For the good of some

This is a topic on which I am doing some research.

Paul Krugman writes a look back at the law change (the Garn-St. Germain Depository Institutions Act) that gave birth to our current economic crisis.

This is a topic on which I am doing some research.

Paul Krugman writes a look back at the law change (the Garn-St. Germain Depository Institutions Act) that gave birth to our current economic crisis.

After reading I thought PK was far too gentle on Reagan. However the article mentions Reagan and his advisors. Who were Reagan’s advisors? Some info is in the comments:

Reagan’s circle didn’t include only men. One of the worst architects of the financial disaster was Wendy Gramm, whom he called his “favorite economist,” Gramm, wife of Phil Gramm, was appointed by Reagan to head the Commodity Futures Trading Commission. Among other things, she worked diligently to protect the growing derivatives market from regulation, including shielding energy derivatives from regulation at the behest of Enron. At the end of the Reagan/Bush era, she left the CFTC to become a board member of Enron. We know how that turned out. Of course, she teamed up with her hubby to continue the march to deregulate derivatives, culminating in his insertion of the Commodity Futures Modernization Act into a last-minute must-pass spending bill.

The housing bubble and sub-prime market collapse was bad, but it was the credit default swap derivatives and other undercapitalized, unregulated derivatives that toppled the whole house of cards, and it couldn’t have happened without Reagan and the Gramms.
Eric E., Hood River, OR

—-

Yep. Reagan, Stockman (David) and other advisors set out to destroy the social safety nets and the protections that permitted ordinary people to save for retirement without being defrauded. They succeeded.

Somehow it is not very satisfying to say “I told you so.”
Rachel, California

—-

Fernan St. Germain, co-sponsor with Jake Garn (R-UT) of the Congressional Act referenced by Dr. Krugman, was a DEMOCRAT and the Act passed with broad bi-partisan support. In the House of Representatives, it was co-sponsored by CHUCK SCHUMER and STENY HOYER where it passed the Democratically controlled body by a vote of 272-91.

And what was the stepping stone to this “New Deal” betrayal? Jimmy Carter’s signing of the “Depository Institutions Deregulation and Monetary Control Bill” which, according to John Birger ( http://money.cnn.com… )

“…abolished state usury caps that had limited the interest rates banks could charge on primary mortgages – and, in the process, gave banks more incentive to make home loans to folks with less-than-perfect credit.

DIDMCB… did open the door to some predatory lending in low-income communities… deregulated the mortgage market and made home loans more available.”

I have never voted for a Republican in my life and Jimmy Carter was the first President I voted for as a naive young man. My point is not to defend Reagan and the GOP but to insist that NONE of it could have been accomplished without the help of Congressional Democratic majorities who very much participated in the destruction of the New Deal – the very foundation of the Democratic Party.

Nothing will change, Dr. Krugman, if we fail to acknowledge that our current economic downfall was a not just a GOP engineered event. It has resulted from the failure of our DEMOCRACY and won’t be fixed until we have a Democratic Party dedicated to Main Street – and the moral principles behind FDR’s New Deal – not Wall Street.
pugg squaar, manhattan

—-

Subprime crisis impact timeline

That’s enough for now.

Smells like marketing BS

Sharp Develops Five-Primary-Color LCD That Faithfully Reproduces Real Surface Colors

Sharp Corporation has developed a five-primary-color display that faithfully reproduces the real surface colors that humans are capable of perceiving. A prototype of this display will be exhibited at the international symposium of the Society for Information Display (SID) to be held in San Antonio, Texas, US from May 31 through June 5, 2009.

Demand for displays that can render colors in a manner faithful to the appearances of naturally occurring surface colors or designed colors is growing stronger in fields such as industrial design, digital archiving, network-based remote medical care, and electronic commerce. Thus various efforts to satisfy these requests are intensifying, prompting, for example, the development of natural vision technology.

This five-primary-color display comprises “Multi-Primary-Color Technology” that features special image processing circuitry, in addition to the display panel whose pixel structure is based on five-color filters that add the colors C (cyan) and Y (yellow) to the three colors of R (red), G (green), and B (blue).

This combination expands the color gamut (range of reproducible colors) that can be rendered within the color spectrum that humans can discern with the unaided eye, and enables the display to reproduce more than 99% of real surface colors. Nearly all real surface colors can be rendered faithfully, including colors that have been difficult to render using conventional LCD monitors—the color of the sea (emerald blue), brass instruments (golden yellow), and roses (crimson red), for example. As adoption of this technology will enable more efficient use of light energy produced by the backlight, this display will also provide greater energy savings.

First, Red, Green, Blue are the additive primaries used in monitors, projectors, and TV’s. Cyan, Yellow, Magenta are the subtractive primaries used in printing ink on paper. Adding two LED’s of the subtractive primaries with the RGB additive primaries LED’s will add a higher contrast ratio to the display and perhaps a wider color gamut. It will also mean 5 LED’s instead of 3 unless the LED’s have been reduced in size I suspect this will be a lower resolution display.

My bet is this display is an effort to combat the approaching OLED tsunami in displays. My money stays on the OLED.

Exploring Google Spreadsheets

This is GOOD.

Using Google Spreadsheets as a Database with the Google Visualisation API Query Language

Wouldn’t it be handy if we could treat all the public spreadsheets uploaded to Google docs as queryable tables in a database? Well, it appears that you can do so, at least at an individual spreadsheet level: Introducing the Google Visualization API.

Over the weekend, I started exploring the Google Visualisation API Query Language, which is reminiscent of SQL (if that means anything to you!). This language provides a way of interrogating a data source such as a public online Google spreadsheet and pulling back the results of the query as JSON, CSV, or an HTML table.

Got that? I’ll say it again: the Google Visualisation API Query Language lets you use a Google spreadsheet like a database (in certain respects, at least).

Effects of the GM bankruptcy

Layoff, another layoff, still more layoff. Shedding most US workers, dumping its US suppliers, throwing off its pension responsibility, and of course forcing the retained union workers to take wage and benefit cuts. Now what do you think will happen to the US economy as a direct result? What are the odds GM will recover? How long will GM’s recovery take?

BusinessWeek – What If GM Did Go Bankrupt…

Leading Economies Report a Period of Record Decline – NYTimes.com

The economies of the developed world have had their worst quarterly showing in decades, the Organization for Economic Cooperation and Development said on Monday, even as more signs emerged that the pace of the decline was easing.

The combined gross domestic products of the 30 countries in the organization fell 2.1 percent in the first quarter when compared with the previous quarter. If that preliminary estimate holds, it would be the largest drop since 1960, when the organization began collecting such data. The G.D.P. of member countries fell 2 percent in the final quarter of 2008.

“The figures confirmed the impression that we already had from the individual countries’ reports,” said Jörg Krämer, chief economist at Commerzbank in Frankfurt. “It shows the world economy was in free fall in the final quarter of last year and the first quarter of this year.”

Despite the dismal data, Mr. Krämer said that “the economy is now in its landing approach.” He predicted that the world economy would begin to expand modestly in the fourth quarter of this year, followed by “subpar growth” in 2010.

In Japan, the government on Monday raised its assessment of the economy, saying that while corporate profits and business investment continue to decline, the tempo of worsening in the economy was “moderating” as exports and industrial production neared what appeared to be a bottom.

Mr. Krämer said recent purchasing managers’ data from China and the Institute for Supply Management’s index of nonmanufacturing businesses in the United States also supported the conclusion that “the recession could be over by autumn.”

“I’m quite cautious,” he said, “but this is what the facts say.”

Among the seven largest O.E.C.D. economies, only in France — where the economy shrank 1.2 percent — did the rate of contraction ease in the first quarter, the organization said. The organization estimated Canadian first-quarter growth because official data was not yet available.

The O.E.C.D. economies accounted for 71 percent of world G.D.P. in 2007, according to the World Bank. Those economies shrank 4.2 percent in the first quarter from a year earlier. The United States contributed 0.9 percentage point of that decline, while Japan contributed 1 percentage point, the 13 largest euro-zone countries 1.3 points, and the remaining member countries 1 point.

China, which is not a member of the organization, reported that its economy continued to grow in the first quarter.

(Via NYTimes.com)

I’m not an economist so when I read “the largest drop since 1960” alarm bells sound and warning flags start waving. Despite the optimistic predictions no one can pre-judge the outcome of a world wide recession. Except for one thing – there will be more and more deficit spending by governments to avoid the spectre of social unrest (read, revolution).

Is The Bond Hangover Cure of Inflation Worse Than The Disease?

Is The Bond Hangover Cure of Inflation Worse Than The Disease?: Uncharacteristically for an economist, Wolfgang Munchau questions the conventional remedy for the debt millstone: use inflation to trash its value in real terms. Bondholders so often get shafted that it’s a predictable outcome.

But is it wise? Munchau argues that regardless, the piper must be paid. If the powers that be succeed in creating meaningful inflation, they will have to engineer a contraction to wring it out of the system. Volcker demonstrated how painful that could be. The retort is that the all in costs may well be worse that if we muddled along with less aggressive remedies.

But human beings in general, and politicians in particular, do not discount future events the way finance textbooks say they ought to. They engage in hyperbolic discounting. So future costs are vastly cheaper than pain now, particularly if you can dump the mess on a successor.

From the Financial Times:

What I hear more and more, both from bankers and from economists, is that the only way to end our financial crisis is through inflation…

Four immediate questions arise from these considerations. Can it be done? Can it be undone? Can it be done at a reasonable economic cost? Last, should it be done?

Of course, it can be done, but only for as long as the commitment to higher inflation is credible. Inflation is not some lightbulb that a central bank can switch on and off. It works through expectations. If the Fed were to impose a long-term inflation target of, say, 6 per cent, then I am sure it would achieve that target eventually. People and markets might not find the new target credible at first but if the central bank were consistent, expectations would eventually adjust. In the end, workers would demand wage increases of at least 6 per cent each year and companies would strive to raise their prices by that amount.

If, however, a central bank were to pre-announce that it was targeting 6 per cent inflation in 2010 and 2011, and 2 per cent thereafter, the plan would probably not succeed. We know that monetary policy affects inflation with long and variable lags. Such a degree of fine-tuning does not work in practice. My own guess is that one would have to make a much longer-term commitment to a higher rate of inflation for such a policy shift to be credible. I suspect that the greater the distance between the new rate and the current rate, the longer the commitment would have to be.

Could it be reversed, once it had been achieved? Again, the answer is yes; again, the commitment would have to be credible….any new credibility would have to be earned through new policy action. This might imply nominal interest rates significantly above 6 per cent for an uncomfortably long period.

What would happen then? I can think of two scenarios. The best outcome would be a simple double-dip recession. A two-year period of moderately high inflation might reduce the real value of debt by some 10 per cent. But there is also a downside. The benefit would be reduced, or possibly eliminated, by higher interest rates payable on loans, higher default rates and a further increase in bad debts. I would be very surprised if the balance of those factors were positive.

In any case, this is not the most likely scenario. A policy to raise inflation could, if successful, trigger serious problems in the bond markets. Inflation is a transfer of wealth from creditors to debtors – essentially from China to the US. A rise in US inflation could easily lead to a pull-out of global investors from US bond markets. This would almost certainly trigger a crash in the dollar’s real effective exchange rate, which in turn would add further inflationary pressure.

Under such a scenario, it might not be easy to keep inflation close to a hypothetical 6 per cent target. The result could be a vicious circle in which an overshooting inflation rate puts further pressure on the bond markets and the exchange rate. The outcome would be even worse than in the previous example. The central bank would eventually have to raise nominal rates aggressively to bring back stability. It would end up with the very opposite of what the advocates of a high inflation policy hope for. Real interest rates would not be significantly negative, but extremely positive.

Should this be done? A credible inflation target of 2 or 3 per cent, maintained over a credibly long period of time, is useful. But I doubt that a 6 per cent inflation target could be simultaneously credible and sustainable. Tempting as it may be, it is a beggar-thy-neighbour policy unless replicated elsewhere and would come to be regarded as such by many countries in the world. It would produce a whole new group of losers, both inside and outside the US, with all its undesirable political, social, economic and financial implications. It would also fuel the already rampant discussions about the inevitable death of fiat money.

Stimulating inflation is another dirty, quick-fix strategy, like so many of the bank rescue packages currently in operation. As Hemingway said, it would feel good for a time. But it would solve no problems and create new ones.

You may have noticed a crucial assumption….’workers will demand wage increases.’ Pray tell, how? Workers have no bargaining power in the US. Merely goosing interest rates does not a a tight labor market make.

Stagflation was seen as impossible until it took place. I wonder if we could wind up with rising bond yields due to concerns about large fiscal deficits, with a lower rate of goods inflation due to the lack of cost push (wages are a significant component of the cost of most goods, save highly capital intensive ones). In fact, we could see stagnant nominal wages with mildly positive inflation, which means wage deflation. If that was also accompanied by high yields, you would have much of the bad effects of debt deflation per Irving Fisher (high real yields and reduced ability to service debt) since real incomes would be falling in the most indebted cohort.

(Via naked capitalism.)

“Own to Rent” Taking Place in Phoenix

“Own to Rent” Taking Place in Phoenix: In 2007, Dean Baker proposed an idea he called ‘own to rent‘, in which homeowners facing foreclosure would be given the option of staying in their home indefinitely, provided they paid market rent. The notion was that stressed families would be spared the cost and disruption of moving if they were indeed viable renters (a big deal for kids in school). It would also save the bank the cost of foreclosure and the expense of maintaining a home and readying it for sale.

Critics argued it was a terrible idea, that banks would come out worse, and that the former owners would make lousy tenant (it appears not to have occurred to them that the now-tenants probably have improvements they made, giving them more attachment to the house than a typical rental).

Well, this obviously stupid idea is taking place full bore in Phoenix, as entrepreneurs find owners facing foreclosure and offer to buy the home if they remain as tenants. That says the economics are at least tantamount to the banks offering the same deal directly. However, in fairness, investors look negatively at banks that carry a lot of REO (real estate owned) so a bank would have to do a great deal of investor education to operate a similar program (and imagine what it would take to get investors in a securitized vehicle to sign off on this approach). And the other reason an idea like this has attracted such a following in Phoenix is a unique combination of a particularly distressed real estate market and a big influx of investment funds. But if other markets continue to swoon,the Phoenix model may become common.

From the New York Times:

With this sweltering desert city enduring one of the largest tumbles in housing prices for any urban area since the Depression, there is an unrelenting stream of foreclosures to choose from. On some days, hundreds are offered for sale at the auctions that take place on the plaza in front of the county courthouse.

There is also a large supply of foreclosed families who can no longer qualify for a loan. And that is prompting a flood of investors like Mr.[Lou] Jarvis, who wants to turn as many of these people as possible into rent-paying tenants in the houses they used to own….

Absentee buyers, who can be either investors or individuals purchasing a vacation property, bought nearly 4 of every 10 homes sold in the Phoenix metropolitan area in April, according to the research firm MDA DataQuick. That is up 50 percent since late 2007, and is nearly the same ratio as at the 2005 peak.

Once again, just about everybody seems to be buying as many houses as they can, positive it will make them rich — or at least allow them to recoup some of their losses….

In January, Mr. Jarvis began working as director of investor relations for Brewer Caldwell, a property management firm that had been approached by the CBI Group, a real estate fund based in Calgary, Alberta. In its first foray into the American market, CBI is buying 175 rental houses in Phoenix.

One of them belonged to Mary Lou and Jorge Aguilar, who purchased it new for $111,000 in 1999. Three years ago, after a series of financial difficulties, they refinanced for $185,000 for reasons they no longer understand. ‘Our lender talked a pretty picture,’ Mrs. Aguilar said bitterly.

When the couple’s mortgage payment adjusted to $1,242 a month, they fell behind and ended up in foreclosure. They now pay $1,014 in rent, which they say is bearable.

Still, their feelings are mixed. ‘It’s not our house anymore; it’s someone else’s,’ said Mrs. Aguilar, who works for the state welfare department.

For CBI, the deal is sweet. At that rent, it would recoup the $52,000 it paid for the house in about five years. ‘This type of deal is absolutely not available in Canada,’ said Jarrett Zielinski, a CBI executive. ‘No city here has fallen by 50 percent, the way Phoenix has.’

However, there is a possible fly in the ointment:

Brewer Caldwell has bought about 125 houses this year for its clients. Only a quarter had owners who were living there already and willing to stay on as tenants. Filling up the rest, and all the other houses the company intends to buy, will depend on a steady supply of people who cannot afford to buy for themselves.

‘If Phoenix loses population,’ Mr. Jarvis says, ‘then buying houses here is a bad bet.’

Phoenix is geographically dispersed and requires heavy duty air conditioning for a chunk of the year. Will the city lose appeal when energy prices rise?

(Via naked capitalism.)