Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009), which was translated and republished in Chinese (2014). He is researching a book about Ben Bernanke. He writes a blog at www.AuContrarian.com.
“Groups of women were crushing each other…, a real mob, more brutal for covetousness….the furnace-like heat with which the shop was ablaze came above all from the selling, from the bustle at the counters… There was the continuous roar of the machine at work, of customers crowding into the departments, dazzled by the merchandise and then propelled towards the cash-desk. And it was all regulated and organized with the remorselessness of a machine: the vast horde of women were as if caught in the wheels of an inevitable force.”
Émile Zola: The Ladies’ Paradise (1883)
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The furnace-like roar to prevent financial immolation must move faster all the time. The Wall Street Journal reported in April that “Xie Daoliang’s business survives by trading almost exclusively in a virtual currency, but not by choice. Mr. Xie makes bulldozer treads and other parts for heavy machinery. These days, when he makes a sale he seldom gets paid in cash. Instead, he gets a piece of paper with a value printed on it and a promise from a bank that it will pay at an arranged point in the future. In China’s economic slowdown, businesses are having troubles paying suppliers, and banks are getting shy about lending, so cash is scarce. The notes-a form of IOUs known as acceptance drafts – are increasingly being used instead, and Mr. Xie says they really get around… ‘At the moment, there’s no cash. It’s all just bills,’ says Mr. Xie… ‘It’s unreasonable.’ Acceptance drafts, which are similar to postdated checks but are guaranteed by a bank or state-owned enterprise, have been a fixture of trade in China for years. But corporate treasurers, chief financial officers, people at small loan firms and analysts say that as the economy slows, cutting into companies’ sales, the bills are being passed around more and more. Driving the exchange of paper, analysts say, is an unwillingness, or inability, by banks to meet demand for cash loans, especially from smaller companies. ‘The credit transmission mechanism is breaking, or even broken,’ said Leland Miller, president of the China Beige Book, a quarterly survey of Chinese businesses and banks. ‘Firms are having a difficult time getting access to funding, and for small firms it’s extraordinarily difficult.'”
A “credit transmission mechanism [that] is breaking, or even broken,” is no way to run a financial economy. A constant infusion, whirling at a faster pace, sustains the world’s flagging non-financial economy.
Two weeks before the stock market crash in 1929, the New Yorker described to its readers the feverish levels of real-estate speculation and desperation: “[M]any contractors of estimable standing are ready to take over the ‘secondary financing’ of not-too-large operations, meaning they will put up most of the cash necessary to complete the building, over and above what the first mortgage provides. They do this in order to keep their operation from falling apart. This loan for the building, which is really a second mortgage, is discounted at some ‘big, friendly bank’, so that the contractor’s money is not tied up after all…”
Without further knowledge it is not possible to know the terms under which the big, friendly bank made the loan. What was the collateral? It is almost certain the collateral booked by the bank received less scrutiny than in 1925 or 1935. The loan for the building (which may never have been built) was expected to move off the books at a profit and at a speed that would prevent the censure of an internal or external audit.
Regarding Mr. Xie’s cashless world; it is in a fix: “Trouble in Chinese property also has implications for the country’s financial system, in particular the shadow banking sector, which has lent huge amounts to developers and relies on highly-priced land for collateral… In an indication of just how exposed China’s economy is to a property downturn, Moody’s… estimates that the building, sale and outfitting of apartments accounted for 23% of Chinese gross domestic product in 2013.” (Financial Times, May 13, 2014)
The October 1929 furnace-like roar was past the commercial building credit peak (though, not past the building peak.) Sources from the time can be contradictory, but support that conclusion. Estimates showed $675,000,000 of real estate bonds had been sold in the United States in 1925. That was “an increase of more than 1,000 per cent since 1920.” Later, calculations would show $54 million were issued in 1921, $752 million in 1925 and $833 million in 1928 – the peak: before $395 million in 1929.
When mortgage-making was accelerating in 2005, faster securitization and deal-making prevented the “real” economy from collapsing. The real economy was missing all the fun. The Bank for International Settlements (BIS – the central bankers’ central bank) made this clear in a 1993 report: “Financial liberalization, innovation and other structural changes in the 1980s created an environment in which excess liquidity and credit were channeled to specific groups and markets. These include large institutions, high-income earners and wealthy individuals, who responded to the incentives associated with the changes. These groups borrowed to accumulate assets in global markets – such as real estate, corporate equities, art, commodities, silver and gold – where the excess credit was apparently recycled several times over.”
On Nov. 12, 2013, in London, “Francis Bacon’s three-paneled painting ‘Three Studies of Lucian Freud’ became the most expensive work of art ever sold at auction on Tuesday when it soared to $142.4 million at Christie’s.” Two days later, in New York, Andy Warhol” set a new all-time record in the pop-artist field, when his “Silver Car Crash (Double Disaster)” sold at NYC auction for $105 million.
On the same day, Narayana Kocherlakota, President of Federal Reserve Bank of Minneapolis spoke on his home turf. He did his best to boost Christie’s stock price: “The Federal Open Market Committee is currently buying $85 billion of long-term assets per month. Recently, there has been an ongoing public conversation about the possibility that the FOMC might reduce its current flow of long-term asset purchases over the next year. The FOMC’s asset purchases push down long-term interest rates, and encourage consumers to spend….” Kocherlakota lost the $85 billion battle. When the stock market falls 20%, the FOMC will double the wager.
Eight days after Kocherlakota fired his salvo at battered consumers, he fired his top two researchers for speaking the truth. That was the indictment of the Minneapolis Star Tribune: “President Narayana Kocherlakota fires his best economists because they spoke the truth.” The newspaper reported: “The departing economists are Patrick Kehoe and Ellen McGrattan, both highly regarded researchers with long tenures in Minneapolis.” (From Bloomberg Economic Briefs: “Minneapolis Fed departing economists Patrick Kehoe and Ellen McGrattan collaborated on a 2008 Minneapolis Fed paper that challenged the efficacy of New Keynesian models in conducting monetary policy analysis. ‘Some macroeconomists think that New Keynesian models are on the verge of being useful for quarter-to-quarter quantitative policy advice. We do not. We argue that the shocks in these models are dubiously structural and show that many of the features of the model as well as the implications due to these features are inconsistent with microeconomic evidence. These arguments lead us to conclude that New Keynesian models are not yet useful for policy analysis.'”)
Given the brittle state of finance, it is less perplexing – still, indictable, but less perplexing – that, three days after Kocherlakota’s reckless statement, Chicago Fed President Charlie Evans announced the “Federal Reserve should step outside its comfort zone and take a few chances.”
The tinder could go up in a flash. In 2012, Miami property developer Martin Marquiles found a big, friendly bank to lend $80 million for a construction loan. His 24-story condominium project (“The Bellini”) was backed by 59 paintings (the usual: Jackson Pollack, Mark Rothko, Jasper Johns). That was two years ago. “[T]oday, the list of accepted collateral has expanded,” reports the Wall Street Journal. “Steve McQueen motorbikes, Fender guitars… even super yachts and high-speed aircraft have raced onto the list.” Luxury watches, jewelry, bottles of rare wine are “being [promoted as collateral]… by banks and auction houses.” A Bank of America “credit executive” (name withheld to avoid future embarrassment) turns this collateral into “loans [that] can range from $3 million to $56 million in value.” This is going to turn out well, for someone, not for the Bank of America.
Those planning to sell heirlooms should not tarry. The mushroom cloud may keep spreading, but, if past is prologue, when finance stops, the price for stuff vanishes.
On September 26, 2008 – a little over a week after the Lehman failure – the Journal reported: “Wall Street’s Woes Hit Highest End.” Today, as in 2008, the lower end of the housing market had already come undone. “For months, as housing values were falling for midsize ranch houses in Stockton, Calif., and Las Vegas high-rises, sales of high-end properties in financial centers like London, New York and San Francisco continued to percolate along. But that was before last week, when turmoil in the credit markets brought down Lehman Brothers Holdings and imperiled thousands of high-paying jobs. While those rare properties priced at $20 million or more are still holding up, there are signs that the crisis is exacerbating a downturn that was already plaguing properties in the $2 million to $10 million range, a market often sought by Wall Street workers, Since last Thursday, there have been 200 price cuts on properties listed at less than $10 million on Manhattan’s Upper East Side or Upper West Side – a 17% jump from the week before. Deanna Kory, a broker with New York-based Corcoran Group who’s handling nearly two-dozen properties priced between $2 million and $10 million, says her showings are down by about 40% in the last two weeks compared to the same time last year. A slew of new buildings set to open in the next year will only increase supply.”
At the infamous September 16, 2008, FOMC gathering, Federal Reserve economist Dave Stockton presented the house view: “I don’t think we’ve seen a significant change in the basic outlook. “We’re still expecting a very gradual pickup in GDP growth over the next year.” “I don’t really have anything useful to say about the economic consequences of the financial developments of the past few days.” If the meeting is not infamous yet, it will be.
By January 2009, New York was going dark – literally. Half the Broadway theatres were dark by the end of January. Upper end restaurants closed. If not for the Federal Reserve’s miracle madness in March 2009 – who knows how far this would have gone? The next time around, we may find out.
Ben S. Bernanke assumed the Federal Reserve throne in January 2006. He was worse than useless. Worse, for one thing – and this is only one of 6,000 reasons – his fabricated reconstruction of the 2008 financial meltdown was exactly bureaucratic: take no blame, take more control “so it will not happen again,” and build the bureaucracy that did not need to be rebuilt. “If we only had more regulation” he whined. Now we have it. “If only Bernanke listened to the bureaucracy that existed in 2006, the bust never would have occurred,” should be the message on placards in front of the Eccles building. (Granted, these would be huge placards. Concision may follow.) The Comptroller of the Currency calculated that credit risk rose for 5% of the banks making leveraged loans in 2005. In 2006, it rose for 69% of banks in the market.
Since Bernanke ignored the regulators, he might, at least, have read a newspaper. Banks did as they pleased, which is to say, their own pursuits developed in an ad hoc nature second only to the Federal Reserve’s ad hoc policy. “If borrowers and lenders alike agree the corporate debt boom can’t last, why isn’t anyone stopping it?” On March 28, 2007, the Wall Street Journal answered its own question: “Hedge-fund managers, buyout artists, and bankers get paid for short-term performance. The long-term consequences of their actions are, conveniently, someone else’s problem. People inside the big banks…. don’t want to get caught missing the next big deal. Their banks, and their own bonuses, might suffer. So they ply ahead.”
A 2004 OFHEO report cited a “March 1999 memorandum from an employee in the Controller’s Department [that] described the benefits of a particular brand of software for modeling amortization, noting the software allowed a user to ‘manipulate factors to produce an array of recognition streams,’ which ‘strengthens the earnings management that is necessary when dealing with a volatile book of business.'” The models purchased by Fannie Mae were corrupt. Given how models are worshipped, it’s a wonder they weren’t thrown in jail for bogus bonuses paid at Fannie Mae.
In 2014, New York real estate is moving faster than Florida swamps in 1925. The velocity of collateral is stationed at the upper end. Day-trading is back. A family townhouse in Bedford-Stuyvesant (Brooklyn) was sold for $1.2 million on February 21, 2014 and re-sold one week later for $1.85 million. House sales in the Hamptons rose 52% in the first quarter of 2014 (from the first quarter of 2013 – when “the worst winter of the millennium” was not an excuse). The ‘$5 million and above’ trades rose from eight to 37. On May 21, 24/7wallst.com published: “The 10 Best Cities to Flip a House.”
Bigger and faster deals must get bigger and faster. Real estate must accelerate. (Really, the paper – mortgages and their securitization, is what must accelerate. There do not have to be any houses at all, and, someday, we may just find the paper market was so detached from wood and brick, that was largely true. Someday, the world will be astonished at what it did not want to know in 2014.)
Fifty-billion dollar deals are not exceptional anymore, except to all the employees who get laid off to pay down the acquired debt. On May 21, 2014, Tom Keene at Bloomberg, asked Ellen Zentner, an economist at Morgan Stanley: “We continue to see M&A frenzy. All this transactional stuff we’re seeing, is this good?” Zentner responded: “I think everyone wants to see increased M&A activity. It’s signs of a healthy market.”
Everyone, at least in the Morgan Stanley M&A department. Those falling out of the real economy may disagree. That would include the employees who will soon be looking for work after the shuttering of 300 Blockbuster, 300 Sears Holdings Corp (NASDAQ:SHLD), 225 Staples, Inc. (NASDAQ:SPLS), 223 Barnes & Noble, Inc. (NYSE:BKS), 200 RadioShack Corporation (NYSE:RSH), 180 Abercrombie & Fitch Co. (NYSE:ANF), 175 Aeropostale Inc (NYSE:ARO), 155 Sbarro, 150 American Eagle Outfitters (NYSE:AEO), 150 Rent-A-Center Inc (NASDAQ:RCII), 145 Brown shoes/ Famous Shoes stores.
In May 2014, Federal Reserve Chairman Janet Yellen delivered an unspeakable graduation address to the NYU seniors at Yankee Stadium. According to MarketWatch, most of the graduates had never heard of the Governor, one graduate telling the reporter she was being very offensive to ask such a question, which is just sooo 2014. In other developments on the campus, the Harvard Corporation was one of the few to display leadership (again, in 2014) when it prevented graduates’ from holding their satanic black mass in Memorial Hall.
Instead Janet Yellen held a Black Mass at Yankee Stadium, extolling the heroism of the Galloping Gourmet, Ben Bernanke, who in Yellen’s fantasy: “demonstrated such courage… [H]e took courageous actions that were unprecedented in ambition and scope. [Bernanke’s actions were “unprecedented in ambition and scope.” – FJS] He faced relentless criticism, personal threats, and the certainty that history would judge him harshly if he was wrong.” Oh it will, Janet, and you are doing just what is required to clarify History’s ambiguities. Keep pushing the huddled masses to spend and speculate on markets rigged by the Federal Reserve for the one percent.
Keynesian economics did not go far when it was first peddled to the public in the mid-1930s. In Frozen Desire, James Buchan wrote, at the heart of Keynes’ General Theory, “the old private virtues (prudence, thrift, kindness) are public vices.” Keynes, like most reformers, grew to loath the people he had decided to reform. His Holiness discovered the unwashed were hopeless. Despite Keynes’ instructions in The General Theory, the public still wanted to make money and save.
The lifelong currency speculator asserted: “The love of money as a possession….is a somewhat disgusting morbidity, one of those semi-criminal, semi-pathological propensities which one hands over with a shudder to the specialists in mental disease.” From the autobiography of Felix Somary, The Raven of Zurich: “Keynes biographer praises him for his prescience about the coming crash. I could quite clearly prove the opposite. …Keynes, who was even then a widely praised individual, made an odd impression on me. He expressed contempt for economics as a science, and for individual economists, not excluding himself; but was obviously very proud of his talents as a speculator.”
Buchan went on to express his own confusion: “I don’t know which is preferable: to ignore the avarice that is the chief feature of modern society, or to wish it away! In attempting to restore the ethical component to political economy, Keynes turned virtue on its head: his economics are a sort of Black Mass.”
There is no hiding from the Keynesian Black Mass. In Europe, ECB President Mario Draghi played with his puppets before declaring credit-loosening commandments in early June. Martin Wolf, the predictable establishment mouthpiece at the Financial Times, wrote “Time for Draghi to Open the Sluice,” on May 14. Paul Krugman told “a gathering of the European Central Bank’s top researchers and policy makers” on May 26, 2014, the “the ECB and other banks around the world need to raise the inflation targets they have clung to since the 1990s. At 2%, those goals are too low….”
This odious performance was matched at a Cleveland Fed jamboree where Adam Posen, currently head of the Peterson Institute, formerly a member of the Bank of England’s Monetary Policy Committee, declared that concern about potential central-bank produced inflation is ‘unnecessary hand-wringing.’ Posen then boasted: “I’m not worried that there is an imminent financial stability problem for the U.S.,’ Posen added. ‘Once you’ve had a bubble, you are less likely to have one soon afterward.”
Playing Tweedledee to Tweedledum, another Too-Large-to-Think economist, Larry Summers, announced in November 2013 “the economy lately hasn’t shown an ability to grow without bubbles (quoting Bloomberg): ‘It has been a long time since we have had rapid, healthy growth in the country.'” He went on to say his was “not an argument for bubbles,” but, “it was time to change the framework.” He offered nothing in this regard, so effectively said we need to pile bubbles upon bubbles and see what happens.
In the same talk, he threw another bowl of pasta against the wall: “On the question of whether the Fed stepping up and providing liquidity when no one else would was the right thing to do, I think historians are going to judge that about 98 to 2.” The ratio is probably correct, but not in the direction Summers thinks.
On May 15, 2014, Summers was quoted by Fortune magazine in “a packed auditorium of hedge fund industry professionals at SALT, the annual industry confab.” The phlebotomizing policymaker claimed: “Low interest rates could become a source of instability down the road.” One might wonder why he used the future tense. Fortune continued: What’s more, Summers said that the Fed’s policies are likely making the income inequality problem in the U.S. worse, by helping wealthy Americans who hold the majority of stocks, more than the rest of the country. ‘A policy that works by pumping up asset prices is not going to be egalitarian,’ said Summers.” Did anyone ask about the 98 to 2 call? Had Summers recently read the 1993 BIS Report?
So which is it? Do we want bubbles? Do we have bubbles? Are they good or bad? It depends on the day and audience. On November 6, 2013, Jeffrey Lacker, Richmond Federal Reserve President was quoted in The King Report: “The rich are increasingly likely to remain rich, and the poor are increasingly likely to remain poor.” Janet Yellen seemed to acknowledge this when on March 31, 2014, The Great Labor Economist told an audience in Chicago of “the courage and determination of the people” who have suffered “the past six years. [These] have been difficult for many Americans, but the hardships faced by some have shattered lives and families. Too many people know firsthand how devastating it is to lose a job at which you had succeeded and be unable to find another…. . And yet many of those who have suffered the most find the will to keep trying.”
It would be more shattering and devastating if the 99% understood how the Fed’s money-printing is the central reason they suffer. After years of zero-percent interest, family incomes continue to decline; pensions are imperiled by “going out on the risk curve” to earn a return; savers have been squashed; life insurance, long important to family stability in the West, is being extinguished; endowments, the same.
Galling is how the apparatchiks of poverty are cashing in. Bernanke and his $250,000 dinners with hedge fund managers. Krugman, so casually upping a fabricated 2% inflation “goal,” and paid so well for it. Martin Wolf may or many not be getting rich, but he was handed the 2014 Overseas Press Club Award a couple of weeks before his ECB-approved “Time for Draghi to Open the Sluice” headline. These awards are soccer trophies inside the hive of accepted opinion.
Adam Posen is President of the Peterson Institute. He gouges on the fatted calf bequeathed by Pete Peterson, who established the Institute as a platform for sound finance. Posen, speaking on CNBC in January, bragged that Federal Reserve Chairman William McChesney Martin (1951-1970) employed similar measures to Quantitative Easing during his tenure.
There could not be two more dissimilar approaches to monetary policy. Posen wrote (in Challenge, July/August 2008) inflation rates of “4, 5, or 6 percent a year, say, will [not] hurt growth. It is just not there in the data.” He went on to say researchers have found once “you get to an annual inflation rate of 10 percent – some would say 8 percent, some people would say 12 percent,” you “begin to see significant negative effects on growth.”
On August 13, 1957, William McChesney Martin was dead set against a positive inflation rate to promote growth. Martin told the Senate Banking Committee that the person most likely to be injured in the inflationary cycle was the ‘hardworking and thrifty…little man‘ on fixed income who could protect neither his income nor the value of his savings. Often, he was also the unemployed victim of the collapse.” As different groups struggle to insulate themselves from the loss of purchasing power, ‘fundamental faith in the fairness of our institutions and our government deteriorates.”
In the February 25, 2014, Financial Times, Adam Posen, co-author with Ben S. Bernanke of Inflation Targeting: Lessons from the International Experience expressed his pleasure with “Abenomics”: “Abe Has Good Medicine but Japan Needs a Stronger Dose.” The heavyweight economist offered his blessing: “Japan’s recovery program is showing promising early results.” Posen warned though, more inflation was needed: “[E]conomic reform programmes fail to deliver…. when policy makers failed to recognize the risk of persistent deflation. Arguably, it has been the case with U.S. fiscal policy since the 2009 stimulus.
More and more. The Federal Reserve’s balance sheet has grown from $850 billion in mid-2007 to $4.3 trillion on June 4, 2014. Arguably, at least Posen is arguing, it should be $10 trillion today. The nearly $4.0 trillion increase over seven years approximates the amount of U.S. Treasury- and mortgage-securities the Fed has removed from the market (without looking further at refinancings, for instance). The lack of “liquid” Treasuries has caused no end of trouble, such as poorer quality collateral (the Fed loves talking about the liquidity it supplies to the market). The relentless otherworldliness of such policymakers falls on the masses to bear
Posen’s Japan (which does what American economists tell it to do) continues to target an inflation rate of 2%. This, in a country where more elderly than babies wear diapers. On May 29, 2014, Japan announced its annualized inflation rate at 3.2%. Ten-year bonds yield less than 0.60%. For those still young enough to work, wages have fallen22months in a row. Since 1997, the average, annual, Japanese salary has fallen by the equivalent of $6,700
Bernanke-Posen inflation-targeting is worse for the retired. On June 5, in “Abenomics Spells Most Misery Since ’81 as Retiree Skimps on Meat” Bloomberg reported that Mieko Tatsunami is “making due by halving the amount of meat I serve and add vegetables…..The price of everything we eat on a daily basis is going up.” Trotsky produced similar results in the Ukraine.
On June 28, 1978, Federal Reserve Board Member Henry C. Wallich addressed a graduating class, not too far from Yankee Stadium, at Fordham University.
Inflation was on everyone’s mind and Wallich was forthcoming. “Inflation,” he informed the young and idealistic graduates, “is a means by which the strong can more effectively exploit the weak. The strategically positioned and well-organized can gain at the expense of the unorganized and aged.”
How is this so? Wallich explained inflation “is technically an economic problem. I mean the breakdown of our standards of measuring economic values, as a consequence of inflation.” The strong are smart enough to understand that inflation “introduces an element of deceit into our economic dealings.” Contracts are no longer made to “be kept in terms of constant values” but, one party understands this better than the other. Contracts during a period of inflation are made with monetary terms “unpredictably shifting measures of weight, time or space…”
Among the losers is labor. “Inflation becomes a means of exploiting labor’s money illusion.” Among the winners, from the mouth of this public servant, is government. “It allows the politician to make promises that cannot be met in real terms, because, as the government overspends trying to keep those promises, the value of those benefits shrinks.” This creates a “diminishing ability of households to provide privately for the future…. One may ask whether it is not an essential attribute of a civilized society to be able to make that kind of provision for the future.” Wallich went on to emphasize “the increasing uncertainty in providing privately for the future pushes people who are seeking security toward the government.” (And so, the public panic concerning Social Security and health insurance today.)
At the same time, inflation “creates a vacuum in the private sector into which the government moves.” He worried that the consequences of the inflation would be “a shift into the third dimension, away from democracy and toward authoritarianism.” Wallich’s question was more than theoretical; he grew up in the German, Post-World-War-I hyperinflation, which wiped out the middle class.
On May 20, 2014, Philadelphia Fed President Charles Plosser described the calculus of the world economy through which the “accumulat[ion of] assets in global markets… is concentrated” in a few hands “where the excess [is] recycled several times. In Plosser’s words: “[C]entral banks have become highly interventionist in their efforts to manipulate asset prices and financial markets in general…. This approach has continued well past the end of the financial crisis….. [W]e have created an environment in which ‘it is all about the Fed.’ Market participants focus entirely too much on how the central bank may tweak its policy, and central bankers have become too sensitive and desirous of managing prices in the financial world…. If financial market participants believe that their success depends primarily on the next decisions of monetary policymakers rather than on economic fundamentals… And if central banks do not limit their interventionist strategies…they will simply encourage the financial markets to ignore fundamentals and to focus instead on the next actions of the central bank.”
Finance should not be important in the lives of most people. In 1950, the Bureau for Economic Analysis calculated the percentage of the U.S. economy engaged in finance was 9%. There is practically no decision in our lives that does not involve finance today. In 1950, the extent of most Americans’ financial dealings were their passbook savings account and house mortgage. Today the average person has been dragooned into money-dealing to survive.
The concentration builds with remorselessness beyond the comprehension of those who fuel it. We get hit with it everyday, often, the Know-it-alls effectively throwing up their hands in an “it’s beyond me” attitude:
May 28, 2014. BusinessWeek Headline: Headline: “Fed’s Junk-Loan Caution Spurs Creative Accounting Alchemy” Story: “Lenders are increasingly allowing junk-rated borrowers to adjust their earnings to make them look more creditworthy as U.S. regulators increase pressure on banks to refrain from underwriting too-risky deals. Such tweaks, which are permissible under more and more credit agreements, can help companies stay in compliance with their loan terms or to raise debt. More than half of loans this year for issuers backed by private-equity firms allow them to boost earnings by an unlimited amount through projected cost savings from acquisitions and ‘any other action contemplated by the borrower,’ said Vince Pisano, an analyst at Xtract Research LLC, citing a sample he’s reviewed.”
May 30, 2014. Bloomberg Economic Briefs: “The New York Fed’s Liberty Street Economics blog takes a look at rising household debt. ‘According to our February 2014 survey, 51 percent of the high-risk borrowers have maxed out a credit card in the past year, compared with less than 20 percent for the lower-risk groups.'”
June 2, 2014. Bloomberg: Story: “Unstoppable $100 Trillion Bond Market Renders Models Useless” Headline: “If the insatiable demand for bonds has upended the models you use to value them, you’re not alone. Just last month, researchers at the Federal Reserve Bank of New York retooled a gauge of relative yields on Treasuries, casting aside three decades of data that incorporated estimates for market rates from professional forecasters.”
June 4, 2014. Bloomberg Economic Briefs: “”Princeton Professors Markus K Brunnermeier and Yuliy Sannikov, writing for Vox, take a look at the transmission of monetary policy through asset-backedsecuritization. “Euro zone monetary policy transmission is broken. A key aspectof this is the failure of credit to get to small and medium enterprises, and consumers.This column uses the ‘I theory of money’ to diagnosis the problem andpropose ‘prudently designed’ asset-backed securitization as the cure.””
June 4, 2014. (This was released just prior to ECB President Mario Draghi’s announcement of looser ECB monetary terms) William H. Buiter: The Simple Analytics of Helicopter Money: Why It Works – Always. From the CEPR abstract: “A helicopter drop of money is a permanent/irreversible increase in the nominal stock of fiat base money with a zero nominal interest rate, which respects the intertemporal budget constraint of the consolidated Central Bank and fiscal authority/Treasury – the State.”
Buiter, the Dutch-American- Bank of England Bank Monetary Policy Committee member-Citigroup-skirt chasing-monetary nut, was discussed in”Going Digital.”
June 6, 2014. Bloomberg News Briefs: “A National Bureau of Economic Research working paper quantifies the lasting harm to the U.S. economy from the financial crisis: ‘In 2013, output was 13 percent below its trend path from 1990 through 2007. Part of this shortfall – 2.2 percentage points out of the 13 – was the result of lingering slackness in the labor market in the form of abnormal unemployment and substandard weekly hours of work. The single biggest contributor was a shortfall in business capital, which accounted for 3.9 percentage points.'”
June 6, 2012.Fox News, GRAZ, Austria – “A devastating fire which gutted a crematorium in southern Austria was caused by an obese woman’s excessive body fat blocking an air filter, Austrian public broadcaster ORF reported. The fire occurred at the facility in the city of Graz in mid-April. Firefighters had trouble extinguishing the blaze due to a thick layer of insulation lining the crematorium’s walls. Austrian officials investigating the fire found that it was caused by the burning body of the 440-pound woman. The obese corpse reportedly led to overheating in the crematorium’s filter system, triggering the blaze. Other recent fires caused by the burning of obese bodies were reported in Germany and Switzerland. Former Graz city fire chief Otto Widetschek said special crematoria for obese people should be set up in Austria to deal with the potential dangers of cremating obese bodies. ‘In Switzerland, there is now a special crematorium for XXL-bodies,’ he told ORF earlier this week.'”
Via Au Contrarian