Posts filed under “Think Tank”


An example that the more the US govt gets involved in cleaning up the
economic mess, the longer it will last, aka Japan, Fitch is forecasting
that between 65-75% of mortgage loans that are modified will redefault
after 12 mo’s. An example of the damage that can be done to a family by
artificially modifying a loan for one who should be renting and
redefaults in 12 mo’s and thus prolongs the agony and delays the
inevitable, is the money that a family spends each month on a mortgage
during the initial 12 after modification that can be used for renting at
a lower monthly price, with money leftover. It’s not the same as owning
one’s own home but it improves the financial health of the family. The
foreclosure process however painful also more quickly clears markets and
brings out demand. The homeownership rate is now 67.5% versus the
average of 65.3% dating back to ’65 and we need to get back to that
average and not keep artificially propping it up.

Category: MacroNotes

Only a madman can get the $ to rally?

Who would have thought that the best friend of a US$ bull would be Kim Jong Il but it was North Korea’s missile and nuclear test that bounced the $ after 5 days of selling last week. Commodities are lower as a result and helping to pressure crude is the realization (as expected) that nothing…Read More

Category: MacroNotes

Words from the (investment wise) May 24, 2009

Stock markets kicked off the last week on a high note, but then the US parted ways with other markets as the remaining four days went downhill for American stocks. In contrast, global markets in general had only one down day on Thursday.

In addition to non-US equities, risky assets such as commodities, oil, gold, silver and platinum, and high-yielding currencies performed strongly amid fresh signs of “less bad” economic and financial conditions. However, safe-haven trades such as the US dollar and government bonds got whacked, especially following Standard & Poor’s decision on Thursday to mark down its medium-term outlook for the UK’s AAA credit rating from “stable” to “negative”. This raised concerns that the US may face a similar fate.


Source: New York Post, May 23, 2009.

As the implications of surging government debt levels move to center stage, the US Debt Clock makes for sobering reading. Click here or on the image below for the live version.


Source: US Debt Clock, May 23, 2009.

David Rosenberg, Merrill Lynch’s former chief North American economist, who has just commenced duty with buy-side firm Gluskin Sheff & Associates, commented as follows: “While the UK government debt-to-GDP ratio is around 40%, the rating agencies are looking at 100% in coming years. The US government debt/GDP ratio right now is near 65%, but clearly heading higher. It seems as though 100%+ is the trigger point for downgrades …

“So the view out there that the US is about to receive a credit downgrade despite the dramatic expansion of the government balance sheet is a little premature. For now, it makes for nice cocktail conversation but as super-sized as the deficit is (13% of GDP), there is enough room in the debt ratio that the US would likely have to run three more years of this sort of fiscal policy to be seen as a candidate for a downgrade.”

The performance of the major asset classes is summarized by the chart below.



Following the previous week’s bruising, the MSCI World Index last week gained 2.2% (YTD +2.3%) and the MSCI Emerging Markets Index 5.4% (YTD +31.6%).

Similarly, the major US indices reversed course, but in a much more subdued fashion, as seen from the fairly flat movements of the major indices: S&P 500 Index (+0.5%, YTD -1.8%), Dow Jones Industrial Index (+0.1%, YTD -5.7%), Nasdaq Composite Index (+0.7%, YTD +7.3%) and Russell 2000 Index (+0.4%, YTD -4.4%).

The Nasdaq remains the only major US index still in the black for the year to date, finding itself in the company of the majority of emerging and mature markets.

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Category: Think Tank

Securitization: Advanta and the Fiction of True-Sale

Below is a comment by LSU Professor Joseph Mason and Eric Higgins  on the evolving situation in the securitization market. While the folks at the Fed and Treasury pretend that they can breathe life back into the private label securitization market, the legal underpinnings of this OTC market are disintegrating under the weight of mounting losses and falling cash flow. –  Chris

Advanta and the Fiction of True-Sale

Joseph R. Mason and Eric J. Higgins†

On Monday, May 11, 2009, Advanta Corp. announced that their credit-card securitization trust would go into early amortization and that they will shut down all of the accounts in the trust. What the casual observer (and most regulators) missed is that this announcement is also endemic of the problems at the heart of securitization: the “true-sale” classification from which securitizations obtain their off-balance sheet treatment.

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Category: Think Tank

The Paradox of Deficits

The Paradox of Deficits May 23, 2009
By John Mauldin

Things That Go Bump in the Night

A Trillion Dollars as Far as the Eye Can See

The Global Recession Gets Worse

Where Will the Money Come From?

The Paradox of Deficits

Naples, London, and Eastern Europe


From ghoulies and ghosties
And long-leggedy beasties
And things that go bump in the night,
Good Lord, deliver us!
–Old Scottish Prayer

There is something that is bumping around in my worry closet. The bond market is not behaving as if there is deflation in our future, and the dollar is getting weaker. Unemployment keeps rising, but most of all, the US government deficit looks to be spinning out of control. This week we look at all of this and take a tour around the world to see what is happening. There is a lot of interesting
material to cover.

But first, I am proud to announce that thanks to your donations the net proceeds from the Richard Russell Tribute Dinner totaled $17,000! A donation was made in that amount to the Autism Society of America, San Diego County Chapter, in Richard Russell’s name.

The evening was captured in both video and photographs, and we would like to share those with you. We have put together a DVD that captures all the wonderful moments, including tributes from Richard’s longtime friends and family, an entertaining skit by Richard’s daughter Daria, and another touching tribute by Richard’s daughter Betsy. Perhaps the best speech, however, came
from Richard himself — which is of course included on the video. For those who could not attend in person, we have already made copies of the video and will mail it to you as soon as you order it. The cost is $29.95, and that includes shipping. You may order as many copies as you like.

To order the video, please visit:

The photographs were placed on Shutterfly, an online gallery where you may view them and choose the ones you would like to order. We have created a web page specifically for these photos. To access that page, please use this link: or you can link from the page above. Now, let’s jump right into the letter.

A Trillion Dollars as Far as the Eye Can See

As of this week, total US debt is $11.3 trillion and rising rapidly. The Obama
Administration projects that to rise another $1.85 trillion in 2009 (13% of
GDP) and yet another $1.4 trillion in 2010. The Congressional Budget Office
projects almost $10 trillion in additional debt from 2010 through 2019. Just
last January the 2009 deficit was estimated at “only” $1.2 trillion. Things
have gone downhill fast.

But there is reason to be concerned about those estimates, too. The CBO assumes a
rather robust recovery in 2010, with growth springing back to 3.8% and then up
to 4.5% in 2011. Interestingly, they project unemployment of 8.8% for this year
(we are already at 8.9% and rising every month) and that it will rise to 9%
next year. It will be a strange recovery indeed where the economy is roaring along
at 4% and unemployment isn’t falling. (You can see their spreadsheets and all
the details if you take your blood pressure medicine first, at

Just a few quick thoughts. This year the proposed administration plan is to borrow 50% of every dollar spent. The CBO projects than nominal GDP will grow by about 50% over the next 10 years (which is historically reasonable), but also that revenues will double, which suggests massive tax increases in relation to GDP. Interestingly, the International Monetary Fund says growth next year will be tepid at best (more below). The deficit in 2010 is almost 10% of GDP. The average proposed deficit is almost a $1 trillion average for the next ten years. Ten years from now, the deficit is projected to be $1.2 trillion. And that is if government costs do not go up and inflation only averages 1.1% for the next six years.

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Category: Think Tank

Interactions between Monetary and Fiscal Policy

Interactions between Monetary and Fiscal Policy in the Current Situation
Vice Chairman Donald L. Kohn, At the Conference on Monetary-Fiscal Policy Interactions, Expectations, and Dynamics in the Current Economic Crisis, Princeton University, Princeton, New Jersey
May 23, 2009

Our current economic situation has altered some of the usual interactions between monetary and fiscal policy. One change regards the relative effects of monetary and fiscal policy. The depth and persistence of economic weakness has meant that traditional monetary policy–the target for the federal funds rate–has become constrained from easing as much as might be desirable under the circumstances, and, as a consequence, the target federal funds rate is anticipated to remain near zero for some time. But as a result, fiscal stimulus has potentially become more effective in boosting economic activity than it usually would be.

Another change involves the potential for monetary policy actions to have greater fiscal implications than usual. The Federal Reserve has extended both its open market operations and lending programs in unprecedented ways to ease financial conditions and to help revive economic activity. In our open market operations, we have embarked on large-scale purchases of intermediate- and long-term Treasury securities, agency debt, and agency-guaranteed mortgage-backed securities (MBS) in order to put further downward pressure on borrowing costs, greatly increasing the degree of maturity transformation on our balance sheet. In addition, our traditional liquidity operations have been extended to include new borrowers and new markets, with the potential for greater credit risk than usual.

In my view, our nontraditional policy actions have been necessary to avert a far worse economic outcome, and they remain consistent with the traditional goals and principles of monetary policy. Moreover, as I will be discussing, we have structured these policies with the aim of accomplishing our objectives with few, if any, fiscal consequences. I will conclude with some thoughts about the transition back toward more typical monetary policy as the economy and financial markets improve.1

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Category: Federal Reserve, Think Tank

Bernanke’s Boston College Law School Commencement

Chairman Ben S. Bernanke
At the 2009 Commencement of the Boston College School of Law, Newton, Massachusetts
May 22, 2009
Commencement address

I am very pleased to have the opportunity to address the graduates of the Boston College Law School today.  I realized with some chagrin that this is the third year in a row that I have given a commencement address here in the First Federal Reserve District, which is headquartered at the Federal Reserve Bank of Boston.  This part of the country certainly has a remarkable number of fine universities.  I will have to make it up to the other 11 Districts somehow.

Along those lines, last spring I was nearby in Cambridge, speaking at Harvard University’s Class Day.  The speaker at the main event, the Harvard graduation the next day, was J. K. Rowling, author of the Harry Potter books.  Before my remarks, the student who introduced me took note of the fact that the senior class had chosen as their speakers Ben Bernanke and J. K. Rowling, or, as he put it, “two of the great masters of children’s fantasy fiction.”  I will say that I am perfectly happy to be associated, even in such a tenuous way, with Ms. Rowling, who has done more for children’s literacy than any government program I know of.

I get a number of invitations to speak at commencements, which I find a bit puzzling.  A practitioner, like me, of the dismal science of economics–and it is even more dismal than usual these days–is not usually the first choice for providing inspiration and uplift.  I will do my best, though, and in that spirit I will take a more personal perspective than usual in my remarks today.  The business reporters should go get coffee or something, because I am not going to say anything about the markets or monetary policy.



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Category: Think Tank

inflation-deflation sword fight

With the markets clearly getting concerned about the US$ ($ index falling this morning to just shy of the important technical level of 80), inflation (with the CRB index now up more than 20% from its lows and gold just $45 from $1000), and the financial condition of the US govt and coincident rise in…Read More

Category: MacroNotes

Potential Funding Worries Send Shudder Through Markets

Good Evening: The U.S. capital markets shuddered with a thought that many participants had never before considered — the credit worthiness of the sovereign entity known as the United States of America . This unheard of discussion started with a small downtick in the credit outlook for Great Britain , but, as with any form…Read More

Category: Markets, Think Tank

I am constantly amazed at the willingness of some very smart people on Wall Street to follow the herd, even over the proverbial cliff. How can we believe in rational markets when so many investors are sticking their heads in the sand?  The people buying bank stocks  on “value” fall into this camp, IMHO.  More…Read More

Category: Credit, Markets, Think Tank