Continue reading Doomsday Scenario: Craig's List is another nail in the news coffin

Doomsday Scenario: Craig's List is another nail in the news coffin originally appeared on BloggingStocks on Tue, 07 Apr 2009 17:06:00 EST. Please see our terms for use of feeds.

The most sweeping fiscal stimulus in a generation is about to be signed into law by President Obama. It amounts to $787 billion and includes tax incentives, infrastructure projects, renewable energy developments, and payment to state and local authorities.

However, investors appear to be skeptical as indicated by the performance of the markets today for a variety of reasons:

• Some estimate that as much as 75% of the spending will not reach the economy until 2010.
• There are questions as to how many jobs in the United States will actually be created.
• People are uncertain as to how productive the spending bill will be and how much is actually just wasteful "pork."

Continue reading The fiscal stimulus plan: Where is the missing element that solved the Great Depression?

The fiscal stimulus plan: Where is the missing element that solved the Great Depression? originally appeared on BloggingStocks on Tue, 17 Feb 2009 16:39:00 EST. Please see our terms for use of feeds.

Last March, I posted on whether we were at the beginning of the Greatest Depression. Back then, my reasoning was that there was $6.1 trillion in financial toxic waste -- in the form of Collateralized Debt Obligations (CDOs) -- in our financial system resting on a sliver, a mere $340 billion, in capital.

Therefore, a 6% decline in the value of that toxic waste would wipe out the bank capital. (I should have added in another $6 trillion in mortgage-backed securities). When you consider that Merrill Lynch sold $31.6 billion of its CDOs last year for 22 cents on the dollar, you realize that toxic waste needed an 80% haircut rather than a 3% one -- and voila -- you've wiped out all the capital!

If you look at some basic statistics comparing the current economic situation with that of the Great Depression, you might think that we are in relatively great shape. Our unemployment rate now is 7.2% -- at its nadir, 25% of the population was unemployed in the Great Depression.

Continue reading One more time: Is this the Greatest Depression?

One more time: Is this the Greatest Depression? originally appeared on BloggingStocks on Thu, 22 Jan 2009 11:30:00 EST. Please see our terms for use of feeds.

Fed Chair Ben Bernanke always likes to remind us that he is a scholar of the Great Depression. But I am not sure he has drawn the right lessons from it based on his actions. As Mark Twain said, history doesn't repeat itself but sometimes it rhymes. There are certain rhymes between the Great Depression and the current circumstance. Income inequality and negative savings rates leading up to the current circumstance are the same as they were in 1929. In both situations, high levels of borrowing and lack of transparency were key contributors.

But things are also different now. For example, securitization is at the core of the current catastrophe and so is the globally-interconnected nature of the financial system. There are $13 trillion worth of mortgage backed securities (MBS) and collateralized debt obligations (CDOs) alone and there is perhaps $340 billion worth of capital on the books of leading financial institutions (FIs).

And due to the global interconnections, banks in Germany were wiped out since they bought too much of this financial toxic waste. And this does not even take into account the $54 trillion credit default swap market - which did not exist in 1929.

Continue reading Have we learned the right lessons from the Great Depression?

Have we learned the right lessons from the Great Depression? originally appeared on BloggingStocks on Fri, 17 Oct 2008 12:45:00 EST. Please see our terms for use of feeds.

Continue reading Will a new U.S. president lead to a new mortgage system?

Will a new U.S. president lead to a new mortgage system? originally appeared on BloggingStocks on Wed, 30 Jul 2008 16:55:00 EST. Please see our terms for use of feeds.

IMF now expects the global economy to grow 3.7% in 2008, down from its earlier forecast of 4.1% growth, Bloomberg News reported, citing an IMF document it obtained at the meeting of Southeast Asian deputy finance ministers and central bankers in Vietnam. The IMF also said there's a 25% chance global growth will drop below 3% in 2008 and 2009.

In January 2008, the IMF lowered its forecast for global economic growth this year to 4.1%, the lowest since 2003, from 4.4% predicted in October 2007. At that time the IMF said last year's increase in credit costs resulting from defaults on mortgages aimed at borrowers with poor credit histories was hurting the rest of the economy.

Continue reading IMF again cuts 2008 global growth forecast on credit crunch ripples

IMF again cuts 2008 global growth forecast on credit crunch ripples originally appeared on BloggingStocks on Wed, 02 Apr 2008 15:18:00 EST. Please see our terms for use of feeds.

With wholesale inflation running at a 12% annual rate, prices are raging out of control. But Fed Chair Ben Bernanke is wagering that the risk of economic contraction is greater than the damage from inflation. He might be thinking that it took 15 years to get us out of the Great Depression but only two years in the early 1980s of 19% Fed Funds rate to break inflationary expectations after a decade of the stagflationary 1970s.

In 2005, the Wall Street Journal reported that Ben Bernanke was a Great Depression "buff." This makes me think that he is trying to avoid making the mistakes that the Fed made in the 1930s. In so doing, he is spurring runaway inflation. For example, the price of gasoline is expected to rise to $4.00 a gallon this summer with help from $103-a-barrel oil. Back in January 2001, oil was at $24 a barrel -- it's increased at a nice 23% compound annual growth rate in the last seven years. Since oil is traded in dollars, Bernanke's interest rate cuts are spurring a weaker dollar, hence higher oil prices.

The Great Depression started in 1929 with a stock market crash. And it really didn't end until World War II -- which spurred enormous government spending to build a war arsenal. Bernanke believes that a major reason that the Great Depression lasted so long was that the Fed tightened credit, which cut off liquidity when it was needed most.

Continue reading Is Bernanke right to ignore inflation?

Is Bernanke right to ignore inflation? originally appeared on BloggingStocks on Fri, 29 Feb 2008 14:30:00 EST. Please see our terms for use of feeds.