Ben Franklin Report: The Mark to Market Rule

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As if in direct response to Colbert's challenge to create something, anything to believe in to turn the recession around, the Financial Accounting Standards Board changed the Mark to Market rule. Unfortunately this was actually in response to intense pressure from Congress and the Banks. This lets banks revalue their toxic assets before reporting them on their books. (Which makes me wonder why this was done just after the end of the first quarter.) The banks that took on more risk than they could manage don't just get to value these assets at whatever they want, they get to value these pieces of steaming crap at whatever they think someone would pay if anyone was interested in buying a steaming pile of shit just because someone called it golden.

Of course this looks exactly like what we have been doing so far in relation to this banking fiasco. We looked at the disaster and saw that the people in charge had established a system of perverse incentives that encouraged highly risky acts and called them extremely safe because of a complete lack of regulation. Our response has been to give even more huge shit tons of cash these very same people that fucked us for fun and profit and by removing any other regulation that insists we call a spade a spade. I am finding it harder and harder to resist the urge to call for murderous mobs to converge on Wall Street.

The Wall Street response to the reduction of regulation was obvious. Though, two years ago, if you said that Dow 8,000 would be good news people either would have thought you were crazy or they would have been terrified.

In this article, John Berry tries to criticize the negative reaction to the rule change that I outlined above. But he is comparing apples to oranges when he says,

The family doesn’t have to put up money to cover the difference between the mortgage and the lower market value. Nor should the Atlanta bank have to take a big hit on its reported income because some other mortgage-backed securities owner sold in a depressed market.

He is comparing the effect on banks that have to back their lending by having 10% of that value on their balance sheets. Which of course home owners don't do. And the family that is upside down on their mortgage will have to pay that money on the mortgage that is more than the value of their home just because they bought at the wrong time.

Lots of pundits and apologists for the financial industry keep trying to accuse home owners that face loosing their residence of buying beyond their means. Through this argument they try to push some of the moral culpability for this fiasco on people who only wanted a nice house. They didn't buy above their means, they listened to the market. The market told them what they were worth. It's not their fault the market lied to them because they couldn't have understood the market. Seriously, if huge banks couldn't see this coming when they specialize in finance, then its simply irrational to accuse home buyers of wrongdoing just because the effect of their actions is to further reduce the property value of their neighbors.

Berry does make a legitimate point about the removal of reality in accounting. He asserts that the Atlanta bank he is referring to in the above quote intends to hold on to its mortgage backed securities until they mature. Meaning the bank will be getting all the money from the mortgagees. This is the family in his apples to oranges scenario who has to pay the full value of the mortgage even though the house is worth less. (But hey, at least it still provides the same amount of warmth and shelter. Its just that breakfast nook they added doesn't mean they can afford to send the kids to college.) This means that the banks assets are really worth nearly their full value because the bank will get paid what it originally bargained. So the accounting rule lets them value their assets at what they can reasonably expect to still get paid over 30 years and they can lend out more money to consumers and businesses which increases liquidity and gets the markets moving again and leads to more manufacturing, more jobs, and more spending. Everyone's happy.

Except that just brings us back to where we started last November. No one knows how many mortgages will go into arrears or how many will be devalued through the proposed new bankruptcy rules. The short of it is we don't know if the mortgage backed securities will be worth what they were originally bargained for in 30 years when they run their course. All we do know is that they will be worth less. If not become worthless.

The Walk Of Shame: Paulson

It looks like Paulson's greatest career attribute is the ability to beg. Perhaps that is how he got installed as the ineffectual treasury secretary. He got down on one knee to beg Nancy Pelosi to support the $700,000,000,000.00 BBBBBBBBBBillion Bailout, and on Monday he begged the banks not to horde the cash he is handing them. He is doing this while expressly stating that there are no strings attached. Paulson said,

At a time when events naturally make even the most daring investors more risk-averse, the needs of our economy require that our financial institutions not take this new capital to hoard it, but to deploy it.

The free market has been dead since FDR, but the Bush administration has found a way to revive the same trickle down economics that got us into this recession, distract everyone by saying you are resorting to socialism. The awful truth behind that scary buzz word is that they are socializing the financial industry's losses in order to insulate their profits from market forces.

The Ben Franklin Report: Talking Points and the MSM

It was interesting to me to observe the tone of media coverage regarding the Bailout over the last week. Prior to the rejection of the first bill by the House the coverage was neutral with most coverage being directed at explaining just what the legislation was supposed to do but there was almost no coverage of popular opinion which was vastly opposed to the measure. After the shock subsided from the precipitous drop in the stock markets following the vote by the House, and it was found that the sky had not fallen and business continued as normal, the MSM started covering the vast negative public sentiment. This was mainly as a means of explaining why the Representatives voted as they did and attached to the old adage that the House is the more populist body. Suggesting that the real people of the country are only actually represented in government at the national level in the House of Representatives.

Until this morning the MSM was freely using the term "Bailout" to describe this massive gift of taxpayer dollars to the greedy rich motherfuckers that got us into this crisis in the first place. However this morning, the MSM has started referring to the bill as the "Rescue Plan." Yes, the Bailout that passed the Senate in the dark hours of the night when noone could see their shame has been spun. Instead of being a colossal failure of leadership, this is now a plan. Instead of being a giant burden of over $10,000 on every taxpayer, this is being called a "Rescue."

How long will this kind of transparent bullshit go unchallenged? Where is the voice of the American people? We, the people of the United States are overwhelmingly opposed to this legislation but if you look at the MSM you would think that we all accept this bill as a necessary evil. This is exactly the same failure of the media that got us into Iraq. Where are the pointed questions? Where are the experts holding the feet of the members of congress to the fire? Why is Kucinich the Keebler the only person that sounds sane? It takes a vegan who thinks he was abducted by aliens to raise concerns about the artificial haste with which this bill is being forced through congress? What about the old adage that the Senate is the more deliberative side of the Legislature?

Where was the thought process yesterday? It was clouded by fear and greed. Fear that there is an imminent catastrophic collapse in the future, and greed motivated by all that money. Why think about rational solutions when you can slip in a rider that directs funds back to your pet projects? If you are going to alienate millions of people by voting "yes" you might as well buy the votes of a few back home.

Like 9/11, this is another crisis that was easy to foresee but once it materializes people in government are using the ignorance of those that did not see it coming to create an unjustified panic in order to gain unfettered power. I cant' believe that exactly the same trick is working on the same people just six years later. I guess Lincoln was wrong.

I wish that was all I had to say about this but I want to highlight the behavior of the presidential candidates and I want to single out a particular economic pundit who has been causing me great personal outrage for the last three weeks.

The H-pod has been getting increasingly aggravating with his constant reliance on the trickle down theory of economics as if it is still a valid method of thinking. As if trickle down hasn't been clearly disproven by the recent recession. As if he isn't just fattening us up for the slaughter. Velshi is just trying to keep the taxpayers calm and encourage acceptance of the vastly flawed Bailout.

As for the candidates, they have both failed to show leadership in this crisis. Neither candidate has even attempted to deliver a strategy for solving this problem. Neither candidate nor their VP nominees have given concrete examples of things they would do if elected that differs from anything they have been saying since June of '07. To me its painfully obvious that they could follow FDR and his lead that propelled us out of the last Great Depression. They start a massive public works project. How about one that creates energy independence? Then you solve two national problems at once. OK, its four problems is you include oil wars in the middle east and energy's impact on the environment. Massive building projects that create super solar farms in the sun belt, wind farms in the great lakes and off the Atlantic coast, factories that produce the new solar power generating windows. The government can spend some of the seven hundred fucking billion dollars of U.S. taxpayer rape on investing in our technology future. The U.S. is falling behind. It was the lack of foresight of congress that caused the Large Hadron collider to be built in France and Belgium.

Both parties have failed. Both houses of Congress have failed. The Bush administration has failed. Local governments have failed. Wallstreet has failed. Individual investors and property buyers have failed. Foreign governments and corporations have failed. There is plenty of blame to go around but little understanding of the full scope of the failure. This colossal failure of leadership is not likely to be cured by panic and a rush to pass the first piece of legislation proposed by an administration that has showen itself to be power hungry and incompetant. We need to vote every one of these selfish beureaucrats and politicians out of office. We need to finish the job of cleaning house that we started in 2006.

Throw the bums out.

Ben Franklin Report: Unraveling the Knot

Although this article is long, it gives a thorough look at the fundamental conflict of interest between the credit rating agencies and the financial markets that exploded and is, to say the least, now exposing the U.S. economy to further downside risks. However, this is only one part of the calculations behind Gross Domestic Product.

Private spending and business activity is also fairly important when considering the health of a particular economy. While oil futures are a good indicator of what will happen in a few months, after oil has been refined, with near record low refinery utilization rates, into various chemical products, individual corporations earnings are perhaps a better indicator. Bank of America, the giant in discount consumer financing announced a 77% drop in profit for the first quarter of this year, mostly because of concerns with defaulting mortgages. For some anecdotal evidence, one need do no more than compare this graph of subprime mortgage concentrations, with this article about California's foreboding rising in foreclosure rates. Global shippers UPS and FedEx are usually a good indicator of economic prospects.

However, with the ongoing catastrophe that is the hunger crisis, inflation, rather than the lack of available credit, would seem to be the biggest threat to global economic stability. This inflation is, of course, a natural response to the growth in oil prices, as industrialized economies depend on the supply of crude oil in just about every sector.

The situation is exponentially compounded when the currency that is the basis of all of these transactions is rapidly depreciating in value, as seen in record lows versus the Euro. One must wonder if Ben Bernanke and the rest of the Federal Reserve Board are questioning their monetary policy, as economies that are keeping interest rates up to draw capital are seeing their currencies rise in relative value.

Another factor in this fiduciary fiasco is the echo chamber of ideas. Last summer, CEOs declared the housing crisis near its end, and more recently that the crisis was in its last throes. The point that we can take from these statements is that their companies are more important than reasoned, open discourse about the overall state of the economy. And that it is a losing proposition to trust those who are dependent upon a stock price. As long as there are CDOs and other arcane financial creations that do not have a monetary value, banks will continue to be plagued with problems, which will be further complicated by consumer spending withering away under the burn of inflation and unemployment. Surveying a crystal ball to find the answers to when the U.S.' GDP might become positive again is less than useful.

Ben Franklin Report: States Paying Bills

What is an annual or bi-annual exercise in frustration in good times, has become a nightmare for many states across the union, as legislators tangle over spending priorities. An equally alarming trend is that some states were only able to reach their decisions behind closed doors, away from the probing eyes of the concerned public. And how concerned should the public be about the problems behind budget shortfalls? Well, the public is already cutting back on their expenditures, so there's little reason to further bemoan the plight of Main Street. To provide some background context, here are the BEA's GDP Figures by State. Government spending is a major factor in GDP calculations, and with states being forced to spend less, there will be further downward pressures on GDP for 2008.

In Kentucky, the budget process is getting bogged down as State Legislators use money in special funding pools to spend millions of dollars on efficient and not expenditures, such as infrastructure little league equipment. However, to add more funds to the state's General Fund, lawmakers are planning to seek at least $25 million through the sale of bonds. Even with the modest amount requested, one would hope that the State Government would seek to diversify their income sources to allow for more flexibility. The deadline for final action on the budget is April 15th, the last day of the 2008 General Assembly.

In New York's new budget, the final version of the budget allots education funding in a similar pattern to previous state budgets, with appeals to certain constituencies, such as Westchester. Nine days late, the budget was decided in last minute closed door talks between legislative leaders and Gov. Patterson, who has reportedly been marginalized throughout budget negotiations. However, depending on $1.5 billion windfall funding begs the question of whether or not the state has overspent.

In another case of infrastructure projects falling under the axe of deficits caused by falling receipts and increased costs, South Carolina's budget is facing a $90 million shortfall that appears to be stifling long-term economic growth and short-term development opportunities. Water and sewage aside, the proposed fiber optic system, Light Rail, designed to connect the state's three research universities to national and international colleagues probably would have created numerous extraneous benefits beyond the possibility of drawing private investment.

Nevada's situation seems much more drastic, or in the words of Senate Minority Leader Dina Titus, Democrat from Las Vegas, "We're down to the bone." As all of their traditional revenue streams have dried up, the state is facing at least $350 million in budget shortfalls, aside from unfunded liabilities in the State Pension system which will cause problems in future years.

In California, the Governator is on a tour of Republican strongholds to drum up support for an amendment to the state constitution required by his sytemic fix of the state budget process. In an effort to tie the hands of legislators, Arnold is trying to limit increases in legislative spending to 5.4%, the average increase in revenue in the state, an effort to average out the boom and bust years.

In Florida, the downturn in tax revenues has gotten so bad, that the Florida House has proposed suspending Hospice funding for the next two years. Lawmakers argue that the programs can be supplemented by localities and hospitals. It stands as just another lesson of the problems that stand to be created as states reduce the services they can offer as they aren't able to make Benjamin Franklin stretch in quite the way he used to.

Arkansas, too, is facing shortfalls, with the state legislature predicting that only 54% of the second-tier Class B spending will be funded in the coming year.

Ben Franklin Report: Quick Shots Across the Bow

Today will see Round 2 of top economic officials versus Congress! To the finish! For the first time yesterday Fed Chairman Ben Bernanke mentioned the dreaded "R" word, and it isn't radical or racism.

In the Wall Street Journal today, Andy Lapierre gives a thorough look at the ongoing credit crisis and the Fed's responsibility in causing asset bubbles, malinvestment, and labor dislocation through the "Greenspan put."

The President of the New York Federal Reserve, Timothy Geithner is still worried about the state of capital markets, and has a plan to fix the regulatory overhang created by the Federal Reserve's new lending options. In an election year, the Fed has a steep hill to climb in justifying putting so many billions of tax payer dollars at risk. His testimony, though really boring to read, has a couple of gems firmly lodged into it. Like this:

The sudden discovery by Bear’s derivatives counterparties that important financial positions they had put in place to protect themselves from financial risk were no longer operative would have triggered substantial further dislocation in markets. This would have precipitated a rush by Bear’s counterparties to liquidate the collateral they held against those positions and to attempt to replicate those positions in already very fragile markets.

In short, we judged that a sudden, disorderly failure of Bear would have brought with it unpredictable but severe consequences for the functioning of the broader financial system and the broader economy, with lower equity prices, further downward pressure on home values, and less access to credit for companies and households.

In a sign that the credit crisis is spreading beyond the mortgage market where it first reared its ugly head, Americans are falling behind on every single type of loan.

And, for good measure, here are some anecdotal accounts of the muni bond problems. Public projects are being forced to sell bonds due to tighter and tighter budgets, but being handled on the other end by higher financing costs. Of course, in some cases, these are projects that will save money for the taxpayer.

Ben Franklin Report: Sober Up

This morning Ben Bernanke tried on a new role, that of a voice of reason to the financial markets. In testimony before Congress, Bernanke warned that the economy is still probably headed into a recession and that the American economy probably won't see growth until 2009. In pointing out the potential problem areas, the Fed Chairman rattled off a list of the biggest sections of the credit market. To be fair, his calculations account for a wide degree of volatility in the markets and an inability to forecast the future amidst this turmoil.

Treasury Secretary Henry Paulson, while in his sixth visit to China to address outstanding economic issues between two largest economies in the world, took a step back from policy brinkmanship and indicated flexibility in using government money in addressing the crisis in the housing market. However, he revealed his true feelings on the matter in his disregard of those homeowners who are now suffering the phenomena "negative equity" in their homes. It remains to be seen whether this change of heart is a result of recognizing the benefits of government intervention in the marketplace or the windfall benefits the financial industry will receive in the event of any government intervention.

In perhaps some strange sort of April Fool's joke, the markets reacted exuberantly to UBS and Deutsche Bank writing down a combined $19 billion dollars and will seek to elicit almost as much capital investment. And the good news doesn't end there. The Commerce Department announced factory orders decreased 1.3% in February. When one considers the recent rise in unemployment, these numbers can be expected to go down further with a shrinking labor force. The IMF is predicting a significant downturn in the global economy, to understate the conclusion. Cleveland-based National City bank appears to be headed down the road to failure in the wake of the ongoing financial crisis. If they're hoping for a turnaround in the greater Cleveland area to cleanse their balance sheets to make a takeover more appealing, they can probably sooner expect a deux ex machina to show up at their headquarters in the form of a flying pig. The crux and source of the entire problem, the financial industry, is facing a slowdown for the entire year of 2008, in case that wasn't obvious.

In other news, it would appear that homeowner relief has gotten a rider of tax breaks for home builders. The only good side to this is that the provision probably won't cost the government much, as it will be shrinking revenue from a shrinking sector.

Ben Franklin Report: Questions, Questions Everywhere

Unfortunately, due to the arcane nature of economic measurements and a desire on the part of the elite to remain elite, there is an entire market around attempting to provide answers to clients and predict near- and long-term economic phenomena. So, in an effort to help you from wanting to go spend money on overpriced financial services, here are some questions you may be asking, and some answers.

• How much will this crisis cost the economy in the long term? According to JP Morgan Chase, the overall costs could be as much as $1.2 trillion.
  
• How is the crisis being felt in other markets? Europe's economy is resilient against the contagion, thanks to the rising Euro and sound monetary policy of keeping interest rates stable, which, in turn, draws available capital into the Eurozone. Head of the European Central Bank President, Jean-Claude Trichet remains skeptical if the worst has yet to come. Canada's CIBC still is working through at least $25 billion in exposure to monoline insurers.
  
• Is there more unwinding yet to happen in bad loans? The simplest way to answer this would be to say, "Yes." However, as details are still emerging about the prevalence of home equity loans, or other liens placed on homes in addition to the traditional first lien, mortgages, there is still a lot of red ink to be spilled.
  
• Is the stock market going to be a viable investment anytime soon? Perhaps, but not for the next few years. In the cyclical nature of business, the stock market traditionally sours for a decade after a decade of strong trading. So if this trend continues, the market will probably not begin to make lasting gains until approximately 2012.
  
• With increasingly visible protests against financial corporations receiving bailouts from the Federal Government, are there any other potential targets of popular discontent? As all politics are local, one need look no farther than the financing of your local Wal-Mart. Does your local community allow 'tax increment financing?'
• The employment outlook is souring, but was there any good news in the latest batch of GDP data? Not really, almost every number on the page is down in comparison to the quarter before, with a very precipitous drop in government spending. Also of note, exports are declining at the same time as imports are decreasing, which is a reflection of real consumer spending. Also of note, the value of real residential fixed investments, that of houses and such, fell by 25.2%.
• With all of the concerns about moral hazard, is there really a bad way to intervene in the marketplace? Yes, there is. For instance, pushing Fannie and Freddie into buying bad loans and then holding more capital in reserve against this new volume of bad loans. Businesses and executives that made bad decisions need to face the consequences of their decisions. The government has enough work to do to get its own house in order. I'm not alone in thinking that with this bailout will come a spiraling dollar.
  

Ben Franklin Report: Caturday Reading

With Ben Bernanke's newfound affinity for nimble and flexible policy, the comparison to a cat almost seems natural. However, in an effort to help you better channel your inner cat here is some reading and food for thought.

First, usaspending.gov is a really awesome website for policy addicts out there with some dynamic ways of looking at the way that the U.S. Government spends its money, with much potential for fun and blogging. For instance, in 2007, the Federal government spent less on traditional state spending than in previous years. This continues, despite record federal deficits. As one would expect the crumbling value of the dollar is being reflected in exponentially increasing federal spending. Unfortunately, for us, the War in Iraq and the Global War on Terror are contributing, if not causing, this problem.

Here is a handy slide show from the GAO about how the government is spending its money. The numbers are pretty terrifying, especially considering that these numbers don't reflect the quicksilver economic reality that we are currently faced with, aka the increased transportation costs of gas prices going up by 25% on average. Remember when it was serious when gas reached $2 a gallon? Not to mention the fuel inefficient vehicles the military relies on aren't going to see less use in the near future. Unlike the GAO, we here at the Fringe Element feel that more constructive advice is necessary, if for nothing more than general principle. My recommendation would be to move towards an asset-based financial system, perhaps similar to Islamic banking practices, in an effort to provide some stability to the dollar to try to halt its historical slide to worthless.

The Ben Franklin Report: Everybody Panic!

What would happen if the government forced these big financial institutions to take responsibility for their own bad behavior, instead of forcing it on individual home owners?  Its both a bit creepy and a bit reassuring when the Wall Street Journal is asking the same questions we have been for months.  They reach the conclusion that presumably the fed reached with sober and rational thought.  That it is against public policy to allow a pillar of the U.S. financial world to fall during a widespread crisis.  

My problem with this whole thing is not so personal so long as I have a roof over my head and a steady job so I resort to moral philosophy.  I see a great deal of hypocracy in the behavior of large financial institutions during this crisis.  I assume that these white men in power over these companies are of a political bend that reacts negatively to the concept of welfare.  Yet here we see one of the most gross examples of corporate welfare since the Cheney crafted energy bills.  These institutions acted with a conscious disregard for the substantial risk in their investments or undertook efforts to conceal the risk.  This is a violation of even the slim standards of corporate ethics.  Even concealment is a thin excuse.  I am no financial guru, but even I was aware of news articles by sober economists who saw the writing on the wall regarding the real estate bubble a year ago.  Now these institutions are pushing the consequences of the risk they willingly, or negligently undertook, on home owners, and now on the tax payers because the government is afraid of what will happen.  Rightly so.  Still, it could be worse.  

This is another example of the Bush administration being asleep at the switch.  This administration frequently selects highly incompetent people for the highest offices in government based almost solely on their loyalty to the party or the specific individual that currently holds the office of the president, rather than to the people to whom they are supposed to be accountable.  This is not to say I would rather have had more cumbersome regulation of the markets.  But the markets will run off a cliff like a blind lemming if given the opportunity and I presume this administration allowed that to happen because of a pathalogical need to continue to claim the economy was doing well as whole sectors of the economy collapsed, one after the other, on their watch.  Now, more regulation is guranteed. This regulation is going to be drafted by people with only a rudimentary understanding of what happened and are more conserned with elections.  All industry has to do to avoid new, clumsy, onerous regulation is stop being both selfish and stupid at the same time.  

With the weak Dollar, the times are right for the manufacturing sector to surge into action and save us.  Tragically the long fall of the giant U.S. manufacturing sector, that supplied durable goods to the whole of the world for almost a century appears to be complete.  The last nail driven in the coffin by Wal-Mart.  

These two realities of market forces are both strong examples of the foolishness of faith in the market.  The government releaving financial institutions of the moral hazard of the decisions they make and our pathalogical need to consume massive quantities of cheep, foreign-made, goods are illustrative of how even regulated capitalism encourages us to feed the monster that is killing us.

I blame you.

Ben Franklin Report: a Perfect Storm

As always, the world keeps spinning, and people will keep being people. So, by way of briefing, here are a few developments, like how a Recession is inevitable. Bush is optimistic.

Ben Franklins are increasingly worthless, compared to most foreign exchanges. The Dollar has gone below 100 yen for the first time in more than a decade, and keeps hitting new highs against our poor greenback. Inflation, though, reportedly didn't go up by very much in February, perhaps signifying a leveling out of prices, in the wake of consumer prices not properly reported in the Consumer Price Index. Any hope that inflation will be ameliorated by flattening or perhaps falling consumer demand is probably, at best, naive with oil on its march up to $125 a barrel. Fannie Mae and Freddie Mac may have been thrown a lifeline by Fed chief Ben Bernanke, but should he have? Is it enough? $200 Billion is a lot of money to be financed by Treasuries, yet not very much compared to the size of the mortgage market. Speaking of which, is going into dire straits as the crisis is beginning to move into the more traditional branch of mortgages, those whom enjoy good credit histories. In truth, the Fed has now set a course to assume all risk to the global financial system from the mortgage crisis.

Treasury Secretary Henry Paulson has announced new financial guidelines that are already market practice, which mostly center around risk assessment and the documentation required to receive a mortgage. Any notion of adjusting accounting requirements to allow banks to free up capital on their balance sheets, however, seems extremely misguided.

Fanning the entropy further, a pair of large financial institutions have collapsed in the wake of the problems in the financial sector. Bear Sterns, just after appointing a new head of East Asian operations, found its liquidity destroyed almost overnight. Thankfully for them, JP Morgan is riding in to the rescue. The Carlyle Group may come to the rescue of its stepchild, not-really subsidiary Carlyle Capital Corporation, as its assets have been seized. In a branding effort, David Rubenstein, Carlyle co-founder, wants to make sure that investors break even. This effort, like almost all of the efforts of the Fed and Treasury, are aimed at helping large banks and financial institutions recover their capital outlays lost as a result of inordinate risk assumption.

Must Watch Video: Tent Cities in LA.

A Testimonial that generically represents the leading edge of the crisis.

Ben Franklin Report: Reality Sets In

For those uninterested observers, the price of a barrel of crude briefly touched a record of $105.97, which is above the record set during the 1979 oil crisis, adjusted for inflation. As for monetary data, several growth engines are looking at double digit money supply growth, with the corresponding increase in inflation, namely, Saudi Arabia, South Korea, and China. In the United States, figures from the end of February also pointed to growth in inflation in March and beyond.

For less abstract data, one can look at the inflation figures from the European Union. Resisting calls to lower rates to help encourage consumer spending, the ECB and Bank of England have, for the most part, resisted cutting rates for fear of even greater inflation, deciding again today that no rate cut was necessary. Once again, I ask, does Ben Bernanke have doubts late at night about the course of monetary policy here in the U.S.? This move, on the part of the Europeans, will help serve to mitigate some of the effects of the financial crisis, by drawing capital to accounts where said capital can earn more interest.

American employment figures superficially appear stable, with whatever signs of growth that one might be able to pull from them. Better data will be available next week to see if the economy can keep itself sputtering along based on job creation, but this seems like a losing proposition, to say the least, especially with the rising tide of foreclosures.

On the retail side of things, shoppers are definitely out looking for bargains, reflected by strong sales at Wal-Mart and weaker sales at the higher priced Gap and J.C. Penney. In Europe, big box retailer Carrefour is also reporting lower earnings, after having its profit margins mostly wiped out by logistical costs during the second half of last year. While the company expects to see return to strong profitability in the near term, their plan of lowering logistical costs may not achieve fruition with the price of oil not likely to fall in the near to medium term.

In the stock markets, the credit crunch is beginning to be seen in failed margin calls, and perhaps the beginning of a margin spiral. Thornburg Mortgage Co. and the Carlyle Capital Corp. both reported failed margin calls, sending both scrambling for cash. Which, as the spiral metaphor implies, will send stock prices further downward, and other companies scrambling to find enough cash to cover accelerated margin calls from banks.

The bet that companies are wagering their financial futures on, namely that the US Treasury will ensure that agency mortgage securities, such as those issued by Fannie Mae and Freddie Mac, are going to go sour, and have been called "absolutely not true" by a Treasury spokeswoman. The markets are reacting, but in a more direct way, the spread between these securities and U.S. Treasuries is growing, which is a sure sign that investors are having second thoughts about the long-term viability of the GSE twins.

Troubled bond insurer Ambac has announced that it is expected to raise $1.5 billion in capital to keep its business operations going and avoid a rate cut by Moody's. Interestingly, banking institutions do not appear interested in offering Ambac any capital, which may be a sign that the worst is yet to come in municipal bonds. Unfortunately for Ambac, the company is going to require more than this to keep afloat.

As always, theories as to how and why abound. Some, such as Rich Karlgaarld, favor a supply side solution, with a lower tax burden on business. As he argues,

"What's the effect of supply-side tax cuts? As Steve Forbes likes to say, when you reduce the tax burden on a thing, you tend to get more of that thing. Reduce taxes on production and you get more production. More production means that more goods and services must compete for your dollars. That's how prices go down, not up. This is not hard to figure out! It is simple supply and demand. If you want prices to go down, increase supply. Incentivize the suppliers."

Unfortunately, this is meaningless if those who provide demand aren't capable of demanding anything out of the economy. With the dollar losing evermore value, the individual consumer is going to be hard-pressed to find any margin for consumption amidst higher costs for staples, such as energy and food. Oh, and not believing in the evidence of something does not mean that there is no evidence of that something.

On the other side, the Mogambo Guru finds the best way to read the Total Fed Credit, completely drunk. Grumbling about fiat money supply, the fractional reserve system, and the direction of monetary policy in the U.S., the Guru decries those who say Gold is the panacea for the ills of the dollar. Gold, by the by, is already above its previous record high and is pushing towards $1000 a troy ounce.

Ben Franklin Report: Lists Abound

Because businessmen love lists, here is a list of some of the important stories surrounding the ongoing financial crisis.

• 12 Steps to keep Ben Bernanke awake at night.
  
• As inflation looks more and more probable, the price of oil jumps to a new record high of $100.10, and, of course, the markets react.
• With U.S. Treasuries already near historic lows, analysts are seeing a market at near capacity as the government is forced to sell off billions more in deficit spending. While central banks with large inventories of treasuries and such securities should be the most nervous, every American citizen should probably share their concern.
• The Fed's new Term Auction Facility, created to help inject liquidity into the banking system has been extensively used, to the tune of $50 billion. The only problem is that the collateral behind these short-term, one month loans is collateral that wouldn't be accepted by other parties.
• The credit crunch is threatening to bury Boston's "Big Dig."
• Credit default swaps, according to the Office of the Comptroller of the Currency, now measure more than the amount of U.S. Treasuries outstanding.
• Credit Suisse's CDO headache
  

Ben Franklin Report: Time to Testify

Eliot Spitzer, the Governor of New York, yesterday weighed in on the ongoing financial crisis, with the unique perspective of one who was attempting to halt predatory lending practices before they were allowed to become the problems that we are seeing unfold today. The obscure bureaucracy, the Office of the Comptroller of the Currency (wiki), appears to have played a key administrative role in allowing this crisis to involve much more capital than would have otherwise been possible. As black has become white and white black, the Bush Administration has seemingly turned a bureaucracy dedicated to providing a degree of confidence in our banking system and protecting consumers, has become a tool for financial profiteering. Comptroller Dugan has this to say in response to the Governor's allegations, essentially pointing the finger of blame back at the states and arguing that the worst abuses came from institutions that do not fall under the purview of the OCC. Is this, perhaps, the next scandal to emerge from the Bush Administration?

In other news, Freddie Mac has announced plans to ease the financial liability of of its private mortgate partners. At issue is the liabilities said partners are burdened with incidental to the protection afforded by the mortgage agency. In tandem with this, the stimulus proudly signed by Bush into law the day before yesterday, increases the maximum value of a mortgage that the twins Freddie Mac and Fannie Mae may take onto their books, up to a maximum of $729,750. These two actions, in different ways, accomplish the same financial objective: to shield the private investors from the risk that they themselves took on by means of regulated governmental entities, which will inevitably mean that the taxpayer or, more likely, the purchasers of U.S. Treasuries will be stuck with the consequences of the ballooning crisis. Of particular note to the Presidential Election, some of the markets that would fall into the category to receive the largest margin of protection are in New York and California.

MBIA, Inc. executive said in Congressional testimony that they are in a position to withstand the financial crisis and no new regulation is required. The other contender for who rejected Warren Buffet's offer, FGIC Corp. announced intentions to be split up into two separate corporations, one for municipal bond insurance and another for the subprime mortgage liabilities, to cope with a new rating from Moody's at below investment grade.

On the legal front, the SEC is looking at revising financial transparency in response to more than three dozen investigations underway by the agency. The FBI is investigating a total of 16 corporations for fraud in relation to the financial crisis. I'm sure that this type of indeterminate liability will weigh heavily on the minds of investors who are desperately needed to provide all-important capital. The latest figure, produced by an analyst at UBS, forecasts the potential loss resulting from the ongoing financial crisis at $203 billion, which is likely to go up as other sectors of the credit market and municipalities become less safe investment choices.

This news, of course, makes Ben Bernanke's assurances of adequate insurance from risk sound like a flight of fancy. In light of Bernanke's precarious position, one must look to figures that measure confidence in U.S. monetary policy, like foreign exchange rates (Updated Dollar-Euro Exchange Rates). Considering the fall in the dollar in response to the Fed Chairman's comments, it would appear that the investment community does not share his opinions on the long-term outlook for the greenback. Considering his acknowledged position as the foremost authority in central banking, one might ask if Ben Bernanke is second guessing the Fed's dovish rate policy with the European Central Bank taking a more hawkish policy, keeping interest rates above 4%.

Below, is Bernanke's testimony yesterday, a song inspired by the Fed Chairman, and hot video from Reuters. Enjoy!

Ben Franklin Report: Looking For a Knight in Shining Armor

With the subprime crisis beginning to spread to other parts of the credit market, economists are bearish to the point of betting on a recession for 2008. Of course, those who enjoyed the party are very unwilling to pay the tab. Thankfully for them, Warren Buffet isn't willing to allow the entire municipal bond market to implode, out of the goodness of his heart and the potential metaphysical ramifications. Just kidding.

"When I go to St. Peter, I will not present this as some act that should entitle me to get in," [Warren Buffet] said. "We're doing this to make money."

Some feel as though this is a poison pill to the companies that have received the offer. Ambac and another undisclosed company, either MBIA Inc. or FGIC Corp. (any guesses on which one?), has already rejected Buffet's offer. Here is a look at some of the other ideas being sent around the financial industry aiming at rescuing a bond market which is faltering to the tune of $6 Billion as of yesterday, by the way. The market responded by retreating to the Treasury market, pushing the yield down half a percentage point. And the greenback fell against the Yen in Asia on credit worries.

Another reporter for Reuters, John Parry, suggests that the United States government might be forced to enter the market to stabilize it in the event of a depression. Of course, he admits that it would have to be financed in the form of new government debt based on more tax cuts, but he doesn't admit that it would serve as a kind of bailout for the corporate interests who have made so much money up to this point on strange new financial instruments, like CDOs. Investors should be more careful in considering how they allot their money. There is no reasthe government should protect those who wanted to make a quick buck

Ben Franklin Report: Where Did My House Go?

As anecdotal evidence of the ongoing financial crisis, the foreclosure rate in Wisconsin jumped in the past month to a new record high! As with other states, the urban areas are being hit the hardest, with Milwaukee County leading the state in the number of newly empty properties.

As for hard statistical evidence, I present the Rental Vacancy Rates, as compiled by the U.S. Census Bureau. There's a lot to be said for this table, but one of the most important notes regards the rent of a 1-unit structure, which actually decreased if one uses the value of a 2007 Dollar. One potential lesson from this is that the dollar didn't actually increase in purchasing power during 2007, in fact it lost such power. When prices increase in this fashion, it is almost certain to be indicative of inflationary growth, as in the growth derived not from any improvement in quality of product or innovative economic organization, but rather from aggregate forces which are reducing the power of the greenback. I believe this phenomenon might be called stagflation. The changes in vacancy rates do not appear to be statistically significant, other than perhaps a slight trending in shorter vacancy times. Which can only be taken as good news, despite the problems that foreclosure causes renters.

Amazingly, the search volume for 'foreclosure' has jumped by double in the past year, and the Internet, in an example of supply meeting demand, has come through with a plethora of sites designed to provide consumers information on foreclosure actions.

On the reverse side, most homeowners are not fully aware of their options when faced with foreclosure, according to Freddie Mac. Thus, many fall easy prey to scams like this one.

Ben Franklin Report: the Buttered Side

Even though the Industrial & Commercial Bank of China, the largest bank in the Middle Kingdom has announced $1.2 billion in exposure to the subprime crisis, there may yet be a silver lining. Considering that the Bank of China, number two in terms of amount of exposure in China, announced that they might post a loss on the year on such transactions, the executives at the ICBC are obviously re-examining the fundamental risk beneath the AAA-rated financial instruments behind the ongoing crisis.

There are still a couple of good opportunities out there in the world of finance for even the most bearish investor. If you are looking for banks that have strong fundamentals, no exposure to the subprime crisis, and are being sold at bargain prices, look no farther than Scandanavian banks. Or, if you are completely risk-averse and require underlying assets to your investment, perhaps you should consider Islamic banking, like in Malaysia.

Here in the U.S., the economy has risen to the tip of everyone's tongues. In hard-hit California, candidates are pitching their message to whoever will listen. In Massachusetts, the State is bringing civil suit against Merrill Lynch, seeking profits from selling the aforementioned AAA-rated credit instruments, collateralized debt obligations to Springfield, Massachusetts. And there are one or two more thoughts floating around about the planned economic stimulus moving through Congress.

Ben Franklin Report: Consequences

Observable in most economic aggregates of data, there is a form of statistical lag, which is how long it takes those who count to count the count that they choose to count. This phenomenon is acutely visible in the most recent jobs report, which is accompanied by a downward revision of data from December, to the tune of 376,000 jobs in the level of employment. According to the latest figures, the economy lost about 17,000 jobs in January. There is a large disparity, according to the aforementioned story, in the number of jobs expected and those that actually were, wherein lies the statistical lag. If one can assume that there is a two month lag in the system when it comes to employment figures, how will they look two months from now? In my opinion, the stock market could come to reflect the 2003 levels of the job market, depending on the fundamental strength of the U.S. Dollar, because it is all about the Benjamins. The reporter, Rex Nutting, Washington Bureau Chief for MarketWatch, covering the jobs report also says hard times are coming, starting, "The last pillar to hide behind has fallen. Jobs are being lost in the U.S. economy."

Speaking of, the dollar isn't seen to be in the best shape, having lost ground against most of the major currencies since the beginning of the year, such as the Euro and the Yen. Canada's Dollar is enjoying the benefits of a difference in interest rates, again stronger than the American greenback. Of course, the U.S. Dollar is continuing it's increasingly not so gradual slide against the Chinese Yuan (RMB).

In a minor aside, the subprime crisis is continuing to develop in an international way. The latest casualty of the curious lending practices is Mizuho Financial Group, to the tune of $3.2 Billion. In a sign that the subprime crisis is going to spread into other sectors of the economy, pharmaceutical giants like Bristol-Myers Squibb and IT tech companies like Ciena Corp. are posting writedowns on subprime investments. Moody's is predicting that the subprime loss could amount to 85% of all such loans made, their CEO blames flawed models. It looks like the State of Florida is going to blame Countrywide Financial Corp, and the FBI is looking at 14 companies and counting. Alan Greenspan is trying to deflect blame from his time in office. In an exercise of States' Rights, states are refusing to take on the burden of refinancing subprime mortgages, a primary part of Bush's economic crisis recovery plan. And, also, there's video goodness, as Jon Stewart talks about the economy.

Benjamin Franklin Report: The Sucking Noise Gets Louder

For those financial analysts who are looking at the balance sheets over at the mortgage twins, Fannie Mae and Freddie Mac, are probably worried now that the CEO of Fannie Mae is "preparing for a long winter" and Freddie Mac expects $10-12 billion in mortgage losses over the next quarter. Can the twins survive another bad quarter or two, and could the financial markets withstand their collapse? Ask again in 2010. The news brought down the Dow Jones and the wider markets when announced.

Benjamin Franklin Report: 30 Nov 07

An inevitable feature of the give and take in our economic system is the fact that we have to pay back whatever it is that we use. In simplistic terms, when you spend money, it has to come from somewhere, be it in the form of a trade item or currency. Or, if you really need money, you can spend your future earnings, which has gotten us into a bit of a bind recently, as I previously reported. In summary, the market is looking like it's rebounding nicely. Freddie Mac (NYSE:FRE) and Fannie Mae (NYSE:FNM) managed to issue some short-term debt items to raise enough capital to keep their operations afloat at least for another 90 days. (Wait, what is an S&L again? Why were they so controversial again?) The really big news item of the day, though, is this article. Countrywide Financial is dealing with the private ramifications of the ongoing credit crisis, although there is a whiff of hope in the air that is pushing Countrywide's stock (NYSE:CFC) up by more than 14% at press time. Citigroup (NYSE:C) is also benefiting from what some jackass business correspondent might call headwind generated in the markets by potential government intervention. I guess if Hope is not readily apparent, corporations are not forced to create their own by saddling their duly paid representative to take on their misguided liabilities.