Demise of the US MIddle Class: the Downward Spiral of Dumbness

A quick review of a recent blog entry titled Republican Presidents and Income Inequality in America might help clear up any mysteries after reading this NY Times story about how the US middle class has been economically screwed, first by one group of elitists, and then again by another.

If that does not do it for you, a quick review of this blog entry The Big Lie ought to be enough to get the message across.

If you understand no more needs to be said. And if not after all this, then there are none so blind as those who will not see.

The downward spiral of dumbness of the middle class in the US seems to be coming to an end with the over 50 crowd, at least according to the recent election polls. Let's hope that the middle class finally gets at least an even break.

April 9, 2008
Economic Scene
For Many, a Boom That Wasn’t
By DAVID LEONHARDT

How has the United States economy gotten to this point?

It’s not just the apparent recession. Recessions happen. If you tried to build an economy immune to the human emotions that produce boom and bust, you would end up with something that looked like East Germany.

The bigger problem is that the now-finished boom was, for most Americans, nothing of the sort. In 2000, at the end of the previous economic expansion, the median American family made about $61,000, according to the Census Bureau’s inflation-adjusted numbers. In 2007, in what looks to have been the final year of the most recent expansion, the median family, amazingly, seems to have made less — about $60,500. (Thank God there is no inflation right? - Jesse)

This has never happened before, at least not for as long as the government has been keeping records. In every other expansion since World War II, the buying power of most American families grew while the economy did. You can think of this as the most basic test of an economy’s health: does it produce ever-rising living standards for its citizens?

In the second half of the 20th century, the United States passed the test in a way that arguably no other country ever has. It became, as the cliché goes, the richest country on earth. Now, though, most families aren’t getting any richer.

“We have had expansions before where the bottom end didn’t do well,” said Lawrence F. Katz, a Harvard economist who studies the job market. “But we’ve never had an expansion in which the middle of income distribution had no wage growth.”

More than anything else — more than even the war in Iraq — the stagnation of the great American middle-class machine explains the glum national mood today. As part of a poll that will be released Wednesday, the Pew Research Center asked people how they had done over the last five years. During that time, remember, the overall economy grew every year, often at a good pace.

Yet most respondents said they had either been stuck in place or fallen backward. Pew says this is the most downbeat short-term assessment of personal progress in almost a half century of polling.

The causes of the wage slowdown have been building for a long time. They have relatively little to do with President Bush or any other individual politician (though it is true that the Bush administration has shown scant interest in addressing the problem). (This guy can't possibly be serious. Bush has been like death for the middle class. Not that Clinton-Rubin was much better with their sweetheart deals with China in return for campaign contributions. But it was certainly Reagan, Bush I & II that did in the great majority of Americans - Jesse)

The slowdown began in the 1970s, with an oil shock that raised the cost of everyday living. The technological revolution and the rise of global trade followed, reducing the bargaining power of a large section of the work force. In recent years, the cost of health care has aggravated the problem, by taking a huge bite out of most workers’ paychecks.

Real median family income more than doubled from the late 1940s to the late ’70s. It has risen less than 25 percent in the three decades since. Statistics like these are now so familiar as to be almost numbing. But the larger point is still crucial: the modern American economy distributes the fruits of its growth to a relatively narrow slice of the population. We don’t need another decade of evidence to feel confident about that conclusion.

Anxiety about the income slowdown has flared at various times over the past three decades. It seemed to crescendo in the first half of the 1990s, when voters first threw George H. W. Bush out of office, then, two years later, did the same to the Democratic leaders of Congress. Pat Buchanan went around preaching a kind of pitchfork populism during the 1996 New Hampshire Republican primary — and he won it.

Then came a technology bubble that made everything seem better, for a time. Record-low oil prices in the 1990s helped, too. So did the recent housing bubble, allowing families to supplement their incomes by taking equity out of their homes.

Now, though, we appear to be out of bubbles. It’s hard to see how the economy will get back on track without some fundamental changes. This, I think, can fairly be considered the No. 1 economic project awaiting the next president.

Fortunately, there is an obvious model waiting to be dusted off. The income gains of the postwar period didn’t just happen. They were the product of a deliberate program to build up the middle class, through the Interstate highway system, the G. I. Bill and other measures.

It’s easy enough to imagine a new version of that program, with job-creating investments in biomedical research, alternative energy, roads, railroads and education. On the campaign trail, Hillary Clinton, John McCain and Barack Obama all mention ideas like these. (We have lots of income creating programs its just that they are for large corporations like Halliburton, KBR, etc. - Jesse)

But there is still a lack of strategic seriousness to the discussion, as Bruce Katz of the Brookings Institution notes. After all, the United States spends a lot of money on education already but has still lost its standing as the country with the highest college graduation rate in the world. (South Korea and a couple of other countries have passed us, while Japan, Britain and Canada are close behind.)

The same goes for public works. Spending on physical infrastructure is at a 20-year high as a share of gross domestic product, but too much of the money is spent on the inefficient pet programs championed by individual members of Congress. Pork barrel spending does not add up to a national economic strategy.

Health care and taxes will have to be part of the discussion, too. Dr. Ezekiel Emanuel of the National Institutes of Health pointed out to me that a serious effort to curtail wasteful medical spending would directly help workers. It would spare them from paying the insurance premiums and taxes that now cover that care.

The tax code, meanwhile, has become far more favorable to high-income workers at the same time that they — and they alone — have received large pretax raises. That doesn’t make much sense, does it? (It makes a lot of sense to George W. Bush and his cronies - Jesse)

It’s a pretty big to-do list. But it’s a pretty big problem. Since the economy now seems to be in recession, and since recessions inevitably bring their own pay cuts, my guess is that the problem will look even bigger by the time the next president takes office.

E-mail: leonhardt@nytimes.com

Volcker: the Dollar is in Crisis, the Financial System Has Failed the Test of the Marketplace

Volcker Says Fed's Bear Loan Stretches Legal Power
By John Brinsley and Anthony Massucci

April 8 (Bloomberg) -- Former Federal Reserve Chairman Paul Volcker questioned the central bank's decision to rescue Bear Stearns Cos. with a $29 billion loan, saying it was at ``the very edge'' of its legal authority.

``The Federal Reserve has judged it necessary to take actions that extend to the very edge of its lawful and implied powers, transcending in the process certain long-embedded central banking principles and practices,'' Volcker said in a speech to the Economic Club of New York.

Fed Chairman Ben S. Bernanke last month agreed to lend against Bear Stearns securities, paving the way for JPMorgan Chase & Co. to buy its Wall Street rival. Bernanke, who worked with Treasury Secretary Henry Paulson to broker the bailout, last week defended the move as necessary to prevent ``severe'' damage to financial markets.

Volcker, the Fed chairman from 1979 to 1987, had implicit criticism for U.S. regulators and market participants who allowed ``excesses of subprime mortgages'' to spread into ``the mother of all crises.'' The Fed's Bear Stearns loan was unusual, he said.

``What appears to be in substance a direct transfer of mortgage and mortgage-backed securities of questionable pedigree from an investment bank to the Federal Reserve seems to test the time-honored central bank mantra in time of crisis: lend freely at high rates against good collateral; test it to the point of no return,'' he said.

Wall Street Subsidy

Lawmakers, while praising the Fed and Treasury for averting a financial collapse, have also questioned the plan to subsidize Wall Street while the Bush administration resists using government funds to assist homeowners cope with the worst housing crisis in 25 years.

Volcker said the Fed's loan may send investors the wrong message.

``The extension of lending directly to non-banking financial institutions -- while under the authority of nominally `temporary' emergency powers -- will surely be interpreted as an implied promise of similar action in times of future turmoil,'' he said. (this is the very substance of moral hazard - Jesse)

Volcker said the modern financial system has ``failed the test'' of the marketplace.

When asked whether he predicts a ``dollar crisis,'' he said, ``you don't have to predict it, you're in it.''

The dollar has dropped 15 percent against the euro and 14 percent versus the yen in the past year.

$945 Billion in Losses

``What Chairman Volcker said in his remarks is that we need to make sure we are taking a look at the implications of the Fed decision,'' Glenn Hubbard, former chairman of President George W. Bush's Council of Economic Advisers, said in an interview. ``The question is: How do we then redesign regulation around a decision that bold?''

Volcker's critique comes as policy markers struggle to prevent the world's largest economy from contracting, a prospect Bernanke himself raised last week. The International Monetary Fund today said the global losses from securities tied to commercial real estate and loans to consumers and companies may reach $945 billion.

``The bright new financial system, with all its talented participants, with all its rich rewards, has failed the test of the marketplace,'' Volcker said.

As credit markets seized up, the Fed gave the 20 primary dealers in U.S. government bonds the same access to discount- window loans that had previously been reserved for banks. The central bank now auctions as much as $100 billion to lenders a month, and has cut the cost on direct loans to just a quarter- point above the overnight rate on loans between banks.

``The implications of these decisions, and the lessons from the unfolding crisis itself, surely deserve full debate and legislative review in the period ahead,'' Volcker said.

Fed's Response

The Fed has also lowered its benchmark rate six times since September to 2.25 percent from 5.25 percent, and traders anticipate it will cut by at least another quarter point this month to cushion the economy's downturn.

Volcker, 80, said the problems stemmed in part from trading of increasing complicated securities including derivatives that ``have taking on a trading life of their own,'' and said the turmoil ``adds up to a clarion call for an effective response.''

`There was no pressure for change, not in Washington which was spending money and keeping taxes low, not on Wall Street which was wallowing in money, not on Main Street with individuals enjoying easy credit and rising house prices,'' Volcker said. (that pressure ought to have come from the Fed. It is their job to 'take away the punch bowl.' - Jesse)

To contact the reporter on this story: John Brinsley in Washington at jbrinsley@bloomberg.net

Last Updated: April 8, 2008 17:50 EDT

The Fed is Increasingly Concerned about Stagflation

If we get an inflationary recession, it is because of Greenspan and Bernanke, Clinton and Rubin, Bush and Paulson, and their inability to keep their hands out of the markets, tinkering and fine-tuning them to advantage their own ends and those of their cronies.

Will they never learn? Do they really care?

Fed minutes: Severe downturn possible
Tue Apr 8, 2008 2:40pm

WASHINGTON (Reuters) - Members of the Federal Reserve's policy-setting committee worried at their most recent meeting that housing and financial market stress could trigger a nasty slide in the economy, even as inflation pushed higher, minutes of the meeting released on Tuesday show.

"Some believed that a prolonged and severe economic downturn could not be ruled out given the further restriction of credit availability and ongoing weakness in the housing market," minutes of the March 18 meeting said.

A staff forecast buttressed that somber outlook, projecting "a contraction of real GDP in the first half of 2008 followed by a slow rise in the second half," the report said.

At the same time, Fed officials found recent inflation reports "disappointing," noting also with concern that some indicators of inflation expectations were edging higher.

Policy-makers said there were limits to what could be done through interest rate cuts to deal with problems underlying the collapsed housing market and the credit crunch, but agreed trimming borrowing costs might provide some help.

However, Fed officials said it would be hard to calibrate policy responses because their aggressive rate cuts in recent months would take some time to show their effects on economic activity.

The Fed has cut benchmark interest rates by three percentage points to 2.25 percent in six months.

U.S. rate futures rose on the gloomy Fed economic outlook, and the implied chance of the federal funds rate being cut to 1.75 percent by mid-year rose to 90 percent from 68 percent. U.S. stocks stayed weak after the minutes were released.

The Fed said that while exports were getting a boost from a cheapening U.S. dollar, there also was a risk that the devalued greenback will further add to inflationary pressures from costlier oil and other commodities.

(Reporting by Mark Felsenthal and Glenn Somerville; Editing by Theodore d'Afflisio)

The Dollar is Being Devalued

This chart is from an excellent blog called Sudden Debt. We read it regularly, and suggest you do as well.

Someone sent us this chart and asked: What do you make of this? and by inference: What does it mean, what does it imply?

We make a lot of it, because it has been a recurrent theme at this blog since the first: The Die is Cast for the US Dollar, Is the Fed Monetizing Bad Debt, Is the Fed Accountable? and The Odyssey of Ben Bernanke.

It has also been a recurrent theme at The Crossroads Cafe, postings at various places around the web, and a primary investment strategy in our personal portfolios since about 1999. Let's put it up as a headline, and in one nice simple sentence.

The Fed is being forced to devalue the US Dollar.

At one time the dollar was backed solely by US sovereign debt: AAA Treasuries and a few fully guaranteed agencies like Ginnie Mae. Now it is backed at least in good part by collateralized debt obligations for which there is no market at stated values.

The devaluation of the dollar has been gaining steam relative to the other fiat currencies around the world like the euro and the yen under the Bush Administration. The strong dollar under the Clinton administration was effectively an accounting illusion. Commodities are a real problem because so many of them are controlled by non-G8 countries.

A lot of breath has been wasted debating the Hegelian dialectic between inflation and deflation. In a purely fiat regime it is a policy decision, nothing more.

Japan made their decision for their own reasons and got a protracted deflation, probably because they had a huge national savings at hand, an industrial policy of net exports, and a complex kereitsu controlled economy in cooperation with the bureaucrats at Ministry of International Trade and Industry 通商産業省 or MITI.

The US is making its decisions its way and is getting inflation, probably because it has a huge national deficit and no savings. Debtors do not willingly choose deflation. Without external standards its a policy decision. But the debate masks the real issue, that we are falling into a centralized command economy, and moving away from free market discipline. The further they go, the more the Fed will have to control directly. Some say that dollars can only be created if banks make loans, as if it is some law of physics. Oh really? Who says this? Where and by whom is it written? When will the decisive moment come when this is put to the test.

Its all about moving to a common and interlinked fiat system, not necessarily one currency. Its an arranged system similar to Bretton Woods with a renewed dollar hegemony, except the fix might be more flexible and less explicit. Its does not have its basis in evil. Its fault is hubris, the fatal flaw of all central command economies and those who would rule them.

Its a neo-liberal Keynesian dream in which the country is managed as a command economy by a small group of elites, and the rest of the world accepts their designated place in the grand scheme of things.

An important milestone along the way will be when the Fed runs out of Treasuries to back the dollar currency in circulation. Will people care that the dollar is now backed by questionable Wall Street debt? Will the Treasury find a graceful way to give them unlimited supplies? Will the rest of the world keep providing us with key commodities and manufactured goods? Its an awkward bridge that must be crossed in which appearance slips and the crowd gets a brief glimpse of reality. But its not the last obstacle, and perhaps not the biggest.

Will it succeed? We surely do not know. As the president said, it would be easier to make things happen if we had a dictatorship. We like the idea of hedging against a possible failure.

Until 1971 the US dollar was backed by gold. The Dollar is no longer the reserve currency of the world. Until last month it was backed by the sovereign debt of the United States government. One can presume that it is still backed by the full faith and credit of the federal government, no matter what. Although the nature and character of its backing is clearly changing, the final outcome of what it will become exactly is yet to be decided.

The die is cast

Someone just sent me this April 8 interview with Jim Rogers in which he says similar things. Its worth reading. Jim Rogers: More Pain for the Greenback, and the Failure of the Federal Reserve

The Big Lie: the Fed is Blameless On the Housing Bubble

"The question is whether you were lying then or are you lying now... or whether in fact you are a chronic and habitual LIAR!..."

"My Lord, may I also remind my learned friend that his witness, by her own admission, has already violated so many oaths that I am surprised the Testament did not LEAP FROM HER HAND when she was sworn here today! I doubt if anything is to be gained by questioning you any further!

Sir Wilfrid played by Charles Laughton, Witness for the Prosection

USA TODAY February 23, 2004

"Federal Reserve Chairman Alan Greenspan said Monday that Americans' preference for long-term, fixed-rate mortgages means many are paying more than necessary for their homes and suggested consumers would benefit if lenders offered more alternatives.

In a standing-room-only speech to the Credit Union National Association meeting here, Greenspan also said U.S. household finances appeared generally sound, despite rising debt levels and bankruptcy filings. Low interest rates and surging home prices have given consumers flexibility to manage debt, he said. "Overall, the household sector seems to be in good shape."

Alan Greenspan, April 8,2005 Washington, D.C.

"Innovation has brought about a multitude of new products, such as subprime loans and niche credit programs for immigrants...

With these advances in technology, lenders have taken advantage of credit scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers...

Where once more marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to rapid growth in subprime mortgage lending... fostering constructive innovation that is both responsive to market demand and beneficial to consumers."

The Fed is blameless on the property bubbleBy Alan Greenspan
Financial Times - Commentary

Published: April 6 2008 22:03

I am puzzled why the remarkably similar housing bubbles that emerged in more than two dozen countries between 2001 and 2006 are not seen to have a common cause. The dramatic fall in real long-term interest rates statistically explains, and is the most likely major cause of, real estate capitalisation rates (rent as a percentage of a property’s value) that declined and converged across the globe. By 2006, long-term interest rates for all developed and main developing economies declined to single digits, I believe for the first time ever.

Doubtless each individual housing bubble has its own idiosyncratic characteristics and some point to Federal Reserve monetary policy complicity in the US bubble. But the US bubble was close to median world experience and the evidence that monetary policy added to the bubble is statistically very fragile. Paul De Grauwe, writing in the Financial Times’ Economists’ Forum, depends on John Taylor’s counterfactual model simulations to conclude that the low funds rate was the source of the US housing bubble. Mr Taylor (with whom I rarely disagree) and others derive their simulations from model structures that have been consistently unable to anticipate the onset of recessions or financial crises. Counterfactuals from such flawed structures cannot form the basis for policy.

Mr De Grauwe asserts that “signs of recovery” (I assume he means sustainable recovery) were evident before 2004 and hence the Fed should have started to tighten earlier. With inflation falling to quite low levels, that was not the way the pre-2004 period was experienced at the time. As late as June 2003, the Fed reported that “conditions remained sluggish in most districts”. Moreover, low rates did not trigger “a massive credit ... expansion”. Both the monetary base and the M2 indicator rose less than 5 per cent in the subsequent year, scarcely tinder for a massive credit expansion.

Bank loan officers, in my experience, know far more about the risks and workings of their counterparties than do bank regulators. Regulators, to be effective, have to be forward-looking to anticipate the next financial malfunction. This has not proved feasible. Regulators confronting real-time uncertainty have rarely, if ever, been able to achieve the level of future clarity required to act pre-emptively. Most regulatory activity focuses on activities that precipitated previous crises.

Aside from far greater efforts to ferret out fraud (a long-time concern of mine), would a material tightening of regulation improve financial performance? I doubt it. The problem is not the lack of regulation but unrealistic expectations about what regulators are able to prevent. How can we otherwise explain how the UK’s Financial Services Authority, whose effectiveness is held in such high regard, fumbled Northern Rock? Or in the US, our best examiners have repeatedly failed over the years. These are not aberrations.

The core of the subprime problem lies with the misjudgments of the investment community. Subprime securitisation exploded because subprime mortgage-backed securities were seemingly underpriced (high-yielding) at original issuance. Subprime delinquencies and foreclosures were modest at the time, creating the illusion of great profit opportunities. Investors of all stripes pressed securitisers for more MBSs. Securitisers, in turn, pressed lenders for mortgage paper with little concern about its quality. Even with full authority to intervene, it is not credible that regulators would have been able to prevent the subprime debacle.

Martin Wolf argues in the FT that central banks “can surely lean against the wind” even if they cannot eliminate bubbles. I know of no instance in which such a policy has been successful. For reasons I have outlined elsewhere (American Economic Association, January 2004), I doubt that it is possible. If it turns out to be feasible, I would become a strong supporter of “leaning against the wind”.

As far as US monetary policy being (in Mr Wolf’s words) “dangerously asymmetrical”, I point out that over the past half-century the US economy has been in recession only one-seventh of the time. Yet the unemployment rate exhibits no trend. Hence the average rate of rise of unemployment has been far greater than its average pace of decline. Monetary policy in response has been more active during recessions than during periods of expansion, but scarcely “dangerous”.

Much of the commentary critical of my FT article (Comment, March 17) is directed less at its substance and more, as Mr Wolf describes it, at “the ideology I display”. Ideology defines that set of ideas that we each believe explains how the world works and how we need to act to achieve our goals. Some of our views of causative forces are rational, some otherwise. Much of what we confront in reality is uncertain, some of it frighteningly so. Yet people have no choice but to make judgments on the nature of the tenuous ties of causation or they are immobilised.

I do have an ideology. So does each member of the forum. I trust our views are subject to the same standards of evidence that apply to all rational discourse. My view of how the efficiency of global capitalism has evolved over the decades as new evidence has appeared contradicts some earlier judgments and confirms others. I have been surprised by the fierceness of investors in retrenching from risk since August. My view of the range of dispersion of outcomes has been shaken but not my judgment that free competitive markets are the unrivalled way to organise economies. We have tried regulation ranging from heavy to central planning. None meaningfully worked. Do we wish to retest the evidence?

The writer is former chairman of the US Federal Reserve. A longer version of this article is on the FT’s Economists’ Forum at www.ft.com/wolfforum

US Corporate Earnings Estimates Decline Further

We start the first quarter earnings reports this afternoon with Alcoa.

Earnings prospects continue to decline for US companies not involved in the energy sector. Especially hard hit will be the financials.

The biggest events this week may be currency related with interest rate decisions from the ECB and BOE, and the US Trade deficit and IM/EX prices at the last part of the week.

Be careful with trading this information since much has already been discounted in the current stock market prices, and volumes on the NYSE are the lowest of the year.

Be even more careful about listening to the usual Wall Street siren song about now being the time to buy. Its traditional to try and lure the non-US and small investor into the market to help cushion the next leg down, which looks like at some point within the next month or so. A 'trigger event' could take this market down sharply despite the best efforts of the President's Working Group on Markets and the Federal Reserve trying to overlay the cracks with the plaster of monetary inflation.

P.S. @ 5:25 PM - After the closing bell today Alcoa missed estimates, and Advanced Micro Devices (AMD) warned.


Wall St sees sharper drop in Q1 earnings

NEW YORK: April 7, 2008 (Reuters) Wall Street analysts have cut their first-quarter earnings forecasts for US companies even further, according to figures from media estimates on Monday.

Earnings for Standard & Poor's 500 companies are now expected to decline 11.8 per cent, compared with the 8.1 per cent drop projected last week. When the quarter began on January 1, analysts had forecast earnings to grow 4.7 per cent in the period.

The revised forecast comes as a deep global credit crisis has dented the profit outlook for many US companies, particularly those in the financial sector. Financial companies are expected to be affected the most, with earnings projected to fall 61 percent. Consumer companies follow, with earnings expected to drop 11 per cent as US shoppers faced with higher food and energy prices and declining home values spend carefully.

The energy and technology sectors are expected to show the best gains for the quarter, up 33 per cent and 10 per cent respectively, according to Reuters Estimates.

The overall projected rate combines actual figures for companies that have reported with estimates for companies that have not.

The turbulent environment has prompted most companies to issue negative outlooks for the upcoming quarter. There are 242 negative outlooks, and 169 positive, according to Reuters Estimates.

The Die is Cast for the US Dollar

The Rubicon is a river that marked the boundary between the Roman province of Gallia Cisalpina to the north and Italy proper to the south. Roman law prohibited its returning generals from crossing into Italy with their army, protecting the civilian basis of the Roman Republic: Senatus Populusque Romani. SPQR: the Senate and the People of Rome. (A modern equivalent is the US law of posse comitatus.)

When the Roman general Gaius Julius Caesar crossed the Rubicon with his army in 49 BC with the intention of going to Rome, he challenged the independence of the Roman political system and made a war to resolve the outcome of the change inevitable. Hence the phrase, "crossing the Rubicon" to mean an action that precipitates major change and inevitable consequences.

The Republic was replaced by an autocracy as Caesar assumed the title dictator perpetuus, dictator for life.

As Julius Caesar crossed the Rubicon, the historian Suetonius reports that he uttered the phrase alea iacta est, "the die is cast".

Until 1971 the US dollar was backed by gold. The Dollar is no longer the reserve currency of the world. Until last month it was backed by the sovereign debt of the United States government. One can presume that it is still backed by the full faith and credit of the federal government, no matter what. Although the nature and character of its backing is clearly changing, the final outcome of what it will become exactly is yet to be decided.

And so the die is cast.

Bearing Down on the Fed's Balance Sheet
By Randall W. Forsyth
Barron's

Congress turned its sites this week on the rescue -- don't call it a bailout! -- of Bear Stearns by the Federal Reserve and JPMorgan Chase.

All the principals involved, from Treasury to the Fed to the banks, insisted the deal staved off a certain bankruptcy of Bear on St. Patrick's Day, which would have set off a chain reaction that might have threatened a meltdown of the global financial system.

They're probably right; the risk of letting Bear go bust was too great to take. And since then, financial markets have begun to rebound. Stocks have bounced, but more importantly from the standpoint of the economy, the capital markets have improved materially.

Starting with Lehman Brothers' $4 billion convertible preferred offering earlier this week, the capital markets have become much more receptive, allowing banks and other financial firms to rebuild capital that was hit by writedowns of sub-prime-related assets.

While balance sheets in the private sector are being rebuilt, the opposite is happening to the balance sheet of the nation's central bank. Specifically, the Fed's holdings of U.S. Treasury securities are plummeting. In their place, the Fed's various new-fangled lending facilities to banks and the rest of the financial system are burgeoning.

Since Dec. 6, just before the Fed instituted its Term Auction Facility to auction loans to banks, its holdings of Treasury securities plummeted from $780 billion to an average of $589 billion in the week ended Wednesday.

As MacroMavens' Stephanie Pomboy points out, at this rate the Fed will be out of Treasuries before Labor Day, or Aug. 14 to be exact.

Meantime, TAF lending has climbed to $100 billion. And the Primary Dealer Credit Facility -- representing the opening up of the discount to non-banks -- averaged $38.1 billion in the week ended Wednesday. JPMorgan Chase chief executive Jamie Dimond told Congress that Bear Stearns is borrowing about $25 billion via this facility.

That is apart from the controversial $29 billion that will be provided by the Fed to JPMorgan Chase and backed by Bear Stearns collateral -- which won't happen until the merger closes.

In addition, the Fed lent an average of $64.3 billion a day in Treasuries under its Term Securities Lending Facility in the week to Wednesday, in addition to the $21.3 billion a day in Treasuries lent under its overnight lending scheme. Lending Treasuries in exchange for other, lower-quality and less-liquid securities doesn't expand overall liquidity. But it does give dealers securities that are as good as cash in exchange from securities that, in essence, aren't.

But, wait, there's more. In the week ended Wednesday, so-called Other Fed Assets leapt by $21.4 billion a day, to an average of $64.9 billion. In that category resides foreign assets, such as currency swaps with foreign central banks such as the Swiss National Bank and the European Central Banks.

The latest bank-statement week took in the turn of the quarter, when money markets tighten, especially in skittish times such as these. So, European banks likely turned to their friendly, local central bankers for dollar liquidity, which the central banks apparently obtained by drawing on swap lines to the Fed. And those loans were an asset on the Fed's balance sheet, requiring it to shed Treasuries as an offset.

It's enough to make anybody's head spin. But the key point is that all these new and novel loans are displacing Treasuries on the Fed's balance sheet. That means, in effect, the Fed is taking on far greater credit risk in support of the banking system. (and it is the Fed's Balance Sheet Assets that provide the backing for the Federal Reserve Notes - US currency - in circulation - Jesse)

Indeed, says Robert Rodriguez, chief executive of First Capital Advisors, we have "crossed the Rubicon."

"In our opinion, a new financial system is in process of being created," he writes in a report to shareholders. "Some may refer to it as Pre-Bear Stearns and Post-Bear Stearns."

As it becomes the protector of the financial system, Rodriguez continues, the Fed's focus may be distorted by the credit risks that now reside on its balance sheet. Having these risky assets might influence the Fed to follow a less stringent anti-inflation policy as when it just held Treasuries.

For now, Job 1 for the Fed is to keep the financial system functioning -- even if it compromises its other objectives. Hobson, here's your choice.

Fitch Downgrades Debt Insurer MBIA Over Capital Levels

MBIA Loses AAA Insurer Rating From Fitch Over Capital
Christine Richard

April 4 (Bloomberg) -- Fitch Ratings cut MBIA Inc.'s insurance unit to AA from AAA, saying the bond insurer no longer has enough capital to warrant the top ranking.

MBIA, the world's largest financial guarantor, would need as much as $3.8 billion more in capital to deserve an AAA, New York-based Fitch said today in a report. The outlook is negative, Fitch said.

Fitch issued the new, lower rating even though Armonk, New York-based MBIA asked the ratings company last month to stop assessing its credit worthiness. The two companies disagree over how much capital MBIA needs to absorb losses on the bonds it insures. Moody's Investors Service and Standard & Poor's both affirmed their AAA ratings earlier this year.

''It will be difficult for MBIA to stabilize its credit trend until the company can more effectively limit the downside risk'' from collateralized debt obligations, Fitch said.

The long-term rating of MBIA Inc. was cut to A from AA, Fitch said.

''We respectfully disagree with Fitch's conclusions,'' MBIA Chief Financial Officer Chuck Chaplin said today in a statement. ''MBIA has a balance sheet that is among the strongest in the industry with over $17 billion in claims-paying resources, and has a high quality insured portfolio.''

MBIA shares closed down 68 cents, or 4.8 percent, to $13.61 in New York Stock Exchange Composite trading. The stock has declined 27 percent this year.

Capital Raising

MBIA raised $2.6 billion in capital through a bond offering and the sale of a stake to Warburg Pincus LLC, eliminated its dividend and stopped guaranteeing asset-backed securities for six months.

Those decisions prompted Moody's and S&P to keep their top ratings for MBIA. Fitch continued its review. Fitch has rated MBIA's insurance unit since at least 2000, according to data compiled by Bloomberg. S&P and Moody's have rated the company since at least 1987, the data show.

MBIA last month asked Fitch to stop rating the company because it disagreed with the ratings company's requirement that MBIA hold more capital.

MBIA, which started as the Municipal Bond Insurance Association in 1974, and the rest of the bond insurers stumbled after expanding into CDOs that caused losses of more than $7 billion. CDOs repackage pools of assets into securities with varying degrees of risk. The company previously recorded at least 15 years of consecutive profits insuring bonds sold by schools, hospitals and municipalities.

''It's tough for a rating agency to downgrade a bond insurer, to take away the AAA rating,'' said Mark Adelson, founding member of Adelson & Jacob Consulting in Long Island City, New York.

Holding Company

The capital MBIA raised has yet to be contributed to its insurance company and could be diverted to meet obligations at the holding company, Fitch said in its report. MBIA's holding company engages in transactions that may require it to post collateral, creating a rising demand for cash, Fitch said.

MBIA's suspension of its structured finance business, which includes CDOs and asset-backed securities, may help to boost the company's rating back to AAA in the future, Fitch said today.

MBIA will have losses on CDOs backed by subprime mortgages of as much as $4.9 billion after taking into account that they will be paid over time, Fitch said.

The analysis assumes that subprime mortgages backing securities sold in 2006 will experience losses of 21 percent and those originated in 2007 will lose 26 percent, Fitch said. Subprime mortgages are given to borrowers with poor credit.

To contact the reporters on this story: Christine Richard at crichard5@bloomberg.net

Jobs Numbers Revised Back to 2003: Confirm Recession

You may have missed this in today's Jobs Report, but when we started to update our Excel spreadsheets with the jobs data we noticed that the Bureau of Labor Statistics has revised the Jobs Data. It was not the usual revision back a month or two. It went back all the way to early 2003.

Admittedly they could have worked this revision in February or even January, since we don't often go back into prior years to look for major changes. But the fact remains that the data has been significantly revised, and downward.

We're working with really large numbers here overall, and its hard to see these changes in graphs. We're not sure its even worth looking at the monthly changes in the graphs.

What is important is the TREND. And the revised numbers showed a significant confirmation in the downtrends, that our 12 Month moving average has been showing since the beginning of last year.

The US is in a slowdown. More precisely, the US entered an economic recession in the first quarter of 2008 at the latest, and perhaps the fourth quarter of 2007. We'll say what Nouriel Roubini probably wishes he could say: anyone who says we are not in a recession now is either a stooge or merely ignorant.

Look for the Wall Street and government spin to shift from denying that we are in recession, to a new slant that we are in recession but its now half over and its time for stocks to start pricing in recovery in the second half of the year.

Let's see if the President's Working Group can keep stocks propped up to give the average Joe the impression that things are not so bad.

There is only one play in this current team's playbook: fraud - bubble - bust. Because that's all that they know how to do.

They don't know how to facilitate a productive economy to build genuine prosperity for the nation. For the most part they have never created anything worthwhile in their lives, but lived off the labor of others. But they do know how to enrich a few of their cronies, and to deceive, inflate and try to patch the mess once the bubble they created breaks. At least so far.

And here's a report on the Jobs number from John Williams over at Shadow Government Statistics.

March Payroll Decline Easily Topped 120,000

When a Fed Chairman begins talking recession, a recession is in place. Chairman Bernanke's comment on Wednesday that the U.S. economy "even could contract slightly" in the first half of 2008 was more reporting than a prognostication. He certainly had an advance idea of the March employment data that now show a decline in average first-quarter 2008 payrolls versus fourth-quarter 2007, where seasonally-adjusted March 2008 payrolls are down at an annualized 0.7% rate from December 2008.

Despite the bad news in the monthly jobs data, the reported numbers still were overly Pollyannaish, thanks to extreme gimmicking. As anticipated, the industrial production benchmark revisions showed considerably weaker economic activity than previously reported, while the purchasing managers survey again showed a deepening economic contraction and surging inflation.

Also on the inflation front, money supply M2 continued to surge in the latest weekly reporting up a seasonally-adjusted, annualized 24.3% in the week ended March 24th, with annual growth in March M3 now a fair bet to top 17.2%, up from the 16.9% historic high set in February. The money supply numbers will be updated over the coming weekend on the Alternate Data tab at www.shadowstats.com, after tonight's data releases.

Jobs Data Should Continue Fueling Recession Forecasts.

The reported third consecutive decline in monthly payrolls, as of March, will do much to reinforce recession outlooks, but the data remain severely gimmicked, understating the monthly declines in payroll employment, thanks to the usual statistical shenanigans at the Bureau of Labor Statistics (BLS). Net of gimmicks, the decline in payrolls and the rise in the unemployment rate were statistically significant......

Seasonal-Factor Gimmicks.

Year-to-year growth should be virtually identical in both the seasonally-adjusted and unadjusted series, and applying the unadjusted annual change to the seasonally-adjusted year-ago numbers for February and March suggests that the seasonally-adjusted month-to-month change should have been a contraction of 124,000. This reporting gimmick is made possible by the "recalculation" each month of the monthly seasonal factors. If the process were honest, the suggested differences would go in both directions. Instead, the differences almost always suggest that the seasonal factors are being used to overstate the current month's relative payroll level, as seen last month and the month before....

Household Survey.

The usually statistically-sounder household survey, which counts the number of people with jobs, as opposed to the payroll survey that counts the number of jobs (including those of multiple job holders), showed household employment dropped by 24,000 in March against a 255,000 decline in February.

The March 2008 seasonally-adjusted U.3 unemployment rate showed a statistically-significant increase to 5.08% +/- 0.23% from 4.81% in February. Unadjusted, U.3 held at 5.2% in March. The broader U.6 unemployment rate rose to an adjusted 9.1% (9.3% unadjusted) in March, versus 8.9% (9.5% unadjusted) in February. Adjusted for the "discouraged workers" defined away during the Clinton Administration, actual unemployment, as estimated by the SGS-Alternate Unemployment measure, rose to 13.0% in March, up from 12.8% in February....

Purchasing Managers Surveys Show Inflation and Recession.

The stock market truly is irrational if it rallies sharply on a minor upswing in a still-negative purchasing managers survey (manufacturing in March was 48.6 versus 48.3 in February). The alternatives are that either silly hype can rally these extremely vulnerable markets, or that some analysts have a compulsion (or real need) to explain all market movements in terms of any published news, regardless of actions or market manipulations by major players and/or government/Fed. Both factors likely are at play....