March, Tuesday 20, 2012

DOW – 68 = 13170
SPX – 4 = 1405
NAS – 4 = 3074
10 YR YLD -.01 = 2.37%
OIL – 2.41 = 105.68
GOLD – 12.70 = 1651.80
SILV - .76 = 32.26
PLAT  - 28.00 = 1659.00

Yesterday the S&P 500 moved above the 1400 level, and we mentioned how it was the highest level since May 2008, and it was 10% below the record high of October 2007. It's also worth noting that the first time we hit 1400 was July 1999. We could call it a “Lost Decade” but we're heading for 13 years.

Fed Chairman Ben Bernanke delivered the first of four lectures today at George Washington University.Bernanke used  'It's a Wonderful Life' as template to explain what a central bank can do. Not many of the students have seen it. Bernanke says the Fed is a lender of last resort to banks, and without a central bank, depositors couldn't get cash from a troubled bank. And financial panics led Congress to consider establishing a central bank. It sounds like Professor Bernanke was smoking something before delivering his lecture.

A gold standard is a "partial alternative" to a central bank, Bernanke says. But they are far from perfect. He says, there is an awful waste of resources mining gold and bringing it to the basement of the New York Fed. Under a gold standard, a central bank has no flexibility to lower rates in recession and raise them during periods of inflation. Apparently none of the students were willing to ask if that was the point of the gold standard. Bernanke says other problems with gold standard is that it was subject to speculative attack and forced countries on it to maintain a fixed exchange rate that transmitted bad policies in one country to another. There were about a dozen things Bernanke doesn't like about gold.

Bernanke says the four main causes of the Depression. Economic and financial repercussions of World War 1, gold standard, the stock market bubble and financial panic and the collapse of major banks. And the reason why we got out of the Great Depression was abandoning the gold standard helped the economy recover.

So, I'm following the Propaganda Lectures and I'm wondering how Helicopter Ben could be so incredibly stupid. I'm not saying a gold standard is the answer to our economic problems, merely that Bernanke's analysis is extremely misleading. Then I think Bernanke may be making his own Cross of Gold Speech, but  he's just using code and he really means “Cross of the Euro” but he can't say it out loud. Then I realized Ben needs our compassion. Poor Ben is being sent out on public to try an sell the idea that the corrupt bankers are good for the people and the economy. This concept will surely destroy any remaining brain cells and is an imminent threat to his mortal soul.

The Fed is being attacked from both the left and the right, with liberals criticizing it for not doing enough to bring down unemployment, and conservatives blaming it for doing too much and risking faster inflation. The lecture series — the brainchild of the Fed and the first by a sitting chairman — was  streamed live on the central-bank’s website. Afterwards, it will be posted on the Fed’s YouTube page. The central bank said transcripts also will be available.

Before heading out for his community service, Bernanke was asked about the current state of the economy and the outlook for rates. He said he remains concerned with the pace of growth: "We're going to continue to analyze the financial data we get," he said of the current economic conditions. "It's an interesting period right now. We've seen some improvement, but we've still got a long way to go."

The bond market has been sending clear signals that the economy is showing signs of improvement; still it is likely the Fed will have another round of easing this year. They haven't said anything about it for a while, so there's quite a lot of uncertainty, but I don't think the Fed will just allow the bond market to push rates significantly higher while the Fed maintains a target of 2% inflation.

Deutsche Bank said it received subpoenas and requests for information from U.S. and European Union agencies as part of a global probe into interbank offered rates and that it was also being sued over alleged dollar interbank rate manipulation. The requests came from entities including the U.S. Department of Justice, the U.S. Securities and Exchange Commission, the Commodity Futures Trading Commission, and the European Commission. There have also been a number of civil suits filed in U.S. federal courts, alleging the bank manipulated the dollar London Interbank Offered Rate, or LIBOR, and prices of dollar Libor-based derivatives.

Libor is the benchmark for around $360 trillion worth of financial contracts worldwide. The daily Libor poll asks banks at what rate they think they will be able to borrow money from each other in 10 major currencies and for 15 borrowing periods ranging from overnight loans to 12 months. As the credit crisis took hold, allegations started mounting that Libor no longer reflected reality and authorities undertook to examine whether traders at the banks tried to influence whether the rate went up or down in order to profit on bets on the direction it would go. Could this be the end of Libor as we know it?

Meanwhile, U.S. Treasury Secretary Timothy Geithner went to Capitol Hill and he said Europe was only at the initial stages of a long and difficult path toward fiscal sustainability and warned heavily indebted countries not to resort to draconian measures to fix their budgets. Geithner told the House Financial Services Committee "Economic growth is likely to be weak for some time. The path of fiscal consolidation should be gradual with a multiyear phase-in of reforms.”

The countries at the heart of Europe's debt crisis — Greece, Ireland, Spain, Italy and Portugal — have each taken steps to reduce their budget deficits and impose reforms to make their countries more competitive. Geithner says more cuts are not the answer: "If every time economic growth disappoints, governments are forced to cut spending or raise taxes immediately to make up for the impact of weaker growth on deficits, this would risk a self-reinforcing negative spiral of growth-killing austerity."

The European financial crisis and the ensuing recession are of critical importance. The euro area is the world’s largest economy; its trajectory has a powerful impact on the fortunes of Asia and even the United States. This effect is even stronger at a time when the world economy is so fragile. Time to breathe a sigh of relief, with resolution of the Greek bailout? Not so fast. Greece never actually received a bailout; the bankers holding Greek bonds were bailed out. Greece is likely to need re-adjustments to its plan. Portugal is probably next. There had been a concern that the CDS world would breakdown and cascade out of control but apparently not.  Now comes the hard part of working through a solution to a Euro recesssion that looks more like a depression in some parts of the continent.

So what are we learning about the Euro-crisis? Not all of the debt-burdened countries were fiscally profligate. When the global recession of 2008-09 struck, most eurozone governments went further into deficit, as social welfare and unemployment benefit payments increased and tax revenues collapsed. In some cases, the problem, which the depression aggravated, was a structural deficit associated with overgenerous social spending and insufficient tax collection. This scenario applies most profoundly to Greece. To a certain extent, it applies also to Italy, although a slow trend growth is driving the debt dynamics there. However, the characterization of excess public spending does not pertain to all the problem eurozone countries.

For instance, Ireland, in contrast, was a paragon of fiscal rectitude on paper. In the midst of a boom in financial and housing markets, the Irish government ran budget surpluses. With the financial crisis, the government implemented a complete bank deposit guarantee and subsequently bailed out major banks, resulting in massive increases in the government’s debt. Similarly, Spain was running a budget surplus —until the collapse of its housing market. All the Euro-austerity hasn't been working out so great. Portugal is in trouble; the country has accepted the European Union's austerity measures but it is literally killing the country. In February, deaths in Portugal increased by 20%. The Emergency rooms are now charging double. There is a general strike. There have been severe cutbacks in health and welfare. While the IMF believes that Portuguese debt is sustainable, most practicing market participants who do not have a gun to their head see full well the unsustainable nature of the Portuguese debt load.

And this is the disconcerting part. We've been told that there are scores of smart boys and girls that learned the lessons from the 2008 financial meltdown and they won't make the same mistakes in Europe, however they weren't able to detect the beginnings of the Euro-crisis and  they weren't able to forge commitments to prevent the problems from worsening, and they're not out of the woods yet, not by a long shot. Have they avoided a meltdown? Yes. Have they avoided a grinding economic decline? Not yet and not likely.

“Compared to last year, California state tax collections for February shriveled by $1.2 billion or 22%. The deterioration is more than double the shocking $535 million reported decline for last month. The cumulative fiscal year decline is $6.1 billion or down 11% versus this period in 2011.” I would ask, if California, the largest state in the US is this sad, are the good retail numbers being reported real?

Cora Currier of Pro-Publica recently did a nice, neat, concise breakdown of the numbers behind the recent $25 billion dollar multi-state mortgage settlement.

$3 billion: total for which banks can be credited for offering refinancing to underwater homeowners who owe more than their homes are worth. (There are questions about exactly how the credits will work and why the banks are being given incentives rather than punishment.)

$17 billion: total from the settlement that banks can be credited for offering loan modification ($10 billion) and other forms of “consumer relief” ($7 billion) for underwater borrowers — counted separately from the refinancing incentives.

11.1 million: underwater mortgages in the U.S.

$717 billion: negative equity from those underwater mortgages.

3 million: estimated underwater mortgages owned or guaranteed by government-controlled Fannie Mae or Freddie Mac, which are not covered by the settlement.

5 percent: portion of the country’s underwater mortgages that might qualify for modification under the settlement, according to a Brookings Institute estimate. (Officials have put the number closer to 10 percent.)

Murdoch Street Journal gave this Federal Reserve Pope quiz:

–Name two of America’s founding fathers who feuded over the creation of a central bank?

–Has the Supreme Court ever considered whether a central bank is constitutional?

–What President ended the 19th century version of the Federal Reserve and what was it then called?

–Who was Walter Bagehot and what was his famous dictum?

–What event prompted the creation of the Federal Reserve in 1913?

–Who created the Federal Reserve?

–Name the only state in the U.S. which has two regional Federal Reserve Banks.