Post-Bubble Facts of Life

By: Doug Noland | Fri, Feb 13, 2009
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For the week, the S&P500 sank 4.8% (down 8.5% y-t-d), and the Dow dropped 5.2% (down 10.6%). The Morgan Stanley Cyclicals fell 7.2% (down 15.9%) and the Transports were clipped for 7.7% (down 16.4%). The Utiliities were smacked for 5.5% (down 3.7%), and the Morgan Stanley Consumer index declined 4.7% (down 7.9%). The small cap Russell 2000 (down 10.2%) and the S&P400 Mid-Caps (down 6.1%) were both down 4.7%. The Biotechs slipped only 0.9% (up 8.8%). The NASDAQ100 declined 3.2% (up 2.1%), and the Morgan Stanley High Tech index dropped 5.0% (up 3.2%). The Semiconductors (up 4.0%) and the Interactive Week Internet index (up 4.9%) each declined 3.8%. The Broker/Dealers sank 6.5% (down 2.6%), and the Bank lost 14% (down 41.1%). With Bullions rising $30.60, the HUI Gold index added 1.8% (up 2.9%).

One-month Treasury bill rates ended the week at 24 bps, and three-month bills were at 32 bps. Two-year government yields were little changed at 0.93%. Five-year T-note yields were volatile but ended the week down 8 bps to 1.84%. Ten-year yields fell 11 bps to 2.85%. Long-bond yields were about unchanged at 3.72%. The implied yield on 3-month December '09 Eurodollars jumped 11.5 bps to 1.55%. Benchmark Fannie MBS yields fell 10 bps to 4.25%. The spread between benchmark MBS and 10-year T-notes widened one to 136 bps. Agency 10-yr debt spreads narrowed 5 to 71 bps. The 2-year dollar swap spread increased 8 to 69 bps; the 10-year dollar swap spread added 2 to 25 bps, and the 30-year swap spread declined 5.75 to negative 29 bps. Corporate bond spreads were mostly narrower. An index of investment grade bond spreads widened 2 to 220 bps, while an index of junk bond spreads narrowed 46 to 1,169 bps (11-wk low).

Investment grade issuance included Cisco Systems $4.0bn, Goldman Sachs $1.6bn, Marathon Oil $1.5bn, Metlife $1.0bn, News America $1.0bn, PACCAR $750 million, McKesson $700 million, Unilever $1.5bn, Oglethorpe Power $350 million, and PepsiAmericas $350 million, and Connecticut Light & Power $250 million.

February 13 - Bloomberg (Gabrielle Coppola and John Detrixhe): "High-yield, high-risk bond sales almost tripled to $2.38 billion this week, the most in seven months, as borrowers took advantage of a rally in corporate debt to increase cash reserves and pay down credit lines."

Junk issuers included Chesapeake Energy $1.425bn, Cox Communications $1.25bn, CSC Holdings $525 million, Denbury Resources $420 million, and HCA $310 million.

I saw no international issues this week.

U.K. 10-year gilt yields sank 39 bps to 3.55%, and German bund yields dropped 26 bps to 3.11%. The German DAX equities index fell 5.0% (down 8.2%). Japanese 10-year "JGB" yields ended the week down 8 bps at 1.255%. The Nikkei 225 declined 2.1% (down 12.2%). Emerging markets were mixed to higher. Brazil's benchmark dollar bond yields fell 4 bps to 6.78%. Brazil's Bovespa equities index gave back 2.5% (up 11% y-t-d). The Mexican Bolsa dropped 5.2% (down 13.5% y-t-d). Mexico's 10-year $ yields rise 5 bps to 6.64%. Russia's RTS equities index rallied a notable 19.8% (down 1.2%). India's Sensex equities index gained 3.6% (down 0.1%). China's Shanghai Exchange jumped 6.4% (up 27.5%).

Freddie Mac 30-year fixed mortgage rates dropped 9 bps to 5.16% (down 56bps y-o-y). Fifteen-year fixed rates fell 9 bps to 4.81% (down 44bps y-o-y). One-year ARMs increased 2 bps to 4.94% (down 6bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates down 5 bps this week to 6.90% (up 24bps y-o-y).

Federal Reserve Credit declined $10.3bn to $1.830 TN. Fed Credit expanded $972bn over the past 52 weeks (113%). Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt last week (ended 2/11) increased $6.2bn to a record $2.561 TN. "Custody holdings" were up $448bn over the past year, or 21.2%.

Bank Credit declined $6.0bn to $9.764 TN (week of 2/4). Bank Credit expanded $430bn year-over-year, or 4.6%. Bank Credit jumped $372bn over the past 22 weeks. For the week, Securities Credit sank $74.2bn. Loans & Leases jumped $68.2bn to $7.124 TN (52-wk gain of $242bn, or 3.5%). C&I loans added $3.6bn, with 52-wk growth of 8.7%. Real Estate loans jumped $19.7bn (up 4.9% y-o-y). Consumer loans slipped $0.5bn, while Securities loans rose $43.3bn. Other loans increased $2.1bn.

M2 (narrow) "money" supply dropped $27.8bn to $8.250 TN (week of 2/2). Narrow "money" has now inflated at an 18.4% rate over the past 20 weeks and has jumped $723bn over the past year, or 9.6%. For the week, Currency increased $1.0bn, and Demand & Checkable Deposits rose $18.8bn. Savings Deposits sank $47.7bn, and Small Denominated Deposits declined $4.5bn. Retail Money Funds fell $1.8bn.

Total Money Market Fund assets (from Invest Co Inst) dipped $3.4bn to $3.903 TN, with a 52-wk expansion of $515bn, or 15.2% annualized.

Total Commercial Paper outstanding dropped $31.5bn this week to $1.554 TN. CP has declined $281bn over the past year (15.3%). Asset-backed CP added $2.2bn to $736bn, with a 52-wk decline of $80bn (9.8%).

The Asset-Backed Securities (ABS) issuance remains light. Year-to-date total US ABS issuance of $1.8bn (tallied by JPMorgan's Christopher Flanagan) is a fraction of 2008's comparable $27.7bn. There has been no home equity ABS issuance in months. Year-to-date CDO issuance is less than $300 million.

International reserve assets (excluding gold) - as accumulated by Bloomberg's Alex Tanzi - were up $380bn y-o-y, or 6.0%, to $6.721 TN. Reserves have declined $226bn over the past 17 weeks.

Global Credit Market Dislocation Watch:

February 12 - New York Times (Stephen Labaton and Edmund L. Andrews): "The Obama administration's new plan to bail out the nation's banks was fashioned after a spirited internal debate that pitted the Treasury secretary, Timothy Geithner, against some of the president's top political hands. In the end, Geithner largely prevailed in opposing tougher conditions on financial institutions that were sought by presidential aides... He resisted those who pushed to dictate how banks will spend their rescue money. And he prevailed over top administration aides who wanted to replace bank executives and wipe out shareholders at institutions receiving aid. Because of the internal debate, some of the most contentious issues remain unresolved."

February 11 - Bloomberg (Rich Miller): "Treasury Secretary Timothy Geithner ducked the tough questions investors want answered as he rolled out a plan to repair the financial system... Driving investor doubts was Geithner's failure to clearly address three issues at the heart of the crisis: Will banks saddled with toxic debt be forced to fail? How will illiquid assets be removed from bank balance sheets? And what will be done to arrest the decline in house prices that triggered the turmoil?"

February 9 - Bloomberg (Mark Pittman and Bob Ivry): "The stimulus package the U.S. Congress is completing would raise the government's commitment to solving the financial crisis to $9.7 trillion, enough to pay off more than 90% of the nation's home mortgages. The Federal Reserve, Treasury Department and Federal Deposit Insurance Corporation have lent or spent almost $3 trillion over the past two years and pledged to provide up to $5.7 trillion more if needed..."

February 10 - Bloomberg (Dawn Kopecki): "Fannie Mae and Freddie Mac... may need more than the $200 billion in funding pledged by the U.S. government if the housing market continues to deteriorate, Federal Housing Finance Agency Director James Lockhart said."

February 11 - PRNewswire: "At $429.4 billion credit losses for 2008 exceeded those of the previous three years by more than seven times, according to the February 2009 issue of S&P's Loss Trends Monthly... In total, banks represented 54% of the volume of bad loans last year, or $231.2 billion dollars."

February 9 - Bloomberg (Jonathan Keehner and Pierre Paulden): "The five banks that helped finance the takeover of Lyondell Chemical Co. have lost at least $3.7 billion, and that figure may climb to more than $8 billion, which would make the leveraged buyout the costliest in history for lenders. Goldman Sachs Group Inc., Citigroup Inc., UBS AG, Merrill Lynch & Co. and ABN Amro Holding NV agreed to underwrite the $20.9 billion takeover of... Lyondell by Basell AF..."

February 10 - Bloomberg (Michael J. Moore and Pierre Paulden): "JPMorgan Chase & Co., Citigroup Inc. and Bank of America Corp. are among lenders cutting back on $1.6 trillion of credit lines as they face increased demand for loans that threaten to drain capital."

February 11 - Bloomberg (Belinda Cao and Judy Chen): "China should seek guarantees that its $682 billion holdings of U.S. government debt won't be eroded by 'reckless policies," said Yu Yongding, a former adviser to the central bank. The U.S. 'should make the Chinese feel confident that the value of the assets at least will not be eroded in a significant way,' Yu, who now heads the World Economics and Politics Institute at the Chinese Academy of Social Sciences, said..."

February 11 - Bloomberg (Laura Cochrane and Denis Maternosvky): "Russian companies, the biggest emerging-market borrowers during the last three years, are shut out of the international bond market after yields jumped sixfold since August... No Russian company has raised money through foreign bond sales since August... 'The primary market is dead,' said Stanislav Ponomarenko, a fixed-income analyst at ING Groep... "I wouldn't be too surprised if there are no bond deals done by Russian corporates for most of 2009, if not the entire year.' ...International banks proposed talks with Russian companies that owe $400 billion in the next four years, the Russian Association of Regional Banks said..."

February 11 - Bloomberg (Yuriy Humber and Torrey Clark): "Russia's first budget deficit in a decade may reach 8% of gross domestic product this year, more than previous estimates, and the government may spend half of a sovereign wealth fund to cover the shortfall."

Currency Watch:

February 12 - Bloomberg (Dan Hart): "Eisuke Sakakibara, known as 'Mr. Yen' from his 1997-1999 tenure as Japan's top currency official, told... CNBC that the economic stimulus plan in the U.S. may take time. Sakakibara said the current problems in the U.S. are 'much more complicated' than the economic situation in Japan in the 1990s and that a U.S. recovery might take two years or more."

The dollar index gained 0.8% this week to 86.04. For the week on the upside, the Swiss franc added 0.01%. On the downside, the South African rand decined 3.7%, the Swedish krona 3.5%, the British pound 2.7%, the Australian dollar 2.7%, the Mexican peso 2.0%, the New Zealand dollar 1.6%, the South Korean won 1.5%, the Canadian dollar 1.2%, the Taiwanese dollar 1.0%, the Singapore dollar 0.8%, and the Euro 0.6%. The yen declined 0.1%.

Commodities Watch:

February 9 - Bloomberg (Tom Biesheuvel and Jesse Riseborough): "Iron ore is recovering from a three-year low just as Cia. Vale do Rio Doce, Rio Tinto Group and BHP Billiton Ltd. start talks with Asian steelmakers to set prices for annual supply contracts. Prices rose 33% since October to $84.50 a metric China's spot market... Reserves fell 22%t from the record reached in September, while shipping costs more than doubled this year as orders picked up. Imports of iron ore into China rose 6.2% in December..."

Gold jumped 3.4% this week to $942 (up 6.8% y-t-d), and silver rose 3.8% to $13.665 (up 21% y-t-d). March Crude sank $2.31 to $37.86 (down 15% y-t-d). March Gasoline declined 3% (up 14% y-t-d), while March Natural Gas dropped 6.8% (down 21% y-t-d). March Copper sank 5.3% (up 10% y-t-d). March Wheat slipped 1.9% (down 8.8% y-t-d), and Corn dipped 0.5% (down 7.3% y-t-d). The CRB index dropped 5.0% (down 7.1% y-t-d). The Goldman Sachs Commodities Index (GSCI) declined 2.1% (down 5.2% y-t-d).

China Reflation Watch:

February 13 - Bloomberg (Kevin Hamlin): "China's economy is showing signs that a 4 trillion yuan ($585 billion) stimulus package is taking effect. The world's third-biggest economy may expand 6.6% in the second quarter after slowing to 6.3% in the three months to March 31..."

February 12 - Bloomberg (Kevin Hamlin and Luo Jun): "China's new loans rose by a record in January and money supply expanded at the fastest pace in more than a year as the government pressured banks to support a 4 trillion yuan ($585 billion) stimulus package. Banks extended 1.62 trillion yuan of new local-currency loans and M2... climbed 18.8% from a year earlier... The jump in new loans to twice the record set a year earlier shows China may succeed in reviving growth..."

February 13 - Bloomberg (Zhang Dingmin and Luo Jun): "China's central bank is asking lenders to identify recipients of $237 billion of loans made in January as part of a push to stimulate the economy... The People's Bank of China surveyed banks for details on the recipients and terms of the record 1.62 trillion yuan of new lending... The central bank is trying to ensure loans contribute to economic growth, the person said."

February 10 - Bloomberg (Irene Shen): "China vehicle sales topped the U.S.'s for the first time last month... January auto sales in China totaled 735,500, a 14% drop, the China Association of Automobile Manufacturers said... That compares with a 37% plunge to 656,693 in the U.S..."

February 11 - Bloomberg (Kevin Hamlin): "China's exports fell by the most in almost 13 years as demand dried up in the U.S. and Europe... Outbound shipments declined 17.5% in January from a year earlier and imports fell 43.1%, the customs bureau said..."

February 13 - Bloomberg (Jiang Jianguo): "China plans to invest more than 600 billion yuan ($88 billion) in the nation's telecommunications and electronics industries, the 21st Century Business Herald reported..."

February 13 - Bloomberg (Irene Shen): "China's air-passenger volume gained the most in a year last month... Passenger numbers gained 18% from a year earlier..."

Japan Watch:

February 9 - Bloomberg (Mayumi Otsuma): "Japan's economy is deteriorating at a pace unseen in the past half century, the central bank's chief economist said. 'Japan's recent economic decline is faster than that of the U.S., which has been experiencing the worst financial crisis in a century," Kazuo Momma, head of research and statistics at the Bank of Japan, said..."

February 13 - Associated Press (Tomoko A. Hosaka): "Japan's economy likely contracted at an annual pace of more than 10% in the fourth quarter, analysts predict... The Cabinet Office is expected to reveal Monday that gross domestic product in the October-December period plunged an annualized 11.7%... That would mark the steepest drop for Japan since the oil shock of 1974..."

India Watch:

February 12 - Bloomberg (Anil Varma): "Money supply in India grew 17.9% in the two weeks ended Jan. 30 from a year earlier, compared with 18.7% in the prior two weeks..."

Asia Reflation Watch:

February 10 - Bloomberg (Ben Richardson and Carmen Ng): "Amid the gloom, investment bankers in Asia may have something to cheer: the busiest start to any year selling bonds and stocks... Fiscal stimulus packages and government guarantees of bank bonds are ensuring ample supply of new debt. At the same time, interest rates have been slashed."

February 12 - Bloomberg (William Sim): "The Bank of Korea cut its benchmark interest rate to a record-low 2% to revive an economy headed for the first recession in more than a decade as exports and spending cool."

February 9 - Bloomberg (Janet Ong): "Taiwan's exports fell by an unprecedented 44.1% last month on reduced global demand for the island's computer chips, laptops and mobile phones."

February 10 - Bloomberg (Nguyen Kieu Giang): "Vietnam's steel consumption tripled since October as the government's stimulus package boosted the property market, Vietnam Net online news service said..."

Latin America Watch:

February 13 - Bloomberg (Adriana Brasileiro): "Brazilian policy makers have a 'historic opportunity' to cut benchmark interest rates to single digits this year as inflation eases and economic growth sputters, said former central bank president Gustavo Franco. 'It's a completely new world that Brazil is ready to enter,' Franco... said... 'It's the moment for the central bank to show courage and chase this new paradigm.'"

Central Banker Watch:

February 12 - Bloomberg (Daniel Kruger): "The Federal Reserve Bank of New York is in talks with at least four firms to expand the network of dealers that underwrite government-bond auctions as the U.S. prepares to sell more than $2 trillion in debt this year. MF Global Ltd. and Nomura Securities International Inc. are in discussions to join the 16 so-called primary dealers that trade directly with the central bank... RBC Capital Markets, the investment-banking arm of Canada's biggest bank, and Jefferies & Co.... are in negotiations, according to people familiar with the process."

February 10 - Bloomberg (Johan Carlstrom): "Sweden's central bank lowered the benchmark interest rate by a percentage point, twice as much as expected, and said it won't rule out zero rates to jump start lending... The world's oldest central bank lowered the seven-day repo rate to 1%..."

Fiscal Watch:

February 11 - Bloomberg (Vincent Del Giudice): "The U.S. budget deficit widened more than economists forecast last month as spending soared and corporate tax receipts shrank, putting the Treasury on course for a record annual shortfall of more than $1 trillion. The excess of spending over revenue in January rose to $83.8 billion, compared with a $17.8 billion surplus in the same month a year earlier. Spending gained 30.6%, while revenue dropped 11.4%. Corporate tax revenue in the past four months is down 44.3% from a year earlier. The deficit four months into the 2009 fiscal year already is higher than the record for all of the previous year."

Unbalanced Global Economy Watch:

February 9 - Bloomberg (Theophilos Argitis): "Canadian bankruptcies in December jumped 47% from a year earlier, as more consumers struggled to pay their bills amid the country's first recession since 1992."

February 11 - Bloomberg (Theophilos Argitis): "Canada unexpectedly recorded its first monthly trade deficit in more than three decades... The deficit totaled C$458 million ($373 million)..."

February 9 - Bloomberg (Robert Hutton): "Britain's economy is headed for into its worst slump in a century, according to Ed Balls, a Cabinet minister and former adviser to Prime Minister Gordon Brown, the Yorkshire Post reported. 'This is a financial crisis more extreme and more serious than that of the 1930s,' Balls told a Labour Party meeting... 'The reality is that this is becoming the most serious global recession for, I'm sure, over 100 years as it will turn out.'"

February 11 - Bloomberg (Svenja O'Donnell and Brian Swint): "Bank of England Governor Mervyn King said the U.K. is in a "deep recession" that may force policy makers to create money and pump it into the economy after cutting interest rates to a record low. 'Further easing in monetary policy may well be required," said King... 'That is likely to include actions aimed at increasing the supply of money in order to stimulate nominal spending.'"

February 12 - Bloomberg (Jennifer Ryan): "U.K. mortgage lending fell to the lowest level since 1974 last year, the Council of Mortgage lenders said..."

February 10 - Bloomberg (Jennifer Ryan): "U.K. housing sales dropped to the lowest level since at least 1978 in the quarter through January as property prices fell further and Britain's recession deepened..."

February 13 - Bloomberg (Brian Swint): "Europe's economy contracted the most in at least 13 years in the fourth quarter... Gross domestic product in the euro region declined 1.5%..."

February 13 - Bloomberg (Chris Reiter): "European car sales plunged 27% in January to the lowest level in two decades..."

February 11 - Bloomberg (Jurjen van de Pol and John Martens): "Belgium faces the worst recession in three decades on deteriorating exports and company investment, the nation's central bank said in slashing its 2009 economic forecast. The Belgian economy, the sixth-largest in the euro area, will shrink 1.9% this year, the National Bank of Belgium... said..."

February 12 - Bloomberg (Emma Ross-Thomas): "Spain's economy shrank by the most in more than 15 years in the fourth quarter, as what may be the worst recession in half a century pushed the unemployment rate to the highest in Europe."

February 12 - Bloomberg (Alex Duff): "Some of Spain's millionaire soccer players have had their first taste of the credit crunch. Valencia failed to make a salary payment to its players... The club is promising to pay the amount due... by tomorrow..."

February 10 - Bloomberg (Johan Carlstrom): "Swedish industrial production fell by the most in at least 18 years December... Production dropped 20.3% from a year earlier, compared with a revised 12.3% decline in November..."

February 13 - Bloomberg (Andrea Dudikova and Ott Ummelas): "The Estonian and Hungarian economies contracted in the fourth quarter, while the economic expansion in the Czech Republic and Slovakia slid... Estonia's economy shrank in the fourth quarter an annual 9.4%, the most in at least 15 years, while Hungary's economy contracted 2%... East Europe's economies are being hit as the global crisis curbs demand for exports..."

Bursting Bubble Economy Watch:

February 9 - Bloomberg (David Mildenberg and Margaret Chadbourn): "As many as 1,000 U.S. banks may fail in the next three to five years, almost double the one-year tally at the height of the saving-and-loan collapse... RBC Capital Markets analysts said. Most of the failures will probably occur at banks with less than $2 billion in assets as their commercial customers default, said Gerard Cassidy, an analyst at RBC..."

February 10 - Bloomberg (Courtney Schlisserman): "Confidence among U.S. small businesses fell to the lowest level since April 1980 as companies became more pessimistic about sales and earnings prospects..."

February 12 - Bloomberg (Alan Bjerga): "Profits for U.S. farmers will fall for the first time in three years as crop prices stay below last year's records and expenses decline more slowly than revenues, the government said. Net farm income will drop 20% to $71.2 billion this year..."

MBS/ABS/CDO/CP/Money Funds and Derivatives Watch:

February 9 - Bloomberg (Jody Shenn): "JPMorgan Chase & Co. analysts almost doubled their projections for losses on some prime-jumbo mortgages underlying securities... Losses on so-called hybrid adjustable-rate mortgages backing 2006 and 2007 prime-jumbo securities will reach 8% to 10%, according to... analysts John Sim and Abhishek Mistry."

GSE Watch:

February 11 - Bloomberg (Jody Shenn): "Fannie Mae... will no longer bar real-estate investors from qualifying for its loans if they already own four properties as it seeks to spur housing demand. The company will expand its limit for investor and second- home loans to as many as 10 properties per borrower..."

Real Estate Bust Watch:

February 12 - Bloomberg (Kathleen M. Howley): "Home prices dropped the most on record in the fourth quarter... The median price of a U.S. home declined 12% from a year earlier and sales of properties with mortgages in default accounted for 45% percent of all transactions, the Chicago-based National Association of Realtors said..."

Speculator Watch:

February 10 - Bloomberg (Chen Shiyin and Jonathan Burgos): "Temasek Holdings Pte's investments shrank 31% in the eight months through Nov. 30... The state-owned investment company's assets were valued at S$127 billion ($85 billion)..."

Muni Watch:

February 13 - Bloomberg (Jeremy R. Cooke): "The lowest benchmark short-term municipal bond yields in at least 18 years encouraged U.S. tax- exempt borrowers... to sell at least $4.9 billion of bonds this week."

California Watch:

February 10 - Bloomberg (Michael B. Marois and William Selway): "California Governor Arnold Schwarzenegger is preparing to fire thousands of government workers as an impasse over the state's $42 billion budget shortfall threatens to drain the state of cash. Schwarzenegger... plans to send notices on Feb. 13 to 20,000 workers informing them they may be terminated..."

February 9 - Bloomberg (William Selway and Michael B. Marois): "First, Superintendent Don Iglesias canceled plans to update science laboratories in public schools in San Jose... Now he's preparing to fire hundreds of teachers. The 31,000-student district is a victim of the California budget crisis, an annual event in the most populous state and the biggest ever with a $42 billion shortfall expected over the next 17 months."

New York Watch:

February 13 - Bloomberg (Michael Quint): "New York state expects to receive $12.6 billion in federal stimulus funds over the next two years, setting the stage for Governor David Paterson and legislators to allocate the money to help close a record $14.2 billion deficit."

February 11 - Bloomberg (Henry Goldman): "New York state's highest earning taxpayers would pay thousands of dollars more in income taxes under a proposed bill that sponsors say would raise $6.2 billion... The measure's sponsor... said the move would provide an alternative to increasing the sales tax on clothes and trimming Medicaid and school budgets..."

February 10 - Bloomberg (Michael Quint): "The New York Lottery is proposing a gamble where the odds aren't always in its favor -- moving its $1.3 billion prize fund into investments such as stocks, corporate bonds, real estate and hedge funds and out of the safety of U.S. Treasuries. If the agency were to double its annual return to 8% as it projects, the prize would be $37 million more for state coffers as New York grapples with a record $13 billion budget deficit next year."

Crude Liquidity Watch:

February 9 - Bloomberg (Grant Smith and Juan Pablo Spinetto): "OPEC members delayed 23% of oil and gas production projects after prices plunged from last year's record, Secretary-General Abdalla el-Badri said. 'If prices keep at this level then you will see a decline in investment,' el-Badri told reporters... 'Right now we are postponing 35 of our 150 projects.'"

February 11 - Bloomberg (Henry Meyer): "The United Arab Emirates warned of 'soaring risks' for its corporate sector because of banks' reluctance to extend credit amid the global financial crisis, state-owned Emirates News Agency reported."

Post-Bubble Facts of Life:

It was not all that long ago that Mr. Greenspan, Dr. Bernanke and their cohorts were communicating assuredly about post-Bubble "mopping up" policymaking. They mistakenly believed that astute contemporary central banking provided ample knowledge and ("helicopter") firepower to reflate any unfolding bust. There was also the implicit presumption that the benefits arising from the boom far outweighed the manageable costs associated with any possible bursting Bubble.

Today, things are a bloody mess. The Credit system, economy and conventional economic doctrine are all a mess. Washington is a mess. Fiscal and monetary policymaking are messes. A CNBC commentator likened the process to watching sausage being made. I would counter that at least you have a decent idea what the end product is going to look and taste like. And following the theme that the greatest policy blunders were committed during the inflationary Bubble period, I'll suggest to readers that there is essentially no possibility of "good" policymaking in this especially unsettled post-Bubble period. Today's policymakers - of all stripes and persuasions - are poised to become forever tarred and feathered. As much as booms create genius, busts are an absolute cinch for breeding contagious boneheadedness.

The Greenspan/Bernanke Fed's entire fanciful notion of a positive post-Bubble "mopping up" exercise was a myth. And, importantly, we now have ample support for the thesis that risks rise exponentially during the final "terminal" phase of Credit Bubble excess. How about this: the dearth of policymaking competence during the downside of the cycle is proportional to the financial excesses of the proceeding boom? I would be curious to know how the academic, Dr. Bernanke, modeled the political process when he fashioned his hypothetical "mopping up" abstractions.

There are incredible complexities in regard to the process of Credit Bubbles distorting asset prices, patterns of consumption and investment, and income distribution. Epic Bubbles, as the one we experienced, impart profound changes on the social and political fabric. For one, they meddle whimsically with hopes, dreams and expectations.

Importantly, Bubbles inherently evolve into Destabilizing Mechanisms for Wealth Redistribution. These various distortions tend to grow exponentially throughout the life of the boom, creating the imperative to rein in Bubbles prior to their final, fateful phase of destructive excess. Extending the life and vitality of the Bubble only ensures a more problematic scope and greater consequence from the boom-time wealth transfer. And the more protracted the boom the larger the inevitable number of citizens suffering significant hardship - and the more acute becomes public angst. The bigger the Bubble - the greater the outrage and political fallout. And there is simply no graceful, equitable, timely or orderly course when the gale force political winds are gusting redress for the perceived inequities meted out during the Bubble period. Again, I'm not sure how such pivotal post-Bubble social dynamics were factored into "mop up" theorizing.

To be sure, today's Post-Bubble Facts of Life create a serious policymaking dilemma. Unimaginable wealth was shifted to "Wall Street" and their client base during the boom, while millions of regular folk were saddled with unmanageable debt and, now, negative net worth. Those on the right side of the inflationary boom accumulated historic wealth, while millions on the wrong side destroyed their financial health. The runaway boom inflated expectations - and now comes the depressing phase of disappointment and growing despair. Of course the populace is ticked off, spurring politicians to vilify and seek amends and wealth redistribution. In this regard, there are no surprises today to those of us that have studied the post-1929 landscape.

Major Credit Bubbles evolve into ideological battlegrounds. During boom-times, free-market ideologues pound their chests and take too much Credit for the expanding prosperity. Ditto those with the view that tax cuts are always a righteous and unfailing magic elixir. The boom period fashions a positive reinforcing backdrop for the "conservatives," especially as federal coffers are filled to the brim with inflating tax receipts. As we have witnessed, however, the pendulum can swing rather abruptly back the other way. The "liberals" these days feel they have an unequivocal mandate to use big government to rectify our nation's financial and economic transgressions. With unwavering conviction that it's in the best interest of the majority of the population, they seek to impose governmental influence throughout the financial sector and real economy.

Unfortunately, vilification and payback-time become natural impediments to the policymaking process. Of course, "soak the rich" - the class that benefited so conspicuously throughout the inflationary boom - becomes a focal point for the move to redistribute boom-time wealth. Of course, Wall Street "greed" is vilified, with the general public instinctively backing the powerful political movement to re-regulate the financial system. And, of course, fear of financial and economic catastrophe provides a fertile backdrop for the imposition of government influence and control throughout the real economy.

Hopefully, thoughtful analysis of today's messes will alter the conventional doctrine of how best to deal with asset and Credit Bubbles. But it also helps to explain why Washington policymaking these days often appears less than coherent and policymakers less than competent. The harsh reality is that there is a serious lack of understanding on both sides of the isle (as well as throughout the economic community) as to the forces behind today's crisis; the nature of the deep structural damage respectively imparted upon our financial and economic systems during the boom; and the desired policy path to foster system adjustment and repair. Twenty "experts" would ensure at least 20 conflicting plans.

Fundamentally, there's a complete lack of a coherent framework for even an attempt at gauging whether individual policies will be constructive to system adjustment or whether they will instead compound the damage. Without a credible analytical framework, there is not even a beginning point for thoughtful discussion of policy alternatives. Instead, the debate is predictably fought on political fronts. Ironically, in a period beckoning for cooperative bipartisan problem-solving, the process naturally regresses to irreconcilable ideological battles. When our Washington politicians come to a consensus view on the best course for post-Bubble policymaking, they can then move quickly to resolve global religious conflict and the abortion issue.

My instincts are to want to cut Secretary Geithner and the new Administration some slack. Because we could see this coming. The timing was unclear, but I could have easily predicted some years ago that, come the inevitable arrival of the busting Bubble, our Treasury Secretary (in this case, "Secretaries") was going to appear impotent and not up to the challenge at hand. The market expected far more from the Administration's plan. But it is clearly a case of all of us hoping and expecting too much. There is no simple solution, and there's no palatable comprehensive plan. Put the two parties in a big chamber and there won't be any agreement on what to do. Place one party's leadership around a large table and there'll be no consensus. And, quite likely, have the Administration's top economic policy team gather comfortably around a small table in the Oval Office and there will be similar - and perhaps even more heated - disagreement. We're in store for a messy and protracted adjustment period.



Doug Noland

Author: Doug Noland

Doug Noland
The Credit Bubble Bulletin

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