sangell
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So sad, so true.
But maybe it isn’t the banks that are at the root of our troubles. Maybe it is the Ivy League. Not by accident has every president since Reagan been a graduate of these fine institutions. Mirabile Dictu Dartmouth was the alma mater of Hank Paulson and Timmy Geithner, a one two punch that knocked the American economy down for the count.
A more rational, or perhaps informed, society would shut down these school as being breeding grounds of corruption, vice and criminality. An honest government would look upon a degree from Harvard or Yale law school as a stain not a pedigree!
Given that there is another debt account, the public debt, and that it has grown by about $10 trillion since 2003 with most of that growth since 2008, a reduction in private consumer debt of a couple of trillion isn’t deleveraging at all. Reducing my Visa card balance by running up my balance ( OK I get a better interest rate) on my new Master Card isn’t getting me out of debt especially when that public spending accounts ( through transfer payments) for such a large proportion of consumer income. Thus if you actually try and reduce the growth in public debt you actually make the private debt burden grow.
I suspect the number of Americans with ANY positive net worth has fallen dramatically so the ‘average’ net worth isn’t all that useful a measure. People who lost jobs were forced to take cash from their IRA’s,401k plans and any other savings they had so a lot of people who had positive net worth no longer do.
Worse, some who think they still have assets may find they don’t when they try and redeem them. Even those ‘lucky’ enough to have defined benefit pensions guaranteed by a company, municipality or state may find it is gone or reduced when they seek to draw it.
People have been focused on the ‘fiscal cliff’ of late and that is a serious problem but there is also a demographic cliff nearing as the post KOREAN war baby boomers (1953-61) reach retirement age. This cohort is bigger than the WW2 baby boom and when they start drawing down their assets or pension funds do the same to make the monthly withdrawals you have to ask… who will be the buyers?
So we turn the Central Banks of the world into what Bill Gross called ‘the place where bonds go to die’ and print more dollars to replace the dead debt only, instead of putting those dollars into the hands of the real economy, the Central Banks give them to the financial embalmers who prepare more bonds and debt for the mortuary.
How else can it be when new money is used simply to fund current consumption in the form of transfer payments to the non productive and zero sum speculation on the commodity and stock exchanges by the major banks. As real economy is starved of investment, as incomes stagnate and joblessness grows there is less and less real wealth available to support the growing pile of debt so more of this debt must be shipped to the Bernanke, Draghi, Shirikawa and King financial funeral parlor.
I’ve long felt that economic arguments for ‘free trade’ , namely Ricardo’s theory of competitive advantage were flawed. Outside agriculture, where obviously it makes no sense to try and grow pineapples in New York or coffee in Alaska, one place is as good as another when it comes to manufacturing provided there is a basic infrastructure. Honda can put an auto plant in South Carolina or Osaka and build cars. Given the degree of automation in modern manufacturing even labor costs are not the factor they once were. Increasingly it is political factors that matter in the location of production facilities. Tax and regulatory policy can be more important than hourly wage rates as can the degree of labor docility or militancy. No one would put a car plant in the UK in the 1970’s because of militant trade unions. Today the UK is home to a number of foreign car manufacturers who prefer British tax and regulatory policy to that on the continent.
I know of no one who is feeling secure or confident about the future. Yes, people watch their TV’s and pretend all is well or as well as it is going to get but there is a realization and era has ended and an unease over what is to come.
You don’t have to trade currencies or follow the latest remarks out of Brussels or Frankfurt to know Europe is crumbling. Just the continuous summits and proliferation of acronyms being introduced as ‘solutions’ reveal there is no solution and that all that is taking place is a desperate effort to avoid the inevitable.
We are going to a place the world has not really been since the collapse of the Roman Empire. A world without a new hegemonic
power or ascendant civilization just the decay of the West and no other culture strong enough to defeat or replace it. Maybe not a new Dark Ages but a far more chaotic and poorer world than before.And yet the system keeps on going not because there is any hope for a solution but because there is no solution possible. Its almost like a casino where no gambler dares cash in his winnings less he break the house and have nothing but a pile of worthless chips. The only way out is to continue playing and pretend the chips are valuable and enjoy the free drinks and buffet.
Frightening stuff coming. Making the elderly share their pensions and homes maybe inconvenient to them but if those pensions are being paid with debt their grandchildren must pay is it wrong?
OTOH, how can a society ever hope to recover if half its young can find no work and the half that do work are working on short term contracts or for peanuts? Unlike the other side of the Mediterranean where high youth unemployment has more to do with a demographic bulge from exploding populations, Spain is in a birth dearth. It needs everyone of its young. That they cannot employ them is the true disaster taking place. Starting your working life at age 30 or 35 is something no society has ever tried before because it makes no sense. And that presupposes that, somehow, the Spanish ( or other debt demolished economies) can some how generate enough growth to employ them at that age! Women in particular are facing a situation where their biological clock will run out before they can afford to have a child and in a country where the birth rate is already below replacement that’s a recipe for extinction.
One could argue that defending the broken Euro is part of the problem or that the banking system is broken too and is in a deflationary spiral but that still leaves the sovereign debt problem and that is simply another way of saying many nations are consuming more than they produce and there is no way to ‘fix’ that problem without a reduction in living standards.
At first glance that shouldn’t be that big of a problem. Afterall a reduction of GDP by 10 or 20% shouldn’t mean a return to the stone age just living at the same GDP per capita of a decade or so ago which didn’t seem harsh at all to anyone alive then. But GDP maybe a phantom statistic cooked up by economists and governments to give the illusion of economic progress when all it is measuring is money circulation not real wealth. I grew up in California. That state was genuinely rich in the 1960’s. 18 million people had a functioning and affordable university system, modern highways, generous welfare system and affordable housing. In fact, my stepfather built houses in Palo Alto and Marin county that cost about $35000 and were bought by middle middle class people that can no longer come close to buying those exact same houses.
Despite more than 40 years of GDP growth all we’ve really gotten are better consumer electronics, a bit better cars and marginally better medicine. What we lost was a functioning society. What in the hell happened?
I think you’re drawing the wrong conclusion as to the decline in bankruptcies, especially in regards to businesses. This probably has more to do with zombie banks rolling over loans to zombie companies to avoid writing the loan off. Low interest rates makes the process easier. Also, to the extent that banks are allowing short sales or reworking loans under the various government foreclosure avoidance programs is going to reduce the number of “homeowners’ filing for bankruptcy.
If we are looking for a catalyst it would seem Greece will be it. It is not implementing the MOU it signed and it is going to be politically impossible for Germany and the IMF to continue funding this bunch of deadbeats and a lesson must be made to the other PIIGS that failure to abide by the loan covenants has consequences.
Therefore Greece is almost certain to be cut off and default probably by the end of the month. That will likely end Spanish and Italian access to private market funding and start a wave of bank runs and collapses.
Yeah, that is the killer chart and one that was not in that Paul Samuelson Economics textbook I read in college long ago. The trouble is while everyone understands ( or is made to understand by their creditors) that debt cannot rise faster than income for long at the individual level for long, at the macro level it can because the state can run, by virtue of its control of the currency, run this game for far longer and, lets face it, many of us profit by expanding debt, so we ignore our better judgment or are co-opted by the government.
Long ago, when I had just taken a new position and was making decent money for the first time, I went shopping at Macy’s. I saw a really nice stereo system that I wanted but it was $1400 and I didn’t have it. The clerk suggested I apply for a Macy’s card. I did. Fortunately I was turned down. I resented it and it was only years later when my bank asked me if would accept one did I finally get a piece of plastic but in the decades since they have never made a penny in interest off me despite their best efforts and the countless blank checks they have mailed to me. My bitterness over that long ago slight by Macy’s was the best financial advice I ever got.
I gather the Wyman analysis made no estimate of what would happen if Spanish government bonds were restructured or even marked to market.
If the reports out of Greece that even basic services are breaking down are true then we have moved well beyond the point of Euro membership and onto the question of EU membership.
The EU may not be much for observing democratic principles but it is a stickler for observing democratic forms. The idea maybe to force the military to seize power, huff and puff about it and expell Greece from the EU and stand back and let the Generals reorganize Greece. Then, after a decent interval and with the military having done what elected governments could not, promise to readmit the reformed Greece back into the European Community if the military steps down.
Excellant article but, they say the only things you can really own are the things in your head. Next to that I’d suggest the next best ‘doomsday’ survival asset is an ocean going sailboat. It is both a secure home, an escape option and something that is intrinsically valuable in any medium of exchange. 5 acres in the woods isn’t going to protect you if a SWAT team shows up and gold buried in the backyard is worthless if 9 grams of lead hits you at 1000 feet per second but being able to stay offshore and cross an ocean without going through an airport just might.
I should distinguish that Japan does not suffer the catastrophic unemployment among its young that Southern Europe is experiencing but it is leaving them in lower paying contract jobs and passing on the debt their parents and grandparents accumulated on to them. More like the US though with far worse demographics and without the fossil fuel fillup North America will get over the next few decades.
Europe and Japan are in a special bind with an inverted population pyramid and high youth unemployment. Worse the high debt to GDP ratios are in large measure the result of protecting the jobs of the older workers in state industries and a bloated civil service and leaving the bill for the any young person who is dumb enough to stay and smart enough to find a job.
I think the ‘elites’ are just as scared and uncertain as everyone else is otherwise they would have crushed Greece already.
While its true those in positions of great power sometimes come to believe themselves omnipotent they are not entirely stupid and most read a bit or at least react nervously when untoward events occur. One need only remember how shaky our visibly shaken our ‘leaders’ were on 9/11 or when Hank Paulson told them the financial system was about to collapse in 2008. I won’t deny they recovered their swagger rather quickly when the danger from both events seemed to pass but they know they are riding a tiger and, like us, none of them know how to get off it without risking the tiger’s wrath. They are as scared as we are of what lies ahead so they just pretend that nothing has changed because they have no more idea than we as to how this is going to play out.
Americans look at Europe’s problems with something of a ‘it can’t happen here’ POV but I think it can happen here. We have some very large states with immense budget problems and, just like the PIIGS, they are losing competitiveness to states that don’t have their debt problems. Think California vs Texas or Illinois vs Ohio.
If this situation goes on for a few more years where states like California and Illinois state budgets continue to deteriorate, taxes are raised to stem the red ink and business and high income taxpayers relocate to escape the situation what’s to prevent our PIG states to be in the same situation as Greece or Spain. These states could be frozen out of the bond market or face ultra high interest rates to roll over their debt. Deep cuts in state and local government programs and payrolls that exacerbate their decline and a reluctance of other states to bail out their pension obligations or extend Federal help to them.
Well the NYT’s is out with JPM version of events as told to Andrew Ross Sorkin yesterday after he finished his CNBC show. CDX IG9 is what is what had a meltdown and could melt yet further. Not that I understand this stuff but it seems Dimon has gotten his bank into an AIG type position where they own one side of a bet. Not only does he have to worry about the real macro situation causing the bet to detonate, he also has to appeal to the other players to not raise the stakes. The mea culpa is probably related to this. “I’m whipped so please don’t hit me anymore” the onetime Wall St. bully was more or less whining.
Not long ago BONY was being squeezed for its role as the trustee in all those MBS pools. Investors wanted them to require the issuers to take back loans that did not meet the warranties made. Interestingly, BONY had applied to be part of the CDS cartel at that time too but since the same banks that operate the CDS market also issued most of the defective loans in those MBS pools BONY couldn’t very well put back all those billions in crap mortgage loans the banks had off loaded to investors and expect to be granted its request. Mirabile dictu a universal settlement with the states attorney generals that relieved the pressure to put back crap loans onto the banks balance sheets was cobbled together by the banks and US government. What will happen to BONY’s request I have no idea but they are no longer behind the eight ball now.
I mention this because, obviously, the US government cannot have a repeat of AIG or even have to re-TARP a TBTF bank with an election coming up so some ‘solution’ will be found to JPM’s problem that will require the other players to pull in their claws and cooperate ‘if you know what’s good for you’.
As enjoyable as this debacle is I am curious because it doesn’t fit the pattern of previous bank errors where it is all blamed on a trader, rogue or otherwise. Nick Gleeson, Jerome Kerviel, Fab whatever at Goldman Sachs etc. Here Dimon is taking the fall. That’s not to say that Iksil or Ina Drew or someone else won’t get fired but why did Dimon accept responsibility? The CEO’s at Bear Stearns, Lehman, WAMU, Wachovia or any other bank I am aware of never held a conference call to admit they screwed up.
Is Dimon that much of a stand up guy or is there something else going on?You
{Overall, Bernanke said, home mortgage credit outstanding at banks has contracted about 13 percent from its peak.]
And housing prices have fallen what, 35%, from their peak.Add on the HELOCS and the banks haven’t come close to working their way out from under their bad loans and Bernanke wants them to make MORE mortgage loans in the teeth of his artificially levitated economy? Bankers maybe doing the Lord’s work, they maybe ‘dancing’ , they may even be stupid but they aren’t going to make loans against collateral they KNOW is still falling in value unless its got that government guarantee attached.
How do banks KNOW home prices are still too high? Because they know how many homes they already own and how many they have yet to foreclose on. They also know that if Congress doesn’t extend the tax holiday on forgiven debt past December the short sale is DEAD and foreclosure will soar as underwater homeowners can’t even sell their homes at a loss without incurring a heavy tax burden.
skipbreakfast raises a valid point, Greece owes big time and to multinational entities that don’t accept being stiffed. That said, the scale of the debt mountain is going to take everyone down. I don’t think many people realize that that Fiscal compact Merkel is so keen doesn’t just mean reducing fiscal deficits, it requires paying down national debt to GDP ratio back to the 60% level the original Maastricht Treaty envisioned and doing it over the next 20 years!
The pro growth faction is also dreaming. There is no economic policy that one can implement that is going to create 4 or 5% GDP growth unless it is pure inflation. That might solve the debt problem but not the standard of living one. Europe saw its labor force peak last year and its young are unemployed. What you have is an aging protected labor force heading off into retirement leaving nothing but debt and unemployment in their wake. They’ve sucked the wealth from their socieities and its basically all over save for the shooting.
I suspect there is a French Tim Geithner about to tell Hollande what is and is not acceptable and if that doesn’t work Angela Merkel will explain that Germany and its AAA allies still call the shots in Europe. Greece looks more problematic but here too I suspect a coalition will be patched together to keep the Troika money flowing. Voting to go over the cliff is one thing but walking up to the edge and staring down can weaken one’s resolve.
I too think the demographic element is being overlooked. The fact that this issue of excessive debt, low growth rates and fiscal deficits exists in every big OECD nation indicates that the problem goes deeper than any recent policy development.
The geezers are coming home to roost, if you will. 2011 was not just a bad year economically for Europe. It was the year its labor force hit its maximum. Every year from now on there will be fewer and fewer working age people throughout the EU. There will also be more and more retirees. An extraordinarily bad situation if you are trying to boost economic growth rates. Ask Japan which has been in this situation for some time now.
The English speaking nations are in a similiar bind but it is less dire because of higher birthrates ( but the higher birthrates are concentrated in the lowest socio-economic class so it may not be of much if any benefit economically). Spain, which imported more people percentage wise of any advanced economy over the past dozen years (half the children in are born to foreign parents and 15% of the total population is officially foreign born but some say it could be as high as 25%) shows that mass immigration is no solution either if your immigrants are just low skilled labor imported to support the tourist and construction industries.
Hope you get back. I enjoy reading your stuff. Your stand ins, not so much, you ‘guest’ commentators not at all.
Not a whole lot to recommend this post even if it didn’t contain the gratuitous Jew bashing.
As to the notion that ‘very little of the funny money is getting out into the real economy’ er, just where do you think it is going if not as transfer payments to the poor? So if you want to blame a group of people for our economic woes blame the poor and elderly whose housing, nutritional, medical, educational, bingo and recreational drug needs have outpaced government revenue throughout the developed world.
Watched a documentary on US/Russian relations the other night an one scene had Putin sitting at the head of a table of Russian businessman explaining to them he needed their signatures on some agreement but one billionaire seated at the table hadn’t yet signed. All eyes turned toward the recalcitrant oligarch till he got up uncomfortably while Putin, leaning back in his seat pushed the document to the edge of the table and laid his pen on it. The billionaire leaned over and signed and as he stood back up a smug looking Putin says “could I have my pen back”!
Somehow I can see this same scene being played out as Greek bond holders are asked if they will tender their bonds.
Well John Newton was a slaver before he got religion so a private equity investor could have the same insight into the flaws of his economic system. We also have the example of former hackers being hired as computer security experts.
I agree ( mostly) with Stockman. He’s spot on about the real US economy being dead in the water for the past decade and maybe about the stock market too. Problem is, most people don’t have vast fortunes they can sit on and what is cash if not a bearer bond of the US government? So some utility, energy and mining stocks may actually be safer than cash. So says Marc Faber as well as yours truly.
I also think, if we can, somehow, get a handle on our debt problem, the US, well really North America, sits above every other region in the world. We’ve got the finest research universities in the world, more energy resources than any continent, abundant farmland and water and for the next quater century military supremacy over China.What’s not to like?
Ridiculous assertion. So the ‘wealth’ of neolithic tribes was stolen in Africa and North America and this enormous horde of beaver pelts, stone tools and animal skins was transmogrified into the industrial revolution.
The “Titanic” metaphor is overused and, in this case, abused. The Cameron movie version had little to do with the reality of the actual 1912 event though I won’t argue with the substance of your post.
In fact, a number of first class passengers died. Like the recent cruise ship disaster off the coast of Italy, large passenger ships are hard to evacuate. The crew of the Titanic, more than the passengers, decided who would be offered those seats and first
class passengers were more accessible. It wasn’t a malevolent decision just a practical one and that is the real metaphor for our times.Saving millions of homeowners our thousands of passengers is difficult. It creates a chaotic situation where panic is likely to set in and eliminate the ability of those in charge be they a ship’s company or government regulators to exercise control.
