Free Markets, Free People

Musings, Rants and Links over the 18th Fairway:02/09/2010

We finally got a mixed bag on the employment front this month, a welcome change from the purely awful. However, with everyone focused on “creating” jobs I think this quick synopsis attacking the unrealistic expectations of when and where jobs will come from is well worth reading. This chart gives you an idea of how bad it really has been (click image for larger version)


Yves Smith looks at the problem of how to handle the prospect of the financially weaker members of the European Union possibly defaulting. neither the PIIGS nor their colleague states want to take the steps they may need to take. Markets however are sending a clear message, “Do Something!” The risk goes beyond the direct damage from the potential losses from holding these countries debts. European banks are already shaky, with shaky assets and still a lot more leverage than is safe. I believe Europe’s bear market is likely back on.

European banks are shaky? How provincial of me not to mention our own banks. The coming wave of defaults in the Alt-A and Prime mortgage space are not getting enough attention, Yves helps out there as well. Not only are the losses coming (pretending loans are good only works until they actually default) but the banks are in for some serious lawsuits from all kinds of parties that bought the toxic loans. First in line are Freddie and Fannie. They will still lose at least 400 billion, but they’ll take a good chunk out of the banks hide on the way down.

the phrase “credit specialists at Citi” is not exactly the kind of thing which instills enormous confidence in analysts and investors these days

I think that is an understatement. They want to sell another fancy derivative designed to remove all risk if there is a systemic crisis when, of course, those supposed to pay up will certainly have the money to do so….Right?

Please imagine me banging my head against the keyboard. And no, the response of the Citi Spokesman doesn’t make me feel any different, in fact, it makes me feel worse.

The term liquidity is the pixie dust the financial commentariat uses to obscure what is really going on. I maintain, and have throughout the last few years, that our difficulties have not been a liquidity crisis (though many who had no business exposing themselves individually to liquidity drying up for them certain had a liquidity crisis) but a solvency crisis. David Merkel points out that liquidity always exists, it just goes where the marginal credit buyer has gone. Where insolvency risk seems to be increasing, the marginal buyer can become very scarce and will provide it to areas seemingly exposed to less risk. At the end of the day it is solvency that is our problem, and until we solve that liquidity will go to those perceived to be least at risk. Right now that is the government and those they are backing. Hence a credit crunch for much of the economy.

Speaking of credit, consumer credit has now declined for 11 straight months. A record, and by a long shot. (Click image for a larger version.)


In the “no big surprise department,” and paralleling the argument I made at the time, it has now been shown that the ban on short selling during the crisis did not help support prices and damaged stock market liquidity. In the no surprise at all department the biggest complainers turned out to have fundamental problems that short sellers were pointing out accurately (much better than our regulators.) The loudest complainer of all, and their bizarre CEO, Patrick Byrne. The upshot, they have been cooking their books for years, just like the short sellers were claiming.

Cross posted at The View from the Bluff

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11 Responses to Musings, Rants and Links over the 18th Fairway:02/09/2010

  • I know that Portugal Ireland Greece and Spain are called the PIGS, but you had two I’s, which nation is the second I ?

  • Potentially good news: from the first chart, it seems as if we may have hit the bottom of the jobless curve.  If it continues to mimic the 2001 curve, employment should stabilize for a few months and then finally begin to increase.
    Potentially bad news: that second chart looks very bad.  That trend line doesn’t match the 2001 line at all, and I wonder how much of an effect it will have on a recovery.  It’s interesting to note that the highest point on it is in the mid-80s.  You can see one of the reasons why Reagan crushed Mondale in the 1984 election.

    • Actually, now that I look at it again, the lines in the second chart do match, but like the first one, the current trend is much worse.

  • // <![CDATA[
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    if (navigator.userAgent.indexOf(“Gecko”)==-1)


    Zero Private-Sector Jobs Created Since 1998
    IOW, all the jobs created from 1998 to about 1007 were dumped in the past 2 1/2 years…roughly, since the Dem’s regained Congress.

  • Oh…POOP!

  • It is looking more and more like the original option of just having the government, that helped create these toxic assets,  merely just buy them all at 100% on the dollar and squirrel them away at the re-governmentized Fannie Mae and Freddie Mac, was the better, or at least cheaper, of the possible options.

  • kyle,

    The second I is Italy.


    The job losses have stabilized, for now. However, the jobless rate will probably increase as the potential labor force continues to grow. It will take creating 200,000 jobs a month for five or more years to get back to the unemployment rate pre-crisis. Which comes to the second chart. In all likelihood we are experiencing a secular shift towards paying down debt and decreasing borrowing. Long term positive, but a short term headwind. Until that process is well underway I expect we will see below trend growth, which means the job market is likely to grow much slower than 200,000 jobs a month for the next five years. In fact, we run a grave risk of dipping back into recession.

    We will learn a lot as defaults accelerate over the next 3-18 months and hidden losses have to be finally fessed up to. If they are not as bad as I fear, and the system handles them without too many big banks collapsing we may avoid a double dip. From an actual loss perspective most are still likely in front of us. Will the system handle it better? Yes. Enough better? Not so sure. That doesn’t include the issues overseas which are substantial, maybe worse.


    I am not one who thinks this is all the fault of the government, though they were a major factor. However, squirreling them away doesn’t eliminate the losses. They exist, and will have to be paid for eventually. I doubt it was cheaper to buy them up at 100%. Not taking the pain up front has its own costs and risks, just look at Japan 20 years on from their crisis.

    My own opinion is we should have put the insolvent institutions into receivership, make the stockholders and creditors take their haircut and reissue stock in the now solvent companies (like we did with Washington Mutual.) Unfortunately Geithner, Bernanke et al  seem to be willing to sacrifice anything to avoid bondholders taking losses. The reason for that I’ll let you guys debate.


    • “The job losses have stabilized, for now.”

      What is your definition of stability?

  • Tim,

    I am just trying to be positive, which frankly has been difficult. I do think the large net job losses are past us, barring another leg down in the economy. A bottoming process if you will. I am far less sanguine about the potential for large sustained net job growth. I have seen nothing to make me feel that my long standing thesis (starting in the Spring of ’05) that we were in for an extended period of below trend growth and a likely major financial crisis (the last part has obviously come true.)

    I’ll be posting on this a bit more, but the short story is financial crisis brought on by excessive economy wide leverage have always resulted in extended economic weakness. Until debt (whether public or private) gets significantly lower relative to GDP the economy will struggle. That does not mean there will not be good stretches, but overall growth will be weak.

    Look at the last ten years. Recession, mediocre growth, then a crash, deep unemployment and now a likely repeat, but even slower growth between now and the next down cycle.