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Archive for May 4th, 2009

Redefining full employment

Posted by WARREN MOSLER on 4th May 2009


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Not good.

As suspected way back on this website:

‘Great Recession’ Will Redefine Full Employment as Jobs Vanish

by Matthew Benjamin and Rich Miller

May 4 (Bloomberg) — Post-recession America may be saddled with high unemployment even after good times finally return.

Hundreds of thousands of jobs have vanished forever in industries such as auto manufacturing and financial services. Millions of people who were fired or laid off will find it harder to get hired again and for years may have to accept lower earnings than they enjoyed before the slump.

This restructuring — in what former Federal Reserve Chairman Paul Volckercalls “the Great Recession” — is causing some economists to reconsider what might be the “natural” rate of unemployment: a level that neither accelerates nor decelerates inflation. This state of equilibrium is often described as “full” employment.

Fallout from the recession implies a “markedly higher” natural rate of unemployment, says Edmund Phelps, a professor at Columbia University in New York and winner of the 2006 Nobel Prize in economics. “It was 5.5 percent; maybe it will be 6.5 percent, maybe 7 percent.”


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Follow up to the radio interview

Posted by WARREN MOSLER on 4th May 2009


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Thanks!

This supplements the tape previously emailed.

White House Claims Head of White&Case Restructuring Group Lied

by Tyler Durden

May 3 (ZeroHedge) — In a story becoming more bizarre by the minute, ABCNews has now picked up on the Perella Weinberg scent with some new twists. According to ABC, White House deputy press secretary Bill Burton claims that the allegations by Tom Lauria, global head of the Financial Restructuring and Insolvency at White & Case are “completely untrue”. As Zero Hedge already disclosed, Perella Weinberg was previously a client of White & Case, however, the firm run by former head of M&A at Morgan Stanley Joe Perella (where incidentally Steve Rattner was head of the Communications group until 1989), decided to fire the law firm after developments unknown, and in a radio show, Tom Lauria had this to say about the White House’s alleged strongarming tactics:

“One of my clients was directly threatened by the White House and in essence compelled to withdraw its opposition to the deal under threat that the full force of the White House press corps would destroy its reputation if it continued to fight…That was Perella Weinberg.”

The White House has now stepped in and claims that this story is patently false:

“The charge is completely untrue,” said White House deputy press secretary Bill Burton, “and there’s obviously no evidence to suggest that this happened in any way.”


What is more strange is that now Perella Weinberg itself is claiming Lauria’s story misrepresented the facts:

“A Perella Weinberg Partners spokesperson told ABC News on Sunday that “The firm denies Mr. Lauria’s account of events.” The spokesperson would not elaborate.”

What is strangest is that Lauria would stake his career and reputation on the line by stating on the record the facts previously disclosed. As such his downside is much bigger than that of Mr. Burton or of the PW’s spokesperson, as they effectively side with the Obama’s side of the story.

Granted there could be even more to this story than meets the eye, thanks to some keen observations by our friends at Finem Respice.

Ultimately, this will be a very interesting development, because without factual backing, Tom Lauria’s career is now on the line, as he has taken on not just the administration but his very own, former client. The bottom line here is that someone is lying, and if any further facts emerge to substantiate White & Case’s position, it could prove to be a massive PR blow to both the White House and the FDIC’s advisor, Perella Weinberg.

The full statement by Perella Weinberg is presented below:

Suggestions have been made that the Perella Weinberg Partners Xerion Fund changed its stance on the Chrysler restructuring due to pressure from White House officials. This is incorrect. The decision to accept and support the proposed deal was made by the Xerion Fund after reflecting carefully on the statement of the President when announcing Chrysler’s bankruptcy filing. In considering the President’s words and exercising our best investment judgment, we concluded that the risks of potentially severe capital loss that could arise from fighting this in bankruptcy court far outweighed any realistic potential upside.

We have a very specific mandate from our investors, and that is to carefully weigh investment risks and rewards. It is not our investment mandate to pursue political or risky legal campaigns with our investors’ money. This was our assessment of investment risk and reward, nothing else.



While we did and still do believe that the lenders would be justified in pressing their objections under conventional bankruptcy law principles, we believe a settlement would now be in the best interests of all parties in the context of avoiding a drawn out contested bankruptcy litigation proceeding, and we encourage our colleagues in the loan syndicate to pursue this immediately.”


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Radio interview with lawyer of secured creditors

Posted by WARREN MOSLER on 4th May 2009


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It’s a bit long, but has a lot of information.

DealBreaker interview with Lauria


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Fed swap lines continue to fall

Posted by WARREN MOSLER on 4th May 2009


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Central bank liquidity swaps (13) $250,215 – $36,059

USD LIBOR is down as well.

Not sure where the funds are coming from.

IMF loans are a possibility, as are direct bank, corporate, and private USD borrowings.

But good news as the Fed is slowly being let off the hook for what could have been its most problematic policy initiative.


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Posted in Articles, Fed | 4 Comments »

Credit Crunch II?

Posted by WARREN MOSLER on 4th May 2009


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This could trigger ‘Credit Crunch II’ which will be far more destructive than anything we’ve seen to date.

In Credit Crunch I lenders stopped lending temporarily for the likes of homes and cars due to fear of falling prices, rising unemployment, etc.

Credit Crunch II will be about all potential lenders, including the banking system, not lending to anyone for fear of not being legally entitled to collect past due balances.

This is a very different kind of systemic risk.

It is politically self inflicted systemic risk.

Intentional or not, the word ‘subversive’ is surfacing.

Hopefully the courts quickly affirm the legal rights of secured lenders.

Sell in May and Go Away

by John Maudlin

May 1 (Ritholtz) — And before I close, let me make a few comments about the Chrysler and GM issues. I tell my kids all the time that actions have consequences. If I hold senior secured debt of a company and the government tells me I have to take less than unsecured junior debtors, I am not going to be happy. I may have been dumb to make the loans in the first place, but I did it under a very specific contract and the rule of law.

If the Obama administration arbitrarily changes those rules to favor a political class (unions), then that is going to have a chilling effect on future lending to all corporations.

OK, one more thought. If Chrysler couldn’t figure out how to make efficient cars from their partnership with Daimler-Benz, are they now going to become viable through a partnership with Fiat, which has been on the verge of bankruptcy for the last decade? Really? GM paid $2 billion in penalties to Fiat in 2005 so as to not be forced to buy them. And Fiat gets 20% for no cash?


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Posted in Articles, Credit | No Comments »

Re: Chrysler related comments by Professor Bill Black

Posted by WARREN MOSLER on 4th May 2009


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>   
>   On Sat, May 2 and 3:48 PM, Bill wrote:
>   
>   I want to amplify a couple of Warren’s points that the media that I’ve seen has
>   missed. To me the key is the internal inconsistency of the Obama
>   administration’s reasoning. Contracts were sacred (AIG bonuses). Now, secured
>   creditors, who negotiated for a lower yield in return for priority (i.e., the prudent
>   lenders), are attacked by the administration as morally evil for not giving up their
>   rights.
>   
>   It’s one thing to use bankruptcy powers against unsecured creditors (and that
>   includes secured creditors to the extent they are undersecured). That’s an
>   inherent risk of being an unsecured creditor, particulary in a nation like the U.S.
>   that allows Chapter 11 reorganizations. (Reorgs may be the interest of unsecured
>   creditors as a class, but they can be hell on particular unsecured creditors.)
>   
>   Secured creditors are not the same, particularly where they are fully secured. The
>   Supreme Court has emphasized that the bankruptcy laws cannot be used to
>   commit a “taking” without just compensation.
>   
>   But the point I want to emphasize is this — why is the same administration
>   refusing to wipe out risk capital (equity and subdebt) in favored banks and instead
>   providing them with myriad federal subsidies while demanding that fully secured
>   auto creditors take a deep haircut? To state the obvious, risk capital has the
>   lowest priority — none. Moreover, it is supposed to be wiped out to create the
>   proper incentives. Conversely, senior debt is not supposed to be wiped out (or
>   extorted into serious haircuts) — that creates perverse incentives. Does anyone
>   seriously believe that if Goldman or Pimco held the large senior debt positions in
>   Chrysler the administration would have extorted and demonized them?
>   
>   Best,
>   
>   Bill
>   


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Chrysler related comments

Posted by WARREN MOSLER on 4th May 2009


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The point remains that the job of the executive branch is to enforce the laws as enacted by Congress.

This is not a time of war, Chrysler is not a national security or strategic issue, nor is the US automobile industry.

In fact, Chrysler was already largely a foreign entity, and even GM is now probably larger overseas than in the US, and the national origin of its shareholders are of no consequence.

This has turned into a simple, unwarranted, unnecessary, and counterproductive show of force between the President and a few lesser Wall St. players.

In the absence of supporting law, the administration, driven by anger, instead used all its bully powers to avoid a Chrysler bankruptcy (for reasons not yet fully disclosed) and, in this instance, lost that (minor?) battle.

The separation of power between executive, legislative, and judicial branches and the rule of law bent but did not yet break.

This is what happens with a President who doesn’t understand the monetary system, and doesn’t understand the US has unlimited ‘financial resources’ to sustain full employment and social equity with or without Chrysler or any other private employer.

Instead, the President sees an inevitable rise in unemployment and the risk of systemic failure should the automobile industry ‘rescue’ fail.

Just as:

  • The errant belief that we need China and others to be able to deficit spend is driving foreign policy ‘concessions.’
  • The errant belief that we can’t ‘go it alone’ with fiscal policy is squandering a golden opportunity to enhance our standard of living.
  • The errant belief that we are economically better off with a balanced federal budget is risking the sustainability of our domestic economy.
  • The errant belief that bank lending is a prerequisite to economic well being is shifting wealth upward away from lower income working people.
  • The errant belief that ‘monetary policy’ can support GDP delays and limits fiscal response.
  • The errant belief that exports are more desirable than domestic consumption depresses our standard of living.
  • The failure to understand the difference between the purchase of financial assets and the purchase of real goods and services continues to prolong our massive output gap and the unrecoverable real losses of high unemployment.
  • All of this can be traced to a world wide failure to recognize the fundamental difference between the gold based monetary systems of the past and today’s non convertible currency regimes.

The Lenders Obama Decided to Blame

by Zachary Kouwe

May 1 (NYT)


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Posted in Articles | 3 Comments »

Six minute video by Mike Norman and his dog John Maynard Canine

Posted by WARREN MOSLER on 4th May 2009


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Mike asked me to post this to get your comments.

Video of Mike Norman and his dog John Maynard Canine


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Posted in Daily | 7 Comments »

2009-05-04 USER

Posted by WARREN MOSLER on 4th May 2009


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Construction Spending MoM (Mar)

Survey -1.6%
Actual 0.3%
Prior -0.9%
Revised -1.0%

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Construction Spending YoY (Mar)

Survey n/a
Actual -11.1%
Prior -10.1%
Revised n/a

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Pending Home Sales MoM (Mar)

Survey 0.0%
Actual 3.2%
Prior 2.1%
Revised 2.0%

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Pending Home Sales YoY (Mar)

Survey n/a
Actual 3.2%
Prior -6.3%
Revised n/a


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