Moon of Alabama Brecht quote
March 07, 2008

The Deleveraging Spiral - Black Friday?

This might become a very interesting day in the financial markets.

New U.S. unemployment numbers will be announced at 8:30 ET. If they are worse than expected, everything might tank. That is, unless the Fed and the Plunge Protection Team step in.

All financial institutions and funds are now deleveraging, i.e. lowering their risk or cutting their losses.

A leveraging factor of 10 means an entity holds assets at a value of 100, but only has a capital of 10 and borrowed the other 90. If the assets of such an entity lose 10% of their value, the capital of the entity is 0. If they lose 20%, the capital of the entity is 0 and its lenders will have to take the rest of the losses.

As lenders do not like to lose money, they watch carefully and as soon as there is a threat of such a situation, they demand immediately repayment of a part of their loans, or more safe collateral for these loans. In finance speech - a margin call.

The entity receiving the margin call has to come up with new capital to bolster the collateral it can give to its lenders or make an emergency-sell of some of its already decreased assets to repay some of the loans and take the loss.

Yesterday Carlyle Capital, a listed hedge fund, received margin calls it could not satisfy. Practically it is bankrupt and its lenders, big banks like Citibank and UBS, will now have to take losses on the  loans they made to CC too.

The fund was leveraged at a lunatic factor of 33 with assets of $22 billion and capital of $670 million. A fall in the value of its assets of just 3.3% wiped out all of its capital. But the assets even fell more (though we don't know how much yet) or were at least perceived to be worth less than 97% of their original value by the banks who lend to CC.

There is one really bothering issue in the CC story. The assets Carlyle Capital was holding were bonds issues by the Congress chartered Fannie Mae and Freddie Mac. These are first class rated bonds which, until a few days ago, were largely perceived to be backed by the U.S. government and as valueable as U.S. Treasuries. But as the Freddie Mac FAQ says:

Freddie Mac's obligations and securities do not constitute government debt and are not guaranteed by the Federal government.

The perceived government guarantee for Freddie and Fanny debt does not exist. The market value of their debt was 'faith based' and that faith has eroded.

Bloomberg headlines Agency Mortgage-Bond Spreads Rise; Markets 'Utterly Unhinged'

Yields on agency mortgage-backed securities rose to a new 22-year high relative to U.S. Treasuries as banks stepped up margin calls and concerns grew that the Federal Reserve may be unable to curb the credit slump.
"Everything is telling you the financial system is broken,'' Simon, whose Newport Beach, California-based unit of Allianz SE manages the world's largest bond fund, said in a telephone interview today." Everybody's in de-levering mode.''

Rising yields on a bond is an expression of its loss in value. So now Freddie and Fannie debt is perceived to have less value. This is quite bothering as Fannie and Freddie themselves are leveraged with a factor of about 30.

Their chartered business is to lend to homeowners (indirectly through brokers) and to issue debt bonds on the other side to get loans from investors. They only have $1 of capital for each $30 they borrow and lend to homeowners. As markets now value their debt at less than 97%, Fannie and Freddie are, in theory, bankrupt.

But these entities are 'too big to fail' and the government (taxpayer) will step in and add to their capital to lower their leveraging factor. The government will of course have to borrow the money itself. This will put further pressure on the dollar, increase long term interest rates and feed inflation through higher import prices.

With gas prices going to $5/gal more people will default on their mortgage, more of Freddie and Fannies mortgage holdings will go bad. Their bonds will lose further values. More bond holders will default. Their lenders will eventually default too. Citibank was one of the banks that lend billions to Carlyle Capital. If Citibank has to take more losses of this kind it will be bankrupt too. (It is also too big to fall and will likely be taken over by the government too.)

A deleveraging spiral is in full motion now. It feeds inflation and decreases the value of the dollar.  It has not yet really hit the stock market, but it will when bank shares go down further and hedge funds will panic-sell their share holdings to meet margin calls on their debt.

Today may see the bad-news-trigger that marks the point where the 'faith crisis' hits the stock markets and these turn out to be 'unhinged' too.

Posted by b on March 7, 2008 at 12:28 UTC | Permalink


U.S. Lost 63,000 Jobs in February; Unemployment Rate at 4.8%

The U.S. unexpectedly lost jobs in February for the second consecutive month, reinforcing concern the economy is contracting.

Payrolls fell by 63,000, the biggest drop since March 2003, after a decline of 22,000 in January that was larger than initially estimated, the Labor Department said today in Washington. The jobless rate declined to 4.8 percent, reflecting a shrinking labor force as some people gave up looking for work.

The unemployment rate is a joke - sinking unemployment rate when more people go jobless.
Revisions reduced by half the 82,000 increase in payrolls previously reported for December.

Service industries, which include banks, insurance companies, restaurants and retailers, added 26,000 workers last month. Retail payrolls fell by 34,100, the biggest drop in more than five years.

Payrolls at builders fell 39,000, the eighth consecutive month of cutbacks.
Manufacturing payrolls dropped by 52,000, the biggest decline since July 2003, after falling 31,000 a month earlier. Economists had forecast a drop of 25,000.

Government payrolls increased by 38,000. That means the total decline in private payrolls for the month was 101,000, the biggest drop since March 2003.
Hourly earnings were up 3.7 percent from February 2007. Economists surveyed by Bloomberg had forecast a 3.6 percent gain for the 12-month period.

Notice that hourly earnings year over year are lees than the inflation rate. Real earnings are sinking.

Posted by: b | Mar 7 2008 13:42 utc | 1

So, if Bernanke cuts rates by 0.5% every couple of weeks, what will he do this summer, when the Fed rate will be at 0? He turns off the lights and leaves the building?

Posted by: CluelessJoe | Mar 7 2008 13:48 utc | 2


I guess he will start paying people to take money off the Fed...

Posted by: ralphieboy | Mar 7 2008 14:01 utc | 3

Our worthless government lies about everything b, you'll be shocked to hear. The U-6 unemployment number is far more accurate.

The popularly followed unemployment rate was 5.5% in July 2004, seasonally adjusted. That is known as U-3, one of six unemployment rates published by the BLS. The broadest U-6 measure was 9.5%, including discouraged and marginally attached workers.

Up until the Clinton administration, a discouraged worker was one who was willing, able and ready to work but had given up looking because there were no jobs to be had. The Clinton administration dismissed to the non-reporting netherworld about five million discouraged workers who had been so categorized for more than a year. As of July 2004, the less-than-a-year discouraged workers total 504,000. Adding in the netherworld takes the unemployment rate up to about 12.5%.

The Clinton administration also reduced monthly household sampling from 60,000 to about 50,000, eliminating significant surveying in the inner cities. Despite claims of corrective statistical adjustments, reported unemployment among people of color declined sharply, and the piggybacked poverty survey showed a remarkable reversal in decades of worsening poverty trends.

Somehow, the Clinton administration successfully set into motion reestablishing the full 60,000 survey for the benefit of the current Bush administration's monthly household survey.

Posted by: ran | Mar 7 2008 14:49 utc | 4

Here's a simplified version of b's post.

A seesaw with a house (image) on one end of variable size, representing dollar real estate value supporting debt (money creation) on the other end. The pivot point is not in the middle; it has been shifted way over toward the debt end so that the mortgage assets can support 10, 20 or 30 times its value in debt. Just for added fun lets put a big oxyacetylene flame under each end to add motivation for keeping the seesaw balanced.

All is fine as the total housing value keeps expanding and the workers on the other (debt) end gleefully add more money to balance it out; their glee even motivates them to further shift the pivot point in their favor when the govt isn't looking or can be paid not to look.

So as the debt workers siphon off more of the new money and less is available for new housing starts, the house image slows its growth to near zero. The debt workers should be worried but they now have mechanisms like derivatives designed to suck more money out of their wrinkled up source and all appears to be flush until the house image starts seriously shrinking.

That dazzling golden egg is disappearing. That homeowning payment source is running dry; most of that spouting cash generator stream has gone elsewhere, not to the wage earner with a monthly house payment. Our seesaw tilts precipitously as the short heavy debt end falls. People are bailing out on both ends.

Is there any way to fix this or do we need a new seesaw? Perhaps a fixed pivot point somewhere in the middle?

(This image is totally off the top of my head and not intended as criticism or disrespect for b's insightful original post. The seesaw is certainly incomplete and fraught with error.)

Posted by: rapt | Mar 7 2008 14:55 utc | 5

@CL - 2 - Bernanke will use his helicopter and throw money out of the door.

In fact he is already doing that. Ínterest rates lower than inflation rate is already expensionary.

The fed has more tools. Next to interest rates it can lend money to banks. It already does this in huge amounts now and seems to take even the shabiest CDO as collateral.

But lowering the interest rate helps nothing in this situation. The U.S. must save more and spend less. It must let people get higher interest rates on their savings than the inflation rate. Who wants to save when you get less interest back than inflation eats up?
BTW - a question too readers. When I write stuff like above I never knwo if it is written too simple or too nerdy. (The above is likely too easy?)

Is it a. understandable? b. of interest?

Some feedback is welcome.

Posted by: b | Mar 7 2008 15:02 utc | 6

b -

Brilliant post. Neither too simple or too nerdy. You sound a little like Billmon, I might even dare to say!

I lurk a lot, this is my first comment.
The insights of the regulars at this 'bar' are very worthwhile.

Posted by: foilhatgrrl | Mar 7 2008 15:07 utc | 7

The perceived government guarantee for Freddie and Fanny debt does not exist. The market value of their debt was 'faith based' and that faith has eroded.

Does this sound familiar, the S&L scandal where various permutations of FLIC gave people the false idea that their savings were back by the Feds? Wasn't a Bush involved in that, theft, also?

Posted by: IntelVet | Mar 7 2008 15:08 utc | 8

It's great, b.

Thanks for this post as I am HUGELY interested and your writing on this topic always helps clarify what I have been reading elsewhere. I constantly marvel at the breadth and depth of your knowledge.

I can't believe the teeter-totter has not yet toppled. How much longer can the denial keep going? When is the big crash coming?

Posted by: Hamburger | Mar 7 2008 15:12 utc | 9

Here come the helicopters: Federal Reserve Announces Bigger Auctions to Banks to Help Ease the Credit Crisis

The Federal Reserve said Friday it is taking bigger steps to ease the nation's credit crisis, including increasing the amount of money it will auction to banks this month to $100 billion.

The Federal Reserve said it will raise its planned March 10 and March 24 auctions to $50 billion each, up from the $30 billion limits it had previously announced. The auctions serve as short-term loans to get banks the cash they need to keep lending to their customers.

Fed officials said in a statement they planned to continue the auctions for at least six months, and would move to even larger auction amounts if needed.

Posted by: b | Mar 7 2008 15:17 utc | 10

Your posts have been great!
I'm happy with both simple and nerdy comments. Sometimes I have trouble with the nerdy but a challenge is when real learning occurs.
Sorry I have been too busy to comment lately.

Posted by: Rick | Mar 7 2008 15:23 utc | 11


Great post...Simple enough for me to understand and links for the more intelligent to deep-dive is they so desire.

Posted by: SimplyLurking | Mar 7 2008 15:45 utc | 12

Undestandable and interesting.
I wonder if Billmon has been able not to hang himself at seeing the complete clusterfuck US economy has become. Or he's just shadenfreuding in his home sipping fine whiskey.

B - 6: Well, throwing money out of the door, expansionary policies and the like, we're speaking of the perfect recipe for continued inflation if not hyperinflation, aren't we? Can they be that retarded?

Posted by: CluelessJoe | Mar 7 2008 15:58 utc | 13

@Clueless - 13 - we're speaking of the perfect recipe for continued inflation if not hyperinflation, aren't we? Can they be that retarded?

Yes and yes. They are in panic-mode and see a systemic financial crisis coming. They try to inflate it away which only will make it bigger.

As I have written before - the money the Fed pumps towards the banks will NOT be used to lend back out to hedgies or people who want mortgages. The banks with the cash will use it to repair their balance sheets - i.e. make profits so they can restock their capital base. Which markets will they use to make these profits - commodities.

Below a song I have stolen from a comment at Calculated Risk

probert writes:

Capital keeps falling on my head
And I simply redirect it to my fav-o-rate
Hard commodi-ty
Oil keeps on rising and
Financials keep on falling...

Capital keeps falling on my head
I'm telling bernanke man to stop it right a-way
Stop issu-ing-debt
People keep on panicking
They don't know what's the matter...

Posted by: b | Mar 7 2008 16:11 utc | 14

You want easy to understand? How about "A Shitstorm is Coming"!

Posted by: R.L. | Mar 7 2008 16:53 utc | 15

Re 9: my Q: How much longer can the denial keep going? When is the big crash coming?

a commenter at Elaine's seems to have an answer:

Now after 8 years the USA has another election. Bernanke is doing his damdest to keep the repuclicans in office. Interest rates will be lowered several more times this year, right up to election week. If this allows the republicans to retain office, the interest rates will stay low; if the dems win or Ron Paul wins, a strong dollar will suddenly be the FED mandate. Interest rates will sky, and all the crap that awaits will be unleashed at once.

Does this sound about right, b? Others?

Posted by: Hamburger | Mar 7 2008 17:05 utc | 16

This is a very good post, b. Clear enough for those of us without an economic background to follow and insightful enough for those with one to take the time to read. I'm always glad to read your thoughts and your links about the economy.

It is an area I ignored for years as seemingly arcane and somewhat boring, but I learned from a contract stint at Freddie Mac about 10 years ago (reading system code to produce a user manual) that I was no dumber and at least a bit more responsible than the average manager at a major financial institution (a scary thought). They really will game the system to benefit themselves at the expense of the rest of us. We, the general population, ignore this stuff at our peril. We need to educate ourselves about economics so we can evaluate who will better manage our economies; statements like "tax cuts generate additional revenue" and "deficits don't matter" might then immediately disqualify someone from being anywhere near our economic life.

I appreciate and sometimes marvel at the time and effort you put into each post you do. As over 1.28 mil page views attest, a lot of other people do as well.

Posted by: lg | Mar 7 2008 17:36 utc | 17

Great post b, it is all very interesting how in some elliptical way (as in #link 16) this pervasive logic has infiltrated everything the administration does. Trying to pad out the economic situation until the next election cycle is not so different than what they are doing in Iraq, with paying off the insurgency to create the illusion things are getting better - at the cost of them becoming much, much worse later, but presumably under a democratic administration. Ya' gotta give em credit in belief though, they'd rather crash and burn everything in sight - than doing the
"socially or economically responsible" thing. Guess they're afraid it might work.

Posted by: anna missed | Mar 7 2008 17:52 utc | 18

@Hamburger - Does this sound about right, b?

It certainly was the hope of the Republicans to keep the walls of the Potemkin city (stock market) standing up until the Dems take over and have to clean up the mess and take the blame for it.

There were three mistakes they made:

1. Markets are hard to control when you don't believe in regulation. Unregulated markets behave in unpredictable ways. They thought they could control the markets without having the tools to control them.

2. The war costs. They did not see the costs of war and its effect on commodities and inflation.

(The war is in some fields of commodities a real problem. Two examples: 1. The emergency build of mine-resistant vehicles cleared the markets of certain special steel variaties. Prices for those varieties shoot up. Other steel prices followed. 2. Tires get used up in Iraq and the army bought all that was available. A friend of mine is working in a crane factory. They had new cranes standing around ready for delievery, but had no tires for those. Delievery delay for new tire orders for a reasonable price was two years.)

3. They thought they could control the Europeans

The European Central Bank has one monetary task. "Fight inflation."
The Fed has a monetary and a political task. "Fight inflation but keep the economy going." Under Republicans the second part was more important and interpreted as "keep our profits high at all costs".

While the Fed ignored inflation and fed a housing bubble festival, the ECB looked at inflation rates and kept interest rates higher.

Now came the emergency. The Fed wants to keep the markets going by lowering the interest rates. But it also has to keep up the dollar. So it hoped and prodded the ECB and the Bank of England to also lower rates. No say both of them. If you are afraid of a lower dollar you better rise your rates.

As the U.S. has no leverage it can use against an independent ECB, Bernanke is now between a rock and a hard place. He can save the stock-market by lowering the rates further, but that would kill the dollar and oil prices would go through the roof.
(There is also a personal story behind this of a very pissed Trichet who wasn't consulted when Bernanke made an unprecedented emergency drop of the Fed rate by 0.75% just because the European markets dropped a few percent that day. That day the ECB lost all respect for Bernanke.)

So three mistakes in the Republican plan:
- Hate for regulatory instruments
- Lack of spending disciplin due to the wars
- Lack of partner behaviour instead of bullying

All these mistakes are classic for Republicans. One could say they screwed up their plan by being themselves. Reagan was a bit smarter than Bush in this. He at least raised taxes 1 1/2 year before he left.

Posted by: b | Mar 7 2008 17:57 utc | 19


As someone who worked at the Fed for 20 years, I thin you are right on the mark. Sometimes it IS all rather simple when you cut to heart of the matter.

As far as timing the collapse though, it's a whorehouse of cards but it's the only house in town. Most people with a sense of justice tend to analyze situations according to the rules and with a eye towards past events. If there's one thing we should see it's that these fuckers just make shit up and change the rules to suit their tastes. They are not going to go bankrupt or go to prison in a world that they created themselves.

Posted by: biklett | Mar 7 2008 18:10 utc | 20

Mozilo, O'Neal and Prince defend pay
tone deaf, absolutely tone deaf. look:

"In short, as our company did well, I did well," Countrywide's Mozilo said.
Actually, your company was going bankrupt, on the schedule you determined.
Stanley O'Neal, who relinquished his title as chairman and CEO of Merrill Lynch & Co. in October after the company reported an $8 billion loss on subprime related investments, argued that his compensation was in line with the broader financial services industry and that his pay was determined as "the board saw fit."
I believe that is the problem under critique.
O'Neal called reports that he collected about $161 million after he stepped down "inaccurate."
Yes, I'm sure they are quite inaccurate. The truth in these cases is always more disgusting.

Posted by: citizen | Mar 7 2008 18:23 utc | 21

Helpful post indeed. Aimed well, to my mind.

Now how about some failsafe ways [for an American] to 1) at least avoid the worst consequences of the dollar devaluation 2) make a profit. Just kidding. My investing acumen could be a negative indicator par excellence. That's why I pay a fee to some manager to handle my meagee retirement cache.

Posted by: DonS | Mar 7 2008 18:36 utc | 22


your decryption of the language of business, such as this excellent post, reveals the truth of the phrase "voodoo economics"

thank you

Posted by: jcairo | Mar 7 2008 18:58 utc | 23

Adding to my comment @19 -

point 3 - the ECB is not willing to follow the fed into hyperinflation

This just in: ECB economist says central banks must chart their own course

The chief economist at the European Central Bank said Friday that central banks were free to chart their own monetary polices, implying that the ECB was under no obligation to cut rates in line with the US Federal Reserve.
"Globalisation does not expand the need for international monetary cooperation beyond an open exchange of views and information," ECB economist Juergen Stark told a conference organised by the French central bank.
The ECB held its main interest rates at 4.0 percent at a policy meeting on Thursday, with bank president Jean-Claude Trichet stressing that fighting inflation remained his priority.
[Stark] said that a "central bank should not mechanically follow other central banks' policy decisions."

Stark added: "The best international architecture is one in which each central bank has a clear mandate to focus on domestic price stability ... each central bank is well advised to react to foreign developments only if these become relevant for domestic price stability."

I understand that Stark is carrying two messages here:

1. Towards the Fed - "f*** you!"
2. Towards other (smaller) Central Banks - "you are free to tell the Fed "f*** you" and you should do so."

So if I were central banker of Singapur, Brazil, or even Japan I would understand this as a "free hand" to deny any favor to the Fed and a bit of hope that the ECB will cover my back when needed (which will be privately expressed and granted).

Lesson: With a strong currency comes (monitary) political weight.

Posted by: b | Mar 7 2008 20:04 utc | 24

Lesson: With a strong currency comes (monitary) political weight.

Too right! LOL.

Posted by: Hamburger | Mar 7 2008 21:31 utc | 25

On a related note: I read awhile back someone listing all the players in this game called big shitpile and noticed that alumni of Goldman Sachs are everywhere, including Sec. of the Treasury. A few days ago I read someone who was totaling up the known exposure of all the Wall Street banks and investment firms, the ones predominantly run by forementioned alumni. The firm with the least exposure? Goldman Sachs. Coincidence????

Posted by: mikefromtexas | Mar 8 2008 0:55 utc | 26

b, this post is very much of interest to me, no question. And a wealth of information, as well as intelligent analysis, as always.

Re your # 24, Singapur, Brazil, others may play free hands. But Japan won't. BOJ will continue to be Fed's silent partner in the field. See here how they may have helped the Fed postpone this current crisis a full five years the last time around. Or rather, bury it in the system so that it could come back as a systemic crisis, I guess.

How Japan financed global reflation

(Don't let the goldbug link put you off. It was originally published here, now behind a subscription wall.)

One would do well to factor in BOJ as part of the Fed's arsenal, though I don't know enough economics to project how that may play out...

Posted by: Alamet | Mar 8 2008 0:58 utc | 27

Great explanation. Speaking about explanations, I found this little slideshow (with stick-figures) helpful in explaning the subprime crisis.

I have the sneaking suspicion that economics is intentionally presented as much more arcane and strange then it is. Makes it easier to convince people to let the professionals handle it (and handle it they do, to their own profit).

Posted by: a swedish kind of death | Mar 8 2008 1:44 utc | 28

A really great post, b. And excellent comments too.

To Alamet @27, I think part of the BOJ answer is that they are currently already charging only 0.5 percent interest rate. This after years of zero interest rate that fed a "carry trade" of borrowing cheap and investing in the U.S., Europe and elsewhere with better returns. In times like we're witnessing now, they can only help the U.S. Fed to a limited extent, I think, since they have so little room to reduce and there is a dramatic decrease in liquidity seeking out the carry trade. (Other commenters please correct me here if this is misguided, as it may well be.)

Question for B., Biklett, others who may understand the mysterious ways of the Fed, and specifically referencing comment #10 above: when the Fed decides to hold these "auctions", they are in essence just printing more money. Right? Especially when they have made clear they would take worthless or heavily devalued crap like mortgage-backed securities as collateral? So it is another way of inflating their way to stability, they hope? And if the "loans" are not repaid and the "collateral" is worthless, does the borrowing bank or institution pay any price, or is it just us hapless citizens who end up holding the bag?

Posted by: Maxcrat | Mar 8 2008 1:53 utc | 29

EconLog's Bryan Caplan points to a Powerpont presentation on how to explain the subprime crisis to ones family.

Bernhard, would you agree with Rob Blake over at Seeking Alpha that Fannie Mae and Freddie Mac are on the brink of choking on a piece too big to be swallowed by the greedy guts?

In Office of Federal Housing Enterprise Oversight [OFHEO] Director, Mr. Lockhart’s words before the Senate Banking, Housing and Urban Affairs Committee on February 7, 2008, just days before the Stimulus Act was made law:

Jumbo loans would present new risks to the already challenged GSEs. The prepayment and credit risks are different than those of conforming loans. The provision also pushes the GSEs to increase their geographic concentration in some of the riskiest real estate markets.

Roughly half of all jumbos are in California. Underwriting them successfully will require new models and systems to ensure safe and sound implementation. Capital also would present challenges even if all newly conforming mortgages are securitized. A $600,000 loan requires as much capital as three $200,000 loans.

I contacted the OFHEO and got a media representative on the phone in the hopes they would comment on what the Director meant by “new models and systems to ensure safe and sound implementation”.

I got a perfunctory, “We’ll call you back”… as of post time no call back was received.

So here we go again. The GSEs want some legislation that will help their bottom line but possibly put the solvency of our secondary market in danger…and they get it…over the voiced opposition of their own regulator.

In the same hearing, Mr. Lockhart reported some outlandish and worrisome facts:

Measured this way, each Enterprise’s leverage increased dramatically in the first nine months of 2007, exceeding 80 times their fair value of equity as of September 30th. Or if you look at it the other way around, there is only 1.2 percent of equity backing their mortgage exposure.

For the first three quarters of 2007, they have each lost $8 to $9 billion in fair value of equity. Their combined fair value equity at the end of the third quarter was $58 billion compared to $5.1 trillion in mortgage exposure.

This is astonishing. Talk about a company on tilt. The GSEs combined have a little over a penny for every $1 of exposure!

And yet every MBS they issue would still be given a AAA rating…including these new “jumbo mortgage” masquerading as conforming securities.

His reasoning seems sound, and if his predictions are right then we better fasten our seat belts. It's going downhill.

Posted by: Juan Moment | Mar 8 2008 5:35 utc | 30

Sorry, didn't see SKOD's earlier link to the stick figures .pps show before I clicked the Post button. Ah well, better twice then not at all :)

Posted by: Juan Moment | Mar 8 2008 5:40 utc | 31

Escalation should be the watch-word for the next ten months.

While American citizens are genuinely excited about change
most fail to recognize silence as an accurate measure of complicity.

Let Telcoms snoop. Let Columbia rattle South America. Let Israel
go shoah against Palestine.

Inflaming international strife benefits America's imperial ambition
while domestically we get ready to blow six hundred dollars.

What happens if the net breaks??? Where will we go?

Posted by: lizard | Mar 8 2008 6:17 utc | 32

Bernhard, would you agree with Rob Blake over at Seeking Alpha that Fannie Mae and Freddie Mac are on the brink of choking on a piece too big to be swallowed by the greedy guts?

Yes - they are likely gone - that is the reason why Bloomberg wrote "Agency Mortgage-Bond Spreads Rise" - it is slowly sinking into the mind of markets that the GSE are a huge, huge shitpile and are at risk and without real backup.

What can the U.S. governement do if they go bellly up? Increase the deficit from 9 trillion to 14 trillion in one moment (worst case) by taking the GSEs on the governmnet balance sheet???

Posted by: b | Mar 8 2008 6:24 utc | 33

@ mikefromtexas #26

With $100-a-barrel here for now, Goldman Sachs says $200 a barrel could be a reality in the not-too-distant future in the case of a "major disruption."

Goldman on Friday also boosted by $10 the low end of its 2008-2012 projected range for crude to $60 a barrel -- significantly lower than current prices, to be sure, but a possible mark for oil if "normalized" trends return to the marketplace.

With the dollar's fall continuing and financial markets roiled by the credit crunch, commodities like oil have been drawing the fancy of increasing numbers of investors. Accordingly, Wall Street firms have been eager to adjust forecasts to incorporate fresh data on the global economy and energy supplies.

Goldman analysts Arjun Murti, Kevin Koh and Michele della Vigna said prices have advanced more quickly than Goldman had forecast back in 2005, when it predicted a range of $50 to $105 a barrel as part of its "super-spike" oil theory.

"We characterized the upper end of the band as more likely to be driven by geopolitical turmoil and that recession was a key risk to our view," the analysts said. "In fact, oil prices have reached $100 a barrel without extraordinary turmoil, and the U.S. currently appears to be in recession."

Tacking on $15 a barrel to all of its oil estimates, Goldman now sees average selling prices of $95 a barrel for 2008, $105 a barrel for 2009 and $110 a barrel for 2010. The high end of its range is now $135 a barrel -- but Goldman hinted that prices could be headed even higher.

"As the lack of supply growth and price-insulated non-OECD demand suggest a future rebound in U.S. gross domestic product growth or a major oil supply disruption could lead to $150-$200 a barrel oil prices," Goldman said.

While saying it has a bullish long-term outlook, Goldman acknowledged that oil prices could correct from recent highs.

Favorite picks among energy stocks include Frontier Oil (FTO: news), Cabot Oil & Gas (COG: news) and Pride International (PDE: news) in the U.S. as well as Eni (E: news), Repsol (REP: news) and Gazprom overseas.

Goldman also reiterated its view that oil prices could fall as normal market conditions return over the next four years.

"The core of our 'super-spike' view is that oil prices will keep rising until demand declines globally on a multiyear basis, resulting in the return of excess capacity and a lower cost structure," Goldman's analysts said. "Given this view, once excess capacity returns, we think prices can move sharply lower."

The analysts reiterated their "attractive" view on the European energy sector, but kept a neutral view on the Russian sector due to costs. It upgraded Transneft and Sibir Energy to neutral from sell after underperformance, and cut Imperial Energy to sell from neutral on capital-spending requirements.

Posted by: charmicarmicat | Mar 8 2008 6:47 utc | 34

@ASKOD (#28): "I have the sneaking suspicion that economics is intentionally presented as much more arcane and strange then it is."

You can say the same thing about politics in general. The way things work is never as convoluted as it is presented (probably not a coincidence that Bernhard has a background in engineering and also has such clear insights into how things work). It keeps the populace largely apathetic and allows "experts" to work with extremely little oversight when the average person internalizes that they aren't qualified to have an opinion.

The American Psychological Association actually voted in the early 20th century (sorry, don't recall the year) to refer to the id, ego and superego in Latin rather than English (in other countries, they refer to them in the native languages as simply "it", "I" and "above I") just to keep amateurs in the dark. The Catholic Church kept masses in Latin for so long for a similar reason. There are countless more examples of this, and it is done consciously, at least in the beginning.

That's part of the reason I have had such impatience in the past with leftists who resort to jargon to obscure facts rather than present them clearly, as if the "winner" of a squabble is the one who can be the most cryptic. Just because you don't understand something doesn't make it necessarily profound, and it's another reason why I am so thankful for (most) of the community here.

Posted by: Monolycus | Mar 8 2008 8:40 utc | 35

Lets not leave out the Iraq debacle which contritbuted to this disaster. If US oil companies gained control of the Iraq oil spigots things would be different. When you are the number one oil glut on the planet those high prices take a toll. Heating a 5,000 SF McMansion and driving to work in a gas guzzler is hurting the pocket books of the well to do also. Witness Thornburg Mortgage Inc. joining the crash. Trying to pay down all those loans while food and energy costs are rising compound the problem:

According to a recent study by the Federal Reserve, homeowners took out more than six hundred billion dollars in home-equity loans between 2004 and 2005 alone—ten times as much as they had a decade earlier—and are spending much of it on personal consumption.

People refer to the Iraq invasion as the biggest US strategic blunder in history for a reason. The US has shot themselves in the foot. The result has been shovelling hundreds of billions of dollars into the pockets of their competitors both directly and indirectly. Russia, Iran, Saudi Arabia and Venezuela collect the cash and Europe gets its oil for cheaper with a higher valued Euro. Even China benefits because the hatred of the invasion of Iraq has driven other countries away from US business.

Posted by: Sam | Mar 8 2008 11:37 utc | 36

@35 - the last paragraph reminded me of slothrop - long densely packed profound sounding posts upon first reading. Closer examination sometimes revealed non-sensical sentences and passages. Regardless, the cryptic nature of his posts certainly didn't help his argument (nor did his insistence that US history began in 1991) as much as it did my vocabulary.

Ah experts. I'm certainly thankful for those that came to r'giap's rescue. Experts are a double-edged blade especially if one's ego is rampant.

I'm no expert on quantum physics, but I do have some understanding of it from reading experts. Any expert worth his water can take an arcane subject and put it in more simple terms to provide clarity - as b heroically does regularly for economics.

There is a DVD called "The Secret" that uses quantum explanations for what it falsely claims. On the related blogs there is lots of pro and con chattering.

When I asked for a simple explanantion of what the quantum realm decribes, I received lots of profound, poetic even, sounding replies endlessly regurgitating the arcane, strange sounding language plagiarised by these "experts". They could talk the talk from the snake-oil salesmen on the DVD, but it was obvious the posters had no comprehension as none handed me a nutshell in their own words.

In the end people will believe whatever they want to, regardless of the facts or how they are presented, especially if the subject touches them emotionally

Posted by: jcairo | Mar 8 2008 12:56 utc | 37

Jaw-dropping graph:

Total Borrowings of Depository Institutions from the Federal Reserve

Posted by: Hamburger | Mar 8 2008 15:30 utc | 38

That is one spikey graph, but what does it measure? Is "Depository Institutions" banks? And this is how much they in total have borrowed from the Federal Reserve?

Posted by: a swedish kind of death | Mar 8 2008 15:38 utc | 39

B, for me the pitch is at the right level. But then economy wise I am probably in the low (D) section of the audience. Your posts on these topics help me see things more clearly. Also, the comments tend to be good, so that would seem to indicate that the posts are generalist enough.

Posted by: Tangerine | Mar 8 2008 15:48 utc | 40

Is "Depository Institutions" banks? And this is how much they in total have borrowed from the Federal Reserve?


A commenter on the graph here says:

Borrowing from the Fed in the last two months was an order of magnitude greater than almost any time in history (the other blip is apparently the Continental Illinois failure in 1984). More can be expected, since reserve requirements have withered away almost to nothing.

Dare we say: Insolvency?

Posted by: Hamburger | Mar 8 2008 15:50 utc | 41

What was colossal strategic blunder for US:UK, (in Iraq on par with Soviet blunder
in Afghanistan as a trigger event, but not ultimate cause of Perestroikan collapse,
despite all the "roses and chocolates" rhetoric going in,) was that a Neo-Zi cabal
of an oil-and-arms cartel led US:UK down the garden path to a financial slaughter.

Thus this week, unsurprisingly, Carlyle Group defaults on debt-call obligations.
Cerebus' means to keep the Lucre and walk away, and I mean big "L", very big "L".
That unraveling Leverage is truly, historically catastrophic. What is, is what is.
(This'd be the part in the movie where the stern of Leviathan heads for the abyss.)

O'Neal called reports that he pretended to be a woman in the lifeboat "inaccurate."
Ironic, what began with Reagan will end with Reaganaut Prince, Monsignori McCain.
Ironic, what began with post-Viet Nam Freeze, will end with post-Gulf III Freeze.
Ontogeny recapitulating phylogeny proven true, in plain view, prime time reality.

Gut tells me we'll come out of this some time in the 1950's, those not debt-slaves.
11% homeless now, might hit 20% ... for the rest, back to Wonder Bread and Velveeta!
SCOTUS makes legal class-action -vs- 401(k) pension funds, now comes that roil down!
So it's gonna shit bubbles around here, but hey, don't let the sun catch you crying!

Posted by: Peris Troika | Mar 8 2008 19:54 utc | 42

@jcairo (#37): "the last paragraph reminded me of slothrop"

Possibly because the last paragraph was specifically referring to slothrop and one other... which is more than I should say, but I have more than 750 ml of Jack Daniels in my belly and I have already engaged in three barfights this evening so discretion is not the paramount of my virtues at the moment. Way off topic and I will let it go until I have sobered up.

Posted by: Monolycus | Mar 8 2008 20:37 utc | 43

Hmm - looks like a few people are waking up to how big the problem now really is.

Banks face "systemic margin call," $325 billion hit: JPM

NEW YORK (Reuters) - Wall Street banks are facing a "systemic margin call" that may deplete banks of $325 billion of capital due to deteriorating subprime U.S. mortgages, JPMorgan Chase & Co (JPM.N: Quote, Profile, Research), said in a report late on Friday.

JPMorgan, which sent a default notice to Thornburg Mortgage Inc. (TMA.N: Quote, Profile, Research) after the lender missed a $28 million margin call, said more default notices and margin calls were likely. The Carlyle Group's mortgage fund also failed to meet $37 million in margin calls this week.

"A systemic credit crunch is underway, driven primarily by bank writedowns for subprime mortgages," according to the report co-authored by analyst Christopher Flanagan. "We would characterize this situation as a systemic margin call."
The JPMorgan report included a revised bleaker forecast for subprime-related home prices. The bank now sees prices falling 30 percent, from its prior 25 percent forecast. Those prices have declined 14 percent since mid-2006, JPMorgan said.

Hmm - when the JPM guy is talking about "$325 billion of capital" what does this mean. A $325 billion of writeoff in loans is a quite low number. A $325 billion in banking core capital losses could happen when $3 trillion of mortgages have to be written off (Leverage factor 1:10). That means several of the big banks will default. Is he that bleak? Don't think so - it is likely that the Reuters writer doesn't get the difference.

Krugman commenting on a recent talk by Fed NY boss Tim Geithner:

That’s pretty close to saying that the financial markets are melting down.

Geithner then goes on to describe the policy measures being taken. And here’s the thing: I don’t think it’s just me, the actions sound trivial compared with the problem. He more or less admits that credit markets are worsening faster than the Fed can cut rates, so that money is effectively getting more expensive, not cheaper; the other measures he describes sound minor. Rearranging deck chairs — that may be too strong, but it’s pretty unreassuring.

So what should be done? I’m not sure (and I’m thinking about it, hard.) For now, I’d just say that this is really, really scary.

Posted by: b | Mar 8 2008 21:05 utc | 44

Good detail on TAF:


Posted by: biklett | Mar 8 2008 21:34 utc | 45

@biklett - yes - interesting idea - quiet bank nationalization by the fed - (quite wonkish too) - thanks.

Posted by: b | Mar 8 2008 21:59 utc | 46

Another metric index bites the dust.

After notching a 13.7 percent increase in import costs YOY and 1.2 percent in January,
in the US Bureau of Labor Statistics U.S. IMPORT AND EXPORT PRICE INDEXES, come this:

"Due to budget constraints, beginning with the January 2008 release, the price series for inbound ocean liner freight, and inbound tanker freight will no longer be published."

This is the church, this is the steeple, open the doors, and see all the sheeple.

Waterboarding is still legal.

Posted by: Jorge Kulembork | Mar 9 2008 4:58 utc | 47

Linda J. Bilmes and Joseph E. Stiglitz in WaPo: The Iraq War Will Cost Us $3 Trillion, and Much More

It's a bleak picture. The total loss from this economic downturn -- measured by the disparity between the economy's actual output and its potential output -- is likely to be the greatest since the Great Depression. That total, itself well in excess of $1 trillion, is not included in our estimated $3 trillion cost of the war.

Others will have to work out the geopolitics, but the economics here are clear. Ending the war, or at least moving rapidly to wind it down, would yield major economic dividends.

As we head toward November, opinion polls say that voters' main worry is now the economy, not the war. But there's no way to disentangle the two. The United States will be paying the price of Iraq for decades to come. The price tag will be all the greater because we tried to ignore the laws of economics -- and the cost will grow the longer we remain.

If Obama picks up on that, connect the economy misery to the cost of war, he has a good chance to win.

Posted by: b | Mar 9 2008 9:36 utc | 48

The micro bottlenecks will bite quicker than macro bleeding: tires, steel, ordnance, consumables. Even with surplus capacity. The war is lost, logistically.

Posted by: dohboy | Mar 9 2008 13:34 utc | 49

American History for Schools, 1776 - 2008

2000-2008 The Second Bosch Wars

"After the declared end of the Third Gulf Oil War, Congress
had passed the Corn Law, imposing a heavy duty on Brazilian
ethanol distilled from sugar cane, and passing that duty on
to American ethanol from corn, in the form of a tax subsidy.

It was thought that if cane ethanol came in from Brazil, it
would be sold too cheaply, then the farmers and landholders
and agricultural corporations could not get enough for their
corn to enable them to make a rich livelihood, and that
marginal land would go out of cultivation.

In this way bread and meat were made very much dearer than
they would have been if Brazilian sugar ethanol had come in,
and with them the price of agricultural land, driving many
who had before made their living by the soil, into urban
ghettos as indentured wage-slave refugees.

Besides this, there was no care taken for the health of the
poor, either in America itself, where 10% of the population
were found homeless and destitute, and 18% without healthcare
of any kind, as in the world at large, where subsidized corn
prices soon led to mass starvation on a global scale.

When people are dissatisfied, the first thing they think of
usually is that if they had political power they could set
everything right. So it was now. Large numbers of Americans
supported what was called, "The People's Charter", and were
therefore called "Populists", or "Paulists" for a popular
statesman of the time, who advocated against Federalism.

At that time both the ruling gentry in WADC, the financial
elites in NYC and the corporate merchant classes were very
much alarmed when they heard what a large number of Paulists
there were, and that dissatisfaction had become so widespread.
Certainly the mass starvation around the world was not theirs
as a concern, but rather, that Paulists would stop shopping,
and with it, the flow of taxes and fees upward to the gentry.

The then Republican President, His Royal Haughtiness George
W Bosch Jr, even went so far as to speak to all the plebians,
declaring that, "...whatever ye dost, do not stop shopping!" [ital. ed.]

The Paulists presented their Commodities Reform Bill at the
Republican Convention that September in the State of Minnesota.
Whereas the nomination selection process has already settled
on another Reaganaut, Senator John McCain, the Paulist's Reform
Bill was rejected by the gentry in private, and never brought
to the convention floor as a plank in the Republican platform.

The news was received with a torrent of indignation. Meetings
were everywhere held to expunge the Federal government laws
and tariffs from State affairs, and so reduce the staggering
hyper-inflation on food, energy and commodity materials so vital
to the health and economic well-being of the nation. In some
cities with large homeless or underclass populations, riots,
arson and mayhem broke out. There was Corn Fever in the air!

The two Democrat candidates standing for election at that time
were both allied with the Neo World Order, a convenient mix of
Free Trade and Protectionist Socialism serving the high elites.
They would no more touch the Corn Law question, than touch the
hands of the poor and homeless rabble wandering city streets.

And so, through that summer, commodities inflation soared from
13.5% (2007), to 21% in real terms by the time of the elections.
The US dollar, having fallen in value against world currencies
by nearly half since HRH Bosch stole office, and the price of
oil having risen by well over truly usurous and astounding 700%,
with it, the costs for food to eat and fuel to heat, citizenry
began to rise up in places, demanding an end to the Corn Law.

The soon-to-be President McCain was forced to address this issue
as a promise in his campaign, and from there it was taken up
by those Congressmen also standing for re-election, until by
the time of McCain's inauguration, every newspaper and magazine
not controlled by Rupert Murdoch's Clear Channel Media spoke
of the egregious hyper-inflation in food and energy commodities.

Senator Paul, having regained his seat in Congress, introduced
the Kava Amendment to the Farm Bill of 2009, which declared an
end to the Brazilian ethanol tariff and an end to corn subsidies.
But his amendment went farther, suggesting that it is an inherent
right of the people to be free from usury, free from speculation
in commodities which affect human health and well-being.

Although the combined might of the gentry and main stream media
allied against it, Paul's 36-hour long filibuster carried the
day, and so made it a law that henceforth, only providers and
processors of commodities may carry on trade in food and energy,
and that only They, in so far as their pro-rated share of the
overall bounty, and in so far as they were able to make delivery
and/or take delivery, may speculate in commodity price futures,
and that outside capital attempting to seize control of these
producers and processors and thereby indirectly speculate in
the commodities trade, would henceforth be taxed by 50%.

Congress's abolition of the Corn Law and Paul's Kava Amendment
had an immediate beneficial effect. The price of corn plummeted,
and with it the price of gasoline as Brazilian ethanol flooded
into the country. With lower grain and fuel costs, the prices of
meat fell precipitously as well, and the prices for shipping and
deliveries, and for housing construction materials, and for all
matter of previously artificially-usurized goods and services.

With the rampantly spiking Fed Rate carry trade speculation
in commodities now averted, limited only to precious metals,
and precluded against all types of food, energy and materials,
the American economy began to slowly and steadily re-balance.
That mass global starvation which had threatened to turn the
world into a seething cauldron of violence subsided, and with
it the violent fluctuations in prices and supplies which had
threatened to destroy the global economy.

The world's leaders met at UN headquarters in New York City
on July 4, 2010, and together declared unanimous support for the
American ideals of Freedom and Democracy, putting an end forever
to the Neo-Zi Reaganauts, elevating instead Paulist Republicans.

President McCain, in the dodderage of his final years in office,
came to be treated well by history as the Father of Global Renewal,
in bringing an end to Usurists and Speculatists, which have come
so very near to destroying the World, in their Greed for the Lucre."

Posted by: Salma Gundi | Mar 9 2008 19:24 utc | 50

I like the coverage this is getting all over the internet. There have been some good post on the blogs at Huffington Post. If everyone here gets a chance read Ravi Batra.

The thrust of his argument is printing to many dollars does not cause inflation. All money is introduced as debt. That is our current system. But when its introduced as debt, that means there is never enough "real" money to pay it back. If money is introduced as a ledger entry, where is it all. The answer is its not there. Batra wrote a book called "Debt Virus" that explains this. The dollar is a piece of paper for the exchange of goods and services.

Inflation can only be caused by the ability to raise prices. Now, why can oil or other items go so high? Because of three things. First, we, the US, no longer makes enough things to create enough wealth to balance out debt. You must create value added products to create wealth and our economy isn't doign that making the economy out of balance. Second, to much national debt causes a downgrade of US debt, or a de-basing of US credit. Since all money is introduced as debt, others want more money to loan the money. It like an individual and a credit card. As person with a good credit score can get a credit card with less interest. The opposite with a bad credit score. The US credit score has been downgraded. Right now the Fed is lowering interest rates to help banks like Greenspan did in the late 1980s and early 1990s. They'll borrow the money at nearly nothing and use the arbitrage to get their balance sheets strait. Third, extrapolating on pints above, we have too much national debt, individual debt and we have no savings. You can't have an economy that far out of balance. You can't loan money or create money as our system works without something to back it up. With housing prices falling, thats the individuals biggest asset, we have no credit.

So, the bottom line is, the country is bankrupt. If we did the smart things and printed the money and introduced zero debt over the next decade, we could slowly get out of this situation. Otherwise, the way the current system works, we need massive money infusions and massive bankrupting to clear up our national books.

Thats my take.

Posted by: jdp | Mar 9 2008 19:38 utc | 51

b> A deleveraging spiral is in full motion now. It feeds inflation and decreases the value of the dollar.

This is only true if and only if either the Fed or the Treasury monetize the assets at equal or greater than face value.

If not, then you will have destruction of money and mass selling of assets from margin calls. This is very much deflationary.

Considering that the Fed will not monetize at face value (they haven't so far), and will certainly not montize all losses (they haven't so far), I think the idea of inflation (or even hyperinflation) is premature.

I don't deny that someone high up might decide to do something stupid like buy up junk at a price a used car salesman would be proud of, but this is unlikely in the immediate future.

Posted by: | Mar 10 2008 0:33 utc | 52

@52 - Considering that the Fed will not monetize at face value (they haven't so far), and will certainly not montize all losses (they haven't so far), I think the idea of inflation (or even hyperinflation) is premature.
For a bank, debt is an asset. Through the recent TAF-action the banks are giving CDO's and other non marketable debt to the Fed and get back marketable treasuries, not printed dollars. So in a narrow sense this is not monetization. But the bank can use the marketable treasuries to get real money and to by corn futures and the like. Opps - now corn prices increase -> inflation.

@51 - The thrust of his argument is printing to many dollars does not cause inflation. All money is introduced as debt.

People on an Island own a total of 1,000 perls, there form of money. There is a limited number of goods on the island and people trade these goods using perls as a currentcy. As each one makes something different there is lot of exchange and trade on the island.
Now imagine two situations:
a. Suddenly the total number of goods is halfed by some natural catastrophy.
b. Suddenly the number of perls is doubled by a big find of perls.

What happens to prices for goods in a and what in b?

Posted by: b | Mar 10 2008 6:25 utc | 53

In a. you have the ability to raise prices.

In b. you have money that can be saved as long as the economy isn't out of balance like a. That isn't our current economic metric.

We are short of liquidity, thats why banks are borrowing and being infused. If liquidity was in equilibrium everyone would be able to pay off debt.

The dollar or Euro is nothing more that a mode of payment. I work, I get paid for that work. I go to the grocery store, I buy something someone else made using a mode of exchange.

The dollar having value and trading dollars is a game. When a country wants more for a barrel of oil, its because the system is out of balance and they have lost faith in that country. Its all psychological. You know, "In God We Trust" or that we put the founders on the greenback thats to add a notion of faith. In England its the queen. Currency traders and how they view the dollar is a false dichotomy. The US economy is losing its credit rating because of falling housing prices and an unbalanced economy.

Posted by: jdp | Mar 10 2008 11:56 utc | 54

askod (28) - This cracks me up. I still don't really get it but thank you. It's good to laugh.

Posted by: beq | Mar 11 2008 1:00 utc | 55

I just walked into this post. I wish I could add something of subtance to all of this but I cant. All I can say is that it all seems very scary. I ve been searching around and trying figure out what deleverageing means. I read on another blog that what we are experiencing is a world wide deleveraging. I understand the explanation of freddie mac and the bond holders, but what is happening world wide. Your input is appreciated. thanks.

Posted by: eddie | Mar 18 2008 5:48 utc | 56

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