading in that particular instrument? There are clearly economic scenarios in which the values at which the banks are carrying these instruments are justified, and the whole issue is far more subtle and nuanced than your diatribe would suggest.

  6. Bill Smith

    The article is wrong on a number of it’s facts. FASB 157 was not suspended. It was modified, under pressure for sure but not suspended. In fact the SEC issued a report saying it was not to be suspended.

    http://sec.gov/news/press/2008/2008-307.htm

    Congressionally-Mandated Study Says Improve, Do Not Suspend, Fair Value Accounting Standards

  7. Yearning to Learn

    FASB 157 was not suspended. It was modified

    although I do agree we need to be careful with our wording, in this particular case the end result of modification versus suspension is the same.

    we all saw what happened 1 millisecond after the rule was changed.

    thus it seems to me that “suspended” vs “modified” is a purely semantic argument, largely irrelevant to the post.

  8. Kid Dynamite

    this quote from the post: “What should have happened starting in March of ’09 was for the banks to take the suspension of mark-to-market and used it to purge their balance sheets of all the crap they are still carrying” demonstrates the impossible catch-22 here.

    The banks can’t sell the “crap” they are still carrying, because they are pretending it’s worth more than they can sell it for! if they actually sell it, they have to recognize the real loss, instead of marking it as level III hard to value, and pretending it’s worth more.

    1. Gonzalo Lira

      That’s the bankster’s line: “Sorry! We can’t write off these bad assets! No one will buy them!”

      But actually, there IS a market for all this toxic garbage—just not at the prices the banksters want. If the banksters sold this garbage at market prices, they would inevitably incur a huge loss. In fact, the losses would squeeze their reserves, past the point of insolvency—but that was exactly the point of the Volcker Call in ’82, and the suspension of FASB 157 last year: To give the banks leeway, so they could write off dud assets.

      However, the banks—rather than write off the dud assets and take the losses—churned out huge profits off of Uncle Ben’s easy money, while at the same time refusing to write off ANY of the bad assets. If the banksters did write off or write down these non-performers, their “profits” would be wiped out—and so too their bonuses.

      That’s why the banksters aren’t writing off these dud assets—if they write off the assets, they destroy the banks’ “profits”. If there are no profits, there are no bonuses.

      1. Kid Dynamite

        “But actually, there IS a market for all this toxic garbage—just not at the prices the banksters want. If the banksters sold this garbage at market prices, they would inevitably incur a huge loss. ”

        yes – i agree completely. The plan is clearly, as you explained in the 3rd paragraph of your comment, to crank out easy profits, filling the insolvency void, and THEN take the writedowns later, slowly.

        just to clarify – i certainly didn’t mean to imply that the excuse was ““Sorry! We can’t write off these bad assets! No one will buy them!””

        as you wrote, it’s “sorry, we can’t sell these bad assets for as much as we’re pretending they’re worth”

        1. MichaelC

          Except they’re not “filling the insolvency void”. They’re paying bonuses on the ‘profitable’ positions rather than retaining the ‘profits’ to fund the undisclosed losses. Same as it ever was. The feverish trading is the big final chance to grab everything that’s not nailed down. This is just grabbing the appliances before mailing in the keys.

          1. Robespierre

            If the bankers suspect that the worst is not over then they will use any opportunity to make money for themselves damn the consequences. So the fact that they are not fixing their balance sheet tells me that they know they are not fixable withing their tenure as bankers.

    2. rootless_e

      This is a typical error. If I own a note that pays 2% year and “the market” is focused on 3% or more, then the “market value” of my note may collapse, but it’s worth as much as it ever was if I am not in a hurry to sell it.

      1. Robespierre

        May be so but try to borrow using it as collateral and is it your value or the market value that determines how much money can you borrow?

        1. rootless_e

          sure, but is the “cash out” price the actual value of everything? If I earn $100,000/year from my $5M face treasury holdings at 2% and on Monday the market is in a panic and values them a $6M but on Tuesday there is inflation panic and I couldn’t sell them for $4M, did I just lose $2M ?

          1. Kid Dynamite

            for some reason I’m reminded of the Tom Cruise quote from A Few Good Men: “It doesn’t matter what I believe, it only matters what I can prove!”

            rootless_e, we could discuss the values of mark to market accounting all day long, but i’ll say this: you are using extreme examples of Treasury securities. And yes – it’s likely you’ll still get your $5mm back – so no, you didn’t lose $2mm – If you want to play the “hold to maturity” valuation card, then why would you have ever marked them up to $6mm in the first place? there’s only $5mm in face value – you can’t have it both ways.

            But here’s the point: the securities in question (in this post) are nowhere near the realm of guaranteed US treasury obligations, and the banks have proven their inability to effectively estimate their true value (and by that I also mean FUTURE, held to maturity value). As you point out, there are legitimate scenarios where “hold to maturity” valuations may be reasonable. My point is that those scenarios are fewer and farther between than people think. The market isn’t perfectly efficient, but it’s efficient enough.

            for examples, see this:
            http://fridayinvegas.blogspot.com/2010/02/reality-bites-mark-to-wishful-thinking.html

          2. rootless_e

            It’s weird that people want to hold onto the efficient market hypothesis after Paulson and Einhorn’s public bets.

          3. Kid Dynamite

            i don’t want to hijack this thread with an efficient markets debate, but what i said was that markets are efficient ENOUGH. there are certainly periods of panic and irrational pricing, but I’ll argue that the assets we are talking about here (“toxic assets” on banks books), when they still have depressed prices(18 months later!), are being priced accurately (accurately ENOUGH!) by the market. It’s not that they are really worth PAR and that all the would be buyers are idiots. It’s that they really are NOT worth PAR, and the market knows it.

            anyway, good luck people, I have to go rake up my lawn to fix the damage the snowplow did this winter.

          4. monday1929

            I questioned how long Bankers could complain about “fire-sale” prices over one year ago. They almost never use that term anymore but whine in the same vain. I think it was Reggie Middleton who pointed out that one of the banks which was held up during Congressional testimony as showing the flaws of MTM, in which they claimed that they had actual losses of only 90,000 dollars but MTM was forcing them to show losses of over 40 million, ended up going under (bank in Atlanta?)and had losses in excess of 50 million dollars.
            The money center banks are insolvent. While there may be valid distintions that should be made on MTM, the Scumbag bankers, like Jamie Dimon, have lost the right to participate in any such discussions.

  9. fiscalliberal

    Not only the lack of accounting reality, we still seem to be living with the facinaiton that the bankers know what they are doing.

    A case in point, it looks like we are going to do nothing about derivatives. I would hope that Yves would give us a update on her thinking regarding derivatives. I have evolved to the thinking that if it is a form of insurance, we are covering up the fact they are not doing a good job of risk evaluaiton, or in the case of Goldman, selling fraudulent produts and then betting against them. So – it seems the best we can hope for is some form of consumer regulayion to stop the fraudulent loans being made. Stiglitz used the term: no drama Obama which translates to the Bush term, all hat and no cattle. Can we realistically think things are going to get better?

  10. doggyDish Partyd


    speculative bubble. A massive bubble—the kind that makes the Hindenburg look puny.


    Masters of the Universe, instead of what they really are—scum of the earth dressed up in really nice suits.


    extend and pretend”—but it wasn’t suspended, much less averted. I don’t know if the end will be hyper-inflationary or mega-deflationary—all I know is that it’s gonna really suck.

    Life is a limbo. How low can you go, Yves?

    Get down
    !

  11. eurostoxx

    we can all be pessimistic about the end of the world but frankly no equity manager loses his job because he underperformed the markets in a crash. We all lose. But when the markets turn upwards, everyone has performance anxiety. Evey one knows this.. and add in decent valuations on almost every asset class and 0% interest rates and its not hard to explain the recent rally…

    If there is a 2nd coming of this great depression (which I am less sure of now but still consider it a very real possibility) who knows “where” it is best to hide (gold? but even that looks bubblish) and “when” it will come. Therefore its best to join the party. Frankly waiting for it to happen will ruin the rest of your life if you are wrong (a possibility as well)and make you depressed. Much easier to be stupid and play cyclical rally. Just wish I was a little less cynical

    1. Ishmael

      Your comment reminds me of the Chuck Prince (of Citi Bandk fame) line, “keep dancing as long as the music plays.”

      Did not work out well for Citi and I do not believe it will work out well for anyone following your strategy. Good luck!

      1. Robespierre

        But it work well for Prince didn’t it? Last time I checked he was still a millionaire….

  12. UrbanDigs

    Why no mention of the Whole Loan Marks on the books that are not subject to M2M acct rules? Where are these marks that are held in hold books on banks balance sheets? Perhaps this is one big cloud that will linger for many years when everyone knows whole loans from 2004-2008 are probably not worth face value.

    Also, its clear the intentions now are for a fed engineered carry trade environment to slowly allow the banks to recapitalize themselves. Wall street is simply riding on the back of all these fed guarantees and liquidity is finding a home in high yielding assets, all in a search for yield. So, why would these trade not unravel given the rise in the dollar in past months?

    The carry trade that’s on now has nothing to do with the FX carry of old. It’s that a US bank can have illiquid assets on it’s books at 40 when they are worth 10. They just make $10 a year for 3 or 4 years and write down the investment a little bit more each time around while still able to show a profit. So long as nothing drastic happens eventually they’ll have it written down to market. That’s why even if you bid 15 for it you can’t get them to sell it. The thinking on the street goes —> Yes the carry trade is on, but if banks can earn their way out then who cares?

    1. Cathryn Mataga

      >Yes the carry trade is on, but if banks
      >can earn their way out then who cares?

      First come the bonuses. The bonuses must
      be paid, you know “The spice must flow.”
      To the banks, the economy, employment,
      jobs, the future, none of this matters.
      All that matters is whether those bonuses
      can be paid, and everything they do is
      to this aim.

      Second, if the banks have a way to pay
      those bonuses without actually investing
      in the smelly dangerous ‘actual economy’ –
      that is what they’ll do. Obama can go on
      TV and huff and puff about how banks should
      invest more in the real economy, but,
      really, writing actual loans is a whole lot
      of work. Who needs all that hassle? With
      the carry trade, they push a button, make
      a few million dollars. Then, take an early
      lunch and have refreshing martini. I’d
      take that job.

  13. RHS

    “What should have happened starting in March of ’09 was for the banks to take the suspension of mark-to-market and used it to purge their balance sheets of all the crap they are still carrying.”

    Oh boy, this what happens when you ask a novalist and filmaker for finicial advice. Asking to stop and dump their non-performing assets all at once, will cause prices for said assets to plummet even lower than they are really worth as impaired as they are. You will just make the hole even bigger and enrich some hedge funds at the expense of the tax payer who are back stopping the banks.

    One could argue for temporary bank nationization but that would just be a dirvative of ‘extend and pretend’ as you wait for the banks to be healthy enough to privatize. This also carries with enormous risks, as the US government does not have the resorces to run many large complex FIs and has never ran a large complex FI before in its history (Continential Illinois does not qualify as a large and complex FI despite being the 7th largest bank at the time, banks are relativly much larger now and more complicated. Also they sold it all to Bank of America, exactly who would big enough to buy Bank of America today?)

    The FED and Treasury did right thing, it was the lesser evil. IMO you can debate who you should regulate to prevent this from happening in the first place but once it happens, extend and pretend still the lesser evil.

    1. Ishmael

      I really do not believe he/she was saying dump them all at once, but the banks need to plow their earnings into reserves not once again start the bonus machine back up. Look at Wells, gets out of TARP and immediately pays record bonuses to executives when their earning are make believe numbers (HELOC and second mortages are enormous). Doing this keeps the crap ola sitting on their books. Call it nationalization or what. Senior executives at these institutions are not generating “real profits.” They are make believe. These executives should be removed and tried for fraud. Executives should be put in place, paid a lot less and told to wind down operations.

      Anyone who looks at multiples of stocks or prices of commodities knows both are bubblicious! Easy money is pumping these items up just like late 2007. Just like then something is going to pop this bubble and as the author says, look out below.

    2. Ishmael

      This also carries with enormous risks, as the US government does not have the resorces to run many large complex FIs and has never ran a large complex FI before in its history
      ———————————————————-
      The underlying thrust of this statement is that the people currently running these financial institutions know what they are doing which is the biggest joke in all of the postings. These people are liars and con artists. It is my recollection that all of these financial institutions due to the great job management was performing of running them were on life support a little over a year ago.

      This is just one big elaborate scam of the American people.

      WAKE UP AMERICA, YOU ARE BEING ROBBED BLIND!

    3. Jackrabbit

      I don’t think the author was arguing that the banks should dump their toxic assets “all at once” but pointing out that the banks have taken little, if any, real move toward recognizing loses since MTM was essentially suspended.

      “Extend and Pretend” can be a workable, and even optimal solution but only if there is a commitment to right the banks (which includes write-downs). Otherwise instead of being a useful tool that REDUCES risks, it results in INCREASING risks. For the most, it is the political/regulatory apparatus that has to force/threaten the banks to do the right thing, but that has been lacking from the Obama administration. (The banks are much more powerful politically than they were in ’82.)

      I think that analysis makes sense, where I differ is that I think the risks of a collapse are not as great as the risk of a Japanese-style “lost decade(s).”

      1. Gonzalo Lira

        Jackrabbit is correct regarding the points I was trying to make in this post. I did not specify (because I thought it would be obvious) that I wasn’t arguing for a fire-sale of toxic assets. A write-down/write-off of the toxic assets should have been an orderly process, to both reduce the systemic destabilization, while accomplishing the goal of restoring financial health to the financial system.

        RHS is deliberately misconstruing my piece.

      2. monday1929

        By having us debate MTM, Efficient Market Hypothosis etc., instead of whether Jamie Dimom should be jailed for 10 years or twenty years, the bankers have won.
        While we argue minutia, JPM, headed by a man who expects a financial catastrophe, and who profits mightily from them, is the risk manager for 80 Trillion dollars in notional off-exchange derivatives, about the same amount as before the current collapse. THAT is the elephant in the room.

        Lee S.
        AKA NotJamieDimon

  14. jpkatlarge

    You can’t expect anyone to take seriously a regulator called Tim. Sorry if its nomenalistic to say so, but really, don’t expect the Dicks and co. to take him seriously. And he looks wet too, to add to the problem.

    OK, it’s not heavyweight economic analysis, but these simple things do count, irrespective of the issues. Of course the fact that he seems, to everyone but the Obmama team, to be in the pocket of Wall Street doesn’t help.

    1. monday1929

      When Obama selected an admitted tax Cheat to head the IRS/Treasury I began to regret voting for him. I believe that Taxcheatgeithner should be forced to serve out Obama’s full term so all the hatred he deserves will flow to him, and the bankruptcy of his “ideas” be apparent to all. Bernanke too.

      Lee S.

  15. Jackrabbit

    Nice summary of how we got to where we are and the increased, albeit hidden, risks of “extend and pretend.” But I think Japanese-type “lost decade(s)” seems more likely than a collapse.

  16. Lance

    “but if banks can earn their way out then who cares?”

    Earning your way out by extracting rents out of the real economy does not seem to me to be sustainable or real economic growth.

  17. Frank Ohsen

    Mark to Market. How quaint an accounting principle when applied to banks. Of course when present-day insurance companies are faced with wonderful mandates ensconsed within the illustrious health care bill and even though it is 4 years out from commencment, what do they have to do? Why by gosh they have take the charges NOW against their future earnings. Indeed in comparison it appears the concept of Mark to Market for banks is a flat-edged sword wielded by a select few “Doing God’s Work”. Everyone else can go straight to hell sans head without even so much as a tip of the rolling hat to St. Peter at the Pearly Gates.

    Let’s face it. TPTB have sanctioned the holding of two financial sets of books. Capone, Lansky, Gotti, and Siegel, would’ve been dammed proud that we’ve come so far mirroring their proven business model through merely the voting booth and even yet most impressively with nary a shot fired.

    FO

  18. Hugh

    Very nice exposition of what has been going on. The current bubble will continue for as long as Bernanke keeps the spigots open, there is not an exogenous event, and, of course, the banks continue to be allowed to cook their books.

    It’s important to realize that the money we are seeing has to come from somewhere. The Fed is a major source of fuel as are the bubble bucks of banks trading back and forth between themselves but both pension funds and money markets are involved in this and probably have serious exposures for when things go splat. So when they do it won’t just be the banks but people’s pensions and savings that will blow up as well.

    The reason we know this is a bubble and not a recovery is because there is no wealth creation going on behind all the profits and asset inflation. If there were, we would see in the economy and we aren’t. The banks can’t detoxify their crap assets because any move to do so would expose their underlying insolvency. Government and Fed programs to buy up the crap and dump the sludge on taxpayers have been insufficient. They have only managed to extend the pretend.

    And of course even if the banks could work through this they wouldn’t. The lesson they learned about Volcker is that it is a lot easier to replace a Fed chair then go through all the necessary pain and haircuts to get their houses in order. Bankers long since ceased to be bankers and became banksters. They are like gambling addicts. You give them a stack of cash so that they can pay their bills and get back on their feet and the first place they go is the casino. Having another Volcker at this point would change nothing. They would simply try to get rid of him, use the other branches of the Fed to stymie him, get Congress and the White House to muzzle him, find workarounds to anything that was done. The banksters quite simply are unreformable. Most of them need not only to be banned for life from the financial sector but in prison. They gamed the system into the last crash. They are gaming it now. They will continue to do it even after the next crash, which they will have created, –but only if we let them.

  19. Norman Morley

    I like the post, I like Yves’ post more so. I’m 71 + years old, have made & lost like the majority of the American public have over the years and indeed, what has been allowed to happen by B.O.G.S., along with the players in Congress, is nothing short of Fraud. Where is the F.B.I., the U.S.A.G., any # of Federal agencies entrusted to enforce the rules & regulations? The silence is deafening.

    As the post points out, which is not just his opinion, but the opinion of many, who like Yves, have far too many years experience in the Financial industry, have chosen to wear the White hats, for I’m sure personal reasons of their own. I for one trust them and their rational, before I trust the “Spin” coming from either the Government or the Revisionists, regardless of party affiliation and certainly not from anyone who thinks he/she talks the talk, but doesn’t know how to walk the walk, to use an old cliche.

  20. Victor

    Ironically the inevitable meltdown need not be an economic disaster. Because all the resources we need to survive will still be there. All that will be gone is the money — and, presumably, the moneyed. Once we are out from under the thumb of the oligarchs (who will finally and for all time be both broke and broken), we can do just fine, thank you. Assuming the USA will be capable of making the transition from capitalism to something much closer to socialism. Sounds improbable I agree. But necessity is the mother of invention, so yes we can hope.

    The worst case scenario would be the perpetuation of the situation we are now in, because in the absence of a sudden meltdown, there will simply be a gradual decline into total helplessness and hopelessness, as the rich continue to get richer and the rest of us continue to get poorer and ultimately degraded and disdained, as is typical of so many other third world countries. So I’m all for total collapse. The sooner the better!

  21. Calinvest

    I would argue Banks have been using the low rates, and high net inerest income, to write off loans. For example, Wells Fargo charged off $17.5B in bad loans in 2009, and in addition, raised its Allowance for Loan Losses to from $21.5 to $25 B. Unfortunately this has not been enough to stem the rising tide of bad loans, as Wells Nonperforming Assets plus Delinquent Assets still on Accrual rose from $17.8 B to $34.5 B at the end of 2009. Some improvement in hitting a moving target, but more pain to go.

  22. KFritz

    If the US repudiates, will that only happen after inflation and/or deflation? Is it likely to be done independent of Scylla or Charibdis? Can it be an independent ‘outcome from hell?’

  23. PJM

    Some years ago, when teen, I read everything that I could about Weimar Republic and her aftermath. I read about the roots of nazism, fascism and comunnism. I read almost everything about Delano Roosevelt and even about Franco.

    I learned how the History was created by the winners.

    Today, amazing, Im reeding here the same complaints agaisnt “liberal burgois”, against free markets and hidden the true errors. One day I will see the same voices claiming against foreigners, imigrants, minorithies. Jews, muslims, chinese, japanese and so on.

    Oh poor portuguese, how can you teach a lesson to the world?

    Lets read the who believes are the real socialists:

    “One of the least understood phenomena spawned by capitalism in the 20th century is the deadly scourge of fascism. The most common source of confusion is created by those who confound ordinary capitalist politicians with their far more virulent fascist variety. The worst offenders are those labor bureaucrats and reformist socialists who claim to speak for the working class. On those occasions when it’s difficult to distinguish which pro-capitalist candidate for public office is the “lesser-evil,” they may sling the term “fascist” against one to justify supporting the other.

    Like the fable of “The Boy Who Cried Wolf,” such false alarms ill-prepare working people for recognizing the exceptional virulence of fascism when it appears on the scene as a major threat. It paves the way for the rapid growth of a mass fascist movement when the capitalist class decides to play that card. And capitalists are sure to do so when an economic crisis impels the working class on the road toward revolutionary action.

    There are some general characteristics by which one can recognize fascism. These include racism, sexism, xenophobia, homophobia and religious bigotry. But unlike most rightwing bigoted outfits, many of which are not necessarily fascist, it comes heavily disguised with radical populist rhetoric. However what really sets fascism apart is its orientation toward extra-legal physical assaults on the mass organizations of the working class and scapegoated sectors of the population.

    The essence of fascism, as we shall see, lies less in its words, important as they are, than in its deeds. Moreover, an effective fascist movement is not likely to come advertised with swastikas or other exotic symbols of Italian and German fascism. It’s most successful advocates tend to adopt an image compatible with the history and culture of the given country.”

    In http://www.socialistviewpoint.org/sum_03/sum_03_09.html

    I remember reading the two books of Hitler and I think: oh Lord! Were going towards the old evil today. Blame the others. Not myself.

    1. PJM

      The national-socialist progandist Le Pen, some days ago:

      “- immigration :

      C’est dans le domaine de l’immigration que les reniements de Sarkozy sont les plus flagrants. Mais plus c’est gros, plus ça passe.
      En décembre 2008 le Président de la république déclarait : « Le métissage n’est pas un choix, c’est une obligation… Nous devons changer et on va se mettre des obligations de résultat (sic). Si ce volontarisme républicain ne fonctionnait pas, il faudrait que le République passe alors à des méthodes plus contraignantes encore ».

      Depuis 35 ans, 10 millions d’immigrés supplémentaires se sont installés dans notre pays ; 150 000 naturalisations annuelles ont lieu. 400 000 immigrés supplémentaires légaux et illégaux par an s’installent sur notre territoire, non pas pour travailler, puisqu’il n’y a plus d’emploi disponible, mais dans 95% des cas pour un motif familial, social ou médical.
      Alors que le pays est submergé par un tsunami migratoire unique dans son histoire, le gouvernement annonce fièrement l’éloignement de moins de 30 000 clandestins.

      Or, dans ce chiffre dérisoire, sont comptabilisés 10 000 retours volontaires accompagnés d’une aide financière. C’est le cas par exemple pour les tziganes roumains renvoyés avec un pécule de 300 euros et qui reviennent 15 jours plus tard, puisqu’il leur suffit pour cela de présenter, en toute légalité, leur passeport.

      Ainsi, pour 100 000 infractions constatées à l’entrée et au séjour, sur un total probable de plus de 250 000 infractions réelles, seules 20 000 expulsions réelles ont lieu. C’est-à-dire que 80% des clandestins interpellés sont relâchés.
      Et d’ailleurs, souvenez-vous de l’affaire du squat de Cachan qui avait défrayé la chronique en aout 2006 : sur les 238 clandestins, 231 ont été régularisés !

      C’est suicidaire !

      Et la gauche joue le jeu du gouvernement en feignant de croire à sa dureté en matière migratoire, notamment quand il expulse des Afghans. En tout : 12 Afghans sur l’année 2009 quand le gouvernement de gauche britannique en a expulsé quant à lui 1 000 !

      Toutes ces gesticulations médiatiques stériles n’empêchent évidemment pas que l’immigration coute à la France 70 milliards d’euros par an en dépenses de logement, scolarisation, d’hospitalisation, de services publics, d’aides sociales, de lutte contre la délinquance.”

      “- économie :

      Dans le domaine de l’économie, la situation est également apocalyptique.
      L’an passé, plus de 70 000 entreprises ont déposé le bilan en France, c’est un quart de plus qu’en 2008.
      L’investissement des entreprises industrielles a également chuté d’un quart en 2009 ; les dépenses d’équipement dans l’industrie sont revenues au niveau de 1984 ; la production industrielle a chuté de 10% sur un an, et de 13,5% depuis 2000, signe de la désindustrialisation galopante de la France ! Conséquence : 700 000 emplois industriels ont été perdus depuis 2002. 200 000 rien qu’en 2009 !

      L’industrie ne représente ainsi plus que 19% du PIB français, c’est-à-dire en queue de peloton des pays développés, à la quinzième place mondiale exactement, contre 28% en Suisse ou 30% au Japon et en Allemagne !

      Dans le secteur de l’industrie automobile, le gouvernement a débloqué des milliards d’euros, notamment par le biais de la prime à la casse. Pourtant, n’obéissant qu’à une stricte logique comptable, les entreprises telles que Renault qui à elle seule a reçu 3 milliards d’euros, envisagent de délocaliser plus encore leur production.
      Cette semaine c’est la question de la délocalisation complète de la Clio 4 en Turquie qui a défrayé la chronique.

      Sarkozy avait pourtant déclaré en décembre 2006 : « Contre les délocalisations, je mettrai en œuvre une politique industrielle(…). Notre pays doit garder des usines. ».

      En septembre 2008, M. Wauquiez, actuel secrétaire d’Etat à l’emploi avait lui aussi déclaré : « Il est hors de question de laisser des grands groupes comme Renault, qui ont des moyens, détruire des emplois dans des territoires français sur lesquels on a du mal à recréer des emplois et, en plus de ça, aller les transférer dans des pays comme la Roumanie, la Turquie ou la Chine ». Mais aux yeux des caciques de l’UMP, ce ne doit pas être si grave puisque la délocalisation aura lieu en Turquie. Et que ces gens là prétendent que la Turquie est en Europe. Ils ont même eu le culot désigner Istanbul capitale européenne de la culture pour 2010…
      Christian Estrosi à Sophia-Antipolis vient aussi d’appeler à inverser le mouvement que l’Union Européenne et les politiques libérales de son gouvernement ont elles-mêmes créé. Là encore, ce double langage est pitoyable !
      La véritable révolution viendrait de l’arrêt du dumping social des pays où la concurrence de la main d’œuvre ruine des pans entiers de nos industries. Elle viendrait du rétablissement de nos frontières qui permettrait de réguler ces dumpings sociaux, économiques et environnementaux, ce qui stopperait enfin la mise au chômage de centaines de milliers de nos compatriotes.
      La révolution viendrait de la fin de l’immigration massive qui pèse à la baisse sur les salaires des travailleurs Français au seul profit des grands patrons-voyous…

      Dans le secteur financier aussi, alors que les deniers publics ont permis non seulement aux banques de ne pas faire faillite mais de réaliser des profits inespérés, celles-ci ont multiplié les bonus au profit de leurs traders. 1 milliard d’euros pour la seule BNP-Paribas. Face à l’indignation publique, une taxation de 50% de ces bonus sera mise en œuvre.
      Une fois de plus, cela ne relève que de l’effet d’annonce : le produit de ces taxes sera versé au « Fonds de garantie des dépôts », c’est-à-dire justement aux banques !
      En mars 2007, M. Sarkozy déclarait pourtant, tenez-vous bien : « Ma stratégie économique, c’est de libérer les forces de travail en France pour créer ce point de croissance qui nous permettra de résoudre les questions de déficit ».
      Résultat : en 2009, la croissance a chuté de 2,3% ! : C’est la plus forte récession depuis la 2e guerre mondiale !
      Les mises en chantier de logements neufs sont retombées à 300 000 alors qu’elles étaient de 435 000 en 2007, entrainant des dizaines de milliers de licenciements.
      Mais construire des logements neufs ne résoudrait pas le problème puisqu’ils sont occupés en priorité par les immigrés qui arrivent sans cesse. La solution, c’est l’inversion du courant de l’immigration et la préférence nationale.

      - social :

      Le candidat Sarkozy, qui voulait faire travailler plus les Français pour leur faire gagner plus, vient de faire franchir à notre pays la barre des 5 millions de chômeurs réels en 2009.
      Plus de 600 000 chômeurs « officiels » supplémentaires, c’est chiffre le plus mauvais enregistré depuis… 1949 ! Il y a aujourd’hui plus de 550 000 chômeurs officiels en PACA.
      Leur nombre a ainsi augmenté de 30% en un an : de 7 % de chômeurs en 2008, nous sommes sur le point de passer officiellement la barre des 10%.

      Et dans ce chiffre « officiel », ne sont retenus que les chômeurs de catégorie 1, qui ne compte qu’une partie des chercheurs d’emploi.
      Le chômage partiel a été multiplié par plus de 5 en un an. C’est-à-dire 300 000 chômeurs non comptabilisés dans les chiffres officiels !
      Le nombre de chômeurs de longue durée qui ne sont plus indemnisés passera le cap du million en 2010 !
      8 millions de pauvres en France vivent avec moins de 900 € par mois.

      4,8 millions de personnes bénéficient de la CMU, c’est-à-dire la sécurité sociale, profitant tout de même à ceux qui, sans cela, n’auraient droit à aucune couverture maladie.
      1,5 million de foyers bénéficient du RSA, le remplaçant du RMI. Ses bénéficiaires doivent survivre avec 455 euros par personne et 632 euros pour deux personnes !
      600 000 personnes âgées ne touchent que le minimum vieillesse, c’est-à-dire 628 € par mois !

      Le revenu des agriculteurs qui avait déjà perdu plus de 20% en 2008 a perdu de nouveau 34% en 2009. Les céréaliers et les producteurs de lait et de fruits ont vu quant à eux leurs revenus fondre de 50% ! Pendant ce temps, les grandes surfaces, avec la complicité du gouvernement, profitent de cette chute des courts, non pas pour baisser les prix, mais pour grossir leurs marges.
      Plus de 200 000 dossiers de surendettement ont été déposés en un an à la Banque de France ; 1,2 millions de dossiers de logement HLM sont en souffrance… Bref, partout la ruine sociale est insupportable.
      Et pendant ce temps, plus de 200 000 immigrés clandestins profitent gratuitement de l’Aide Médicale d’Etat…
      En décembre 2006, Sarkozy déclarait : « Je veux si je suis élu président de la République que d’ici à deux ans plus personne ne soit obligé de dormir sur le trottoir et d’y mourir de froid ». Aujourd’hui, plus de 3 ans après, la France compte plus de 120 000 SDF, c’est à dire plus des 2/3 de la population toulonnaise…
      Pendant ce temps, le Président d’EDF et de Veolia voulait s’offrir 2 millions d’euros de salaire annuel. Suivant ainsi Sarkozy qui dès 2007 s’était augmenté quant à lui de 170% !
      Pour sauver nos retraites, il est évident que l’allongement de la durée de cotisation est nécessaire. Mais dans un contexte de crise aigue et de désindustrialisation chronique, le nombre de cotisants ne fait que s’effondrer.
      Or, les syndicats s’efforceront de conserver le système des 35 heures.
      La seule variable d’ajustement sera donc le montant des retraites qui s’abaissera.
      Ce sera sur les retraités que pèsera l’effort, d’autant que ce sont eux qui peuvent le moins bien se défendre !”

      In http://www.frontnational.com/?p=3669&nggpage=2

      We can change the name of our ideas. We can say that is socialism, neosocialism, neocomunism, but the complains are the same and some solutions too.

      Some years ago I saw a wall through the border mexican-american. It was the first signal. The signal that is bubbling up some strangest things in USA.

      Alex de Tockeville if was alive would have a heart atack.

  24. PJM

    I dont pretend to be offensive. But a few days ago I read something amazing. Between regulate and government intervention or cut the size, power and the risk of financial sector, a “the liberal alma mater” of these days choosed the first one. Wait a second. Where I saw the same choice? When? Ah! The alternative to international comunism/socialism, or nazism/fascism. Glup!

    I believe that “the liberal alma mater” from today, the guru, has good intentions. But come on. Some books of History can help us a lot.

    After WWII the winners mistified the past and erased the true story, right? Oh mr. Keynes, youre the saint as mr. Karl Marx. Brave new world indeed. It was you the hero, right?

  25. PJM

    I dont pretend to giver false analogies from today to the past. But I read this:

    “Under fascism, big bankers, formerly independent—
    except, of course, “non-Aryans”—have become State
    officials in everything but name. They are often in high
    and influential positions, but they are all members of
    the compact, centralized State machine. Their independence,
    their individual initiative, their free competitive
    position, all the principles for which they once
    fought fervently, are gone. They no longer lead in
    society. They used to be the most influential and independent capitalists, more powerful even than the bankers”

    In The Vampire Economy: Doing Business Under Fascism (1939), by Günter Reimann .

    Well, I read somthings about the Obama Admnistration and I think. Can be this true? Wait a second. I remember reading Holdren and his mate. And I think. Ts this the same ideology with other rethoric and propaganda.

    We can change. Yes we can. Oh god! Im living today as if I was living in some History books. So, is neoliberalism, right? Or neoconservative, right?

    I must to forget what I read and starting again. Oh god! I dont have time to read again.

  26. john bougearel

    Gonzalo,

    The contrast you make between the iron fist of Volcker and kid gloves of the current Fed and admin.

    You miss a substantial point of distinction between 1982 and today, that is leverage. The bank leverage of today is far worse than 28 yrs ago. And the fact is that much of that toxic credit they created 3-6 yrs ago has to be refinanced. The private debt restructuring cycle of 2011-2012 will be what breaks the backs of the banks and by extension the broad economy, much of which will find credit availability scarce, regardless of cash flows.

    1. Gonzalo Lira

      John, unfortunately, you’re right—the leverage today is much worse than in ’82.

      Which only underlines my point—after a year of extend and pretend, no serious write-down/write-off of the bad assets has taken place. So when the proverbial shit hits the fan, the crisis will be much worse than ’08, or 1929 even.

      One thing I disagree with you—you say that the broader economy will find credit availability scarce: Unfortunately, small businesses (which make up the bulk of the US economy) already are in the midst of a tight-credit environment. Credit has been tight for small businesses for the last 18 months—many have been forced to close because of it, and I would argue, a big chunk of the staggering job losses of the last 18 months have been due to the curtailment of credit to small businesses. Certainly credit curtailment to small businesses has been a major factor in the overall sluggishness of the US economy.

      I don’t think we will have to wait ’til 2011 or 2012 to see thing melt down once again—I suspect it’ll happen this year.

      I hope I’m wrong, but I’m betting I’m right.

  27. Skippy

    OK…just rig this speculative dreck with satchels of C4 w/ mercury trips, have scantily clad drink serving wenches roam the trading floors…..stand way back and enjoy the good times.

    Skippy…price discovery…TA…DA!

  28. Doc Holiday

    Trading on earthquake patterns
    http://web.mit.edu/newsoffice/2003/stock-0521.html

    “If you put an extremely large amount of friction–in the form of regulations–into the system, you could prevent the crashes. But moderate amounts of frictions will make no difference,” he said. “In any case, before we can give advice on policy, we need more research to better understand all those regularities in the stock market.”

  29. Doc Holiday

    like turds in the Venice canals, because of the obfuscation of the basic accounting rules—an obfuscation which the banks insist on perpetuating.

    Pure wall street poetry there — sublime, whilst being rude and funny, but at the same time, it exposes the truth of the real under-side of the coin that lays face down in the American gutters of wall street (which I spit in).

    1. skippy

      Personally…me thinks any one with in walking distance needing bowel relief, should conduct their transaction there, that way, the olfactory would parallel the ocular.

      Skippy…why are the laws against raw sewage discarge not enforced in that local of NYC..um.

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