Political Economy category archive

A story of greed and irresponsibility.

Eleven worthwhile minutes. You can bank on it.

The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo

Via Andrew Sullivan.

February 20, 2009 | Posted by: Frank | Posted in: Political Economy | Bookmark this post

Bonddad analyzes “Fed speak.” The conclusion:

Here’s the bottom line: it’s terrible out there.

Follow the link to read the analysis.

While you’re at it, read his thoughts nationalizing the banks.

The hangover deepens:

The number of U.S. workers drawing unemployment aid jumped to a record high of nearly 5 million, the government said on Thursday, as a worsening economy made it increasingly hard to find jobs.

(snip)

U.S. stocks fell as the data reinforced fears the worsening slump would erode company profits, driving the Dow Jones industrial average to 7,465.95, its lowest close since October 2002.

(snip)

New applications for unemployment benefits were steady at 627,000 last week, hovering close to a 26-year high and raising the possibility that job losses in the non-farm sector could cross the 600,000 threshold in February.

Here in the States, we here a lot of fulminations about “globalization” from a States-centric perspective (“our jobs went where?”).

That is not the only perspective. Pamposh Dhar of the Phillipines asks some good questions:

First off, let me say that I am not against globalization. I believe that all human being are connected (or “interconnected,” as Buddhists say), so how could I be against a connected world? I am not.

(snip)

Moving on to the second part of my question: why does the concept of globalization leave our hearts cold?

Follow the link to see how she struggles to answer them.

Lindsay Graham:

“The truth is we’ve put more money into the Bank of America than it’s worth,” Graham said. “That’s not nationalization. That’s just stupid.”

Balloon Juice has more.

More coming:

Records show 143 U.S. homebuilders filed for bankruptcy last year versus 80 in 2007. To remain viable, many will be forced to continue to reduce expenses and cut prices on existing inventory to increase cash flow, in contrast to their previous focus on revenue growth for the better part of this decade.

“It wouldn’t surprise me to see one or two of the top 10 homebuilders filing this year,” said Bittner (of Grant Thornton LLP–ed.). “But in most cases, the current lending environment is unique in that as long as a builder has positive cash flow, the lender doesn’t want to foreclose or force a bankruptcy filing. Recovery is more likely if a bank can be patient with a borrower. Positive cash flow and ability to service interest on a credit facility provides for a better negotiation position with the lender.”

Harvard Business School professor Rakesh Khurana analyzes executive pay, pointing out that “there’s no distinction any more between value creation . . . and value extraction . . . .”

If you want to understand what’s wrong with Wall Street and American business, you will learn more from the seven minutes of this interview that from a year of reading the Wall Street Journal. His conclusion: Wall Street has been paying executives like mercenaries, who sell themselves to the highest bidder, not like Marines, who have a sense of duty, loyalty and a greater good.

And, no, he’s not talking about the size of the paychecks, but rather about the philosophies behind them.

Follow the link to listen (web quotation updated):

Here’s a fact we learned this week: Nearly 700 Merrill Lynch employees earned more than a million dollars last year, even though the company lost $27 billion and was forced to be sold to Bank of America.

It’s the kind of news that raises the hackles of Rakesh Khurana, who teaches at Harvard Business School. He tells host Scott Simon that the highest paid person isn’t always the best.

Read Professor Khurana’s article in the Washington Post here and his subsequent online chat here.

Ronald D. Orol and Alistair Barr of MarketWatch analyzes Geithner’s “stress test.”

Note the list of “banks” which may be taken to the lab for the test–it’s almost all the biggies (I use quotation marks because some of them haven’t been “banks” for long):

Treasury may end up effectively nationalizing many weaker institutions, if its stress tests conclude some firms need more capital.

Treasury is expected to allocate at least $100 billion of the remaining $350 billion from the Troubled Asset Relief Program to a bank bailout fund to buy preferred shares in banks that can be converted into voting common equity “if needed.” According to Treasury, banks can convert securities into common shares in a “worse than expected economic environment.”

(snip)

“Depending on how much capital an institution needs under this program, you could see a high percentage of its common equity, more than half, be issued to Treasury,” said David Brown, partner at Alston & Bird LLP in Washington. (Owning more than half the stock equals government ownership with equals nationalization–ed.)

If needed, the convertible securities will be converted into common shares at a “modest discount” to banks’ stock prices on Feb. 9.
Robert Klingler, attorney at Bryan Cave LLP in Atlanta, points out that most financial institutions were trading at historic low valuations on that date, which means the government stakes could be converted into massive controlling interests.

There are 17 institutions, representing roughly three-quarters of the assets in the banking system, which may be required to take the stress test.

These are: J.P. Morgan Chase, Citigroup, Bank of America, Wells Fargo, Goldman Sachs, American Express, Morgan Stanley, State Street , Bank of New York Mellon, U.S. Bancorp, SunTrust Banks, Capital One, PNC Financial , Regions Financial, Fifth Third, and KeyCorp.

For the owners. Not for the workers.

Watch the owners walk away protected by the bankruptcy statutes.

Watch the workers learn how to live in their cars.

The peanut processing company at the heart of a national salmonella outbreak is going out of business. The Lynchburg, Va.-based Peanut Corp. of America filed for Chapter 7 bankruptcy in U.S. Bankruptcy Court in Virginia Friday, the latest bad news for the company that has been accused of producing tainted peanut products that may have reached everyone from poor school children to disaster victims.

H/T Bill for the link.

FDIC still on its average of three a week (in one form or another–merger, liquidation, seizure). Repubican Economic Theory continues to bear fruit.

Loup City, Neb.-based Sherman County Bank, Cape Coral, Fla.-based Riverside Bank of the Gulf Coast and Pittsfield, Ill.-based Corn Belt Bank and Trust Company were closed by regulators Friday, bringing the number of U.S. bank failures for 2009 to 12 and 37 total since the start of the credit crisis, the Federal Deposit Insurance Corp. said.

Loup City, Neb.-based Sherman County Bank, Cape Coral, Fla.-based Riverside Bank of the Gulf Coast, Pittsfield, Ill.-based Corn Belt Bank and Trust Company, and Beaverton, Ore.-based Pinnacle Bank were closed by regulators Friday, bringing the number of U.S. bank failures for 2009 to 13 and 38 total since the start of the credit crisis, the Federal Deposit Insurance Corp. said.

Nebraska has not seen a bank failure since 1990, according to the FDIC. However, Riverside Bank follows Fla.-based Ocala National Bank, which failed on Jan. 30. Prior to Corn Belt Bank, the last Illinois bank to fail was National Bank of Commerce on Jan. 16.

Margaret Carlson on Bloomberg dot com asks a question (emphasis added):

I learned that 696 individuals at Merrill Lynch & Co. got bonuses last summer. You remember Merrill Lynch, the once-proud institution that on the eve of its implosion was bought by Bank of America Corp., a company that later got billions of dollars in government bailout money.

I would very much like to locate Employee 697. If 696 people who helped destroy the company still got at least $1 million each for their effort, imagine what No. 697 must have done NOT to get it.

Note that almost half of these sales were “distressed“:

Prices of existing U.S. single-family homes dropped a record 12.4 percent in the fourth quarter from a year earlier to the lowest level since 2003, the National Association of Realtors said on Thursday.

The NAR said distressed sales, which includes foreclosures, accounted for 45 percent of transactions in that quarter, dragging down the national median price of existing single-family homes to $180,100.

I suspect the sellers were also distressed, worrying whether their vehicles are big enough for their families to live in.

Prices may be close to bottoming out; the early 2000s was apparently when the just-busted bubble started to inflate (see graph here).

Criswell predicts that prices are going to stay flat for a long time. Persons fearing pay cuts and unemployment do not buy houses. Or cars. Or washing machines. Or anything they don’t have to have.

Addendum, Later That Same Day:

Atrios thinks that housing prices will slide significantly further.

He’s got a Ph. D. in economics and has taught in some of the finest universities in the world.

I don’t have a Ph. D. and have taught persons how to carry trays in dining cars.

We will see if my “it’s not rocket science” contention holds up.

If it doesn’t I will forget about this update.

No wonder “first-time claims” dipped a bit. The pool of employed persons subject to being fired keeps getting smaller.

First-time claims for state unemployment benefits dipped down in the latest weekly data, while continuing claims reached a record high, the Labor Department reported Thursday.

The number of initial claims in the week ending Feb. 7 fell 8,000 to 623,000, a level that is 84% higher than the same period in the prior year. The four-week average of initial claims rose 24,000 to 607,500 — the highest level since November 1982 and up 76% from the prior year. The four-week average for claims draws the attention of economists and investors because it smoothes out distortions caused by bad weather, strikes or the timing of holidays.

Shorter Adam Posner: Let grown-ups run the banks. Time to consider

. . . nationalizing or come close to nationalizing part of the banking sector . . .

Via TPM.

Discussion of TARP (you know TARP, the big green blanket that get$ thrown over a pile of tra$h to hide the stink).

About 40 minutes into the interview:

Guest*: No investor . . . should invest in an organization in which they are not happy with the management.

Diane Rehm: But that can’t tell whether they’re happy with the management until they go down . . . .

The guest went on to say that that “depends on how skilled an investor you are.”

Nothing about the truthfulness or integrity of the organization.

Classic blame the victim.

Follow the link above or click here (Real) to listen.

________________

*I couldn’t figure out which guest and I was too lazy to listen all the way through a second time, but I think it was Robert Hartheimer.

Bonddad summarizes what it is and how it works, in understandable terms.

I am bemused by all the leftie hand-wringing over the Geithner bailout plan. Not because I’m a fan of the plan, but because persons are acting like it’s somehow immutable.

I think that we will find that it’s very mutable.

This administration is not hampered by ideology that prevents it from recognizing when something’s not working.

In contrast, consider the Republican loyalty to tax cuts as the only way to do anything.

Even though that loyalty is based on the demonstrably false Laughable Curve (and, if you don’t want to research the economic theory, just read the stock market pages and the weekly jobs reports), it has become a central tenet of their ideology: They are incapable of considering any economic strategies other than tax cuts for the rich. Making the rich richer is their Eleventh Commandment.

They, like the Blues Brothers, believe they are on a mission from God. (The Blues Brothers had a better script.)

Supplementary Material:

Very interesting interview about executive compensation on Radio Times yesterday. Go here and search for February 9, 2009, and select Hour 1 or listen here (mp3).

Video via TPM.

Andrew Sullivan:

The reason the Republicans are feeling better about themselves is that they managed to turn this debate into one about ideology in a vacuum. That’s how they governed for many years; it’s what they know; and since they have no shame, they feel no need to square their newfound fiscal conservatism in a depression with their record of massive spending and borrowing in a boom.

And he looks at the numbers. The Congressional numbers are particularly interesting:

If the image doesn’t work, just follow the link to Mr. Sullivan’s place.

As BarbinMD says,

It’s not about the saving the economy from collapse, or to stop (sic) skyrocketing unemployment numbers, it’s about making sure it continues long enough for the Republicans to get back into power.

Nissan cutting 20,000 jobs (more than 8% of its workforce):

“In every planning scenario we built, our worst assumptions on the state of the global economy have been met or exceeded, with the continuing grip on credit and declining consumer confidence being the most damaging factors,” President and Chief Executive Carlos Ghosn said in a statement.

Must be that pesky UAW again. Oh, wait.

Addendum:

The Booman has a detailed analysis.

No more Tavern on the Green (PDF):

The world’s largest hamburger chain (Gues who?–ed.) said January same-store sales rose 5.4 percent in the United States, 7.1 percent in Europe and 10.2 percent in the company’s Asia/Pacific, Middle East and Africa segment.