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Tuesday, January 13, 2009

Great Recession Roundup — January 13, 2009

Items of Interest:

Chairman Ben S. Bernanke / federalreserve.gov:
At the Stamp Lecture, London School of Economics, London, England
January 13, 2009

The Crisis and the Policy Response

For almost a year and a half the global financial system has been under extraordinary stress--stress that has now decisively spilled over to the global economy more broadly. The proximate cause of the crisis was the turn of the housing cycle in the United States and the associated rise in delinquencies on subprime mortgages, which imposed substantial losses on many financial institutions and shook investor confidence in credit markets. However, although the subprime debacle triggered the crisis, the developments in the U.S. mortgage market were only one aspect of a much larger and more encompassing credit boom whose impact transcended the mortgage market to affect many other forms of credit. Aspects of this broader credit boom included widespread declines in underwriting standards, breakdowns in lending oversight by investors and rating agencies, increased reliance on complex and opaque credit instruments that proved fragile under stress, and unusually low compensation for risk-taking.

The abrupt end of the credit boom has had widespread financial and economic ramifications. Financial institutions have seen their capital depleted by losses and writedowns and their balance sheets clogged by complex credit products and other illiquid assets of uncertain value. Rising credit risks and intense risk aversion have pushed credit spreads to unprecedented levels, and markets for securitized assets, except for mortgage securities with government guarantees, have shut down. Heightened systemic risks, falling asset values, and tightening credit have in turn taken a heavy toll on business and consumer confidence and precipitated a sharp slowing in global economic activity. The damage, in terms of lost output, lost jobs, and lost wealth, is already substantial...

Felix Salmon / Portfolio: Bernanke's Unconvincing Confidence
James Kwak / The Baseline Scenario: Why Fiscal Stimulus Is Not Enough
Michael Shedlock / Mish's Global Economic …: Bernanke Hints Banks, Economy In Much Worse Shape Than Previously Admitted
Barry Ritholtz / The Big Picture: Bernanke: I'm All In
Kevin Depew / Minyanville:
Bernanke Fingers the Culprit -- In today's speech [Bernanke] confidently asserted that the negative aspects of this "more encompassing credit boom" involved "widespread declines in underwriting standards, breakdowns in lending oversight by investors and rating agencies, increased reliance on complex and opaque credit instruments that proved fragile under stress, and unusually low compensation for risk-taking."

Well, shucks. No mention of who was responsible for that all-encompassing credit boom (The Fed), but let's not ruffle any feathers over mere semantics, especially while the apologist is still at the bar buying rounds...
Larry Summers Letter to Congressional Leaders:
Dear Madam Speaker, Leader Boehner, Leader Reid, and Leader McConnell:

As the President-elect recently stated, ''we start 2009 in the midst of a crisis unlike any other we have seen in our lifetime." He strongly believes that while the American Recovery and Reinvestment plan is critical, it alone will not solve all the problems that led us into this crisis. We must work with the same sense of urgency to stabilize and repair the financial system to address his primary concern: that we maintain the flow of credit that families and businesses depend on to keep our economy strong. It was that concern that led the President-elect to support the financial rescue plan back in September. If we had not all acted together Democrats and Republicans - this economic crisis would have already become an economic catastrophe, with even more jobs lost and more businesses closed.

But the President-elect also shares the frustration of the American people that we have seen too little effect from this rescue plan on jobs, incomes, and the ability of responsible homeowners to stay in their homes. He believes the American people are right to be angry with the way this plan has been implemented. President-elect Obama believes there has been too little transparency and accountability; too much upside for financial institutions and executives who acted irresponsibly without providing enough help for small business owners, families who are struggling to keep their jobs and make ends meet, and innocent homeowners.

That will change when President-elect Obama takes office. Today, he is asking for the authority to implement the rest of the financial rescue plan because the American people need to know that going forward our government has the resources to do whatever is necessary to stabilize our financial system and protect our economy from a potential catastrophe. With the first half of the rescue package now committed, President-elect Obama believes the need is imminent and urgent. We cannot afford to wait...
Bill Bonner / The Daily Reckoning:
Put Bernie Madoff at the Treasury! -- Unemployment is the highest it's been in 16 years - and rising. At 7.2% in December, it is probably already 8% now. USA Today reports that men are losing jobs more than women. This is probably because the damage in autos, finance and construction, industries dominated by men, has been so great.

But you think you've got trouble? What unemployed Americans don't buy unemployed Chinese don't make. A report at Bloomberg tells us that 10 million migrant workers in China lost their jobs in the first 11 months of 2008. By now, the figure is surely much higher.

"Poverty does cause violence," says a professor at Columbia who studied the issue. The Chinese government has warned that it may be faced with "mass incidents" in which it has to use force to keep the mob under control. Next door, Russia has already called out troops to put down a tax revolt in Siberia.

"I'm getting a license to carry a handgun," said an American friend, surprising us over dinner last week. "I don't know...but I see people getting desperate."

Elsewhere in the news is a report that shoplifting in the United States is rising. More than 80% of stores surveyed said it was becoming a bigger problem.

And in Spain, people are so desperate for work they're joining the army...

Calculated Risk

MishTalk - Mike Shedlock

Paul Krugman - NY Times

The Big Picture - Barry Ritholtz

naked capitalism - Yves Smith

Pragmatic Capitalism

Washington's Blog

Safe Haven

Paper Economy

The Daily Reckoning - Australia