FDIC leader says banking system still poses significant risks

FIRST LOOK: FDIC’S HOENIG SAYS PUBLIC REMAINS AT RISK — FDIC Director Tom Hoenig will deliver a broad policy speech this morning at the AICPA-SIFMA conference in NYC.  Hoenig’s speech “says that the public remains at risk of having to pick up the pieces when the next financial setback occurs. The safety net continues to expand to cover activities and enterprises it was not intended to protect, resulting in subsidized risk taking by the largest financial firms and fueling their leverage. At the same time, the tolerance for leverage remains essentially unchanged, leaving us in a situation that is little different than before the recent crisis.  ...
“We can be confident that as time passes, this leverage again will be a problem and the public again will be left holding the bag. … Hoenig offers three recommendations to change this outcome by changing the framework and related incentives. They are: Changing the structure of the industry to ensure that the coverage of the safety net is narrowed to where it is needed … Simplifying and strengthening capital standards … Reestablishing a more rigorous examination program for the largest banks and bank holding companies to best understand the risk profile of both individual firms and financial markets.”

Essentially none of the problems that led to the 2008 banking crisis have been resolved.

China now analogous to Japan in the late 80's

That is the point of the essay When the Growth Model Changes, Abandon the Correlations by Dr. Michael Pettis.  He states "it is much more appropriate to compare China today with Japan in the late 1980s". 

Pettis backs this up by comparing the economic imbalances that existed for these two scenarios, concluding that China's economic imbalances today are much like those in Japan at its economic peak.

"Because of the serious imbalances China is much more like Japan in the late 1980s, with the major difference being that Japan never took debt, investment, and consumption imbalances to anywhere near the levels that China has taken them."

The conclusion that logically follows is that China is in for a long period of economic decline.  Their boom was generated by unsustainable buildups of imbalances and the reversing of this implies stagnance and decline in measures of economic activity.

Rethink the value of college

The cost of college has gone way up at the same time wages for graduates have declined. It's definitely time to reconsider the cost/benefit analysis for attending college.

Marketable skills can be developed in other ways.

Saudi Arabia crude oil production history

This chart shows Saudi production ramping exponentially during the 1960's and early 1970's. In my view this is the prime reason for the peaking of US domestic oil production during the same time frame.

Extremely low cost Saudi oil squeezed out higher cost production in the US.

The chart source is here.

Durable goods metric looks ugly

This measurement took a steep drop recently as the chart shows:

Such drops seem to coincide with recessions, at least recently.

Retail sales likely peaking

The trend appears to be leveling off...

Average earnings have leveled off which supports the idea that retail sales will flatten.

Consumer credit is spiking, but it seems likely that this growth should slow, as consumers' earnings (needed to pay back debts) aren't spiking.

Mortgage fraud being prosecuted

Lorraine Brown, Former Head of DOCX (LPS), Pleads GUILTY to CRIMINAL Conspiracy, Faces up to 5 Yrs in Prison | ZeroHedge

"A former executive of Lender Processing Services, Inc. (LPS) – a publicly traded company based in Jacksonville, Fla. – pleaded guilty today, admitting her participation in a six-year scheme to prepare and file more than 1 million fraudulently signed and notarized mortgage-related documents with property recorders’ offices throughout the United States."

Brown ran the company and the company got paid based on the volume of documents processed. So they faked the process to make it faster and get paid more.

"According to plea documents filed today, employees of DocX, at the direction of Brown and others, began forging and falsifying signatures on the mortgage-related documents that they had been hired to prepare and file with property recorders’ offices. Unbeknownst to the clients, Brown directed the authorized signers to allow other DocX employees, who were not authorized signers, to sign the mortgage-related documents and have them notarized as if actually executed by the authorized DocX employee.

Also according to plea documents, Brown implemented these signing practices at DocX to enable DocX and Brown to generate greater profit. Specifically, DocX was able to create, execute and file larger volumes of documents using these signing and notarization practices. To further increase profits, DocX also hired temporary workers to sign as authorized signers. These temporary employees worked for much lower costs and without the quality control represented by Brown to DocX’s clients. Some of these temporary workers were able to sign thousands of mortgage-related instruments a day. Between 2003 and 2009, DocX generated approximately $60 million in gross revenue."

Cut the defense budget

Here are some suggestions that would reduce defense spending that is unnecessary:

-Bring home all forces from South Korea.  Where's a threat?  In any case South Korea can defend itself.

-Bring home all forces from Europe, except for a few liason people.  Again, where's the threat and why shouldn't European nations be able to defend themselves.

These are legacy operations that exist just due to bureaucratic inertia and turf issues.

Exponential fallacy of economics

Standard economic analysis is based on exponential growth calculations.  In other words, rates of growth are assumed to be exponential ad infinitum.  The classic example is that of continuously compounded interest on an investment.

Pyramid schemes or Ponzi schemes show exponential growth by providing high profits for a few initial investors and losses among great numbers of investors.

Exponential growth models of physical phenomena only apply within limited regions, as unbounded growth is not physically realistic. Although growth may initially be exponential, the modelled phenomena will eventually enter a region in which previously ignored negative feedback factors become significant (leading to a logistic growth model) or other underlying assumptions of the exponential growth model, such as continuity or instantaneous feedback, break down.

That is the core of my argument, that most standard economic analysis fails to take into account where the assumptions that support exponential analysis break down.

Book review: "Makers" by Cory Doctorow

I recently finished reading a good near future science fiction novel:

 Makers: Cory Doctorow: Amazon.com: Books

This novel addresses the issue of changing labor patterns based on widespread availablity of affordable production tools like smartphones and 3D printers. The key thesis is that the nature of work will be constantly changing, in large part due to technological change and demographic factors.

Another theme of the book is that shantytowns(Hoovervilles) become a common feature in American cities due to the non-affordability of conventional housing.

I think in the book the point is made that the adaptations that will need to be made by people will look nothing like traditional lifestyles. Some adapt and some fail and wind up living in shantytowns or living with room-mates. Of course, this isn't news to some observers but I thought the book did a nice job of illustrating some of the possible social structures that may result.

Yet another important theme in this novel is the concept that locations of resources or technological /cultural centers change, and workers will have to migrate to where the economic activity is happening.  The book addresses this by speculating that Silicon Valley becomes too costly and self absorbed to become aware of changes taking place in other parts of the country and of the world, and becomes thereby irrelevant to the people creating new technologies and processes.

One concern addressed in the book is the idea that we might not be able to think up new jobs as fast as the old jobs are automated and outsourced out of existence.   The time required to scale up a new industry can greater than the time required by competitors to undercut the economic logic of the new industry.

Overall, "Makers" is a more benign view of the future than those of post-apocalyptic science fiction, and seems more plausible. The novel provides plenty food for thought about key issues that face American society today.

Japan entering recession

Key elements of the Japanese economy are pointing to a strong chance that the country will record a recession for H2 of 2012.  For instance:

"Households are holding the most cash since 2005, shunning risk as they grow gloomier, Bank of Japan data indicate. Sliding private consumption contributed to an annualized 3.5 percent decline in gross domestic product in the past quarter"(1)

Falling consumption means that revenue growth from consumption tax increases would be limited and such increases would likely contribute to further declines in consumption spending.

Further, increases in cash holdings means less funds available for purchase of government debt and private investment.

"Japan risks its third textbook-definition recession since 2008, meaning two straight quarters of contraction. The median forecast in a survey of economists by Bloomberg News is for an annualized 0.4 percent contraction in the September to December period."(2)

The global economic outlook doesn't give much support to the idea that there will be near term increases in Japanese exports.

"Japan's exports fell 5.0 percent in July-September, the biggest slide since a 6.0 percent decline in April-June last year, the data showed.  Private consumption - which accounts for roughly 60 percent of the economy - fell 0.5 percent in the third quarter.  Capital expenditure tumbled 3.2 percent, the fastest pace of decline since a 5.5 percent drop in April-June 2009.  Sony plans to reduce capital spending by 29 percent in the year to March 2013 and Panasonic plans a 27 percent cut, after incurring huge losses in their TV manufacturing businesses."(3)

Japan's industrial sector doesn't seem capable of rapid reorganization to successfully adapt to the changes  in markets and industries that have been and continue to take place.

Update:  Japan’s Exports Reach Three-Year Low as Recession Looms: Economy - Bloomberg

"Shipments totaled 53.5 trillion yen ($653 billion) for January through October, down 2.3 percent from the same period in 2011...The trade deficit for 2012 so far is a record 5.3 trillion yen."

Radiation impact on Japanese children

"A report by Fukushima Medical University first published this April and updated in July revealed that 36% of Fukushima children have unusually overgrown thyroid glands, and could be prone to cancer.

Of 38,000 children examined, 13,000 had cysts or nodules as large as five millimeters, the Health Management Survey stated, which made doctors around the globe rate Japan’s reaction to the aftermaths of Fukushima disaster as “ultimately medical irresponsibility.”"

Mascot bird teaching Fukushima children how to avoid radiation — RT

Need for change

By Their Fruits Ye Shall Know Them » Counterpunch: Tells the Facts, Names the Names

by Michael Hudson

Here’s the dilemma the American president faces: Markets are shrinking, and consumers are having to repay debts they earlier took on during the heady Bubble Economy that crashed in 2008. Paying down these debts leaves less to spend on goods and services. Labor productivity is soaring – but not wages. While the bailout economy’s fruits are going to profits and paid out as interest and dividends, neoliberals are demanding that the retirement age be raised, not lowered, and that work hours be lengthened more, not shortened. Federal Reserve Chairman Ben Bernanke’s helicopter only hovers over Wall Street, not the rest of the economy.

The middle class that voted so strongly for Mr. Obama four years ago is being squeezed. To describe their plight, I expect the next four years to see the spread of a fresh vocabulary to describe what is happening: debt deflation and neofeudalism, while the classic terms rentier and oligarchy may become popular once again.

But neither party will use these words. Only a third party can do that. Right now its potential members are called “Independents.” A new title is needed for a new pro-labor, anti-militarist coalition that would restore the spirit o0f true reform, progressive taxation and the rule of law (that is, throw financial crooks in jail). The problem the economy faces is how to revive wages and consumer demand, and to write down personal debts, not government debt. Mr. Obama has joined with the Republicans in perverting the vocabulary to pretend that government is the problem, not his campaign contributors on Wall Street.

Japan consistently running trade deficits

This chart of Japan's trade balance shows consistent deficits roughly since the Fukushima catastrophe. 

Since practically all of the country's nuclear power generating capacity has been shut down, the country has been reliant on oil and natural gas imports, which contribute to the negative trade balance.

Given this situation, Japan is likely no longer a net purchaser of US Treasury debt.

Real defense spending by the US

Here's a chart from the Heritage Foundation that shows US defense spending in constant 2005 dollars:

Economics professor admits textbooks highly profitable

Quoted from Standing Behind Every Great Con Artist is Someone Like Glenn Hubbard

"INTERVIEWER: Forgive me, but I'm going to be direct: How does your personal income compare, your private income as opposed to your university salary?

GLENN HUBBARD: Vastly times more, because I write textbooks, so that's much more remunerative than being a professor."