Sarah Rohrs | Bay Area | May 8

San Jose Mercury News - Vallejo has become the first city of its size in California to seek bankruptcy protection.

The decision to file for bankruptcy came in a unanimous vote by the city council Tuesday night as hundreds of residents watched . . . Vallejo has been slammed by increasing costs of its public safety contracts, the housing crisis and lower property values. The city faces a $16 million deficit in the 2008-09 fiscal year that starts July 1. Tuesday night's vote came after months of fruitless talks between city and labor representatives.

Nota bene: They are the first, but they certainly won't be the last! ~spk Mish who is now on our blogroll has more.

May 7

AFP - The credit crisis that has scorched international financial markets is on the wane but more shocks are ahead, US Secretary Treasury Henry Paulson told the Wall Street Journal in an interview published on Wednesday.

"The worst is likely to be behind us," Paulson told the paper, in one of the most optomistic comments by a top US finance official since sub-prime mortgage losses set a domino effect in motion in mid 2007.

Paulson said it would take "some months longer" for the situation to stabilize and cautioned there would likely be further "bumps along the road."

But, he said, "there's no doubt that things feel better today, by a lot, than they did in March."

Paulson said the decision by the US Federal Reserve to rescue US investment giant Stearns and to inject liquidity into other investment banks proved to be a turning or "inflection point" in the crisis.

May 7 (Bloomberg) -- UBS AG, Switzerland's biggest bank, said the U.S. Department of Justice is investigating whether the firm helped clients evade U.S. taxes.

One senior bank employee was ``briefly detained'' by U.S. authorities as a ``material witness,'' the firm said in an e- mailed statement. The Financial Times reported that the employee was Martin Liechti, the Zurich-based head of UBS's international wealth management business for the Americas. Rohini Pragasam, a UBS spokeswoman in New York, declined to comment on the FT report. Liechti could not immediately be reached for comment...

Asia Times Online May 6, 2008

... The current system has experienced a broad transformation to a credit mechanism dominated by market-based instruments, in contrast to the traditional predominant position held by the banking system all the way through Minsky’s "money manager" era. Today, the financial apparatus is beholden not to a coherent banking system but instead to an ambiguous thing called "marketplace liquidity" and the unwavering confidence such a mechanism requires. Importantly, momentous changes to the prevailing incentive system are also consistent with designating a new phase of Minskian capitalism.

Late in Minsky’s life, he expounded upon the role rising stock and corporate debt prices were playing in dictating various behaviors in the credit system, markets and real economy. With financial arbitrage capitalism, the bounty of seemingly limitless (until recently) speculative profits has created a reward system encouraging unprecedented debt creation, leveraging, and myriad forms and layers of financial intermediation.

The latest inquiry is broader and deeper than a separate F.B.I. investigation of mortgage lenders that is also under way.

May 5, 2008, 7:26 am

NYT - Prosecutors in the Eastern District of New York in Brooklyn are stepping up their scrutiny of players in the subprime mortgage crisis, focusing on Wall Street firms and mortgage lenders, The Wall Street Journal reported.

A task force of federal, state and local agencies will look into potential crimes ranging from mortgage fraud by brokers to securities fraud, insider trading and accounting fraud, The Journal said.

The Federal Bureau of Investigation is already targeting major corporate insiders and criminal groups in its investigation of fraud in the mortgage lending industry. The FBI has said it is investigating 19 companies in mortgage cases. ...

Craig Torres | Washington | May 2

Bloomberg - A month after the Federal Reserve rescued Bear Stearns Cos. from bankruptcy, Chairman Ben S. Bernanke got an S.O.S. from Congress.

There is ``a potential crisis in the student-loan market'' requiring ``similar bold action,'' Chairman Christopher Dodd of Connecticut and six other Democrats wrote Bernanke. They want the Fed to swap Treasury notes for bonds backed by student loans. In a separate letter, Pennsylvania Democratic Representative Paul Kanjorski and 31 House members said they want Bernanke to channel money directly to education-finance firms.

Student loans are just the start. Former Fed officials and other Fed-watchers say that Bernanke's actions in saving Bear Stearns will expose the central bank to continuing pressure to use its $889 billion balance sheet to prop up companies or entire industries deemed important by politicians. The Fed satisfied Dodd's request today, expanding the swaps to include securities backed by student debt.

Great insight from Stirling here:

So what all of this means is that the numbers as presented are accurate, but uninformative to the question that most Americans want to know. What they say is that the very small elites are prevailing in their gambling to keep control of the economy, while producing a radically lower standard of living for everyone else. They are continuing in their gamble to incarcerate or keep in the military the small core of people who are willing to break bones to make political change. Here.

No, it's not a touchy-feely, nice sentiment. But that doesn't make it untrue. Nothing will change until the war ends. Period. Full stop.

Quite a catch-22 there, huh?

I think this is a very astute observation from Agonist reader tjfhx

Economic fundamentals are now deflationary as credit contracts, while monetary and fiscal policy is inflationary. This has led to a confusion over whether the US is experiencing deflation (e. g., falling housing values) or inflation (e.g. rising commodity prices). The bias is toward deflation and as Stirling has observed in Fire the Fed and his comment in that thread entitled Inflation, the Fed has adopted a meso-inflationary stance that disincentivizes hoarding dollars under these circumstances by depreciating the dollar, because if large numbers of people start saving rather than consuming, the downward spiral will accelerate out of control.

Thus, the price of necessities must rise, now that discretionary spending is falling, in order to perpetuate the inflation tax that transfers wealth upward. As the price of resources rises, wage earners are forced to pay more, while the owners of resources and those who speculate in them increase their wealth at least nominally and possibly also in real terms if they do very well. If one has funds, the objective is to be on the right side of this equation.

A weird combination of both?

Leonard Doyle | Washington | May 3

Independent - America's love affair with sports utility vehicles (SUVs) and pick-up trucks is finally over.

The gas-guzzlers that ply the country's freeways and clog its city streets and parking lots are falling victim to ever-rising petrol prices, rather than concern about the country's oversized carbon footprint. The fall-off in sales is dramatic however.

Even offers like that from a Denver showroom of a year's free petrol with each new SUV isn't shifting the pick-ups and 4x4s quickly enough to stave off financial ruin for the country's car manufacturers.

With petrol now selling for almost $4 (£2) a gallon, consumers are trading in their Humvees and Ford Explorers so fast that for the first time, one in five cars sold in the US is now a compact or subcompact. In another first, sales of six-cylinder vehicles were bypassed by smaller four-cylinder, mostly Japanese, cars in April.

The credit crunch isn't over, not by a long shot:

The Federal Reserve, seeking to prevent a deeper economic slowdown, took another stab at coaxing banks into lending at lower rates.

The Fed boosted its biweekly Term Auction Facility sales of cash to banks by 50 percent to $75 billion and expanded the collateral it takes from bond dealers through loans of Treasury securities. It also raised the amount of dollars it makes available to the European Central Bank and Swiss National Bank through swap lines to a combined $62 billion from $36 billion.

Borrowing costs for banks have risen as much as 0.38 percentage point in the past six weeks, an increase that blunted the impact of the cash injections that began in December. The strains threatened to further impair mortgage markets, worsening an economy where growth has already stalled.

Really, the Fed's balance sheet has got to be looking pretty bad about now.

That being said, spring is almost over and summer will lull most into a false sense of security, rising gas prices notwithstanding. But as fall arrives and the two worst months, historically speaking for markets that is, of September and October come well, who knows? My crystal ball is certainly far from perfect. But I'd be building up my cash right now more than anything else. Better safe than sorry. With cash you can always get back in the game, but when you're broke?

I'd like to see the numbers, but the NYT is headlining this: "U.S. Economy Grew at 0.6 Percent Pace, Commerce Department Says" right now.

Here's the BEA release. Anyone want to break down the numbers and tell us what really happened?

Barry at The Big Picture talks about the 'big shitpile' they call the GDP numbers.

AlterNet Apr 28, 2008

George Bush came into office. There was a recession almost immediately. Officially it began in March of 2001 and, officially, it ended eight months later.

The causes of that recession are vague and amorphous, generally credited to the "business cycle."

There is, in addition, a minor Republican industry dedicated to backdating the onset by five months, to November 2000, in order to make it a Clinton recession. Or, to inadvertently say that the very election of George Bush screwed up the economy; he didn't even have to come to power.

Asia Times Online Apr 30, 2008 ... It is in this context that I believe U. S. policymakers are today unknowingly risking global financial and economic catastrophe. They are, of course, fixated on domestic concerns and are willing to do any and everything in a desperate attempt to sustain the U. S. Bubble Economy. They are oblivious to both the heightened risks associated with today’s Current Account Deficits and to the various linkages of their policies to Heightened International Monetary Disorder. Stage II is fraught with great but not easily recognizable risks.

Even when times are good, it's hard to believe that corporate CEOs can look you in the eye and tell you that they've truly earned their outrageous $10 million, $50 million, $100 million or more pay packages.

And right now, times aren't good.

But this week I saw another round of stories on corporate CEOs getting multi-million dollar "bonuses" even as their companies lose millions of dollars.

This is just another outrageous example of a corporate culture that is out of control and out of touch with most Americans. These corporations fight any kind of regulation designed to protect workers, the environment, or public health, yet when their irresponsible behavior bites them in the ass, they come crawling to us begging for a bailout, while continuing to lavish hefty paychecks on their top executives.

From 3/6/06, first post on Housing Market

New Federal Reserve Chairman Ben Bernanke said last month housing would enter a moderate slowdown but not a crash.

William Mack, a housing analyst for Standard & Poor's, predicted "a soft landing. The overall market is just taking a step back."

(And they don't take American Express)

http://agonist.org/forum/housing_market#comment-155445

There are four ways to use money: consumption, savings, capital investment and speculation. Savings is coupled with capital investment because savings are needed to provide the funds for investment. Consumption is coupled with speculation in that both are discretionary. Speculation involves discretionary funds that are not spent, saved or invested.

Recently, the action has been in consumption and speculation rather than savings or domestic capital investment. Moreover, consumption has been debt-based and speculation has been highly leveraged, which is also debt-based.

Without savings and investment an economy cannot continue to grow in a real (productive) sense. "Growth" has been borrowed from the future and has to be repaid. Without a corresponding growth in real productive capacity, burgeoning debt cannot be repaid.

Asia Times Online Apr 25, 2008

The great silence of a Gilded Age
By Steve Fraser

Google "second Gilded Age" and you will get ferried to 7,000 possible sites where you can learn more about what you already instinctively know. That we are living through a gilded age has become a journalistic commonplace. The unmistakable drift of all the talk about it is a Yogi Berra-ism: It's a matter of deja vu all over again. But is it? Is turn-of-the-century America a replica of the world Mark Twain first christened "gilded" in his debut bestseller back in the 1870s?

Typical of the Quant mindset:

Moody’s did not have access to the individual loan files, much less did it communicate with the borrowers or try to verify the information they provided in their loan applications. “We aren’t loan officers,” Claire Robinson, a 20-year veteran who is in charge of asset-backed finance for Moody’s, told me. “Our expertise is as statisticians on an aggregate basis. We want to know, of 1,000 individuals, based on historical performance, what percent will pay their loans?”

Fucking Quants--always with this implacable, indestructible belief in a predictable distribution, never realizing that a Black Swan, a multi deviation from the mean event, lurks. One thing about such events: they are patient. How can people so 'smart' be so stupid? I so loath statistics at times like these. Useless.

Read the rest of the essay--it's worth it.

Peter Grier | Washington | April 23

CSM - The federal deficit hit $311 billion for the first half of fiscal year 2008, up from $162 billion the year before.

Deficit? What deficit? Three big intersecting events – war in Iraq, the economic downturn, and the presidential race – this year have combined to knock fiscal discipline far down the list of Washington's policy priorities.

In fact, the federal deficit hit an all-time high of $311 billion for the first half of this budget year, reports the Treasury Department. And Congress is discussing further moves to help distressed homeowners and stimulate the economy. Iraq and Afghanistan will cost at least another $170 billion in supplemental funds through the end of next year.

Mish's Global Economic Trend Analysis- April 22, 2008
Deflation In A Fiat Regime?

I was asked by professor Lance Lewis (and many others) to reply to on a post by Doug Noland called Setting the Backdrop for Stage Two. Before reviewing Noland's post I would first like to comment on this statement made by Professor Lewis: " I have never been one to believe you can have a true deflation with a fiat currency."

Before we can begin any discussion, it is imperative to agree on the meaning of terms. I happen to believe in Austrian economics and the definition I use when I speak of inflation is a net increase in money supply and credit. Deflation is the opposite, a net decrease in money supply and credit. For more on those definitions as well as rationale for discarding seven other definitions, please see Inflation: What the heck is it?

Ok, call me crazy but I thought a foreclosure prevention bill is suppose to be designed to help average folks stem off foreclosures. So will someone tell me how a foreclosure prevention bill would contain bail-out money for automakers, airlines, alternative energy producers and other struggling industries? What do these clowns in Washington have to do to prove to the American public where their loyalties lie. Why is it that when average Americans seek help from their government they are treated to: rely on capitalism and the free enterprise system, but when these CEO’s, who get million dollar bonuses whether their companies succeed or not, make bad business decisions it is ok for the government to bail them out. Who says we are capitalist? I guess the poor are, but the rich sure as hell aren’t.

It’s amazing how ideas that were rejected just a year ago are flying through cyberspace as well as real-space, at the speed of light. I’m talking about two things here. The first I’ll mention is the idea that both the Democrats and the Republicans’ are pawns of the corporate power structure in this country. It will probably seem hard to believe now, but just a short time ago I was called all sorts of things for bringing that up. Since 2004, I have been writing about campaign financing and the need for reform. This one issue is the basis of corporate control along with the “good folks” on K-Street that staff 70 lobbyist’s for every legislator we have on Capitol Hill. Gee, what a great system we have up there (for the legislators and the lobbyists). I can’t wait to run for office myself so I can get in on those goodies they’re passing out (only kidding), this can’t last forever…or can it?

April 21 (Bloomberg) -- To hear Kevin Phillips tell it, the U.S. is a world power on the skids, an overstretched empire slumping toward the fate of Hapsburg Spain, the maritime Dutch Republic and imperial Britain.

The culprits: Wall Street and Washington.

The former Republican strategist lays out his harsh case in ``Bad Money,'' an update of his 2006 bestseller, ``American Theocracy,'' which warned that the U.S. was dangerously dependent on debt and oil. Events have so far vindicated his views.

Thematically, ``Bad Money'' resembles a map of a city subway. It's schematically clear yet complex, with whorls of intersecting lines in red, yellow and blue. The circuit covers ``reckless finance, failed politics and the global crisis of American capitalism,'' as the subtitle puts it. Stops along the way include primers on securitization, peak oil, government manipulation of inflation data, and the drooping dollar.

Gretchen Morgenson

NYT - Slowly but surely, a handful of public-minded bankruptcy court judges are drawing back the curtain on the mortgage servicing business, exposing, among other questionable practices, the sundry and onerous fees that big banks and financial companies levy on troubled borrowers.

It isn’t a pretty sight, if you are a borrower. But shining a light on this dark corner certainly qualifies as progress.

The cases come out of bankruptcy courts in Delaware, Louisiana and New York, and each one shows how improper, undisclosed or questionable fees unfairly penalize borrowers already struggling with mortgage debt or bankruptcy.

The political situation in the United States is different at this particular time than in any other time that I have witnessed in my 57 years on this planet. This is the only time in my life that I can ever remember when the right and the left agree more with each other than the so-called “centrists’” of the GOP and the Democratic Party. Those that lean left, like myself, are afraid of losing their civil liberties, afraid of the corporate control of the mainstream media, afraid of the government’s surveillance of our personal activities, afraid of violations of the second amendment when it comes to gun ownership and are thoroughly disgusted with the governments clampdown on our 1st Amendment rights on free speech. When we see protesters tasered and sprayed with tear gas, hit by rubber bullets and clubbed, as in what happened at the G8 meetings in Washington, something is definitely wrong in this republic.