Wednesday, January 26, 2011

notes on the week ended Jan 22nd

as much as i hate to revisit this, im going to review what we've known about QE2 from the beginning...because it isnt working as it was originally prescribed, the Fed and it's apologists have taken to changing their talking points...quantitative easing was first theorized in bernanke's famous helicopter speech, and the theory was built on in several speeches thereafter, as a method whereby monetary stimulus could be achieved when the Fed funds rate is at or near zero already...what QE was supposed to do is LOWER longer term interest rates...the Fed would buy large amounts of medium term treasuries and thereby lower rates along the entire yield curve; that is not happening, in fact, the yield curve between the 2 year note and the 30 year bond was the steepest on record this week...so now bernanke and other officials are citing rising stock prices as proof that QE2 is working; even Fed research has been leant to this cause, leading some to ask when did the Fed get a mandate to manipulate stock prices...other Fed apologists are saying that although nominal interest rates have risen, "real" interest rates (such as you would compute by allowing for inflation expectations) aren't, and that's all the Fed intended in the first place...the "real" interest rate would apply, for instance, if one is saving for retirement; you'd want to keep the purchasing power of your savings intact; but one cant distinguish between real and nominal interest rates with regards to the purpose of QE, because the small businessman wanting a loan or person in the market to buy a home doesnt; payments on a loan reflect the nominal rate...nor will the banks consider the difference between real and nominal when they reset the trillion dollars worth of Alt 1-A and adjustable ARM mortgages over the next two years...nominal interest rates, which are rising, have real consequences for real people; the only consequence of real interest rates is imaginary...

in another change you can believe in, obama appointed jeffrey immelt, CEO of GE, to replace paul volcker, rounding out his pro-bankster team of economic advisers...lest you labor under the assumption that GE is just a lightbulb & motors company, GE Capital is one of the big six TBTF shadow banks, second only to citi in bailout guarantees, and they were the biggest buyer of political favors in the year just ended...Immelt joins Daley from JPMorgan and Sperling from Goldman to advise obama on what's good for the plutocracy; obama will likely say that immelt will be engaged in increasing american competitiveness or job creation or some such, but it was only three weeks ago that immelt agreed to fold all of GE's existing world-wide business in nonmilitary avionics into a joint venture with AVIC of china so they could compete with Boeing's commercial jet business...

a house republican study committee, aka "the caucus of conservatives," has released a list of proposed spending cuts that it suggests will cut the deficit by $250B a year over ten years for a total saving of $2.5 trillion...while their talking points include mohair subsidies and foreign aid, those arent the big items; included in big ticket items are cutting off all remaining stimulus money (got a half built bridge in your city?), privatizing Fannie and Freddie (Wells Fargo & other banks want to run them with govt  guarantees in place) and already promised medicaid payments to the states...rather than go into more details, ill just link to the whole list here

there have been a few interesting developments on the robo-signer/foreclosure fraud front this week; first, a maryland court ruled that all 10,000 GMAC foreclosures signed by jeffery shephan, the first robo-signer who was exposed, were invalid; basically what GMAC must now do is start over from square one on each of those foreclosures, properly prepare & notarize the paperwork, refile a foreclosure notice, offer modifications to the former owners, and proceed from there as if the original foreclosures had never occurred...also, taking cues from the massachusetts ibenez decision, one judge in new york has halted foreclosures, and banks are apparently halting foreclosures of their own volition in florida...in utah, the states laws apparently will not allow for a remote entity (a note in MBS mortgage trust transferred electronically) to foreclosure on property, and various pieces of legislation in virginia would similarly end the use of MERS transfers and give homeowners facing foreclosure a myriad of new rights; there is pushback in Va, however, as a bank board member/representative is attempting to have the uniform commercial code for Va changed to allow for MERS transfers, and thus allow for blank endorsements of property transfers, gutting the normal contract procedures...and in Massachusetts, the Ibanez decision has opened a whole new can of worms, in that the buyers of homes previously foreclosed on illegally may no longer have clear title to the homes they're now in; the Mass supreme court will next be deciding whether these buyers actually own the property they've bought...

there were two major areas of protracted debate on the economic blogs this week; first, with the House GOP repealing the health care reform act, there was considerable debate as to whether its repeal would add to or cut the deficit; to me, this was all just hypothetical, because the action in the house was largely symbolic, since the repeal could never get past the senate, nor a presidential veto...the other area where the economist heavy hitters weighed in was a debate on what was the cause of continuing unemployment, and whether some workers had a "zero marginal product" making them worthless for a company to hire; i have not included links to either of those tete-a-tetes with todays selection, but if anyone's interested, they can navigate to the appropriate section in this week's blog post for the entirety of either exchange...if you want to catch just one, i'd recommend Three ZMPs and two Co-ordination failures by nick rowe, who has a way of simplifying the most complex of macroeconomic ideas...

several states are still sorting out serious shortfalls in revenues in dealing with their budgets, and most are enacting major cutbacks, even though for many of them those wont even be enough...as of this time, only illinois has opted to raise taxes to keep programs running, and there is already a recall campaign for the illinois governor, as well as mayors in omaha and miami who raised taxes...for several weeks a proposal by newt gingrich to pass a law to allow the states to declare bankruptcy had been mentioned, most in connection with allowing the states to renege on promises to retirees and union contracts, but this week for the first time the idea of some form of state bankruptcy seems to be under serious consideration, as both the NYTimes & latimes ran articles to wit "policy makers are working behind the scenes" to hatch such a plan; one option mentioned would force both retirees and muni-bond holders to take a haircut...if this works anything like the GM bankruptcy did, retiring state workers would also lose their paid health care and have to buy their own insurance...

even though oil in the US (WTI) slipped below $90 a barrel this week, brent crude in Europe continued to hover just under $100, and low sulfur sweet oil from nigeria breached $102 & indonesian crude touched $104, influencing energy prices in asia and africa, prompting calls that OPEC raise output, which were stonewalled...BP agreed to a multi-billion-dollar share swap with russian state oil major Rosneft to drill in the arctic, output of which will replace declining siberian production & keep russia and the world's top producer...a parliamentary group in britain proposed rationing energy and heat oil, whereby each household would get "tradeable energy credits" which could then be bought and sold for access to more or less fuel...t boone pickens computed that we spent $337 Billion on oil imports last year, while bob graham, chair of the gulf spill commission, warned that if we 'drill baby drill" we will "drain the last drop of US oil in the year 2031"

on the back of supply disruptions in india & the chinese new year, iron ore prices have hit a new high, and high coal prices resulting from aussie flooding are also impacting cement prices in asia...steel is up over 1/3 over the past two months, enough to impact future appliance & car prices...argentines are buying cars in record-breaking numbers as an inflation hedge, as they would rather hold a car than currency...and wheat and corn prices also hit new highs...

even though below normal temperatures remain entrenched over the midwest and are moving into the east this week, record warmth continues over northern canada and greenland, and greenland smashed its previous annual record for ice melt, with the melting continuing 50 days longer than normal...lake erie is starting to freeze over, while large areas of hudson bay, at the edge of the arctic, remain ice free...this may turn out to be the first year that lake erie freezes over before hudson bay...

in europe, the Irish central bank was given the go ahead to print euros independent of the ECB as irish savers moved their money out of the country; as expected, the irish govt collapsed and new elections will be held in march...after "successful" bond auctions in portugal & spain, germany pulled out of any plans to expand the EFSF (the financial stability fund) meanwhile, european finance ministers are discussing a plan whereby greece might restructure its debt; it now seems to be a foregone conclusion that greek bondholders will not be repaid in full...

the above are my weekly comments that accompanied my sunday morning links mailing, which in turn was selected from my weekly blog post on the global glass onion…if you’d be interested in getting my weekly emailing of selected links that accompanies these commentaries, most coming from the aforementioned GGO posts, contact me...

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