Decline of the Empire

The Economy Is Worse Than You Thought

It is bad enough that the economy sucks. This situation is made worse by easily discoverable distortions in official government statistics which downplay how much it sucks. (It's suckiness?)

Mike Shedlock alerted us to such a distortion in U.S. Is In Recession, Right Here, Right Now. It seems that if you apply the Bureau of Labor Statistics official CPI-deflator to nominal GDP, instead of the BEA's own deflator, the United States is in recession right now. Rick Davis of the Consumer Metrics Institute explains (via e-mail) what is going on, as do the two charts below from Doug Short (dshort.com).

During the past several quarters we have been persistently critical of the "deflaters" that the Bureau of Economic Analysis (BEA) has used to convert their "nominal" (current dollars) GDP data into inflation-adjusted "real" (chained 2005 dollars) data.

The logic of "deflaters" is simple: as you might expect the BEA can only capture production and consumption data in current ("nominal") dollars, which are distorted over time by the impact of price inflation. To offset that distortion the BEA uses a set of price-indexes to "deflate" the "nominal" GDP into a "real" GDP that is then reported in "chained 2005 dollars" (i.e., all distortions caused by price changes since 2005 are in theory removed from the data before the "real" economic growth is reported).

Click to enlarge either chart. Graphs from Doug Short's Will the "Real" GDP Please Stand Up?

The second chart, which uses the BLS CPI measurement to deflate nominal GDP, clearly shows that the United States is in recession. It also clearly shows that the economy has been far worse for most of the last 2 years than official reports indicated. Rick Davis provides a fair assessment of the government's GDP story.

Quite apart from our concerns about the accuracy and delays in their "nominal" data, we have often found their "deflaters" lacking credibility — and in some cases egregiously so. And recently we have suggested that the entire reported annualized growth rates were merely artifacts of overly optimistic understatements of the actual inflation rates in the US.

Furthermore, major portions of the BEA's recent massive downgrades to historical GDP growth rates were the result of restating historical "deflaters" to levels more consistent with the inflation data previously recorded by their sister agencies, constituting a tacit admission of their past tendencies to just such understatements of historical inflation.

The BEA always views the economy through rose-colored glasses. Is the BEA's pervasive optimism bias a big problem?  More importantly, are these distortions deliberate? Or are they part of the tendency of humans to put a positive spin on everything they do, not matter how outrageous?

Taking the second question first, I imagine that the BEA statisticians are not corrupt, but have a certain way of doing things, no matter how absurd, and they cling to it in the usual way. In other words, that's their story and they're sticking to it. This story reflects an unconscious bias to see the glass as half-full. A change mandating the use of the CPI deflator would probably entail bloody bureaucratic wars which would takes years to resolve. There would be many casualties.

Whether these distortions to GDP are a big deal depends on how you view GDP. To those outside the consensual reality box, these discrepancies may not be all that important because such distortions are wholly expected. There are other valid ways to measure how the economy is doing. The BEA's numbers are a form of propaganda.

However, for those inside the box, the GDP number is the single most important measurement of our economic health. Which means that every discussion of our economic health you read or hear in the media is complete bullshit.

If we can imagine the counterfactual world where the U.S. is in recession right here, right now, every single discussion, economic, political, or otherwise, and without exception, would be vastly different than the usual muddle-headed mush we hear now. So yes, from that point of view, these optimistic distortions to GDP are a Big Deal. But don't expect a revolution in how Official Reality is reported. That would not be in the best interests of those who run this country.

Another Pointless Climate Protest

Even as I write this, global warming protestors are being arrested in front the White House. You can get the story at tarsandsaction.org. They are opposed to the construction of the 1700 mile Keystone Pipeline, which will transport tar sands oil to the refineries of south Texas (video below). The State Department, and President Hopey-Changey himself, must vote up or down on constructing the pipeline by the end of this year.

Producing unconventional tar sands oil is very dirty in terms of CO₂ emissions and direct environmental damage. Those in favor of the pipeline want that (relatively) cheap, politically safe Canadian oil, especially because Mexico's oil production has a bleak future. Today we'll consider the problem from the DOTE point of view.

Andrew Leonard of salon.com took on the issue in Obama's big dirty oil test. He starts by presenting the environmentalist case.

"The Keystone Pipeline," wrote global warming activist Bill McKibben, in a letter urging concerned citizens to join a two-week protest in front of the White House, would be "a fuse to the biggest carbon bomb on the continent, a way to make it easier and faster to trigger the final overheating of our planet ..." In an essay titled "Silence Is Deadly," NASA climatologist James Hansen declared that if the tar sands are fully exploited for their oil deposits, "it is essentially game over" for the planet.

Hansen is sometimes criticized even by other environmentalists for the audacity of his rhetoric, but that doesn't mean he or McKibben is necessarily wrong. Extracting oil from tar sands is an expensive, massively environmentally destructive process that produces more greenhouse gases than the exploitation of conventional sources of oil. If the world continues down its current pell-mell path, avidly devouring dirtier and dirtier sources of fossil fuel, the amount of carbon dioxide in the earth's atmosphere will surely go far past the point of no return. The droughts currently plaguing exactly those regions where the southern end of the pipeline will stretch may one day be remembered fondly as an era of balmy weather.

Leonard doesn't know what "the point of no return" is and neither do I, but the phrase certainly sounds good. In fact, it's already "game over" for the planet according to McKibben and Hansen because they have determined, based on some not-widely-accepted research led by Hansen, that anything above 350 parts-per-million by volume (ppmv) constitutes dangerous interference with the Earth's climate. I recently noted in The Idiot Assumptions Of Mankind that we now stand at 392 ppmv. The generally accepted level for dangerous interference is 450 ppmv. And we should bear in mind that CO₂ emissions from the tar sands are a drop in the bucket compared with global emissions. But let's continue.

So it has been inspiring to see how environmentalists have heeded McKibben's call to action. Each day this week, 50 or so protesters have linked arms in front of the White House and proudly waited their turn to get handcuffed and arrested, only to be replaced by a different 50 activists the next day. Their stories are invigorating. Environmental advocacy groups with a long history of squabbling with each other have joined together in an impressive display of unity. If Obama approves the Keystone Pipeline the backlash from the environmental community will be intense.

Inspiring, invigorating, impressive, intense. And I thought I had a way with words!

And now a strange thing happens. Caught up in environmental rapture, Leonard suddenly switches gears and starts dealing with Reality. This being Andrew Leonard and salon.com, he first explains that it would be political suicide for Obama to oppose the pipeline. Although Leonard doesn't get into it, Republicans don't even believe in anthropogenic climate change, having decided that this theory, like Darwin's theory of evolution, may not reflect the true situation. On these matters, Republicans feel they are entitled to an opinion, which kind of does away with the whole point of Science.

Leonard makes the simple point that any politician opposing "cheap" oil from the Great White North would have to explain to Americans why they're paying so much for gasoline. And Big Labor favors the job-creating pipeline construction. As Leonard continues, obstacles to change get more and more impenetrable.

Even worse, there's zero chance that Obama actually will be able to avoid a "potential environmental disaster," even if he directs Hillary Clinton to put the kibosh on the pipeline. Without a global commitment to a carbon tax or cap-and-trade regime that properly penalizes the production of greenhouse gases, the tar sands will be fully exploited. If the dirty oil doesn't end up in Texas refineries, it will go straight to China. (It may end up going to China anyway, but but that's a separate story.)

This is where the rubber hits the road. Yes, the tar sands will be fully exploited, whether the United States gets the oil or not. There is absolutely no doubt the Chinese would find a way to consume that oil. It's not as if the world is drowning in the stuff

Unfortunately, there is no conceivable chance that any significant carbon-limiting legislation will come out of this U.S. Congress —

Or any U.S. Congress, I should add.

and even if Obama had thrown the full weight of his bully pulpit into the climate change battle before the 2010 midterms it is far from obvious that he could have gotten anything through the Senate even when Democrats had a 60-seat majority. Too many members of his own party had cold feet — whether because of powerful energy-related special interests in their own states, or because of the dreadful condition of the U.S. economy.

Guess what? The economy is still dreadful, and that puts Obama, again, in a tough position...

When push comes to shove, economic concerns will always trump environmental concerns. That's a Rule of Life. Get some small magnets, write it down on a piece of paper, and put it on your refrigerator door. For humankind, environmental concerns are a luxury they can afford when the economy is doing well. And in so far as the economy can not be expected to do well in the foreseeable future, environmental concerns are off the table for many years to come, if not forever. Leonard concludes—

But at the same time, many voters have come to see Obama as a president unwilling to take strong stands. The Keystone Pipeline offers yet another test of this evolving consensus wisdom. Obama appointed a head of the EPA who has been willing to make tough decisions; maybe it is time he followed her lead. Because even though whatever he does, he won't be able to save the world — there's still something to be said for saving your reputation.

We have traveled a long way in a short space, moving from inspiring, invigorating, impressive, and intense to Obama at least being able to salvage his reputation, presumably for future generations. Protesting the construction of the Keystone Pipeline is yet another symbolic, futile gesture. Humankind will never act in concert to mitigate global warming. In fact, humankind is completely incapable of acting in concert about anything if there's a large shared cost to be borne.

And it is impossible to halt a certain amount of warming anyway. There's at least 1.6°C of warming in the pipeline, so to speak, and to halt any increases in atmospheric CO₂, or limit them to 430 ppmv (to pick a target), humanity would have to tear down industrial civilization. Needless to say, that's not China's current plan (or ours). That's the part of the equation environmentalists never mention. We are currently adding 2 ppmv to the atmosphere annually. At that rate we will reach 431 ppmv in 2030, a scant 19 years from now. Some resource scarcity people believe peak oil and peak coal will do the trick, but if fossil fuel production falls off a cliff, we would lose industrial civilization in that case, too. Some salvation!

I'm not a fan of Alcoholics Anonymous—I would have to quit drinking!—but the opening stanza of the Serenity Prayer seems apropos here.

God grant me the serenity
to accept the things I cannot change;
courage to change the things I can;
and wisdom to know the difference

Remember what I've told you as you watch the usual pointless debate.

Watch the full episode. See more PBS NewsHour.

Welcome To Our Imperfect World

I was struck by an exchange between the Business Insider's Henry Blodget and fund manager Mark Dow of Pharo Management (video below). Dow is a former staff economist at the IMF. I transcribed the exchange. The interesting part begins at the 2:27 mark.

Mark Dow — ... the point is that [interest on excess reserves is] an instrument of monetary policy. The Fed is not giving away money to the banks because they want to help their buddies. The banks would much rather be lending this money out, but there's no one to lend it to. And the Fed has said we need to control the Fed Funds rate more than anything else, it's a Public Good, if you want to look at it that way, just like bailing out the banks, as immoral as it was, it was necessary so the collateral damage was minimized, so the dry cleaner in Cedar Rapids could make payroll because he happened to deposit at a bank that was on-lend to Citigroup, or whatever. Right? Unfortunately, that's the perverse incentives that ripple through the system...

Henry Blodget — Every time I talk to you, you make such a persuasive case that there was just no choice, we had to bail out Wall Street and so forth, and yet you step back from this, Wall Street coined money for 20 years leading right up to the crisis. Everything fell apart, all the banks were bailed out, some of the senior managements are still in place, all the equity is now recovered, we protected bondholders 100 cents on the dollar,

I just, I don't understand why it is that it has to be that the laws of capitalism that affect the rest of the country and world, simply do not apply to Wall Street, because what you're saying, we just can't or we would croak.

Mark Dow — In this particular case, for sure we would have gone down. Unfortunately, in a perfect world the bondholders would have taken a haircut. In a perfect world, well, equity didn't go to zero in the case of most of these banks, but most of these guys, they might have gotten bailed out, but they lost a lot of money, they lost less than they should have. They should have lost everything. But had they lost everything, the collateral damage would have been massive. The little guy who didn't do anything wrong is still upset because he thinks that bankers made money somehow.

Henry Blodget — They did!

Mark Dow: No, they didn't. If you look at any of these guys, their net worth got crushed. They owned a lot of stock in their companies, right? Now, the bondholders, they got made whole, but the people running these companies were not bondholders, right? They were equity holders. They got hit and they got hit seriously. Now, they should have been wiped out, right? No arguments there. But unfortunately, that couldn't be done without wiping out the average guy, who didn't do anything wrong.

Henry Blodget — Fair enough.

This is a remarkable exchange, but unfortunately we don't hear many like it anymore. Everyone seems to have moved on, and that's the problem. 

When Paulson (and Geithner, etc.) were extorting Congress for bailout money to keep Wall Street breathing, I was dead set against it. My attitude could have been summed up in two words: Screw 'em! At the time, in the fall of 2008, I was not aware of the "perverse incentives" that rippled through the financial system, I was not aware that the dry cleaner in Cedar Rapids might not be able to make payroll because his deposits were on loan to Citigroup.

If I had known, I would have supported a temporary bailout to stabilize the financial system, to be followed by serious measures to wipe out those who crashed it. And the problem is this: that never happened. When I read that Bank of America is in trouble, I just laugh. When I hear that Warren Buffoon has put five billion dollars into Bank of America, and will make lots of money from that investment, I just laugh. Has nobody gotten the news? Bank of America is too big to fail.

More than some other large banks, Bank of America’s fate is also heavily intertwined with that of consumers. It services one in five home loans, and with 5,700 branches assembled through decades of mergers, it counts 58 million customers...

Bank of America’s capital position is much stronger than it was going into the financial crisis — it held $218 billion at the end of the second quarter by one key measure, but was still behind peers like JPMorgan Chase and Wells Fargo.

Buffoon's investment is as safe as houses used to be. The Sage of Omaha loves this country! What a deal, invest five billion dollars in special issue preferred stock and get a 100% guarantee on your investment in a bank which won't be allowed to fail. He made one billion $1.3 billion the first day, and there's plenty more profit where that came from.

Bank of America will pay Buffett a 6% dividend for the privilege of getting access to his money — and his brand. Shareholders will have to pay for that and live with the threat of a massive dilution as Buffett also got the right to buy up to 700 million shares of Bank of America stock at $7.14 per share.

It's not as if BofA stock is going to fall to zero. It's not as if the bank is going to go belly-up. It's not as if BofA operates under the standard rules of capitalism.

It was the lack of a follow-up to the financial crisis that demonstrated the utter corruption of governance in the United States. Justice was not served, no bankers went to jail or got wiped out after the fact. The system was not purged of perverse incentives. Wall Street's ability to disrupt the life of the "little guy" was not removed. As Henry notes, bondholders were paid 100 cents on the dollar, bank management teams are in many cases still in place, and are still earning those outrageous bonuses.

The "little guy" may not have had a clear understanding of his little-guy-ness until after this crisis. Now it is crystal clear who the little guys are, and who the Big Guys are. Mark Dow refers to what might have happened in a perfect world. He refers to the necessity of bailing out the banks, as immoral as that was.

Welcome to our Imperfect World.

 

The USGS Reconsiders The Marcellus Shale

It is hard for the general public to figure out what just happened to America's "100 years of natural gas" from shale. The United States Geological Survey (USGS) just issued a report estimating that the Marcellus Shale contains undiscovered gas resources of about 84,198 billion cubic feet of gas, which is about 84 trillion cubic feet (TCF) according to the standard unit of measurement. This text is from the USGS summary—

This USGS assessment is an estimate of continuous gas and natural gas liquid accumulations in the Middle Devonian Marcellus Shale of the Appalachian Basin. The estimate of undiscovered natural gas ranges from 43.0 to 144.1 TCF (95 percent to 5 percent probability, respectively), and the estimate of natural gas liquids ranges from 1.6 to 6.2 billion barrels (95 percent to 5 percent probability, respectively). There are no conventional petroleum resources assessed in the Marcellus Shale of the Appalachian Basin.

These new estimates are for technically recoverable oil and gas resources, which are those quantities of oil and gas producible using currently available technology and industry practices, regardless of economic or accessibility considerations. As such, these estimates include resources beneath both onshore and offshore areas (such as Lake Erie) and beneath areas where accessibility may be limited by policy and regulations imposed by land managers and regulatory agencies.

The Marcellus Shale assessment covered areas in Kentucky, Maryland, New York, Ohio, Pennsylvania, Tennessee, Virginia, and West Virginia.

The 84 trillion cubic feet is the USGS mean estimate of how much gas might eventually be recovered from the Marcellus under the assumptions just stated. The USGS had previously (in 2002) said that the Marcellus about contained 2 trillion cubic feet (mean estimate) of undiscovered natural gas. With the advent of horizontal drilling and fracking, the amount of technically recoverable gas has increased considerably. Thus the USGS raised their estimate of gas we might get from the Marcellus.

That seems like good news, but the Energy Information Agency (EIA) had previously said in their Annual Energy Outlook 2011 that the United States has 827 trillion cubic feet of recoverable shale gas, and about 400 trillion cubic feet of that gas is in the Marcellus shale. Bloomberg reported on the conflicting assessments in U.S. to Slash Marcellus Shale Gas Estimate 80%.

The U.S. will slash its estimate of undiscovered Marcellus Shale natural gas by as much as 80 percent after a updated assessment by government geologists.

The formation, which stretches from New York to Tennessee, contains about 84 trillion cubic feet of gas, the U.S. Geological Survey said today in its first update in nine years. That supersedes an Energy Department projection of 410 400 trillion cubic feet, said Philip Budzik, an operations research analyst with the Energy Information Administration.

Advances in the technology used to recover shale gas led the Energy Department to more than double its estimate of recoverable shale resources, to 827 trillion cubic feet, in an April report and to project that the nation has enough natural gas to heat homes and run power stations for 110 years. Shale gas is recovered by fracturing, a technique in which millions of gallons of chemically treated water are forced underground to break up rock and allow gas to flow.

“One fifth of a big number is still a big number,” Kevin Book, managing director at ClearView Energy Partners LLC, a Washington-based policy analysis firm, said today in an interview. “It shouldn’t tell you anything about your conclusions. It should tell you what you need to know about estimates. They get revised.”

To be fair, the EIA hedged their April estimate, saying that "although more information has become available as a result of increased drilling activity in developing shale gas plays, estimates of technically recoverable resources and well productivity remain highly uncertain." See this post at fuelfix.com if you want to know more about how the EIA came up with their estimates.

Now, one-fifth of a big number is still a big number, but needless to say one-fifth of a big number is, when all is said and done, only one-fifth of the original number. If we are taking about years of supply, we can use America's current natural gas consumption to figure out what we've got. (This is called the R/P ratio, where you divide proved reserves by yearly usage, although we are not talking about proved reserves here.) The U.S. currently consumes about 23 trillion cubic feet of natural gas each year. Dividing that into the EIA's original estimate of 827 trillion cubic feet, we get about 36 years of supply from shale gas. Dividing 23 into 400, we get about 17.4 years of supply from the Marcellus shale.

Using the USGS estimate, if we divide 23 into 84, we get 3.6 years of supply from the Marcellus shale. Subtracting, we find that we have suddenly lost 13.8 years of supply. The EIA has said it will adopt the USGS estimate, so it's official. Now we are left with only 22.2 years of natural gas from all shale gas sources (the Marcellus, the Fayetteville, the Haynesville, etc.).

I have gone through this admittedly silly exercise to expose and ridicule the hype behind shale gas supply & production in the United States. The phrase "100 years of natural gas" got loose in the public mind, which sounded pretty good to everybody. To make matters worse, this number usually conflated shale gas with gas coming sources outside the various shale formations.

But now, combining the EIA and USGS estimates, we are down to 22.2 years of gas from shale, which doesn't sound nearly as good. The number "100" has a nice ring to it. It's a round number with a couple of zeros, and it pushes out a potential problem that many years, which is a long time on the human time scale. But when you stop to think about it, it's not a very big number, is it? And now we have a number much closer to 20, which is one-fifth of 100.

One-fifth of a big number is still a big number, as Kevin Book said. But one-fifth of a small number is a much smaller number. That's your take-away message today.

Remedy du Jour -- August 27, 2011

We've got some good stuff today. Enjoy.

• The Fifth Element, the Diva's song (full version)
• Precious Bodily Fluids
• Angelo Badalementi's Laurens Walking, from David Lynch's The Straight Story
• Pat Metheny, music From Cinema Paradiso

 

 

 

 

Saturday Oil Report -- August 27, 2011

I made no prediction about the current oil price in my last Saturday report because the markets seemed to be spinning out of control. Things have calmed down since then—the calm before the storm? Nymex oil sits at $85.37 per barrel, and the price has moved in a narrow range in the mid-80s for most of the last two weeks.

There is no change to the alarm level.

Oil Alarm Level —Yellow

The CFTC is holding hearings to determine new rules for oil trading (e.g. higher margin requirements, position limits). These new rules are already late. We've seen the commission stall as long as humanly possible before it must comply with the Dodd-Frank legislation. No doubt they're hoping they will not need to do anything at all. These hearings are part of the foot-dragging. MarketWatch reported on the testimony.

WASHINGTON (MarketWatch) — Financial activity in the futures market can significantly destabilize oil prices, a Belgium-based academic told the U.S. futures regulator on Friday as part of a debate the agency held as it weighs new rules.

“In 2007 and 2008, destabilizing financial activity caused oil prices to respectively over- and undershoot their fundamental values by significant amounts,” Ine Van Robays, an academic at the Department of Financial Economics at Ghent University in Belgium, told the Commodity Futures Trading Commission at a conference about commodity markets.

However, she added financial activity in the futures market only typically produces a short-term impact.

“This implies that financial trading matters, although its effect on spot oil prices is only short-lived,” Van Robays said.

Her comments were backed up by David Frenk, research director for progressive watchdog group Better Markets. “Financial flows can and do dominate commodity price formation, not all the time, but enough of the time to make a real difference,” he said.

Frenk said that financial speculation is excessive and is causing higher, more volatile prices than would otherwise be the case.

“Given the enormous importance of commodities to the lives and livelihoods of people across the earth, facts should be more important in the debate and purely financial price increases of commodities should be stopped,” he said.

Source

I agree with Van Robays' remarks here, but if financial considerations are always influencing spot prices and the front-month contract, what does short-lived mean? We recently witnessed a significant overshoot due to the Egyptian/Libyan disruption (chart above). If we have a global recession, I expect to to see a significant undershoot like the one we saw in 2009.

One of the least understood aspects of the 2007-2008 oil shock is that both speculation and the fundamentals drove it. At the time I thought the price of oil should have been in the $110-$120 range, but the price got to $147/barrel at one point. Supply-side pessimists chalked up the price spike to fundamentals alone. Those on the other side pointed to speculation as the only cause. It was both.

As expected, academic economist James Hamilton stood up for the fundamentals.

However, University of California economics professor James Hamilton told the CFTC that the big picture driving the price of oil has been stagnating global production of crude in the face of big increases in world incomes and a spike in demand for oil products in emerging markets — not financial speculation.

“Sure it is fine to talk about [financial] speculation, but we should all be able to agree on the big picture that the real story driving the price of oil has been stagnating world supply in the face of a big increase in world incomes,” Hamilton said.

Hamilton downplayed the impact of financial speculation by hedge funds and other traders on oil prices, insisting that market fundamentals are the key factor to consider when thinking broadly about the price of oil.

To back his conclusion, Hamilton pointed out that global production of crude oil, in millions of barrels of oil a day, in the past decade has stagnated, particularly between 2005 and 2009. He also cited International Monetary Fund data that showed global real gross domestic product increased 17.2% between 2005 and 2009, driven largely by growth in emerging economies.

“The big story is that global production of oil has stagnated and it is a very important event that everybody ought to be aware of and think about how this jives with tremendous demand for oil products in the emerging markets and fundamentals,” he added.

And I agree with Hamilton about crude oil production. It is stagnant. The oil supply appears to be in a long, bumpy plateau which could last several more years. Or not.

However, Black Or White thinking continues to dominate the debate about oil prices. Those blaming speculators can ignore "peak oil" concerns. Those blaming the stagnant oil supply can dismiss concerns about speculators. Both financial excesses and the oil supply are big problems we must confront. On and on it goes, this big exercise in futility. In the end, this debate demonstrates once again that humankind can not clearly identify these big problems and act effectively to solve them.

What will the price be in two weeks? Unless something untoward happens in the markets, I think it will be just about where it is now.

Planet Stupid

I have received more than one climate change denier comment in the last 24 hours.

I want you people who seek to "enlighten" the rest of us about the "natural "causes for global warming to know that I will always delete your comments, in so far as they have nothing to do with Reality.

Furthermore, I am not at all surprised that so many Humans are willing & able to deceive themselves about what is happening on this planet, which I have lately (to myself) labeled Planet Stupid.

And here's the kicker:  if more Humans took my view seriously — that members of so-called Homo sapiens ("wise man") are fuck-ups, and shouldn't cling to such an unwarranted, inflated view of themselves, the better off Humanity might be in the long run. And now of course Humans are for the first time in the history of the species fuck-ups on a global scale. There's nowhere to run, and there's nowhere to hide.

This "Progress" people speak of: Where is it?

Always pretending that things are OK when they clearly are not — that's the Downfall, the beginning of the end. And we are now well past the beginning of the end. Recognizing our collective failures — that would be Progress.

-- Dave

Friday Open Thread, Schneiderman Dismissed

Today DOTE invites your comments about the State of the World. The Bernank will make his Jackson Hole speech this morning, which may make for a lively trading session on the NYSE. It's also worth noting that 2nd quarter GDP (annualized growth rate) was revised down from 1.3 to 1.0%. The economy always seems to be worse than initially reported. Why do you think that is?

Less than 24 hours after I ridiculed efforts to fight the "mortgage-industrial" complex, New York state attorney general Eric Schneiderman was removed from his leadership role in fighting settling with the banks over foreclosure fraud. The banks seek "broad" immunity from further lawsuits, and Schneiderman, as the Attorney  General of New York, is uniquely positioned to pursue that litigation. From Bloomberg—

New York Attorney General Eric Schneiderman was removed from a leadership role in negotiating a nationwide foreclosure settlement with U.S. banks because his office “actively worked to undermine” the effort, a state official said.

Schneiderman, who doesn’t want a settlement to bar further investigations of mortgage practices by individual states, was removed from the executive committee of state officials working on the deal, Iowa Attorney General Tom Miller said yesterday in a statement.

The Los Angeles Times describes the context of Schneiderman's dismissal.

An effort by state attorneys general to take big mortgage servicers to task over faulty foreclosure practices has stalled as financial institutions demand broad legal immunity from other mortgage-related probes...

The nationwide effort looking into faulty foreclosures, which involves attorneys general from all 50 states as well as some federal agencies, was expected to have produced a settlement of more than $20 billion by now. But talks have stumbled over how much the banks should pay as well as to what degree they will be released from liability from future investigations...

The five largest institutions involved — Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial — are pushing the states' attorneys for broad release.

[My note: Ally Financial is the former GMAC.]

"We continue to believe that the best way to get the housing market going again in every state is a global settlement that addresses these issues fairly, comprehensively and with finality," BofA spokesman Lawrence Grayson said Monday. The other four financial institutions declined to comment...

As the talks have stalled, the Obama administration has waged a campaign to pressure New York Atty. Gen. Eric Schneiderman, leaning on his supporters to urge him to back a broad deal that would grant immunity to the nation's five largest mortgage servicers, a person familiar with the discussions said. But Schneiderman has remained resolute that his own investigations must be allowed to go forward.

Read Matt Taibbi's comments on the corruption behind any future deal if you want additional details.

And now, the floor is yours.

How's That De-Leveraging Going?

I was struck by a comparison Bloomberg made in Wall Street Aristocracy Got $1.2 Trillion in Fed’s Secret Loans.

Citigroup and Bank of America were the reigning champions of finance in 2006 as home prices peaked, leading the 10 biggest U.S. banks and brokerage firms to their best year ever with $104 billion of profits.

By 2008, the housing market’s collapse forced those companies to take more than six times as much, $669 billion, in emergency loans from the U.S. Federal Reserve. The loans dwarfed the $160 billion in public bailouts the top 10 got from the U.S. Treasury, yet until now the full amounts have remained secret.

Fed Chairman Ben S. Bernanke’s unprecedented effort to keep the economy from plunging into depression included lending banks and other companies as much as $1.2 trillion of public money, about the same amount U.S. homeowners currently owe on 6.5 million delinquent and foreclosed mortgages.

The largest borrower, Morgan Stanley, got as much as $107.3 billion, while Citigroup took $99.5 billion and Bank of America $91.4 billion, according to a Bloomberg News compilation of data obtained through Freedom of Information Act requests, months of litigation and an act of Congress.

First we must look at the Household Debt Mountain.

Source: The Federal Reserve. Data as of 2011:Q1 "Aggregate consumer debt held essentially steady in the first quarter, ending a string of nine consecutive declining quarters. As of March 31, 2011, total consumer indebtedness was $11.5 trillion, a reduction of $1.03 trillion (8.2%) from its peak level at the close of 2008Q3, and $33 billion (0.3%) above its December 31, 2010 level.  Behind the leveling off of total consumer debt was a small increase in mortgage balances shown on consumer credit reports. In spite of the small increase, household mortgage indebtedness and home equity lines of credit (HELOCs) are now 8.1% and 9.9%, respectively, below their peaks. Consumer indebtedness excluding mortgage and HELOC balances fell slightly ($30 billion or about 1%) in the quarter. Consumers non-real estate indebtedness now stands at $2.29 trillion, 9.6% below its 2008Q4 peak."

You can see that household debt in the first quarter ($11.5 trillion) was actually slightly above its 2010 fourth quarter level, although it is 8.2% below the 2008 peak. The phrases "de-leveraging" or "repairing household balance sheets" are actually euphemisms for defaulting on debt.

Not zero scaled. Graph courtesy of Calculated Risk.

This second graph shows that payment on 10% of the household debt is late, with most that delinquency being severely derogatory or more than 120 days late. This delinquent debt amounts to $1.15 trillion, which is part of the tally Bloomberg mentioned. Also, Bloomberg was referring to what "consumers" owe on foreclosed or delinquent mortgages, while the second graph includes all kinds of debt (student, auto, etc.).

Back in 2008 Ben Bernanke bailed out the financial system by handing out $1.2 trillion in basically "free" loans to various shyster institutions (and perhaps some above-board ones as well). See the complete list here. But the Household Debt Mountain just sits there. In the recent past it was pared down by various defaults, but now for the first time since the meltdown, it is growing again. Student loans, which are only $700 billion in the first chart above, are expected to hit the one trillion mark later this year. So much for de-leveraging.

And although Ben saved us from a Depression as the story goes, in the three long years that have passed since, no serious attempt has ever been by the Powers That Be to restructure household (mortgage) debt, to reduce the principal on underwater mortgages, force usurious credit card interest rates lower or even forgive some of the debt (i.e. a debt jubilee). Thus we get defaults. Various excuses are offered for inaction, usually involving issues of fairness or responsibility (e.g. the homeowner signed on the dotted line, now he has to live with the consequences, or how do you choose who gets restructured or a principal write-down). Even refinancing under government programs like HARP is outrageously expensive.

These ethical considerations apply to households only. They do not, and never have, applied to banks. This is only one of many glaring Double Standards that exist in our corrupt society.

The sad truth is that the Household Debt Mountain isn't going anywhere. Households do not have, and will not have, enough income to de-leverage (as opposed to default) in the sense we hear about in the media. How long would it take to reach the 2005 level of indebtedness? At the rate we're going, the answer is Never, or with defaults, A Very Long Time. Which apparently is just the way Powers That Be want it.

Do I Have To Show The George Carlin Video AGAIN???

Bank fraud and official appeasement has been much in the news lately. Yves Smith has been all over it (here and here). I have combined both of her stories in this quote.

It is high time to describe the Obama Administration by its proper name: corrupt.

Gretchen Morgenson [of the New York Times] reported yesterday that the Obama Administration was pressuring the New York Attorney General Eric Schneiderman to drop his opposition to the so-called 50 state attorney general mortgage settlement. The short form is the banks want a “get out of liability for almost free” card, which is patently absurd. Not only have they caused a colossal economic train wreck, but sadly, they remain such central actors that they need to be involved in remediation. Letting them off cheaply would be tantamount to putting a band-aid on gangrene.

The editorial in today’s New York Times may be a sign that the tide is turning. The elites are starting to break ranks with the mortgage industrial complex.

There was a remarkable quote in Morgenson's original article on the pressuring,  a quote so remarkable that it is red font-worthy.

The lawsuit angered Bank of New York Mellon, and as Mr. Schneiderman was leaving the memorial service last week for Hugh Carey, the former New York governor who died Aug. 7, an attendee said Mr. Schneiderman became embroiled in a contentious conversation with Kathryn S. Wylde, a member of the board of the Federal Reserve Bank of New York who represents the public [left].

Ms. Wylde, who has criticized Mr. Schneiderman for bringing the lawsuit, is also chief executive of the Partnership for New York City. The New York Fed has supported the proposed $8.5 billion settlement...

Characterizing her conversation with Mr. Schneiderman that day as “not unpleasant,” Ms. Wylde said in an interview on Thursday that she had told the attorney general “it is of concern to the industry that instead of trying to facilitate resolving these issues, you seem to be throwing a wrench into it. Wall Street is our Main Street — love ’em or hate ’em. They are important and we have to make sure we are doing everything we can to support them unless they are doing something indefensible.”

Mr. Schneiderman declined to comment on the encounter.

Well, the banks are always doing something indefensible, so that's kind of a moot point

Who could argue that the Obama Administation is not corrupt? That the mortgage-industrial complex is not a danger to the public? That Ms. Wylde, who represents the public at the New York Fed, has not been completely co-opted by the banks? Only those with a vested interest in the financial system, or the figuratively blind, might argue for the legitimacy of the mortgage-industrial complex and Team Obama.

 Yves Smith is feeling considerable righteous indignation about all this. She urges us to take an activist stand.

As much as this [Times editorial] is a very positive step, I hope readers will not take this for granted. In comments, not only did quite a few call or write Schneiderman to show support, but some of you also took it upon yourselves to express your disapproval to the two parties that Morgenson had identified as putting the screws on the attorney general: Donovan and a member of the New York Fed’s board, Kathryn Wylde.

I hope those of you who haven’t yet taken action will either give an “atta boy” to Schneiderman, or better yet, call or e-mail Donovan and/or Wylde and voice your disapproval.

Schneiderman: 800 771-7755 or 212 416-8050 or http://www.ag.ny.gov/online_forms/email_ag.jsp (the form is much more user friendly than most of this sort)

Shaun Donovan: [email protected]

Kathryn Wylde: no direct number, the “media outreach” (which shows what their priorities are) is (212) 493-7511. The main number for the Partnership for New York City (guess only the top 1% are “partners”) is 212-493-7400.

Barry Ritholtz has called for her resignation from the New York Fed (as a class C director, she purports to represent the public, when it’s clear she represents only the corporate funders of her not for profit). Call her office and say the New York Times editorial proves she is not standing up for what is best for the city and the country. Demand that she resign from the New York Fed.

In so far as the current Administration has been subservient to the mortgage-industrial complex every day in every way since the Obama's first day in office, as an outraged "masaccio" details at firedoglake, righteous indignation (or calls for resignations) is pretty much a full-time job. In fact, it was time to stoke up that righteous indignation before President Hopey-Changey took office when he appointed Tim Geithner, the head of the New York Fed and Kathryn Wylde's current employer, to be his Treasury secretary.

Was it not a mere three years ago that Obama was out on the campaign trail establishing his remarkably effective Hopey-Changey Brand? And then we all voted for him. I voted for him, and I'll bet Yves and Barry did, too. We were suckers!

Wall Street gave Obama lots of money in 2008. The only question now is whether Big Finance will support him again in 2012. And why wouldn't they? He has served them well. According to the Washington Post, things are looking up for Obama on the Wall Street front.

About a third of the money his top fundraisers have brought in this year has come from the financial sector, suggesting that strained relations with Wall Street have not hurt the president’s ability to attract donations there for his reelection campaign, according to data released Friday by the Center for Responsive Politics.

Strained relations with Wall Street? Jesus wept.

I want to call a time-out. Is this what honest people were put on God's Green Earth to do? To play the opposition role in a rigged, corrupt farce where politicians serve those who bribe them? And then protest to no avail? Is that all there is? When does this game stop? It doesn't, it never stops, certainly not in the final decades of Declining Empire.

It is one thing to observe and comment on the rigged game, but it is quite another to get all worked up about it. Righteous indignation indicates a dangerous level of emotional commitment to a game that can't be won. All this Hope and Pretending—it's just crazy! Doesn't true opposition consist of trying to put a stop to the game by refusing to play? And urging others to refuse to play? And urging them to save themselves outside the game by whatever (honest) means possible?

What if they held an election and nobody showed up? That would be a glorious day. Do I have to show the George Carlin video AGAIN???  

It's a Big Club and you ain't in it!