News Round-Up
So far the news this week has been very ordinary. Nothing suggests we need to change our expectations about next year that much. That is if we accept the likelihood of a very slow recovery with continuing downside risk. The point being that we have not yet begun to see data that foretells a strong upswing. Things remain tepid to say the least.
Leading Indicators:
Take yesterday’s leading indicators for instance: they rose for the seventh straight month, which is obviously a good thing, but the increase was much weaker than the previous month – the index rose 0.3% in October and 1.0% in September. In fact October’s rise was the weakest in six months. So any headline proclaiming that the recovery remains firmly on track is technically correct, but it misses the crucial aspect of much recent data: there is no momentum. We have forward motion, but is appears to be either fitful or weakening. Our language now is reverting to the inverse of that we used earlier in the year. Back then we spoke of things getting worse ‘less slowly’. Now we speak of things getting better, only less slowly.
I call it sputtering. That’s a technical economics word reserved for dubious and unpredictable growth.
We are definitely sputtering.
Unemployment:
The other data yesterday reinforced this general view. The weekly report for new claims for unemployment assistance showed that we remain stuck just around the weekly loss of 500,000 jobs. Remember that this is not a count of actual net jobs lost because it does not include any reference to new jobs being made, and even in this economy there are new jobs being created all the time. Just nowhere near enough. The good news within the claims data is that the trend is still down: the four week moving average dropped very slightly once more to 514,000. The bad news is that the number of people making long term claims is still climbing and has now reached 4.23 million. Obviously, and this is no news at all at this point, the job market is a very long way from being healthy.
TARP:
It may have slipped your memory but last year we, the taxpayers, provided a ton of money to the banks so that they could pay themselves fat bonuses this year survive. This week’s report by the person installed to take a look at the way TARP was managed – an ex-Goldman guy, who knew there were so many of them? – criticized the Fed’s handling of the way in which the AIG bail-out ended up being a back door bail out of other Wall Street firms.
Surprise.
The issue back then came down to the extremely weak leadership the Fed displayed as they sought to push back against the counter parties who had purchased those infamous Credit Default Swaps we all read about – and contributed to – late last September.
The story goes this way:
AIG sells a ton of totally insane CVDS contracts. The contracts are insane because AIG has nowhere near enough money to pay up on those contracts were they to come due in a cluster. No matter: the geniuses earning those massive bonuses at banks like Goldman and Citi all decide that the risk of a cluster default is so small no one needs to care – and these folks are still employed? – so they not only buy covered contracts they buy ‘naked contracts as well. Lots of them. A ‘naked contract being one where I buy insurance against something I don’t own … like me buying life insurance on your death. These naked contracts are tons of fun and make lots of money for the gamblers traders who get away with it. The problem is that by piling up lots of naked contracts the system is now awash with insurance against a much smaller number of possible events. So instead of stabilizing the market by offering sensible insurance against a default, they destabilize it because single event can cascade across the balance sheets of banks who weren’t even involved in the original deal being covered.
Back to the story …
When the economy soured last year it turns out that the geniuses had been dumb as all hell – are these people still employed? Apparently none had noticed that AIG was way too small to pay up if a cluster of defaults swept through the economy. It’s actually more technical than that: the terms of these contracts includes the posting of collateral. The clever people at Goldman etc realize that it might take time for AIG to get the money together to pay off on the contract so they ask for front money. You know just in case something really insane happens like we need to call in the contract. No that will never happen. But horrors it did. As the credit market tanked the geniuses started to get itchy and asked AIG to ante up more front money. AIG looked in its piggy bank, realized it was empty, and ran to the Fed for help.
Basically the cry from AIG was: bail us out or watch the banking system melt before your eyes.
The Fed, being full of ex-bankers and bank sycophants, jumped right in. They decided to pour in the money needed for AIG to make good on all the calls being made against it.
The big question became how much money is needed?
That’s where the Fed failed. And we ended up getting gouged. Royally gouged.
The big criticism is this: the counter-parties were trying to enforce contracts that, in the absence of the taxpayers, were worth either nothing or, at best, a few cents on the dollar. But AIG was not in bankruptcy, it was being bailed out. So the Fed decided it had, legally, to abide by those contracts. It tried to get the counter-parties to agree to take a hair cut – take less than the 100% they were owed. Only Credit Suisse agreed. All the others, including Goldman, JP Morgan, Citi, Wells Fargo, Bank of America and all the other rogues gallery of taxpayer beneficiaries told the Fed to get lost. They guessed – or knew – that the Fed would have to keep AIG afloat and so the cards were in the bank’s hands. Naturally the Fed, being a Wall Street groupie, caved in and we ended up larding the banks with cash that they most likely would never have seen otherwise.
It appears that the Fed held out on our behalf for all of a nanosecond.
The lawyers will all cry that the Fed have no option: those contracts had to be honored.
To which I reply: balderdash. We had the money. They wanted it. The question is now how much. I would have let them sweat over a weekend. Let the geniuses contemplate their potential losses. then force them to take a decent haircut. Not enough to sink them, although they surely deserved to sink given their stupidity, but enough to make them feel the pain. And enough to reduce the taxpayer bill from the stratospheric levels it late became.
All this has a happy ending of course.
Goldman is back to paying egregious bonuses. AIG complains daily about the invasive nature of its government overseers who – gasp – dare to suggest that the dimwits who nearly sank the Western world should collect merely sensible bonuses this year rather than the normal insane ones they are used to.
The Fed chugs on happily cow-towing to Wall Street. And Tim Geithner, who master minded the cave in, has been promoted.
So all is well.
At least that’s what they all say.
I say we’re headed into another finance inflamed crisis – watch those emerging market asset prices as they streak skyward aided and abetted by our neighborly geniuses.
Are they still employed?
Unfortunately, yes.
