Why Is There No Reform?

First the reform of the financial system, and then the stimulus can find a footing. The existing level of debt obligations are too large and unproductive of cash flows to service.

The debt must be written down and the currency devalued to increase the wages of debt payers relative to them. This is an unacceptable alternative at the moment because politically the debt holders and the big money center banks are running the system. The parallels to Japan are remarkable, where the inability to realize their losses caused an entire country to lose its way for a decade.

Until we break up the big money center banks into their parts, and write off their debt obligations, we are pouring money into a Wall Street sinkhole of corruption. This will involve the reinstatement of Glass-Steagalls.

"The United States should emerge from the economic crisis with a two-part financial system that places tighter restrictions on banks, says former Federal Reserve chairman Paul Volcker.

To prevent another banking crisis from undermining the economy, the U.S. financial system must turn back the clock to a time when commercial banks were the core of the credit system, said Mr. Volcker...

The system that Mr. Volcker envisions "looks more like the Canadian system than it does like the American system," he told a Toronto audience last night..."

And there will be no recovery, only increasing pain, until we break the pattern.

“The Government should allow every distressed bank to go bankrupt and set up a fresh banking system under temporary state control rather than cripple the country by propping up a corrupt edifice…

…amounts to swapping taxpayers’ ‘cash for trash,’ Stiglitz said yesterday in a panel discussion at the World Economic Forum in Davos, Switzerland. ‘You shouldn't chase good money after bad. We’re talking about a national debt that’s very hard to manage.'" Joseph Stiglitz

What is the reason then that we are following a path that will fail? Are those who know what is happening afraid to admit it, to tell the truth? Is it simple looting until the harsh medicine is taken? Is it the cowardice of the Democrats? Is it the obstructionism of old line thinkers like Larry Summers and Tim Geithner?

It is most probable that there are still just too many of those who say, "Why can't things just go on as they have done before?" The awareness that the game has changed will penetrate the public consciousness slowly.

It's over. We cannot keep trying to rebuild the unsustainable, because eventually the great forces of probability will crush us and destroy us, all that we have.

But until the people are ready for change, to accept that reforms are necessary, the Administration must tread lightly. As de Tocqueville said, "The most dangerous moment for bad government is when it begins to reform."

Only time will tell. Until then you know what to do.

P.S. An early responder said, "I presume that you mean buying gold" about 'you know what to do.' And then they laid out the reasons and ways in which the government would confiscate it.

Sorry to have been cryptic, and its my fault. Let me give you the more straightforward answer that I gave to them.

"Actually it's "need little, want less, and love more" which is at the bottom of he blog.

But if it does become the kind of government that blatantly confiscates wealth through whatever means, where will you hide? First they came for gold...

Ok don't buy gold. What you will buy? Whatever wealth you do have will be taken eventually. There are no bystanders if a government turns to lawlessness.

Better to get your head screwed on straight now and realize it is not about gold, it is not about the right investments, it is about freedom."

How Cheap Is the PE Ratio When Earnings Are Negative?

Market Watch
S&P heads to first quarter ever of negative earnings
By Kate Gibson
4:29 p.m. EST Feb. 13, 2009

NEW YORK (MarketWatch) -- As Wall Street tracks Washington's moves to help the beleaguered banking sector and push through a massive economic stimulus, nearly 400 of the S&P's 500 companies have weighed in and reported a collective loss, even excluding the financials.

"This is the worst; after the sixth quarter of negative growth, it will be the first quarter ever of negative earnings," said Howard Silverblatt, senior index analyst, at Standard & Poor's.

A sixth quarter of negative growth ties the prior record set when Harry Truman was president, running from the first quarter of 1951 to the second quarter of 1952.

"Next quarter, we're expecting a new record of seven quarters of negative growth," Silverblatt added.

As of the close of business Thursday, Silverblatt calculates S&P earnings per share, on a reported basis, at a loss of $10.44 for the quarter. If financials were taken out of the equation, that deficit would drop to $2.35 a share.

"The majority of it is financials, but the biggest issue to hit as reported -- the worst charge -- was ConocoPhillips (COP) , which accounted for $3.66," said Silverblatt.

Income from continuing operations at the companies in the S&P 500 that already have reported earnings fell $90.8 billion, with financials contributing $70.4 billion of the decline. Conoco accounted for $31.9 billion of the shortfall, said Silverblatt...

The Dow is now "too heavily weighted in financials to accurately reflect the current business mix of this country," said Marc Pado, U.S. market strategist, Cantor Fitzgerald.

With 84.8% of the market value and 390 issues reported, operating earnings, which includes income from products or services and excludes financing and other costs, are down 62% from the fourth quarter of 2007, Silverblatt said...

Balance Sheet Recessions and Japan Redux

Here are a few excerpts from an essay by Axel Leijonhufvud at VoxEU which was brought to my attention by xyphius from Japan.

The essay in particular was quite good, but the introductory comments in the email from xyphius were also quite to the point that we've been making here for some time.

"I've been wondering about the consequences of what Japan did in the lost decade and whether there are any lessons to be learnt from it. I remember asking a (Japanese) friend in the early part of this decade (before Chinese Viagra revived the moribund economy) why after so many years with so little to show from policy there was little pressure for change - his reply: "We aren't hurting enough to want to change."

I take my cue from that answer: Deficit spending was a palliative that bought off demands for political reform, and propping up the banks and by extension their insolvent clients prevented a liquidation in which a meaningful transfer of assets could have occurred. In short, the political, bureaucratic and business oligopoly maintained the status quo ante.

What might become of the cocoon years? A horrible festering mess?!"

It could be something beautiful if Japan embraces reform and becomes a more vibrant, open democracy and breaks up the keiretsu economy and the tyranny by bureaucracy. It is as likely if not moreso that Japan would choose a return to national fascism. But having expended the flower of its youth in the last great War, and with zero population growth, Japan would likely need a more youthful ally. War is an old man's game, but younger men provide the fuel.

The object lesson here for us of course is that the US is going down the same path, with a military-financial complex that resists change, and may subject the country to enough of a economic scourging to set the stage for rescue by a 'great man' as national saviour. Fascism was a rather popular choice the last time the world went through a deflationary depression.

To make it pointedly clear, the US must reform its financial system which requires breaking up the big Wall Street money center banks. Once broken up they may more easily be reintegrated into an organic economy, and stimulus may take root in a real economy.

The point is not to save the banks. The point is to save the depositors, the pension funds, and the good regional banks that are banks, and not vehicles of financial engineering.

The dollar must relinquish its role as the reserve currency of the world, because our hobbits, dwarves, and men have shown themselves incapable of wielding that power gracefully. It is too great a temptation and its misuse will result in our own destruction. But we must also reform the international trade system and prevent the blatant market manipulation of the Asian tigers, China and Japan.

There are those who say, "Why can't things just go on as they have done?" The awareness that things have changed will penetrate the public consciousness slowly. It's over. It's done. Things must go forward, and we can never go back. You cannot keep trying to rebuild the unsustainable, because eventually the great forces of probability will crush you.

Our fate should we fail to reform our system is to change into something more horrible than we can possibly imagine.

And here are the excerpts from the VoxEU essay by Axel Leijonhufvud.

Richard Koo (2003) coined the term “balance sheet recession” to characterise the endless travail of Japan following the collapse of its real estate and stock market bubbles in 1990. The Japanese government did not act to repair the balance sheets of the private sector following the crash. Instead, it chose a policy of keeping bank rate near zero so as to reduce deposit rates and let the banks earn their way back into solvency. At the same time it supported the real sector by repeated large doses of Keynesian deficit spending. It took a decade and a half for these policies to bring the Japanese economy back to reasonable health.

The Swedish policy following the 1992 crisis has been often referred to in recent months. Sweden acted quickly and decisively to close insolvent banks, and to quarantine their bad assets into a special fund. Eventually, all the assets, good and bad, ended up in the private banking sector again. The stockholders in the failed banks lost all their equity while the loss to taxpayers of the bad assets was minimal in the end. The operation was necessary to the recovery but what actually got the economy out of a very sharp and deep recession was the 25-30% devaluation of the krona which produced a long period of strong export-led growth. Needless to say, the US is in no position to emulate this aspect of the Swedish success story.

Why not?

The lesson to be drawn from these two cases is that deficit spending will be absorbed into the financial sinkholes in private sector balance sheets and will not become effective until those holes have been filled. During the years that national income fails to respond, tax receipts will be lower so that the national debt is likely to end up larger than if the banking sector’s losses had been “nationalised” at the outset.

No Ordinary Recession by Axel Leijonhufvud

Lloyd's Bank May Fail, Be Nationalized

This is Lloyd's Bank, one of Britain's largest, but it is not the same as Lloyd's of London, now known as Lloyd's International, the famous insurance firm.


Government may have to take full control of Lloyds
By James Kirkup
6:16PM GMT 13 Feb 2009

Ministers have been warned they will be forced to take full control of Lloyds Banking Group after its shares fell by a third amid huge losses.

Britain's biggest high street bank shocked the City by announcing almost £11 billion of losses last year, more than twice what banking analysts had expected.

The Government already holds a 43 per cent stake in Lloyds after injecting £17 billion into the bank last year.

The bank's shares closed down 32.5 per cent last night. The fall leaves taxpayers with a paper loss of nearly £10 billion on the government's investment.

Lloyds Banking Group was formed by the merger of Lloyds TSB and HBOS last year. In a government-brokered deal, Lloyds agreed to rescue the stricken HBOS after it came close to collapse.

That deal came under fresh scrutiny as it emerged that most of the enlarged bank's losses - some £7 billion - came from HBOS's lending business.

The HBOS loss is more than twice what the bank itself had forecast for 2008 and raised questions about Lloyds' financial health after the merger.

Eric Daniels, the Lloyds chief executive this week admitted to MPs that his bank had done only a fraction of normal "due diligence" analysis of HBOS before agreeing to buy it.

The loss also sparked predictions that the state will eventually have to buy the bank outright.

George Osborne, the Tory shadow chancellor, expressed fears for Lloyds' survival.

He said: "The scale of the losses at HBOS are staggering and now risk dragging down Lloyds too. The taxpayer money pumped in through the first bailout in October is all but wiped out by these losses."

Vince Cable, the Liberal Democrat Treasury spokesman, said Lloyds may no longer be viable as private company.

He said: "It looks increasingly as if Lloyds is being dragged under by the dead weight of HBOS. It looks increasingly as if Lloyds HBOS will now go into majority public ownership, followed inevitably by nationalization."

Mr Daniels insisted that his bank's long term prospects remain healthy.

He said: "Whilst we recognise that the short term outlook is more challenging Lloyds Banking Group has the largest UK financial services franchise with excellent long-term earnings potential."