Perspectives on the global economic meltdown

[Bade]

I'm saying don't buy something you cannot pay off in 5 to 7 years tops.

The idea of paying 3000/month for 20 years is insane.

Or maybe never buy anything that costs you more than what you would pay in equivalent rent. This is a good guideline to follow, although it does not help you when you want to sell the house and the market is such that there are no takers.

[Hari Seldon]

Been yapping about possible bankruptcies faced by gubmints of a lesser gawd (a.k.a. state, county and city gubmints). Remember, these lesser gawd's gubmints aren't constitutionally allowed the luxury of printing their own money to cover their surely legitimate deficits.

So, since they can't go the constitutional route, they go the constipational route.

They declare bankruptcy at once voiding all sweetheart deals, contracts, liabilities and obligations they collected alongside votes and bribes during good times.

Prichard Alabama Files Bankruptcy Over Pensions

Prichard Mayor Ron Davis released the following statement Wednesday morning:

“I have looked at every opportunity available to obtain money to help fund the retirement plan for the City of Prichard. After careful review of all of our options, bankruptcy protection seems to be the only solution left at this time.

Over the past 50 years, the pension plan was amended by the Legislature more than fifteen times, and always the economic burden on the City was increased. This has been a long term problem that was unfortunately inherited by this administration.

After several lawsuits filed by pensioners, it has forced us to come to this decision, one that will protect the city and its residents.

After a certain threshold, wherein precedent dissolves restraint, the deluge.

[Singha]

did not see it reported here but UK Govt this week 'injected' 40billion pounds into RBS and Llyods. it was reported RBS is all but nationalized in name now , while Llyods is still feral.

[Hari Seldon]

did not see it reported here but UK Govt this week 'injected' 40billion pounds into RBS and Llyods. it was reported RBS is all but nationalized in name now , while Llyods is still feral.

I must be slipping, but is it different from the 50 bn pounding quoted in moi boor bo(a)st above?

To be fair to Sri Mervyn King, he's buying time of sorta to force through some reformatory changes in the system - to ultimately break down the too big to fail failures. Or so the charitable thinking goes. To me, its hard to think why any g7 central banker would go aghainst big banking interests significantly given they're joined at the hip onlee.

[Singha]

where is this gold physically held? I saw some pgm that many govts leave it in some
banks and vaults in new york including a federal reserve facility near wall street.

all our gold holdings MUST be moved to india and held by the RBI . I would not put it past
Unkil to pull some rule of its ass at a opportune moment and say "gold, what gold?, whose gold?"

http://gata.org/node/7972
India may buy still more gold from IMF
Submitted by cpowell on Tue, 2009-11-03 13:51. Section: Daily Dispatches

By Abhrajit Gangopadhyay and Elisabeth Berhmann
The Wall Street Journal
Tuesday, November 3, 2009

http://online.wsj.com/article/SB125722876971624729.html

NEW DELHI -- India's central bank bought 200 metric tons of gold from the International Monetary Fund last month, in the first major move by a leading central bank to diversify its foreign-exchange reserves.

Analysts said the move is potentially bullish for gold, but it is by no means the start of a significant shift away from U.S dollar holdings.

The Reserve Bank of India said in a statement that the move was part of its foreign-exchange reserves management operations.

"I would have advised the governor of RBI to buy gold as our forex reserve is comfortable. The RBI has done just that. That doesn't mean we don't prefer dollar any more or like gold any better," Indian Finance Minister Pranab Mukherjee said.

"The purchase won't trigger a substantial mismatch in asset holdings of the RBI. Dollar will continue to be a significant part of foreign-exchange holdings, as most of India's external debt is in dollars. The gold buying, as of now, seems just an asset diversification strategy," said Sonal Varma, an economist at Nomura Financial Advisory & Securities in Mumbai.

A senior finance ministry official said the central bank may seek to buy more gold from the IMF directly. "It makes sense to buy gold as it will appreciate more than the U.S. dollar," he said.

The purchase of nearly half of the 403.3 metric tons of gold earmarked for sale by the IMF boosted spot gold in Asia, reminding investors that central bank reserve diversification will continue to fuel demand for the yellow metal in the open market.

The off-market deal also reinforced the view that little or none of the IMF gold may eventually reach the open market, limiting any bearish impact such a big sale may have had otherwise.

The RBI bought the gold over a two-week period between Oct. 19 and Oct. 30, an IMF statement said. The $6.7 billion proceeds from the sale indicate an average estimated price of $1,045 a troy ounce, far higher than IMF's projection of $850/oz a few months ago, when its executive board approved the sale.

Sue Trinh, currency strategist at RBC Capital in Sydney, said the announcement supported the view that central banks are actively looking for ways to diversify their reserves away from the dollar.

The RBI is "still a buyer at current high-price levels, indicating gold is likely to move up further. This is positive for the market," said Kunal Shah, an analyst at Nirmal Bang Commodities in Mumbai.

The IMF declined to comment on potential buyers for the remaining amount, but said it is still in "an initial period to sell gold directly to central banks and other official holders that may be interested in such sales."

There has been speculation that Chinese and Russian central banks may also be interested in buying gold directly from the IMF. Open market sales will be conducted only if any gold is left after the "initial period" and "the Fund will inform markets before any on-market sales commence," the statement said.

The news boosted gold prices in Asia, pushing up the December gold contract on India's Multi Commodity Exchange to a record high of 16,325 rupees ($348.71) per 10 grams.

"Central banks have switched from net sellers to net buyers. Over the last few years, gold [exchange traded funds] have become a major presence in the market. Gold's investor base is broadening, which is positive for gold," said Janet Kong, managing director at Goldman Sachs' commodities investment research division in Hong Kong.

Gold holdings in the SPDR Gold Trust, the world's largest gold ETF, have reached 1,103.52 tons, making SPDR the seventh-largest gold holder, placing it ahead of Switzerland.

"Diversification has been an ongoing story for Asian central banks, and gold is one of the possible diversifiers. Gold holdings in comparison to dollar holdings are low," said Westpac Senior Commodity Analyst Justin Smirk.

[Suraj]

Analysts said the move is potentially bullish for gold, but it is by no means the start of a significant shift away from U.S dollar holdings.

Say what ? Sounds like the anal-ysts are being true to themselves.

[Satya_anveshi]

Not that I would like to somehow stop the free ride that US and UK enjoy at the expense of all others.

But really.. If dollar is to be backed up by Gold, who is stop US from gobbling all the gold that is out there? If they could do it for OIL, diamonds, other rare metals, why not Gold?

What will that achieve? If countries are hoarding gold, what impact does it have on dollar? Yes, countries will have alternate ways to hedge their international transaction with countries that do not want to deal with dollar but how far this strategy will be sustainable?

more and more questions? But ofcourse, we need to buy more of that metal and *keep* it safe to *our* use. You don't own it if you don't hold it.

[Umrao Das]

Folks I wanted to write a report on China in African Bull but never got to it after my trip!

but read this please, Dont mistake this for yellow fever peril though!

It's China's world. (We just live in it)
After a shopping spree for natural resources, the Chinese are shifting to automakers, high-tech firms, and real estate. Where will they strike next?
By Bill Powell, contributor
Last Updated: October 8, 2009: 9:35 AM ET


Employees of CMEC, the Chinese construction giant, are building a hydroelectric dam in the Congo. CMEC requires Chinese workers to wear yellow hardhats and the Congolese to wear blue.




When China's $300 billion high-speed train system is completed, it will be the world's largest, fastest, and most technologically sophisticated. Photographer Benjamin Lowy captures the epic project and reveals its human side.
View photos
For real-time analysis from the best in business, follow Fortune on Twitter.

(Fortune Magazine) -- You wouldn't think the men who run the oil-rich country of Nigeria would have much spring in their step these days. The nation is plagued by a never-ending guerrilla war, one that has trimmed the country's oil production to two-thirds of its potential capacity.

But now Nigeria is in the process of renewing production licenses for some of its most prolific offshore fields, and there's a new player in town making the traditional oil powers from the West (Royal Dutch Shell (RDSA), Exxon Mobil (XOM, Fortune 500), Total (TOT)) very nervous -- and the Nigerian government very happy.

CNOOC (CEO), one of China's three largest oil companies, is trying to pick off some of the licenses; indeed, the Beijing-based company wants to secure no less than one-sixth of the African nation's production. And CNOOC, apparently, isn't screwing around.

Tanimu Yakubu, an economic adviser to the Nigerian President, recently told the Financial Times that the Chinese company is "really offering multiples of what the existing producers are pledging [for licenses]." Then he added giddily: "We love this kind of competition."

China's acquisitions
Oil in Nigeria (and the Congo and Brazil and Kazakhstan and ...). Natural gas in Iran. Iron ore in Australia. China's hunt for natural resources around the globe, which began in earnest earlier this decade, has intensified as never before.

In September alone, China's sovereign wealth fund, the China Investment Corp. (CIC), shelled out nearly $1 billion to buy an 11% stake in JSC KazMunaiGas Exploration Production, a Kazakhstan oil and gas company. Just a week earlier CIC paid $850 million to acquire 14.9% of Noble Group, the Hong Kong commodity-trading powerhouse. Earlier this summer the China Development Bank lent Petrobras, the Brazilian national oil company, $10 billion to help fund exploration in deep waters off Brazil.

So far this decade China has spent an estimated $115 billion on foreign acquisitions. Now that the nation is sitting on massive foreign-exchange wealth ($2.1 trillion and counting), it is eager to find something (anything!) to invest in besides U.S. Treasury debt.

0:00 /3:58U.S. - China trade tenses up
In 2008, China's investments abroad doubled from $25 billion to $50 billion. Yes, China still lags the U.S., which, as the world's largest exporter of capital, invested $318 billion abroad last year. Yet in many ways, China has only begun. And it won't stop anytime soon.

Though still focused mainly on the natural resources that power its economy, China is now, slowly but surely, broadening its foreign-investment horizons. Both the government and private firms are beginning to look beyond the developing world for assets.

Already the Chinese have bought stakes in foreign banks, utilities, and semiconductor companies. This is a hugely consequential step, both for China and for the global economy.

In the first decade of the 21st century, China established itself as the world's workshop. The next decade (if things go right) could see China emerge as the world's leading exporter of capital.

As Daniel Rosen, the coauthor of a recent study on China's foreign investment and a principal at the Rhodium Group, a New York City consultancy, puts it, "Increasing foreign direct investment is the next critical step in China's integration into the global economy."

How critical? China's recycling of the dollars it earns via its trade surpluses is a key part of the "rebalancing" of China's economy that everyone knows needs to occur. China saves too much, consumes too little, and has been overly reliant on exports to fuel its economic growth.

The current binge of growth at home -- nearly 8% in the first half of 2009 -- has been driven by a huge upsurge in credit growth from state-owned banks, as well as massive government stimulus spending. Neither is sustainable, and indeed, policymakers in China have already begun to rein in the surge in bank lending.

Make no mistake, the way Beijing has generated growth in 2009, however impressive it may look from afar, will prove to be an aberration. Once this period of crisis passes, China has no choice but to confront the necessity to drive up household incomes and private consumption.

This macroeconomic adjustment will, among other things, require a stronger renminbi to boost the Chinese consumer's purchasing power. A more valuable currency will also make foreign assets cheaper for acquisitions, driving microeconomic decisions at the company level.

From factory to owner
The implications for Chinese companies are huge. Becoming the world's factory has pretty much taken China's economy as far as it can.

As consultant Rosen puts it, "For a lot of Chinese companies, domestic economies of scale are now maxed out." China's corporate sector does not need to invest in and run factories that sell sneakers for Nike or toys for Mattel or auto parts for Magna. Chinese companies need to become Nike, Mattel, and Magna. They need, in consultant-speak, to move up the value chain.

Another reason the Chinese are buying stakes in foreign companies -- or buying them outright -- is that so few domestic companies have experience operating in the U.S. or Europe. Everything -- from the regulatory and legal environments to auditing and consumer safety standards -- is alien to the Chinese.

Arguably the most painless mode of entry for them is outright acquisition. That's what Chinese computer maker Lenovo did when it bought IBM's PC business in 2005 -- one of the few high-profile acquisitions of a U.S. business by a mainland company. Lenovo had a dominant position in PCs at home but little presence abroad. The acquisition changed that instantly. Lenovo has since worked hard to maintain the image of a global, as opposed to a Chinese, company.

This process, which China has called its "going out" strategy, will not happen overnight. But make no mistake, it is gaining momentum. Take Geely, for example, an ambitious, privately owned automaker based in Hangzhou, a city just south of Shanghai. Its CEO, Gui Shengyue, said last month that the company was interested in buying Volvo's car business from Ford (F, Fortune 500). A deal may or may not happen (of late Volvo's management has been throwing cold water on the idea). But the interest shown by a credible Chinese company in wanting to buy a big, established brand abroad should not be ignored. It's a signpost to the future.

Real estate fever
A big part of that future will involve China investing in financial assets and real estate. Look only at the number of trips that the world's leading hedge fund managers have been making to Beijing this year. They go for the same reason Willie Sutton robbed banks, but they arrive at the headquarters of CIC as supplicants on bended knee, desperate for investable capital in the one place in the world where that is very much in surplus.

CIC has $300 billion of the nation's money to invest, and it has now begun doling out dollops of it to a variety of Western investment managers because it has nowhere near the capacity to run that kind of money by itself. So in September it gave $1 billion to Oaktree Capital Management, the L.A. firm that specializes in buying distressed debt securities (an area that yielded huge returns in the past year).

Analysts expect an additional $2 billion to go to Western hedge funds and money-management companies in the next few months -- and that represents only a sliver of CIC's forthcoming investments.

J.P. Morgan & Co. in Hong Kong estimates that Beijing's sovereign wealth fund will invest $50 billion in the coming year. CIC officials have had recent discussions with several private equity managers -- including BlackRock (BLK, Fortune 500) and Lone Star -- about investing in U.S. real estate. "Mortgage-backed debt as well as outright purchases of buildings," says one banker with knowledge of the talks. "You name it, it's on the table."

Investment advisers who have talked with CIC's top management have said that they are acutely aware of what one investment banker calls "the Japanese precedent." In the late '80s and early '90s Japanese companies splurged on trophy properties, including Rockefeller Center, and wildly overpaid for many of them.

CIC itself, in one of its first investments, bought a 9.9% stake in the Blackstone Group (BX) just before the company's $31-a-share IPO -- and just before the market crashed. (Blackstone now trades at $13.60.) "They are being very careful and very disciplined in their approach to potential real estate investments," says one Western banker in talks with CIC.

The Chinese have already learned from bitter experience that investment abroad is not always win-win. Far from it, in fact. Their first whiff of that reality came in 2005, when CNOOC tried to buy Unocal, the Los Angeles-based oil company, and was rebuffed. The effort triggered opposition in Washington -- some congressmen questioned the wisdom of letting a big American oil company get taken over by a partially state-owned company from a country that, while not an enemy of the U.S., is not an ally either.

As China's state-owned companies increase their foreign investments, expect repeats of the Unocal case. Australia's foreign investment review board recently recommended that no foreign company be allowed more than a 15% stake in any of the country's natural resources companies. That decision, coming in the wake of China's state-owned aluminum company's failed effort to acquire nearly 20% of mining giant Rio Tinto (RTP), is aimed squarely at Beijing.

At a time when trade tensions with Beijing are rising in the wake of President Obama's decision to slap tariffs on Chinese-made tires, the cry of the trade hawks is easy to anticipate: Chinese state-owned companies can buy our assets here, but can we turn around and buy a state-owned company in China?

The answer is no, but that doesn't mean the U.S. should not take China's money. Washington needs to set clear guidelines for Chinese investment. Are all U.S.-based energy companies off-limits? Or only some? Or none? Says Rosen: "I expect China will play by the rules -- provided it knows what the rules are."

Let's hope he's right. Because the Chinese have more dollars than they know what to do with, and economies benefit when both goods and capital flow freely across borders. The U.S. ought to set aside its current economic insecurity and answer a simple question correctly: If the Chinese want to park more of their money in American assets (besides Treasury bills), why wouldn't we open our pockets and take it?

Read comments too

http://money.cnn.com/2009/10/07/news/in ... /index.htm

[kmkraoind]

US sets more duties on China pipe in record case

The United States has set preliminary anti-dumping duties ranging from 36.53% to 99.14% on Chinese-made steel pipe used in oil wells, a source familiar with the decision said on Thursday.

A group of US producers— Maverick Tube Corp., United States Steel Corp, TMK IPSCO, V&M Star LP. Wheatland Tube Corp. and Evraz Rocky Mountain Steel— asked the Commerce Department in April for the import protection.

They were joined by the United Steelworkers union, the driving force behind the tires case Obama decided last month.

[Hari Seldon]

Joke making the rounds online...

The Last Nickel


A father walks into a restaurant with his young son.
He gives the young boy 3 nickels to play with to keep him occupied.

Suddenly, the boy starts choking, going blue in the face.
The father realizes the boy has swallowed the nickels and starts
Slapping him on the back.

The boy coughs up 2 of the nickels, but keeps choking.
Looking at his son, the father is panicking, shouting for help.

A well dressed, attractive, and serious looking woman, in a blue
business suit is sitting at a coffee bar reading a newspaper and sipping
a cup of coffee. At the sound of the commotion, she looks up, puts her
coffee cup down, neatly folds the newspaper and places it on the
counter, gets up from her seat and makes her way, unhurried, across the
restaurant.

Reaching the boy, the woman carefully drops his pants, takes hold of the
boy's testicles and starts to squeeze and twist, gently at first and
then ever so firmly. After a few seconds the boy convulses violently and
coughs up the last nickel, which the woman deftly catches in her free
hand.

Releasing the boy's testicles, the woman hands the nickel to the father
and walks back to her seat at the coffee bar without saying a word.

As soon as he is sure that his son has suffered no ill effects, the
father rushes over to the woman and starts thanking her saying, "I've
never seen anybody do anything like that before, it was fantastic. Are
you a doctor? "

'No,' the woman replied. I'm with the I.R.S.'

[Tanaji]

http://news.bbc.co.uk/1/hi/business/8346170.stm

Personal insolvency rises by 28%
Cash, cards and bills
Debts have built up for some people during the downturn

A record number of people were declared insolvent in England and Wales in the third quarter of 2009, according to figures from the Insolvency Service.

[Nandu]

'No,' the woman replied. I'm with the I.R.S.'

Very topical.

http://www.mybanktracker.com/bank-news/ ... -tax-rate/

[Hari Seldon]

An SDRE face is the best bet to deflate Yindia's soundly muddled ekhanomic thinking.

India Navigates Global Crisis But Now Needs Reforms

India has been affected by the global economic crisis but through a combination of "accidental Keynesianism" with high fiscal deficits even before the crisis, and swift monetary easing it has managed the global crisis so far better than was predicted by most experts and international agencies. India's trade and financial integration into the global economy - especially since the mid 1990's - ensured that a global crisis would affect India.

Of course, when good things happen as a consequence of conscious decision India takes, the benfits become mysteriously 'accidental' only. Pls see the BS for what it is. Keynesianism is a red herring there. What Sri YV Reddy achieved at the helm of the RBI - banking regulator of last resort in Yindia before, during and after the financial ass-et bubble burst - was a result of conscious decision-making based on crystal clear thinking and a deep and enduring understanding of underlying reality, not superficial bubble bloat.

SDRE janta calling it accidental and all that is serious disservice to that great man YV Reddy garu.

[Neshant]

Hari bhai, I do not give much credit to any central bank/banker be it in India or anywhere else. I put them on par with astrologers and its dangerous to think of them as anything other than that.

The central banker does not know what the market price of bananas are. Why would anyone think he knows what the interest rate (the price of everything) should be? He has no clue what the effect of printing money or raising or lowering interest rate will have on the economy - positive or negative. He just fiddles around and if it works out he takes credit and if not, he goes for another round of fiddling.

At best these guys are just well meaning but deluded individuals living a lie and thinking their fiddling with interest rates & money printing is a science. In fact its no different than rolling dice.

At worst, you have the US federal reserve type system where a cartel of crooks have effectively hijacked the nation and are exploiting the productive elements of society.

The whole idea of separating a person from the fruits of his labor is a scam. Putting into the hands of one man power over the productive sweat & toil of millions is insane.

Real money and the free market should be what sets prices, interest rates, supply & demand ..etc. Not some guy sitting in an office fiddling around.

[Hari Seldon]

^ Neshant, I broadly agree with your high opinion of central bankers.

Dr YVR is of a different make though. It would have been all too easy to go with the flow, like Greenspan did, and tradeoff relatively small pain now for a large crash later. YVR stood firm on not allowing the toxic derivative products, CDOs and other pure-poison wall street output from contaminating the Indian financial system.

I praise him not just as a stellar central banker but more as a stellar regulator (which the RBI also is).

It took intellect of a high order to understand the scam wall street was pushing onto commercial and central banks around the world and act on that understanding against an army of naysayers, lobbyists, critics and dumb yappers by the ton. It took great sagacity, grit and mettle to hold one's ground against the array of collective conventional wisdom.

Now, I don't expect you will buy my viewpoint. That's fine. Whats the fun if we all agree with each other, eh?

[Neshant]

If greenspan with all the info in the world on wheeling & dealings in the US was clueless about what was going on, what is the likelyhood some guy in India knew what was happening? The reality is nobody knew what was happening except those pulling the fraud.

Maybe this YVR was wisely cautious in letting in financial crap that wasn't clearly understood. Or maybe it was red tape that entangled foreign banks slowing their entry into India. Its all besides the point.

The point I'm trying to make is that its dangerous to concentrate power over everyone's wealth into the hands of one guy no matter how clever everyone says he is.

Sooner or later he will slip up or some idiot will take his place, make a huge blunder and destroy everyone with it. I call this the 'one idiot theory'. A system where it takes just one idiot to destroy everything is a system in danger of collapse.

Even today, Greenspan refuses to take any responsibility for his role leading up to 2008. The fact is that these guys don't know jack.

[Hari Seldon]

^Theek hai. Believe what you will.

For my part, I wouldn't ascribe innocent mistakes to what the central bankers, particularly those at the Fed reserve, were doing.

BIS, by the way, is the central bankers club. BIS analysis pointed out way back in 2002 that the whole setup was rigged to blowup down the line. Here's the whole story:
Global Banking Economist Warned of Coming Crisi

White, a Canadian, worked for various central banks for 39 years, most recently serving as chief economist for the central bank for all central bankers, the Bank for International Settlements (BIS), headquartered in Basel, Switzerland.

William White predicted the approaching financial crisis years before 2007's subprime meltdown. But central bankers preferred to listen to his great rival Alan Greenspan instead, with devastating consequences for the global economy.

Its an open secret that the BIS folks as far back as 2002 pointed out to bubble formation possibilities in some as yet unknown asset classes due to overly low interest rates, then to bubble possibilities in the realty sector in 2003, then by 2004 to the full blown possibility of a spectacular blowup due to highly leveraged financial institutions using highly suspect financial instruments (CDOs) to sow a samson option in the entire broader macroeconomy using highly explosive hedge instruments (CDSes) despite having a highly levered capital structure (all the big banks, mortgage corps, FIs, hedge funds, name it. All of them guilty until proven innocent) and a highly absent regulatory structure....

Bottomline, everyone knew the game was on. The emerging markets played along because they wouldn't wanna lose the lucrative emerged export markets now, would they and the emerged ones played along because they otherwise would have to face the reality of insolvency only.

So yup, I would not pretend nobody or very few somebodys know. Not so. IMVHO only.

[g.sarkar]

why would you buy a house that takes you a lifetime to pay off? it is the stupidest thing you can do. you have just one life. the last thing you should do is waste your life paying for a house or anything else for that matter.
By the time the stimulus, bailout and other debt related money wasting ideas come to a disasterous end, housing will be down 80% once people come to their senses. A house will cost 60 to 75K max, not 600K.

Neshantji,
Most NRIs who have lived in the US for some time own a house and I do not think any one can call them stupid. And there are good reasons for buying a house in the US. The traditional American dream has been to own a house. Traditionally, most couples try to get into a house before having children. Apartments are not considered to be a good place to raise children. Also, the state wants that houses are owner occupied. This means tax generation for the local government, who takes care of schools, roads and sewerage. Also, construction firms generate business and jobs. Houses also cause a lot of gadgets to be sold such as fridges, dish-washers and washers. To encourage people to buy houses the government has given tax benefits. Mortgage payments have two parts. The principle and the interest. If you see the amortization schedule of a house payment, you will see that in the beginning almost the entire payment is interest payment. And this part is completely tax deductable. Depending on your tax bracket, this is a legal tax shelter. If you live in an apartment or a rented house, you pay almost the same amount as a mortgage payment. But with a house ownership you gain equity every year. Now, the drastic fall in housing prices are an aberration caused by the sub-prime lending prices that caused the prices to soar beyond a reasonable value. If you purchased at the high point, you will have incurred a loss. But I have not yet heard of a 600K house fall to 75K yet. I do not know if you kept up with the sub-prime lending situation over here, things have stabilized somewhat. But we have been there before. About 10-11 years ago, there was also a large drop in housing prices in Californnia. Most of these are very cyclical in Kalifornia.
Gautam

[Hari Seldon]

Sure enough, the way to fight bad ideas is with worse ideas.

AFL-CIO, Dems push new Wall Street tax

The nation’s largest labor union and some allied Democrats are pushing a new tax that would hit big investment firms such as Goldman Sachs reaping billions of dollars in profits while the rest of the economy sputters.

The AFL-CIO, one of the Democratic Party’s most powerful allies, would like to assess a small tax — about a tenth of a percent — on every stock transaction.

Small and medium-sized investors would hardly notice such a tax, but major trading firms, such as Goldman, which reported $3.44 billion in profits during the second quarter of 2009, may see this as a significant threat to their profits.

“It would have two benefits, raise a lot of revenue and discourage speculative financial activity,” said Thea Lee, policy director at the AFL-CIO.

Sure, sounds all reasonable and all but its targeted at everyday financial transactions, not the secretive opaque ones - the CDSes and complex derivatives - that can bring down the system one fine day. Congress so watered down the bill to regulate derivatives as to render it effectively meaningless. Baki sab, all this noise is a sideshow, a diversion.

[AnimeshP]

If greenspan with all the info in the world on wheeling & dealings in the US was clueless about what was going on, what is the likelyhood some guy in India knew what was happening? The reality is nobody knew what was happening except those pulling the fraud.

Maybe this YVR was wisely cautious in letting in financial crap that wasn't clearly understood. Or maybe it was red tape that entangled foreign banks slowing their entry into India. Its all besides the point.

The point I'm trying to make is that its dangerous to concentrate power over everyone's wealth into the hands of one guy no matter how clever everyone says he is.

Sooner or later he will slip up or some idiot will take his place, make a huge blunder and destroy everyone with it. I call this the 'one idiot theory'. A system where it takes just one idiot to destroy everything is a system in danger of collapse.

Even today, Greenspan refuses to take any responsibility for his role leading up to 2008. The fact is that these guys don't know jack.

Neshant ... You may have your reasons to mistrust central banking but just because some idiots in the US did not do their jobs properly it does not make it right to talk down YV Reddy or RBI in this manner ... This "some guy in India", as you put it, knew what was going on and took action to prevent this from happening in India ...

How India Avoided a Crisis

“He basically believed that if bankers were given the opportunity to sin, they would sin,” said one banker who asked not to be named because, well, there’s not much percentage in getting on the wrong side of the Reserve Bank of India. For all the bankers’ talk about their higher lending standards, the truth is that Mr. Reddy made them even more stringent during the bubble.

Unlike Alan Greenspan, who didn’t believe it was his job to even point out bubbles, much less try to deflate them, Mr. Reddy saw his job as making sure Indian banks did not get too caught up in the bubble mentality. About two years ago, he started sensing that real estate, in particular, had entered bubble territory. One of the first moves he made was to ban the use of bank loans for the purchase of raw land, which was skyrocketing. Only when the developer was about to commence building could the bank get involved — and then only to make construction loans. (Guess who wound up financing the land purchases? United States private equity and hedge funds, of course!)
Then, as securitizations and derivatives gained increasing prominence in the world’s financial system, the Reserve Bank of India sharply curtailed their use in the country. When Mr. Reddy saw American banks setting up off-balance-sheet vehicles to hide debt, he essentially banned them in India. As a result, banks in India wound up holding onto the loans they made to customers. On the one hand, this meant they made fewer loans than their American counterparts because they couldn’t sell off the loans to Wall Street in securitizations. On the other hand, it meant they still had the incentive — as American banks did not — to see those loans paid back.

Seeing inflation on the horizon, Mr. Reddy pushed interest rates up to more than 20 percent, which of course dampened the housing frenzy. He increased risk weightings on commercial buildings and shopping mall construction, doubling the amount of capital banks were required to hold in reserve in case things went awry. He made banks put aside extra capital for every loan they made. In effect, Mr. Reddy was creating liquidity even before there was a global liquidity crisis.

Did India’s bankers stand up to applaud Mr. Reddy as he was making these moves? Of course not. They were naturally furious, just as American bankers would have been if Mr. Greenspan had been more active. Their regulator was holding them back, constraining their growth! Mr. Parekh told me that while he had been saying for some time that Indian real estate was in bubble territory, he was still unhappy with the rules imposed by Mr. Reddy. “We were critical of the central bank,” he said. “We thought these were harsh measures.”

“For a while we were wondering if we were missing out on something,” said Ms. Kochhar of Icici. Banks in the United States seemed to have come up with some magical new formula for making money: make loans that required no down payment and little in the way of verification — and post instant, short-term, profits.
As Luis Miranda, who runs a private equity firm devoted to developing India’s infrastructure, put it: “We kept wondering if they had figured out something that we were too dense to figure out. It looked like they were smart and we were stupid.” Instead, India was the smart one, and we were the stupid ones.

Ms. Kochhar said that the underlying risks of having “a majority of loans not owned by the people who originated them” was not apparent during the bubble. Now that those risks have been made painfully clear, every banker in India realizes that Mr. Reddy did the right thing by limiting securitizations. “At times like this, you tend to appreciate what he did more than we did at the time,” said Mr. Kapoor. “He saved us,” added Mr. Parekh.

For some more insight into the thinking and actions of YVR, please read his interview ...
How former RBI governor YV Reddy foresaw the crisis

[Hari Seldon]

[Hari Seldon]

Awesome post, AnimeshP. Thank you for making the point so well.

Ms. Kochhar said that the underlying risks of having “a majority of loans not owned by the people who originated them” was not apparent during the bubble. Now that those risks have been made painfully clear, every banker in India realizes that Mr. Reddy did the right thing by limiting securitizations. “At times like this, you tend to appreciate what he did more than we did at the time,” said Mr. Kapoor. “He saved us,” added Mr. Parekh.

Jai Ho.

[AkshayM]

Hari,

I don't think lot of people understand the CDSs and how it does not really serve the hedging purpose. If the party selling the CDS cannot pay up when default occurs what is the point of buying such CDS? And the institutions were buying by the boatloads of CDS without ever thinking if the counterparty can pay up or not.

[Neshant]

As eager as you are to seize on what YVR did or didn't do as evidence of his great foresight, , understand that he does not know what is going to happen 1 year from now let alone 5 years from now. I know it is difficult for Indians to resist the temptation of raising people who claim great foresight to the status of gods. If he does know what is going to happen, please have him state it in advance so we can make a few bets on it rather than having it written up in an article in hindsight. Greenspan was hailed as a genuis prior to 2007 and now he's an idiot who almost brought upon financial armageddon.

The truth is that these guys are little more than coin tossers where if a decision proves fruitful in hindsight they are credited with it and if it proves disasterous, they claim people are lucky to have them around to 'fix' the problem.

Unfortunately many here are now bedazzled that India escaped this mess unharmed and are eager to credit YVR with it. It won't be until he makes a disasterous decision that destroyes the wealth of millions that this spell will be broken. This is inevitably the case when power over the fortunes of millions is concentrated in the hands of one person.

No person should ever have the power to decide what is in a bubble and what isn't, what is the correct price for a house or some item, what interest rates should be, that the fruits of other people's labor be taken away from them to prop up someone else... etc. To do so is to claim that that person knows more than the free market.

For all you know if this was the early 90s, he could have killed the IT industry claiming it was a bubble or his recent decisions could have saved India for financial disaster. Only in hindsight does it become evident which tells me that economics aka the science of fiddling around is a fradulent science. I'm afraid the lessons of the financial mess has been lost on many - the lesson being that the higher ups have no great wisdom or foresight and concentrating power over the lives of millions in a few hands can only lead to disaster.

I don't think many will be willing to consider my premise above. People are looking to create godmen, not absorb the lessons of the crisis.

[Rahul M]

neshant, he did state it in 2008, according to the interview.

http://www.moneycontrol.com/news/econom ... 15331.html

[AkshayM]

the lesson being that the higher ups have no great wisdom or foresight

Without getting in to the merit of YVR's foresight, I will agree with above. And lot of it can be attributed to simple psychological dimensions like hubris, ideological, jealousy, boneheaded, personal enrichment, devoid of moral compass and the good ol' fear and greed.

[AkshayM]

That is not to say there were not others, lowly or otherwise, who saw that the fundamentals were amiss. To me, blowing up of LTCM was that.

[Suraj]

I disagree with the argument that a central banker is little more than a coin-tossing charlatan. In a fiat currency system, the central banker has particular powers and responsibilities to influence and moderate monetary (and by consequence economic) activity, because economic transactions are being conducted using a medium they create and manage, i.e. money. As long as economic transactions are conducted using a medium issued by the central bank, it is the bank's business to be involved in moderating those transactions. In a fast developing economy with rising money supply and velocity of monetary transactions, the central bank head has a crucial role to play in trying to moderate speculative investment (e.g. house flipping).

I see the 'free market' as a rhetorical construct more than reality, and pretty much every country has governments or central banks interfering in the interest of public good, or just their self-interest. Even the 'freest' economies like Hong Kong have seen recent citizen drives to get the government to curb speculative growth of real estate prices that have put decent housing beyond a significant section of the population.

[AnimeshP]

As eager as you are to seize on what YVR did or didn't do as evidence of his great foresight, , understand that he does not know what is going to happen 1 year from now let alone 5 years from now. I know it is difficult for Indians to resist the temptation of raising people who claim great foresight to the status of gods. If he does know what is going to happen, please have him state it in advance so we can make a few bets on it rather than having it written up in an article in hindsight. Greenspan was hailed as a genuis prior to 2007 and now he's an idiot who almost brought upon financial armageddon.

The truth is that these guys are little more than coin tossers where if a decision proves fruitful in hindsight they are credited with it and if it proves disasterous, they claim people are lucky to have them around to 'fix' the problem.

Unfortunately many here are now bedazzled that India escaped this mess unharmed and are eager to credit YVR with it. It won't be until he makes a disasterous decision that destroyes the wealth of millions that this spell will be broken. This is inevitably the case when power over the fortunes of millions is concentrated in the hands of one person.

No person should ever have the power to decide what is in a bubble and what isn't, what is the correct price for a house or some item, what interest rates should be, that the fruits of other people's labor be taken away from them to prop up someone else... etc. To do so is to claim that that person knows more than the free market.

For all you know if this was the early 90s, he could have killed the IT industry claiming it was a bubble or his recent decisions could have saved India for financial disaster. Only in hindsight does it become evident which tells me that economics aka the science of fiddling around is a fradulent science. I'm afraid the lessons of the financial mess has been lost on many - the lesson being that the higher ups have no great wisdom or foresight and concentrating power over the lives of millions in a few hands can only lead to disaster.

I don't think many will be willing to consider my premise above. People are looking to create godmen, not absorb the lessons of the crisis.

Neshant ... tell me, is it not the case in every sphere in life (not just economics) and has that not been so throughout history. After all, we do allow Governments to concentrate powers in their hands and they have power over millions if not billions of lives. Hell, throughout history we have had power to make decisions always concentrated in the hands of a few (kings, emperors et al).
Also, I am curious about this "free market" that you speak of .... can you or any other free marketeer point out to a successful "free market" that existed and thrived at any point in history (and please don't quote examples of free trading of one or 2 goods. I am asking of an example of a economic system which allowed a state or an empire to flourish).
I sometimes feel that "free market" is the capitalists equivalent of proletariat society of the communist ...

[Hari Seldon]

Just like a slightly more careful reading of the Mahabharatam renders this profound insight that 'there are no heroes', a long-horizon view of politico-economic history also reveals the same insight only.

Even in the heydays of the free-marketing era (prior to WW1) before cross-border regulation became all the rage, there was disparity, unequal power sharing, irrational booms and spectacular busts, fraud and the regular shadow of human nature only.

As for d'eification' commentary, why Neshant ji, who better than your pure self would know, eh? Your earnestness in deifying Sri Adam Smith, Milton Friedman and the other high priests of the free-marketing credo is no secret now, or is it.

Calling "Indians'' names and stereotypical labels ('overeager to raise to god status' etc) certainly has done wonders for the basis and merits of your argument, am sure. "There, I've called them blind and dumb - my argument wins!" When one could have agreed to disagree, why go on and on?

Instead of acknowledging that a man (YVR) who could have gone along with the flow and do what other central bankers did, actually understood the fraud that was on and lived his regulatory mandate of protecting the Indian financial system from pure poison - you simply had to go on a crusade because, well, blanket consistency and ideological faith in free-marketism sans market enabling institutions (central banks primarily) commands so. What next, push for removal of the government now, because, well, its very existence imperils the 'free' part of free markets, I wonder? Kindly go ahead, make that argument also, am all ears.

[Hari Seldon]

Hari,

I don't think lot of people understand the CDSs and how it does not really serve the hedging purpose. If the party selling the CDS cannot pay up when default occurs what is the point of buying such CDS? And the institutions were buying by the boatloads of CDS without ever thinking if the counterparty can pay up or not.

Akshay,

IMO folks knew (somewhere deep down perhaps) what they were doing when they went on a CDS buying binge. They were hedging all right, but not their particular risk against a counterparty. Rather they were hitching their particular risk to systemic stability and thereby hedging their losses against gubmint bailouts.

The CDSes and other derivatives have created a web of links amongst the big players making each in turn ever more 'too big to fail'. The Lehman failure demonstrated this in spectacular terms when gubmints came up with untold billions in a jiffy to secure the dumb party's (AIG) smart counterparties (GS JPM etc) lest system-wide outage occur.

[Hari Seldon]

Krugman's latest column is interesting. If true, we are saved only.

graph link

If unemployment eases, like this ekhanomist article proclaims it will, then the world is saved.

Yet there are other signs that the problems may eventually ease, and indeed the jobs report itself, released on Friday November 6th, contains puzzling contradictions. The total number of non-farm payroll jobs fell by 190,000, or by 0.14%, led by construction, manufacturing and retailers. That was a bit more than expected, but consistent with a generally moderating pace of job losses.

Am willing to try out belief in a green shoot, for a change.

Jai Ho.

[Raja Bose]

Depending on your tax bracket, this is a legal tax shelter. If you live in an apartment or a rented house, you pay almost the same amount as a mortgage payment. But with a house ownership you gain equity every year. Now, the drastic fall in housing prices are an aberration caused by the sub-prime lending prices that caused the prices to soar beyond a reasonable value.

If you purchased at the high point, you will have incurred a loss. But I have not yet heard of a 600K house fall to 75K yet. I do not know if you kept up with the sub-prime lending situation over here, things have stabilized somewhat. But we have been there before. About 10-11 years ago, there was also a large drop in housing prices in Californnia. Most of these are very cyclical in Kalifornia.

I agree that the decision towards purchase of a house involves many non-financial factors. However, one must also take care to plan if one really needs to buy a house or not. It is no longer an open-and-shut decision for NRIs that buying a house in US is always the right way to go. Earlier it was almost always so but the current crisis clearly underlines the fact that it is not. Earlier, Indians migrating to US would do so with the aim of settling here (and hence the ability to ride out periodic crises) but that is no longer so with a large volume of R2I - something I forsee increasing monotonically in the coming years. In such a case, is buying a house a wise decision if one plans to leave the US in 10 years? A critical factor in these housing purchases seem to the the timing - the timing of when you bought the house and the timing of when you sell the house - a lot of luck and risk is inherent. However, for a lot of people the selling of a house is linked to other non-negotiable factors (say for example, R2I). In such case the house can become an albatross around the neck, that too at a time when funds need to be committed elsewhere. I dont think one can say buying a house is an open-and-shut good decision and moreover, statistics do not give the right picture as they confound the picture especially when the decision will vary widely based on individual situations.

[g.sarkar]

.....In such a case, is buying a house a wise decision if one plans to leave the US in 10 years? A critical factor in these housing purchases seem to the the timing - the timing of when you bought the house and the timing of when you sell the house - a lot of luck and risk is inherent...... In such case the house can become an albatross around the neck, that too at a time when funds need to be committed elsewhere. I dont think one can say buying a house is an open-and-shut good decision and moreover, statistics do not give the right picture as they confound the picture especially when the decision will vary widely based on individual situations.

Rajababu,
You are right. The situation for everyone is different and has to be analysed individualy. In the old days, before the crises, the rule of thumb was not to sell before 5 years, as each sale involved closing costs that needed to be recovered. Things have changed and there are no such hard and fast rules anymore. If you are planning to stay in the US for 10 years, perhaps it would be a good idea to buy. But in a falling market, at least for now, you will be trapped if you were forced to move in a short time after the purchase. The job market is bad, so if you are in Kalifornia, and lose your job, you may get stuck with the house and hence the area. Now, with a falling market, houses are selling like hot cakes. Forclosed houses, at 70-80% of market price are being picked up by investors very quickly. I have friends who are buying and they tell me that for good houses (meaning good location, built recently and below market price) there are 10-15 offers within a day or so, and they go very quickly. Another thing to consider, if you buy and forced to move, you can rent the house and you may still get a positive cash flow. You may use this house as a tax write off too deducting all expenses. With so many people losing houses, the demand for rented houses have shot up. This is because most people who have lived in a house are unable to return to an apartment.
One more thing: you have spoken about timing. But remember, there are only two times that the price of the house is important. The day you buy and the day you sell. The rest of the time, the value of the house fluctuate but it should not affect you. Unfortunately, due to psychological reasons, this is not true and people get very nervous if you find that you owe more on the house than the market value. We are indeed living in interesting times.
Gautam

[Chinmayanand]

X- Posting ...

The pound weakened to as low as $1.66, compared with $1.679 earlier today after David Riley, head of global sovereign ratings at Fitch, said in an e-mailed statement the U.K. is the most at risk of losing its AAA status among top-rated nations because the country needs “the largest budget adjustment.” Link

[Hari Seldon]

^A credible downgrading of UK-stan is == declaring war only. The consequences of such a move will be war-level in destructive potential and impact with none of war's redeeming features ('unity, nationalism, emergency production and employment spikes etc).

The Fitch beetch better keep its claptrap shut. Lest londonistan bomb its board into the ground only. All is fair in war, after all, no?

[amol.p]

Lloyds to cut another 5,000 jobs

Bailed-out British lender Lloyds Banking Group (LLOY.L) is to cut a further 5,000 jobs by the end of 2010 as it continues to overhaul its operations and integrate HBOS.

Lloyds, 43 percent owned by the government, said on Tuesday it would take mitigating actions, including redeploying staff and releasing contractors and temporary employees, to limit the net reduction in permanent jobs to 2,600.

That would take net cuts to permanent jobs at Lloyds to around 9,000 since it acquired HBOS in January. Analysts have estimated that over 30,000 jobs could go as the two banks integrate-----we call this intergration..????? or is it mass culling..???

http://www.reuters.com/article/ousivMol ... VU20091110

[amol.p]

Credit card issuer Advanta files for bankruptcy---{more green shoots in economy}


Advanta Corp (ADVNA.O), a large issuer of credit cards to small businesses, filed for bankruptcy protection after the recession caused many customers to default on payments.

The Spring House, Pennsylvania-based company and more than a dozen affiliates filed for Chapter 11 protection late Sunday with the U.S. bankruptcy court in Delaware.

The filing excluded the company's Advanta Bank Corp unit and customers would still be required to make payments on outstanding credit card balances

"The economic debacle over the last two years{ how it two years...i think we just completed one year of recession} devastated Advanta's small-business customers and Advanta itself," Chief Executive Dennis Alter said in a statement.

http://www.reuters.com/article/smallBus ... AM20091109

[Hari Seldon]

^ IMO, the best case scenario now is that the khanate goes into a Japan style stable funk over the next few yrs /decade in ekhanomic terms.

There is simply no vitality and healthy risk-return calculus anymore sans gubmint support/ intervention in the crisis-damaged emerged markets anymore, IMHO.

And yes, deflation is o-so-totally in. This from Denninger's blog, latest:

link

Let's recount what we know to be facts:

* Lending has not increased since "QE" began, despite the alleged purpose for "QE" being to increase lending. In fact total bank credit is decreasing at a rate never before seen in the history of modern data collection. This is being reflected in consumer credit, business credit, all forms of credit - except for Federal Government debt.

* The Primary Dealers are asserting that they require Tier Capital Relief to be able to participate in the reverse repo operation.

* Yet in theory at least, the "new reserves" that were created, since they financed Treasury issue, which the primary dealers intermediate, should be sitting on their "credit balance" with The Fed. That is, either The Primary Dealers are lying (they require nothing) or they don't have the reserves any more.

OK, hence, he says, the excess reserves the banks are supposedly holding has disappeared in extinguished debts that have been defaulted upon. Slightly long connection but read his piece and take your call. He can be a tad excitable at times.

Simply put, the system is (still) insolvent as it was last fall and that insolvency has been papered over with The Fed's "money hose."

The system has NOT "stabilized" - quite to the contrary. As with the FDIC that has refused to close banks until they are 30, 40, or even 50% underwater on their assets The Fed has effectively papered over the insolvency of the primary dealers to the point that they are now demanding the ability to ignore the primary safety and soundness metric for a bank - Tier Capital - as "compensation" for participating in The Fed's attempt to drain the excess reserves it pumped in. This says that they're not only still broke they're more broke than they were last fall!

The bottom line is that The Fed gambled and lost; Bernanke was gamed and instead of "QE"d funds being used to increase lending the "printed money" was used to both cover defaulted debt and speculate in the markets.

Read it all.

Elsewhere, ekhanoblogs are abuzz with rumor that the fed intends to use 'rescued' banks as receptacles for treasury debt that might find getting overseas buyers ever harder going fwd. How true this is, I don't know. But, something to keep watch for, I guess.

[Tanaji]

UK-stan reduced to eating expired food? Say it ain't so!

http://news.bbc.co.uk/1/hi/magazine/8326756.stm