The Market Ticker

Does anyone remember my ranting at Paulson when he was talking about his "Bazooka"?  Here is what I said:

This joins the list of other "dead wrong" statements you've made, of which I am keeping a running copy and sent them around on the 19th of July. 

How many times do you get to be wrong as Treasury Secretary Hank before you resign in shame?

And now I must ask again - is that really a Bazooka in your pocket, or an empty launcher?  I'm not the only one that's curious you know; the bond market seems to think it smells like BS, and so does the stock market.

Fannie and Freddie collapsed, remember?

Paulson was proved - and rather quickly so - to be completely full of crap.

Bernanke's comments today may have just provoked a dollar catastrophe - a collapse move that may have just begun.  Witness this chart:

The market took about 10 minutes to discern that Bernanke's "concern" was BS, and now has pushed in the chips - "all in" - breaking key support below 75 - and still going.

The carry traders have redoubled their bets and obviously intend to force Bernanke to either put up or shut up.

The problem with Paulson's claim is that when the market called the bluff he wound up sticking the taxpayer for up to $400 billion, of which more than $100 billion has now been dissipated.

It appears the FX market intends to force Bernanke (and Geithner) to either defend the dollar or allow it to collapse.  The violence of this move and the concurrent "ramp job" that accompanied it in the S&P 500 makes clear a few points though.

• The "efficiency" of transmission between this move down and the move up in the stock market is lower than the previous moves have been, although the correlation remains intact.
  
  
• The FX markets will press this bet incessantly as they did when Geithner last mouthed the "strong dollar" mantra.

The Fannie and Freddie game wound up bankrupting both firms and forcing the government to bail them out.

Who is going to bail out the United States Government if and when the FX markets and carry traders cause a disorderly collapse in the dollar?

Just as with Paulson's idiocy I'll bet not one person in Congress or The Administration will stand up and put a sock in Bernanke, despite the fact that we are again seeing the "ALL IN!" game when the person doing it is holding 2-7 off-suit.

But this post, if Bernanke has indeed provoked a collapse of the dollar, is one I will be printing as a full-page advertisement in USA Today - if there still is a USA Today, or for that matter any other national newspaper to which one can freely insert material, in a couple of years.

I just gotta.....

When I last spoke at the Economic Club of New York a little more than a year ago, the financial crisis had just taken a much more virulent turn. In my remarks at that time, I described the extraordinary actions that policymakers around the globe were taking to address the crisis, and I expressed optimism that we had the tools necessary to stabilize the system.

I had a load in my pants, but put saran wrap over my underwear so you couldn't smell it.  It worked too, didn't it?

Today, financial conditions are considerably better than they were then, but significant economic challenges remain. The flow of credit remains constrained, economic activity weak, and unemployment much too high. Future setbacks are possible. Nevertheless, I think it is fair to say that policymakers' forceful actions last fall, and others that followed, were instrumental in bringing our financial system and our economy back from the brink. The stabilization of financial markets and the gradual restoration of confidence are in turn helping to provide a necessary foundation for economic recovery. We are seeing early evidence of that recovery: Real gross domestic product (GDP) in the United States rose an estimated 3-1/2 percent at an annual rate in the third quarter, following four consecutive quarters of decline. Most forecasters anticipate another moderate gain in the fourth quarter.

We let banks borrow at zero but you're going to pay 29.9% and like it.  Nobody has a job.  We're playing Wile-E-Coyote pedaling in air, having not stepped off the brink but gunned it and flew 400 feet off the end.  Oh, and the ground is 3,000 feet down.

As for "Real GDP" we count your wealth and output as having grown if you go to the bank and take a $20,000 cash advance on your credit card.  That makes you richer, right?

How the economy will evolve in 2010 and beyond is less certain. On the one hand, those who see further weakness or even a relapse into recession next year point out that some of the sources of the recent pickup--including a reduced pace of inventory liquidation and limited-time policies such as the "cash for clunkers" program--are likely to provide only temporary support to the economy. On the other hand, those who are more optimistic point to indications of more fundamental improvements, including strengthening consumer spending outside of autos, a nascent recovery in home construction, continued stabilization in financial conditions, and stronger growth abroad.

Absolutely - those $20,000 credit card cash advances are great - especially when the interest rate goes up to 29.9%.  This will absolutely promote a durable increase in consumer spending and go straight to the bottom line of corporations..... until you go bankrupt!

My own view is that the recent pickup reflects more than purely temporary factors and that continued growth next year is likely. However, some important headwinds--in particular, constrained bank lending and a weak job market--likely will prevent the expansion from being as robust as we would hope. I'll discuss each of these problem areas in a bit more detail and then end with some further comments on the outlook for the economy and for policy.

So long as we can sucker China into buying our Treasuries.....

I began today by alluding to the unprecedented financial panic that last fall brought a number of major financial institutions around the world to failure or the brink of failure. Policymakers in the United States and abroad deployed a number of tools to stem the panic. The Federal Reserve sharply increased its provision of short-term liquidity to financial institutions, the U.S. Treasury injected capital into banks, and the Federal Deposit Insurance Corporation (FDIC) guaranteed bank liabilities. The Federal Reserve and the Treasury each took measures to stop a run on money market mutual funds that began when a leading fund was unable to pay off its investors at par value. Throughout the fall and early this year, a range of additional initiatives were required to stabilize major financial firms and markets, both here and abroad.¹ 

All these banks are still broke.  We papered over the insolvency with printed money, but now we're hearing of people like Goldman changing priority of creditors on some of their deals.  Now now, don't sidle toward the door yet - that smell isn't really the curtains burning!

The ultimate purpose of financial stabilization, of course, was to restore the normal flow of credit, which had been severely disrupted. The Federal Reserve did its part by creating new lending programs to support the functioning of some key credit markets, such as the market for commercial paper--which is used to finance businesses' day-to-day operations--and the market for asset-backed securities--which helps sustain the flow of funding for auto loans, small-business loans, student loans, and many other forms of credit; and we continued to ensure that financial institutions had adequate access to liquidity. Additionally, we supported private credit markets and helped lower rates on mortgages and other loans through large-scale asset purchases, including purchases of debt and mortgage-backed securities issued or backed by government-sponsored enterprises.

We let people lie some more.  It worked so well during the 2000 era.  Home buyers lied about incomes, ratings agencies lied about safety, banks lied to everyone (including themselves and me) and I lied on a daily basis about how "house price appreciation reflects sound fundamentals."  Heh, can't change an unbroken record now!

Partly as the result of these and other policy actions, many parts of the financial system have improved substantially. Interbank and other short-term funding markets are functioning more normally; interest rate spreads on mortgages, corporate bonds, and other credit products have narrowed significantly; stock prices have rebounded; and some securitization markets have resumed operation. In particular, borrowers with access to public equity and bond markets, including most large firms, now generally are able to obtain credit without great difficulty. Other borrowers, such as state and local governments, have experienced improvement in their credit access as well.

We own it all - of course we can print up some more (worthless) currency to paper over whatever.  That's only going to happen for our friends though - you, the average American, are truly screwed.

However, access to credit remains strained for borrowers who are particularly dependent on banks, such as households and small businesses. Bank lending has contracted sharply this year, and the Federal Reserve's Senior Loan Officers Opinion Survey shows that banks continue to tighten the terms on which they extend credit for most kinds of loans--although recently the pace of tightening has slowed somewhat. Partly as a result of these pressures, household debt has declined in recent quarters for the first time since 1951. For their part, many small businesses have seen their bank credit lines reduced or eliminated, or they have been able to obtain credit only on significantly more restrictive terms.² The fraction of small businesses reporting difficulty in obtaining credit is near a record high, and many of these businesses expect credit conditions to tighten further.

Remember when I said "you are screwed"?  Yep.  "You" includes all the little people.  Consumers, small businessfolk, you're all bus fodder and we're gonna back over you after running you down.  Gotta make sure you're dead, after all.  "Such a lovely house......"

To be sure, not all of the sharp reductions in bank lending this year reflect cutbacks in the availability of bank credit. The demand for credit also has fallen significantly: For example, households are spending less than they did last year on big-ticket durable goods typically purchased with credit, and businesses are reducing investment outlays and thus have less need to borrow. Because of weakened balance sheets, fewer potential borrowers are creditworthy, even if they are willing to take on more debt. Also, write-downs of bad debt show up on bank balance sheets as reductions in credit outstanding. Nevertheless, it appears that, since the outbreak of the financial crisis, banks have tightened lending standards by more than would have been predicted by the decline in economic activity alone.

There's a few of you who have figured it out and given us the bird, refusing to borrow and bankrupt yourselves.  The rest of you are bankrupt.  Is that "credit-worthy"?

Several factors help explain the reluctance of banks to lend, despite general improvement in financial conditions and increases in bank stock prices and earnings. First, bank funding markets were badly impaired for a time, and some banks have accordingly decided (or have been urged by regulators) to hold larger buffers of liquid assets than before. Second, with loan losses still high and difficult to predict in the current environment, and with further uncertainty attending how regulatory capital standards may change, banks are being especially conservative in taking on more risk. Third, many securitization markets remain impaired, reducing an important source of funding for bank loans. In addition, changes to accounting rules at the beginning of next year will require banks to move a large volume of securitized assets back onto their balance sheets. Unfortunately, reduced bank lending may well slow the recovery by damping consumer spending, especially on durable goods, and by restricting the ability of some firms to finance their operations.

Oh darn they're going to stop us from lying as much.  We'll screw you some more in retaliation for that.

The Federal Reserve has used its authority as a bank supervisor to help facilitate the flow of credit through the banking system. In November 2008, with the other banking agencies, we issued guidance to banks and bank examiners that emphasized the importance of continuing to meet the needs of creditworthy borrowers, while maintaining appropriate prudence in lending decisions.³ This past spring, the Federal Reserve led the Supervisory Capital Assessment Program, or SCAP--a coordinated, comprehensive examination designed to ensure that 19 of the country's largest banking organizations would remain well capitalized and able to lend to creditworthy borrowers even if economic conditions turned out to be worse than expected. The release of the assessment results in May increased investor confidence in the U.S. banking system. A week ago, the Federal Reserve announced that 9 of 10 firms that were determined to have required additional capital were able to fully meet their required capital buffers without any further capital from the U.S. Treasury, and that aggregate Tier 1 common equity at the 10 firms increased by more than $77 billion since the conclusion of the assessment.⁴ 

Colonial Bank was so-well "supervised" that their assets were worth nearly 40% less than claimed when they were finally taken over.  They're not alone.  Losses of 20, 30, 40 even 50% are not uncommon, but it's all ok - the FDIC ends up eating those.  We, as the penultimate bank regulator, rubber-stamp whatever Blankfein tells us to.  Ain't life grand when you can make someone else eat your screwups?

The Federal Reserve will continue to work with banks to improve the access of creditworthy borrowers to the credit they need. Lending to creditworthy borrowers is good for the economy, but it also benefits banks by maintaining their profitable relationships with good customers. We continue to encourage banks to raise additional capital to support their lending. And we continue to facilitate securitization through our Term Asset-Backed Securities Loan Facility (TALF) and to support home lending through our purchases of mortgage-backed securities. Normalizing the flow of bank credit to good borrowers will continue to be a top priority for policymakers.

They will lend all you're dumb enough to borrow at 29.9%.  See Citibank - the ultimate global bank that has your best interest in mind.

Really.

While I am on the topic of bank lending, I would like to add a few words about commercial real estate (CRE). Demand for commercial property has dropped as the economy has weakened, leading to significant declines in property values, increased vacancy rates, and falling rents. These poor fundamentals have caused a sharp deterioration in the credit quality of CRE loans on banks' books and of the loans that back commercial mortgage-backed securities (CMBS). Pressures may be particularly acute at smaller regional and community banks that entered the crisis with high concentrations of CRE loans. In response, banks have been reducing their exposure to these loans quite rapidly in recent months. Meanwhile, the market for securitizations backed by these loans remains all but closed. With nearly $500 billion of CRE loans scheduled to mature annually over the next few years, the performance of this sector depends critically on the ability of borrowers to refinance many of those loans. Especially if CMBS financing remains unavailable, banks will face the tough decision of whether to roll over maturing debt or to foreclose.

We looked the other way and encouraged people to build commercial real estate that nobody really wanted or could pay for too, just like houses.  But unlike houses (we successfully dumped all that trash on you via Fannie and Freddie - and now the FHA!) we haven't figured out how to make you, the taxpayer, eat this one yet.

We will though - trust us.

Recognizing the importance of this sector for the economic recovery, the Federal Reserve has extended the TALF programs for existing CMBS through March 2010 and newly structured CMBS through June. Moreover, the banking agencies recently encouraged banks to work with their creditworthy borrowers to restructure troubled CRE loans in a prudent manner, and reminded examiners that--absent other adverse factors--a loan should not be classified as impaired based solely on a decline in collateral value.⁵ 

Delay is important - we'll dump it all on you as soon as you recover from the violation you took over the last two years on consumer lending and residential real estate.  Until then we've told the banks to lie about valuations.

In addition to constrained bank lending, a second area of great concern is the job market. Since December 2007, the U.S. economy has lost, on net, about 8 million private-sector jobs, and the unemployment rate has risen from less than 5 percent to more than 10 percent.⁶ Both the decline in jobs and the increase in the unemployment rate have been more severe than in any other recession since World War II.⁷ 

All this lying and scamming (which we countenanced and indeed practice ourselves) has led 8 million people to lose their jobs.

Don't worry, it will get worse.  A lot worse.

Besides cutting jobs, many employers have reduced hours for the workers they have retained. For example, the number of part-time workers who report that they want a full-time job but cannot find one has more than doubled since the recession began, a much larger increase than in previous deep recessions. In addition, the average workweek for production and nonsupervisory workers has fallen to 33 hours, the lowest level in the postwar period. These data suggest that the excess supply of labor is even greater than indicated by the unemployment rate alone.

I told you it was going to get worse!  Didn't you listen the first time?

With the job market so weak, businesses have been able to find or retain all the workers they need with minimal wage increases, or even with wage cuts. Indeed, standard measures of wages show significant slowing in wage gains over the past year. Together with the reduction in hours worked, slower wage growth has led to stagnation in labor income. Weak income growth, should it persist, will restrain household spending.

Work harder you slave, or you'll get fired!  Oh, and spend every last penny - it's important.  Especially if you don't have it - go see Citibank - they'll give you that 30% interest rate credit card. 

I promise.

The best thing we can say about the labor market right now is that it may be getting worse more slowly. Declines in payroll employment over the past four months have averaged about 220,000 per month, compared with 560,000 per month over the first half of this year. The number of initial claims for unemployment insurance is well off its high of last spring, but claims still have not fallen to ranges consistent with rising employment.

We're running out of people to fire.  I can't fire my driver, for example.  That would require that I drive myself.  Ditto for my butler.

But I can feed him dog food - heh heh heh....

Although economic pain is widespread across industries and regions, different groups of workers have been affected differently. For example, the unemployment rate for men between the ages of 25 and 54 has risen from less than 4 percent in late 2007 to 10.3 percent in October--nearly double the rise in unemployment among adult women. This discrepancy likely reflects the high concentration of job losses in manufacturing, construction, and financial services, industries in which men make up the majority of workers. From the perspective of America's economic future, the effect of the recession on young workers is particularly worrisome: The unemployment rate among people between the ages of 16 and 24 has risen to 19 percent--and among African American youths, it is now about 30 percent. When young people are shut out of the job market, they lose valuable opportunities to gain work experience and on-the-job training, potentially reducing their future wages and employment opportunities.⁸ 

The young are both stupid and weak.  We know they won't revolt - they have had a dozen years of government indoctrination and just finished up the mandatory part.  (Thank God this isn't France or those youngsters would have gotten the guillotine out from storage by now!)

Given this weakness in the labor market, a natural question is whether we might be in for a so-called jobless recovery, in which output is growing but employment fails to increase.

This is not a question.  The question is whether you will notice that we conspire with the government to simply lie about "output".  Witness the so-called "retail sales report" this morning, which we successfully cooked.  (As an aside that bastard Tickerguy caught us, but nobody reads him anyway.  Fortunately.)

Productivity is defined as output per hour of work. Thus, essentially by definition, a jobless recovery--in which output is growing but hours of work are not--must be a period of productivity growth. In the jobless recoveries that followed the 1990-91 and 2001 recessions, productivity growth was quite strong. It may seem paradoxical that productivity growth--which in the longer term is the most important source of increases in real wages and living standards--can have adverse consequences for employment in the short term. But, when the demand for goods and services is growing slowly, that may be the case.

Work harder or be fired!

In fact, productivity growth has recently been quite high, even when the economy was contracting. Output per hour in the nonfarm business sector is estimated to have risen at about a 5-1/2 percent annual rate so far this year, well above longer-term averages. One reason for recent productivity gains likely was the reaction of employers to the freefall in the economy that began in the second half of 2008. Normally, employers are slow to cut their workforces when the economy turns down. The process of finding, hiring, and training new workers is costly. Thus, if employers expect the downturn will be neither too severe nor too lengthy, they retain more existing workers than they need in the short term, rather than laying them off and replacing them when the recovery begins. However, in the recent downturn, employers were exceptionally uncertain about the future, some even fearing a second Great Depression. Moreover, tight credit conditions left little margin for error. Accordingly, to protect themselves against the worst possibilities, employers shed workers much more sharply than usual in recessions. Thus, the productivity gains this year generally reflected pronounced declines in labor input rather than greater output.

I SAID WORK HARDER AND GET PAID LESS OR BE FIRED!

Will the increases in productivity persist? It is likely that, in some cases, firms achieved their productivity gains by asking their remaining workers to provide extra effort. The additional gains that can be achieved in this way are limited and probably temporary. Although continuing uncertainty and financial constraints might make such firms hesitant to hire, if demand, production, and confidence pick up, they will find their labor forces stretched thin and will begin to add workers. However, other firms, facing difficult financial conditions and intense pressures to cut costs, seem to have found longer-lasting, efficiency-enhancing changes that allowed them to reduce their workforces; and some less-efficient firms, no longer able to compete, closed their doors. Again, improved efficiency confers great benefits in the longer term. However, to the extent that firms are able to find further cost-cutting measures as output expands, they may delay hiring

Employers will stop driving their slaves, er, employees, harder when they fall over dead in the fields.  Oh wait - that was so 1800s.  Or is it more akin to today?  (Let's hope nobody remembers the significance of April 25th, 1792!)

Other factors will affect near-term employment growth as well. Business confidence in the durability of the expansion, for example, will help determine employers' willingness to hire. The current prevalence of part-time work and short workweeks may slow job creation early in the recovery period, as employers may prefer to convert workers from part-time to full-time status and to add overtime work before turning to new hires. In addition, difficulties in obtaining credit could hinder the expansion of small and medium-sized businesses and prevent the formation of new businesses. Because smaller businesses account for a significant portion of net employment gains during recoveries, limited credit could hinder job growth. Overall, a number of factors suggest that employment gains may be modest during the early stages of the expansion.

The longer we keep lying about this the better the chance we can spool up the jet and get out to Paraguay.  Got JP-5?

I return now to the outlook for the economy and policy. As I noted, I expect moderate economic growth to continue next year. Final demand shows signs of strengthening, supported by the broad improvement in financial conditions. Additionally, the beneficial influence of the inventory cycle on production should continue for somewhat longer. Housing faces important problems, including continuing high foreclosure rates, but residential investment should become a small positive for growth next year rather than a significant drag, as has been the case for the past several years. Prospects for nonresidential construction are poor, however, given weak fundamentals and tight financing conditions.

By allowing banks to claim loans are good when they're not we're letting people live in homes where they haven't made a payment in over a year!  This is broadly supportive of consumer spending.  We'll deal with the homelessness later - when we're in Paraguay.

In the business sector, manufacturing activity has been expanding and should be helped by the continuing strength of the recovery in the emerging market economies, especially in Asia. As the recovery takes hold, enhanced business confidence, together with the low cost of capital for firms with access to public capital markets, should lead to a pickup in business spending on equipment and software, which has already shown signs of stabilizing.

China prints money better than we do.  Pay no attention to the empty cities they built, the buildings that collapsed with 3" of snow on their roofs due to shoddy construction, or the schools that collapse in minor earthquakes.  That's all good too - it means they have to spend more on construction!

I have discussed two of the principal factors that may constrain the pace of the recovery, namely, restrictive bank lending and the weak job market. Banks' reluctance to lend will limit the ability of some businesses to expand and hire. I expect this situation to normalize gradually, as improving economic conditions strengthen bank balance sheets and reduce uncertainty; the fallout for banks from commercial real estate could slow that progress, however. Jobs are likely to remain scarce for some time, keeping households cautious about spending. As the recovery becomes established, however, payrolls should begin to grow again, at a pace that increases over time. Nevertheless, as net gains of roughly 100,000 jobs per month are needed just to absorb new entrants to the labor force, the unemployment rate likely will decline only slowly if economic growth remains moderate, as I expect.

Why is my nose 16" long?

The outlook for inflation is also subject to a number of crosscurrents. Many factors affect inflation, including slack in resource utilization, inflation expectations, exchange rates, and the prices of oil and other commodities. Although resource slack cannot be measured precisely, it certainly is high, and it is showing through to underlying wage and price trends. Longer-run inflation expectations are stable, having responded relatively little either to downward or upward pressures on inflation; expectations can be early warnings of actual inflation, however, and must be monitored carefully. Commodities prices have risen lately, likely reflecting the pickup in global economic activity, especially in resource-intensive emerging market economies, and the recent depreciation of the dollar. On net, notwithstanding significant crosscurrents, inflation seems likely to remain subdued for some time.

Oil has doubled and Gold has screamed higher in recent months.  But trust me - there is no inflation.  Gas going from $2 to over $3, headed to $8?  Naw, that's not inflation.  Trust me.  (I already bought the aforementioned JP-5 I need to get out of here - suckers.)

The foreign exchange value of the dollar has moved over a wide range during the past year or so. When financial stresses were most pronounced, a flight to the deepest and most liquid capital markets resulted in a marked increase in the dollar. More recently, as financial market functioning has improved and global economic activity has stabilized, these safe haven flows have abated, and the dollar has accordingly retraced its gains. The Federal Reserve will continue to monitor these developments closely. We are attentive to the implications of changes in the value of the dollar and will continue to formulate policy to guard against risks to our dual mandate to foster both maximum employment and price stability. Our commitment to our dual objectives, together with the underlying strengths of the U.S. economy, will help ensure that the dollar is strong and a source of global financial stability.

I'd love to lie about the dollar but it doesn't seem to work!  What the hell?  You mean there are people smarter than me, and my "jawboning" only works for 10 minutes?  Here, you sit on that spike - it'll feel great.  I promise.

The Federal Open Market Committee continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. Of course, significant changes in economic conditions or the economic outlook would change the outlook for policy as well. We have a wide range of tools for removing monetary policy accommodation when the economic outlook requires us to do so, and we will calibrate the timing and pace of any future tightening to best foster maximum employment and price stability.

We're gonna keep screwing 'ya, and you're going to like it.

Don't read up on April 25th, 1792.

Please.

Here's Bernanke's speech and what he said:

We are attentive to the implications of changes in the value of the dollar and will continue to formulate policy to guard against risks to our dual mandate to foster both maximum employment and price stability. Our commitment to our dual objectives, together with the underlying strengths of the U.S. economy, will help ensure that the dollar is strong and a source of global financial stability.

That's a new one.  You are attentive to it eh?

Well then about this, Sir Jackass?

An EXACT correlation as soon as Bernanke's words were released - synchronized EXACTLY as to time.  Dollar spiked, the S&P 500 dropped.

The Fed has the lever to force this carry trade out of the system before it grows large enough to destroy our economy and productivity.  They need only raise rates - not a lot - just enough to make our markets unattractive.  2% should do it nicely.

Who can argue that 2% isn't "very accommodative" in terms of rates?

Bernanke claims:

My own view is that the recent pickup reflects more than purely temporary factors and that continued growth next year is likely.

He's lying.  If he truly believed this The Fed Funds rate would not be at zero - but it is.

Bernanke "outs" himself by saying:

The demand for credit also has fallen significantly: For example, households are spending less than they did last year on big-ticket durable goods typically purchased with credit, and businesses are reducing investment outlays and thus have less need to borrow. Because of weakened balance sheets, fewer potential borrowers are creditworthy, even if they are willing to take on more debt.

Here's the most-recent Z1 credit graph:

Note that The Fed's "base money" is at present about $1.8 trillion, which is $1 trillion larger than the "normal" $800 billion.

But credit outstanding is some $53 trillion dollars.

Clearly, without credit expansion it is not possible for economic growth to occur.  But credit expansion requires economic activity that in turn allows the coupon payments - interest and principal - to be made.

Where is the evidence that this is, at present, possible?

It's absent because it hasn't happened, and that's a major problem.  By refusing to allow the market to take care of the imprudent, forcing the default of bad loans and thus clearing them from both the lender and borrower's balance sheets, we have impaired any ability to return to economic growth, as the bad debt and its servicing requirements still exist.

Ben goes on to say:

With nearly $500 billion of CRE loans scheduled to mature annually over the next few years, the performance of this sector depends critically on the ability of borrowers to refinance many of those loans. Especially if CMBS financing remains unavailable, banks will face the tough decision of whether to roll over maturing debt or to foreclose.

These "loans" were made imprudently with dramatically-overstated expectations for rents and occupancy.  There is no solution to this problem that results in sustainable growth without foreclosure and the loss being taken, just as there is not in residential real estate and home mortgages.  Yet the policy of The Fed and government is to "extend and pretend", or worse, take all the trash onto the balance sheet of either The Fed or The Treasury, effectively hiding the losses - for a while.  But again, that debt still requires servicing no matter where it is, and that (once again) precludes safe and sound lending, as the debt-carrying capacity has been consumed.

Besides cutting jobs, many employers have reduced hours for the workers they have retained. For example, the number of part-time workers who report that they want a full-time job but cannot find one has more than doubled since the recession began, a much larger increase than in previous deep recessions. In addition, the average workweek for production and nonsupervisory workers has fallen to 33 hours, the lowest level in the postwar period. These data suggest that the excess supply of labor is even greater than indicated by the unemployment rate alone.

No, really?  You mean that having a McJob isn't as good as screwing together cars?  And further, that having your boss scream at you "work harder and faster or GET FIRED!" isn't good for consumer income - and morale?

Weak income growth, should it persist, will restrain household spending.

There is no income growth.  Intentional understatements of inflation - hedonic adjustments and the refusal to include actual house price increases, even though the majority of Americans own homes, mean that we have spent the last ten years watching the average American's real household purchasing power be destroyed.  Now we add outright job loss and ramping credit card rates to the mix, as if the deception by the government and The Fed was insufficient - kicking people after you've managed to shove 'em in the gutter has become the next great Bankster Sport.

The unemployment rate among people between the ages of 16 and 24 has risen to 19 percent--and among African American youths, it is now about 30 percent.

That's because currency and interest-rate imbalances have resulted in those front-line jobs, including especially manufacturing, all going over to China - where they will work for $2/day.  This will not go away without addressing the structural imbalances that The Fed, Congress and The Administration have intentionally created.

Final demand shows signs of strengthening, supported by the broad improvement in financial conditions.

How?  Without jobs how does final demand - with 70% of the economy being consumer spending - strengthen?  Yes, the government can (and has thus far) blow money it doesn't have, so long as China continues to allow it, and transfer that to people.  Is that sustainable? 

The outlook for inflation is also subject to a number of crosscurrents. Many factors affect inflation, including slack in resource utilization, inflation expectations, exchange rates, and the prices of oil and other commodities.

The Fed has directly caused the price of oil to more than double since this spring with its zero interest rates and the establishment of the dollar carry trade.  There is no evidence whatsoever that Bernanke gives a tinker's damn if your gasoline is north of $3/gallon, so I hope you're prepared for it to go to $5, $6, $7 or even $8 - because if this game continues, it will.

We have a wide range of tools for removing monetary policy accommodation when the economic outlook requires us to do so, and we will calibrate the timing and pace of any future tightening to best foster maximum employment and price stability.

Along with 30% unemployment, 29.9% credit card interest rates and destroyed futures for your children and grandchildren.

Bernanke, Geithner and the Administration all are trying to do the impossible - return to "economic growth" in a credit-based monetary system where the carrying capacity of debt has been effectively reached, WITHOUT forcing the removal of that bad debt by allowing the default of those poorly-underwritten and issued loans.

The immovable object has met the irresistible force.

PS: Oh, Bernanke just said he sees no problems with valuations in the US Stock market.  Really Ben?  A P/E of nearly 140 is just fine, right?  No valuation bubble there!

Interesting note on methodology noted by a forum user (Licorice):

Each month, questionnaires are mailed to a probability sample of approximately 5,000 employer firms selected from the larger Monthly Retail Trade Survey (MRTS). Firms responding to MARTS account for approximately 65% of the total national sales estimate. Advance sales estimates are computed using a link relative estimator. The change in sales from the previous month is estimated using only units that have reported data for both the current and previous month. There is no imputation or adjustment for nonrespondents in MARTS.

Got it?

The number is cooked.  Only same-store sale changes count and those stores that closed or were newly opened are ignored.

This implies that the report will may slightly understate results in a rapidly-expanding environment for the first month (although that understatement will be corrected via revisions in the second month) but is almost certain to grossly overstate results in a weakening consumer retail environment - and those overstatements will not be corrected.

Here's why.

A new store (that has no "last month" history) will typically have low sales numbers for its first month of operation, simply because nobody knows it's there.  While most stores have some sort of "grand opening" or other promotion linked to their inception, the usual "buzz" associated with that tends to be fleeting (days.)  Traffic then tends to build with familiarity, assuming that the store is successful.  Since in a flat market this traffic comes from other competitors, the "new store" impact would tend to be neutral or slightly positive beyond actual sales results.  That is, the traffic taken by the new store (from existing retailers) will be counted, because the retailer that loses to the new store is counted and the new store is also counted.  The numbers balance; the under-reporting is limited to the initial "grand opening", which is normally a one-off until traffic and familiarity builds, and the new store is reported both for prior and current months as soon as the first month passes.  This causes a revision (upward) in the second month of operation to the prior month's results.

But a closed store is ignored in the month it fails, and the traffic that shifts FROM it to other stores pumps their comps .vs. the previous month.  Therefore, as stores close it looks like retail activity actually increased when in fact at best it was flat.

Examples will make this clear.

We start with one store in the world that has net sales of "100".

Store #2 opens with sales of 10.  Half of that is new activity, half comes from Store #1.  First month shows a sales report of "95", a decrease.  But in the next month Store #2's numbers come online, the "95" is revised to the (true) 105, and Store #2s numbers (which have climbed to 60, while Store #1 has lost share and now also has an amount of 60) are all reportable.  Net activity is now accurate at 120 and the previous month is revised to the (true) net 105.

Store #1 and #2 both are operating with sales of 60.  Store #2 fails, and half of its business goes to Store #1.  In the month it fails Store #1 shows an increase and Store #2's numbers are DROPPED ENTIRELY, since it did not report.  This is not revised.  We now report a "50% increase" in retail activity, which is total crap - we really had a 25% net decrease for the current month.  But the revision to the previous month does get posted, and depresses the previous month's numbers.

Did this just happen?

The August to September 2009 percent change was revised from -1.5 percent (±0.5%) to -2.3 percent (±0.3%).

Oh, it did!  Now we know where the revision to the previous month came from - stores closed in the present month and their sales loss was intentionally dropped from the current month.

Cute folks, cute.  This intentional omission of stores that fail to report for the current month but did for the previous, instead of counting a closed store as the zero that it is, mean that so-called "improvements" by competitors who pick up the previous store's traffic are not balanced by the loss of the failed store.

As such the report intentionally overstates results and you cannot obtain an accurate magnitude for the distortion.  You can, however, detect that it happened by the negative revision to the previous month's data - and in this case, we got a big one.

If you were wondering how we can possibly have "improving" retail sales data when sales tax information from the states refuses to reflect this alleged "improvement" in retail sales, along with how states can post double-digit sales tax declines while "retail sales" are down by a much smaller percentage, you now understand.  The Census Bureau intentionally lies by omitting the "zero" for a store in the month it closes - that loss of sales is never reported - not even retrospectively in a revision the next month.

The Market Ticker once again dissects The Goebbels Information Bureau residing in our Government.

One wonders about this 1136-page behemoth......

First, some general observations:

• It does not ban off-balance sheet exposures.  Why not, given their history both in ENRON's collapse and the panic of 2008?  How many times do we have to see these entities abused for the explicit purpose of hiding risk?
  
  
• It draws a distinction between "regular" and "too big to fail" companies, putting the second into a putative "more supervised" bucket.
  
  
• It lists requirements that allegedly already exist - including for capital, leverage and "prompt corrective action."  But nowhere in the proposed Title does it appear to contain either civil or criminal penalties for the new agency if it fails to discharge its responsibilities.  As we have repeatedly seen under existing "Prompt Corrective Action" you can have all the laws you want but if nobody will enforce them they are meaningless.
  
  
• The contingent capital - that is, hybrid debt that is automatically convertible to equity upon failure to meet a standard set by the agency - sounds good.  But is it good?  Well, maybe.  More on that later.
  
  
• It does not appear that this act prevents "large" companies from restructuring as a group of bank holding companies to evade supervision.  I may have missed it, but if there is a clause or title in there that prevents cross-ownership evasion (by treating any such cross-ownership as one firm for the purpose of classification) I didn't see it.
  
  
• The leverage limits specified in the act (the "floor", p56) is ridiculously low.  2% capital in tangible equity?  That's 50:1 leverage!  What are these people smoking?  Remember - Bear and Lehman both failed at about 30:1.  Prudential eh?  Like hell.  Realize that with a 2% tangible equity floor a mere 2% loss on assets results in bankruptcy.  How many times have we seen traded securities lose 2% or more in a single day?  Many.  How does one call this "prudential"?
  
  
• Credit exposure: There goes the need for "23A" exemptions.  The putative limit of affiliated and unaffiliated firms is 10% to any single firm, although The Fed has handed out exemptions to that limit like candy on Halloween.  This bill puts a 25% limit (!) on unaffiliated credit exposure - a more than doubling of the previous limits.  This is a tightening of risk controls?  Like hell.  In addition allowing more than ten times the credit exposure to an entity than the equity capital requirement is asinine - this would theoretically allow a single counterparty failure to wipe out the firm's capital by that same ten times!  A firm should not be allowed to have more exposure to a given counterparty than its equity cushion to prevent any single failure from cascading through to the regulated entity and taking it out.
  
  
• The putative "resolution authority" allows the assumption of literally any risk, putative "asset" or liability of a failing firm with the full faith and credit of The United States.  This is effectively the provision of a blanket guarantee of any large financial firm's assets and liabilities by The US Federal Government.  I thought we were getting rid of moral hazard (or is that "mortal hazard" - to the government?)
  
  
• The putative "resolution authority" creates an explicit right to do what The Administration did with GM, Chrysler and others - to insert the government in front of Senior Creditors.  Over the last year or so the sanctity of the capital structure has been essentially destroyed - this act makes that destruction a matter of formal federal law.  Blech.
  
  
• The putative "resolution authority" specifically bars judicial review for those creditors who claim they were screwed by the imposition of modified claim priority.  This codifies in black letter Federal Law what was done to Chrysler and GM bondholders.
  
  
• Ridiculous shortening of statutes of limitations.  There are peppered all over this legislation unbelievably short periods of time to file claims, from 30 to 90 days - dramatically shortening the time to bring suits.  This appears to be intentionally designed to limit the ability of those who believe they were abused by these processes to obtain judicial relief.
  
  
• The supposed "strengthening" of regulation of OTC derivatives contains a very important weasel provision on page 385.  Specifically, it says ".... MAY jointly prescribe rules defining the term "swap" or "security-based swap" to include transactions that have been structured to evade this title."  Note the word MAY.  It is not SHALL, meaning that just as has occurred to date, the CFTC and SEC can willfully and intentionally allow firms to evade all of these "reforms" - and you can bet they will, since this is entirely within their discretion.  Oh, and the byzantine definition of these products has enough holes to drive a truck through - sideways.
  
  
• This act specifically preempts state "bucket shop" laws relating to swaps and OTC derivatives.  This is a serious problem folks - the issue with "bucket shops" is that the putative "dealer" isn't really dealing at all - you're betting against him and he controls the bid and offer, thereby making it trivially easy to guarantee that you lose.  While there hasn't been much in the way of attention paid to this, I am deeply troubled by inclusion of explicit federal preemption of these laws - who in the financial industry wants to be able to evade these important protections in state law, and why?

This act effectively transfers and consolidates the OCC and OTS into this new agency, deleting them.  There may be some good that comes from this, in that OCC and OTS have been accused of both malfeasance and misfeasance - and in the case of OTS, specific allegations of conspiracy to cook the books (e.g. Indymac) have been made.  Nor is this a new problem - it featured prominently in the S&L crisis as well with some of the same actors.  But putting a different name on the door doesn't change the agency.  What's missing here is the same thing that has been missing up until now - an "or else" putting criminal and/or civil penalties into the law so that those who have or do commit this sort of accounting fraud can and will face the music.

Contingent capital sounds like a great idea, and it might even be a great idea.  But who had the idea to set the bar on leverage at 50:1 (a 2% equity requirement)?  That's insane.  What's wrong with the former 12:1 standard?  Oh, I know, these so-called "too big to fail" companies can't make as much money.  I thought the purpose of this act was to impose stronger leverage limits and prudential regulation, not loosen standards further?  Why are we going from 40:1 (today) to 50:1 (in this act) if that is the case?

There is a fair bit to like in this act.  The explicit statement of support for state laws in the consumer protection realm that are stronger than federal protections is one of these areas.  The abolishment of "venue shopping" when it comes to regulators (e.g. OCC .vs. OTS) is long overdue.

But the above bullet points are troubling, and this act reeks of having intentional loopholes written into it via obfuscation, along with no statutory demand that the new FIRA agency actually stomp on such abusers.  There are too many "mays", not enough "shalls", and an absolute lack of "or else's" - making this one of those acts that says more by its absence than presence.

Add to that the further loosening of leverage limits and you have what is obviously a lobbyist-written "bill" that totals 1136 pages primarily as a means to dissuade anyone from reading it.

Well, it didn't stop me.... and what I see in there, despite the gloss of some improvements (especially in consumer protection) is a big fat stinking piece of used dog food when it comes to financial stability and prudent regulation.