Consumer Confidence Soars; How Much Is Unwarranted Hope?

Sentiment that the bottom is in is rapidly picking up steam. Please consider Consumer Confidence Jumps by Most in Six Years.

Confidence among U.S. consumers jumped in May by the most in six years, fueling speculation the economy will recover later this year. The Conference Board’s sentiment index surged to 54.9, higher than forecast, according to figures from the New York- based research group today.

“Pent-up demand is increasing each passing day as reflected in these confidence numbers,” said Nariman Behravesh, chief economist at IHS Global Insight in Lexington, Massachusetts. “But there is a funny dynamic going on as people are waiting. The turn will come when there is a sense that we have passed the bottom,” which Behravesh said may happen as early as August.

My Comment: When the economy is losing 500,000 jobs a month and housing is saturated, outside of bargain hunting, demand is shrinking. Indeed, some consumers are looking for bargains on autos, and rental properties, but that demand will subtract form demand in 2010. This is all part of the healing process, but without jobs (and I still see no recovery in jobs), this round of premature bargain hunting will eventually give way.

The 28-point jump in confidence over April and May is the biggest two-month rally since records began in 1967. The measure reached its lowest point ever in February, with a reading of 25.3.

We’re certainly moving in the right direction,” said James O’Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut. “We expect to have positive economic growth in the third quarter. The job declines will fade.”

My Comment: Actually we are not moving in the right direction. We are moving in the wrong direction at a decreasing rate.

The confidence report showed optimism over the next six months led the jump. The Conference Board’s expectations measure rose to 72.3, the highest level since December 2007. The gauge of present conditions increased to 28.9 from 25.5.

“As far as consumers are concerned, the worst is now behind us,” Lynn Franco, director of the Conference Board’s consumer research center, said in a statement.

Macy’s, the second-biggest U.S. department store, and Chrysler are trying to revive sales. Chrysler, trying to restructure under bankruptcy, is offering incentives of as much as $6,000.

Some Consumers Excited About Bargains

For consumers with cash, with a job, and no fears of losing a job, saving $6,000 on a new car is quite a chunk of change. But what percentage of the population needs a new car, wants a new car, can afford a new car, has a job, and no fears of losing that job? And pray tell what will happen to demand in 2010 if dealers have to pay $6000 in incentives to clear lots now?

Consumer confidence, or consumer hope?

I am not the only one asking questions. MarketWatch is asking Consumer confidence, or consumer hope?

They call it "consumer confidence," but the numbers released Tuesday by the Conference Board might better be pegged as "consumer hope." There's a big difference, namely that confidence translates into spending, while hope is just a good feeling.

Consumers clearly believe the worst is behind this economy and the market, when it's not clear at all to the experts that the U.S. can avoid another leg down -- or worse -- en route to a broad-based recovery.

Consider that there was a big increase in the percentage of consumers expecting the economy to generate new jobs, despite no evidence that the current economy can actually achieve that.

Consumers ignore possible problems when they are feeling good, but the true measure of consumer confidence ultimately is reflected in consumer spending. Any positive move in confidence now won't be reflected in those numbers until late summer.

In a MarketWatch interview, Joseph Battipaglia, market strategist at Stifel, Nicolas, said: "The data is mixed as to whether or not consumers are actually going to open their pocketbooks and start spending again."

The problem with the index reflecting more hope than reality is that the numbers could whipsaw based on bad news, and headline risk right now is big. Jobs, inflation, gas prices, the future of the auto industry, the foothold gained by federal policies and much more will have to be aligned right for confidence gains to continue, and to hold long enough that the now-optimistic consumer actually opens his wallet.

Consumer Conference Board Confidence



The above chart from Bloomberg with thanks to Chris Puplava at Financial Sense.

The expectations index has never in history dropped this far although the present situation index has on two prior occasions. Moreover, the gage of present indicators is still in the gutter at 28.9. I sense that reality will set in when the present situation index fails to rebound along with the hope of growing expectations.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Downsizing of America - Thoughts on a Vanishing Lifestyle

In response to Lifestyle Liquidation - Estates of the Fabulously Rich, an article about an aborted move by the Peacock family to sell a 10,000-square-foot home complete with an exotic game room featuring a hyena and the heads of an elephant and wildebeest, along with 6 sports cars and other items, I received this email from "MB".

Dear Mish,

I’m a longtime reader and always enjoy your take on things. Your article on the failed auction of the mansion in Florida points out a change I think we are facing: huge, overly ostentatious homes are dinosaurs. I am a builder, not working for the past two years because I don’t like to work and lose money, but I was recently tempted by a “bargain” property here in the Portland area.

The bargain property is a ten thousand square feet home on 1.4 acre lot in the most prestigious gated community around. It is appraised at $3.5 million, has a $2.7 million mortgage, is bank owned by a mortgage company in bankruptcy, and the price has kept dropping until it is now at $900,000.

The home has been empty for two years with no heat or water, the beautiful yard is now out of control, the wood windows are all dry rotted from neglect, and as much as I would love to take on a project like that (I truly do love the challenges of building) I can’t see ending up with a 10,000 square foot home with a tax bill of $41,000 and huge utility bills. Who will ever want to live in a home like this again? I considered offering $600,000, but decided to walk away, not wanting to own it at any price.

The times they are a changing.

"MB"

Those who think the bottom in housing is in, especially luxury housing, need to think again. As pointed out in "Lifestyle Liquidation", attitudes are changing, and those attitudes are not changing back. Peak Credit and Peak Earnings are in. Those expecting otherwise need to consider the Effect of Household Deleveraging on Housing, Consumption and the Stock Market.

Peacock aborted the auction of the cars because he owes more on them than the offers. He aborted the sale of the mansion although he would have walked away with over $2 million. Will the next offer be as good?

Cash strapped boomers will be traveling less, eating out less, and buying fewer toys in retirement than they expected. When they go to downsize, who can afford to buy such mansions. Of those who can afford to do so, who will want to?

Is Housing an Investment or a Consumable?

Note what happens to homes that are not maintained: dry rot sets in. In Florida, mold and termites take over. Those who think of housing as an investment are now finding out the reality, housing is more of a consumption item than an investment.

As a consumable, housing prices ought to be reflected in the CPI but officially they are not. Unofficially, I have done so as the following chart shows.

Case-Shiller-CPI (CS-CPI) vs. CPI-U



click on chart for sharper image.

See CS-CPI Negative 5.0% Third Straight Month for more details.

Greenspan ignored the effects of asset bubble like housing, by failing to take into consideration housing in the CPI. Real interest rates were -5% in mid-2004 and stayed that low for quite some time, spawning the biggest credit boom the world has seen. Now in spite of a Fed Fund's rate that is zero, real interest rates are +5%.

Think the Fed knows how to manage an economy? Think again.

Greenspan had the winds of productivity, credit expansion, and consumer attitudes at his back. Bernanke has the winds of credit contraction, consumer attitudes, and demographics blowing stiffly in his face.

Those betting on Bernake's ability to reflate should take another look at Bernanke's Deflation Preventing Scorecard. He's a perfect 13 of 13 failure and changing consumer attitudes towards debt and banks attitudes towards lending are why.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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"Drone Wars" Coming as Japan Prepares to Rejoin Global Arms Industry

US manufactures of military equipment will soon be facing additional competition as Japan's big guns prepare to rejoin global arms industry.

The huge engineering and technological might of Japan may be poised for a new lease of life as the country prepares to ditch a self-imposed ban on arms exports that was introduced in the mid-1970s.

The controversial decision, which is likely to encounter bitter opposition from the country's mainly pacifist middle classes, could deliver significant economic benefits to Japan and lead to a realignment in the global defence industry.

A ruling party MP said that the greatest significance would be the conversion of Japan's robotics industry from civilian to military use as the world's defence spending is directed to remote-control hardware, such as drone aircraft.

Lifting or toning-down the 33-year old embargo would unleash some of the world's most advanced heavy engineering companies into the international weapons market, one of the few areas of manufacturing where Japan's immense technical resources have, for purely political reasons, not produced a dominant global player.

The expected move, which government insiders said may be announced by Taro Aso, the Prime Minister, before the summer, is likely to begin by relaxing the ban to allow Japanese companies to work on joint projects with American and European defence manufacturers, whose products could then be sold internationally.

Joint production and the scope to profit from a share of international sales could draw more Japanese companies into the defence industry and, the Government hopes, bring procurement costs down. Yet as the ban loosens further, government defence insiders say that Japan could be propelled into the top ranks of arms manufacturers.

Mr Aso's Government, meanwhile, is struggling to reverse an unprecedented shrinkage of the economy while the strong yen has made Japanese goods even less price-competitive against South Korean and Chinese products. Defence analysts have long maintained that Japanese industry, once freed from its ban, could quickly rival British, American and European players. Japan's prowess in miniaturised motors, robotics and control systems would be especially competitive.

Drone Operators Ask For 'Open Systems'

National Defense Magazine is reporting Drone Operators Ask Industry For ‘Open’ Systems.

The ground-based equipment that is used to fly unmanned combat aircraft is not adequate to handle the demanding missions of current conflicts, operators say.

Of most concern is the design and configuration of the control stations where pilots fly surveillance drones over combat zones thousands of miles away. Operators have said that the workstation displays do not provide sufficient views of their surroundings, and that the aircraft-control system does not allow them to fly more than one aircraft at a time.

Companies are reacting to these complaints with redesigned control stations that place operators in a cockpit-like environment. The new systems also are attempting to improve interoperability by conforming to open standards that facilitate communications with different types of aircraft. While progress is being made, there are still some hurdles.

In an effort to encourage less “stove-piping,” Congress has mandated that all unmanned aircraft weighing more than 45 pounds must transition to a tactical common datalink that will enable them to interoperate with various ground technologies.

AAI Corp., which manufacturers the Shadow and Hunter unmanned systems, modified its ground control station software to comply with a NATO standard agreement for interoperability between drones that is known as STANAG 4586.

The common user interface is analogous to Windows in the computer industry, he says. The aircraft specific software is similar to a printer driver that communicates with a certain type of printer. If the printer runs out of ink, its driver puts a message indicator on the screen. The same holds true for an unmanned system communicating through the ground control station via a vehicle-specific module.

The station recently completed several takeoff and landing tests of the Sky Warrior, the Army’s newest drone that is based on the General Atomics Aeronautical Systems Inc. Predator. That accomplishment demonstrates that the ground station can control an aircraft made by another manufacturer, Bachman says.

Raytheon Corp. also has modified its ground control stations. The company’s “common ground control system” was built with commercial computers and visual systems laid out in a cockpit-like configuration. Three wide-screen displays give pilots and sensor operators a 120-degree view of the battlefield. The company recently made an unsolicited bid to the Air Force.

General Atomics and Raytheon officials say that their ground control technologies also are STANAG 4586-compliant and can operate multiple aircraft.

The Air Force is rushing to train analysts to pore over UAV feeds and create so-called “actionable intelligence” that commanders can use to locate fleeting targets.
Some military organizations increasingly are relying on automated “sensor fusion” software to create intelligence products.

Not only are there more unmanned systems in the air but they also are being outfitted with larger sensors, which means that operators are “inundated by pixels,” says John Bradburn, senior business development director at Sarnoff Corp. Mission commanders have limited personnel at ground stations to analyze data, which is increasing the demand for automated tools, he says. Sarnoff developed a three-dimensional visualization technology called TerraSight that takes full-motion video from drones and combines it with blue-force tracking data and other metadata to create a digital map of the battlefield where commanders can easily pinpoint the location of targets.

Star Wars: The Clone Wars Trailer 3 - TV Series




AAI Corporation, General Atomics, and Raytheon are soon going to have competition for their drones.

Yoda: "Begun these clone wars have."

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Jobless Graduates Face Dismal Jobs Market

With unemployment rates soaring towards 9% and poised to hit 11% by the end of the year, college graduates are facing the toughest job market in years.

ABC News is asking Got Work?

Casey Savage graduated from Trinity College in Hartford with a 3.8 grade-point average and honors. What he doesn't have is a job.

"I've talked to 24 different firms so far. Hedge funds, investment banks, private equity shops," Savage said. "And I just feel that there's limited opportunities at this point."


According to a survey from National Association of Colleges and Employers, the class of 2009 is leaving campus with fewer jobs in hand than their 2008 counterparts. The group's 2009 Student Survey found that just 19.7 percent of 2009 graduates who applied for a job actually have one.

In comparison, 51 percent of those graduating in 2007 and 26 percent of those graduating in 2008 who had applied for a job had one in hand by the time of graduation.

Kahn studied the impact of the recession in the 1980s and found that seniors who graduated then were still feeling the impact 20 years later. Today's seniors are "going to be earning much less than their counterparts who graduated in better times and they'll be in lower level occupations," she said.

"If I were a 22-year-old today I would be willing to take an unpaid internship," said Lanna Hagge, director of Career Services at Trinity College. "I would be willing to do almost anything just to get the experience and exposure."

College Graduates Tackle Dismal Job Market

CBS News is reporting College Graduates Tackle Dismal Job Market

(CBS) The nation's unemployment rate is soaring, inching closer to 10 percent with each passing month. And that spells trouble for graduating college seniors, about to compete in the toughest job market in decades, reports CBS News correspondent Priya David.

"The previous 5 years it was a seller's market for these kids," said Ed Koc of the National Association of Colleges and Employers. "They could pretty much demand what they wanted in terms of a job and what they got from an employer. That's no longer going to be the case."

One place recent graduates can look for work is the U.S. government. The government has postings for more than 40,000 open slots right now and expects to increase hiring employees straight from college.

College senior Peter Donald expects to find a job in federal law enforcement soon. But fellow senior Bill Frame is still looking for work. He spent months trying for a job on Wall Street without success, and has now widened his search to other industries.

College Graduate Unemployment Understated

The unemployment rate and underemployment rate of college graduates is understated according to the New York Time article The Job Market for College Graduates.

Last month, the number of college graduates who were working fell by 282,000, while only 2,000 more college graduates were classified as unemployed. Why this gap? Laid off college workers, who are unaccustomed to unemployment, may feel a stigma if they report themselves as actively looking for work, so they are uncounted among the unemployed.

The job situation is likely to weaken considerably for less-educated workers as the downturn persists, however, because employers are likely to raise skill requirements. Employers tend to be more selective in downturns. A study by Paul Devereux, for example, found “the education levels of new hires within occupations are higher when the unemployment rate is high and this effect is more pronounced in lower-paying occupations.” If this is right, then more college graduates should be working at Starbucks in the months ahead.

Because jobless college-educated workers appear unlikely to be classified as unemployed and because it is likely that well-educated workers will be taking jobs for which they are overqualified, the depths of this recession should not be measured only by the official unemployment rate. The fraction of the population that is employed is probably a better indicator of the strength of the job market, even though it does not reflect the underutilization of skills by workers who do find jobs.

Looking For Jobs In All The Wrong Places

Casey Savage in the ABC article and Bill Frame in the CBS article are looking for jobs in bubble fields that have popped. The reality is Wall Street is still laying off and the job market in high finance is going to be extremely weak for years to come.

Please consider Wall Street seen replacing few of jobs cut by 2013.

Wall Street securities firms will emerge from the current recession in a down-sized mode, with few of the jobs cut replaced by 2013, even as the industry returns to profitability next year, a New York City fiscal monitor said in a gloomy report released on Wednesday.

The city faces a decline in tax revenues of $2.5 billion in the current fiscal year, and a further $2.2 billion decline in the 2010 fiscal year, due to the Wall Street job cuts, a drooping real estate market and lower business taxes, the city's Independent Budget Office said in the report.

The projected decline for the current fiscal year ending on June 30 represents a 6.6 percent decline in tax revenues, according to the watchdog's report.

"This back-to-back decline -- which follows a year, 2008, of essentially no tax revenue growth -- would mark the first time in at least three decades that the city experienced consecutive years of falling tax revenues," the Independent Budget Office said in the report.

Employment in New York City peaked at 3.8 million in the third quarter of 2008, the report said. The latest forecast for job losses in the city is slightly higher than the loss of 228,500 jobs in the 2001 to 2003 recession -- but smaller than the 377,500 reduction in jobs from 1989 to 1992.

By the third quarter of this year, New York City employers likely will have made three-quarters of the job cuts for the current recession, the report said. The financial sector as a whole is seen axing a total of 56,800 people through the first quarter of 2012. More than half of the jobs lost will be by securities workers, with the sector's workforce falling by 17.2 percent, the report said.

Graduates hoping to become Wall Street wunderkinds or commercial real estate tycoons better be thinking about Plan B. Other than those with specialties in bankruptcy, the Plan A jobs simply are not there. Moreover, those who waste too much time pursuing jobs that are not available are likely to end up in Plan C, working at Starbucks.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Geithner Dismisses GOP Socialism Charge as 'Ridiculous'

Geithner is dismissing GOP Socialism Charge as 'Ridiculous'. I dismiss Geithner's rebuttal on the basis Geithner is a liar. Tune in if you can stand listening:



The Washington Post picks up the story in Geithner Dismisses GOP Socialism Charge as 'Ridiculous'.

"There's still a bit of concern about whether, if you participated in these programs, you'll face in the future some change in the rules of the game, and that's causing a bit of -- a bit of concern," Geithner told The Post's Lois Romano for her continuing "Voices of Power" interview series. Private investors have expressed interest in the program, the government will work to limit their concern and he anticipates they will be "a good deal for the American taxpayer."

"That's the important thing to recognize," he said, "because you -- you have in this basic structure, investors putting skin into the game, taking risk, making judgments about what the price should be for these securities, and the taxpayer gets to participate in the upside in those judgments. So we think they're a good deal for the taxpayer."

Geithner is a Liar

The idea that investors have a skin in the game when the Fed picked the "investors" in the PPIP is a complete farce and taxpayers face 93% of the losses is absurd.

Ironically Geithner's Plan Can Succeed as long as one is fully aware that succeed means the plan is to ....

Dump $500 billion of toxic assets on to unsuspecting taxpayers via a public-private partnership in which 93% of the losses are born by the taxpayer.

Please see the above link for more details as to what constitutes "success".

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Obama Passes Tenants Bill of Rights; Buying Frenzy In Phoenix

President Obama has signed a bill that will halt "No Notice Evictions" in which tenants are give is little as 15 minutes to leave, with nowhere to go, and nowhere to put their belongings.

I talked about no notice evictions in Friday Night Videos: Inflation or Deflation; Lost Vegas.

Lost Vegas

During the boom years, no place in America boomed more than Las Vegas. But when the economy collapsed, Vegas fell hard. Laura Ling tours the wreckage of Sin City, from unemployed strippers and half-built, abandoned casino projects, to hospitals turning away cancer patients and ambulances, to one of the few remaining boom industries--evicting people.



The forced "no notice" evictions in the Lost Vegas video are very disturbing. If someone is not paying the mortgage on their property and is evicted I have little sympathy. However, the video shows multiple instances of "no notice evictions" as many as 13 a day, that give renters as little as 20 minutes to leave with nowhere to go and no place to put their belongings, even if they are current on their rent.

This is theft in my opinion, and I am quite sure the practice is not limited to Las Vegas.

Evicting Entire Rental Buildings

In response to Lost Vegas, "Tin Hat" replied in a comment:

A friend of mine experienced a "no notice" eviction in Ft Lauderdale December of 07. Her rent payments had been on time.

Luckily for her, she caught wind of it/heeded the rumor a week before it happened and found a place to move. As she was taking the last few boxes out of her apartment, the State police showed up to start mass evictions. Those tenants that didn't know, were forced to leave with what they could carry on their backs and nothing else. They were not allowed to go back for anything that was left. So they not only lost the roof over their head, they lost most of everything they owned.

What happened to those people who didn't have some one to take them in on no notice?

Tenants rights? In these cases, there are no tenants rights. It's disgusting. They force people into homelessness through no fault of their own. It's unconscionable. IMO, if a bank is going to foreclose on rental property, they should have to provide adequate notice to the renters, not just the mortgage holder.

She still rents. I worry it will happen to her again.

What an amazing bunch of idiots to kick out good renters in a foreclosure process. Not only is the practice theft, it is point blank stupid. Imagine how much harder it is to sell a rental building with 0% occupancy than one fully rented!

At any rate, I am pleased to report that such theft of private property will stop as of May 20, 2009.

Protection For Renters

Unbeknown to me, the despicable practice of "No Notice Evictions" came to a screeching halt on Friday when Obama Signed New Federal Law Protecting Renters after Foreclosure.

Under the Helping Families Save Their Homes Act, tenants have the right to stay in their homes after foreclosure for 90 days or through the term of their lease. The bill also provides similar protections to housing voucher holders. The protections go into effect immediately and expire at the end of 2012.

At least one third of the units going through foreclosure in California are rentals. Under current law, most California tenants are entitled to 60-days notice of eviction after foreclosure. The new federal law increases this to 90 days.

The NLIHC sent out a memo on Protections for Tenants in Foreclosed Properties.

President Obama signed S. 896, P.L. 111-22, on May 20, 2009. This bill includes a nationwide 90 day pre-eviction notice requirement for tenants in foreclosed properties. The provisions of the bill are effective on enactment, May 20, 2009.
Specifically, the new law will require that the immediate successor in interest at foreclosure

• provide bona fide tenants with 90 days notice prior to eviction and
• allow bona fide tenants with leases to occupy the property until the end of the lease term except the lease can be terminated on 90 days notice if the unit is sold to a purchaser who will occupy the property.

A bona fide lease or tenancy is one where the tenant is not the mortgagor or a member of the mortgagor’s family, the lease or tenancy is the result of an arms length transaction, and the lease or tenancy requires rent that is not substantially lower than fair market rent or is reduced or subsidized due to a Federal, State or local subsidy.

None of these provisions preempt more protective state and local laws and all of these provisions expire at the end of 2012.

Pray tell, exactly why does the law expire on 2012?

New Buying Frenzy In Phoenix

The New York Times article Amid Housing Bust, Phoenix Begins a New Frenzy details just how stupid banks were to be evicting good renters. Let's tune in:

Every weekday morning, Lou Jarvis drives the sun-baked suburban streets looking for investment gold: a family that will lose its house in a foreclosure auction within a few hours.

If the property looks promising, Mr. Jarvis puts in a bid on behalf of any of his dozens of clients eager to become landlords. When he wins, he offers to let the family stay in the house and rent for much less than their mortgage payment.

On some days, hundreds are offered for sale at the auctions that take place on the plaza in front of the county courthouse.

There is also a large supply of foreclosed families who can no longer qualify for a loan. And that is prompting a flood of investors like Mr. Jarvis, who wants to turn as many of these people as possible into rent-paying tenants in the houses they used to own.

Absentee buyers, who can be either investors or individuals purchasing a vacation property, bought nearly 4 of every 10 homes sold in the Phoenix metropolitan area in April, according to the research firm MDA DataQuick. That is up 50 percent since late 2007, and is nearly the same ratio as at the 2005 peak.

Buying properties that are cash flow positive with good tenants is a reasonable thing to do although I am quite skeptical about attempting to manage properties long distance. However, the key point is a nice free market business proposition has sprung up to handle the housing crisis. It seems to be doing quite fine, thank you.

Congress needs to stick to legislation that protects property rights and otherwise let the market heal itself. In due time it will, if only left alone.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Fed's Vice Chairman Admits Fed Has No Exit Strategy

Federal Reserve Board Vice Chairman Donald Kohn is yapping complete nonsense about interest rates floors, the Fed's balance sheet, risk, exit strategies and other items.

Let's take a look starting with Kohn Says Deposit Rate Will Do Better Job in Future.

Federal Reserve Board Vice Chairman Donald Kohn said the central bank’s power to pay interest on banks’ deposits will do a better job of keeping the benchmark rate at the desired level as financial markets improve.

“It hasn’t been a totally effective floor,” Kohn said during an audience discussion at a conference at Princeton University in New Jersey. He is scheduled to address the event later today. “As the balance sheet shrinks and as banks become better capitalized, that will become an effective floor.”

My Comment: It hasn't been totally effective?! What kind of nonsense is that? The truth is it failed 100%. Bernanke's idea was that by paying interest on reserves the Fed could put a floor on interest rates at 2%. Bernanke's idea failed miserably and proof is the Fed Funds rate at 0%.

Congress granted the Fed’s request to immediately pay interest on banks’ reserve deposits as part of the October legislation creating the $700 billion financial-rescue fund. Fed officials hoped that would help keep the benchmark interest rate steady while the central bank flooded the banking system with cash. The authority failed to keep the main rate from declining almost to zero before the Fed officially lowered it that far.

“Interest on reserves is an important part of the exit strategy” from the Fed’s record expansion of credit on its balance sheet to combat the financial crisis, Kohn said today.

My Comment: Excuse me for asking, but by what rationale are we supposed to believe that?

Meanwhile the Fed's balance sheet is ballooning and that will without a doubt complicate the Fed's exit strategy.

That poses an additional question: Exit Strategy? What exit strategy?

Kohn Admits Fed Has No Exit Policy

Inquiring minds are reading Fed's Kohn says rates likely to stay low for some time.

The U.S. Federal Reserve is likely to keep benchmark interest rates near zero for a while in an economy that is pulling out of a steep decline and appears on course for a very gradual recovery, Fed Vice Chairman Donald Kohn said on Saturday.

"The economy is only now beginning to show signs that it might be stabilizing, and the upturn, when it begins, is likely to be gradual amid the balance sheet repair of financial intermediaries and households," Kohn told a conference at Princeton University.

My Comment: Other than via bankruptcies and foreclosures, exactly what balance sheet repair have we seen by households? And what about the fact that ranks of the unemployed are growing by 500,000 a month for months on end? Exactly what will that do to household balance sheets?

Kohn said that in spite of the fragile state of the U.S. economy and the prospect for low rates for a while, the Fed must make plain its plans to pull back its lending when a recovery begins to take hold.

"To ensure confidence in our ability to sustain price stability, we need to have a framework for managing our balance sheet when it is time to move to contain inflation pressures," he said.

My Translation: "We have no framework managing our balance sheet. We will create an exit strategy by the seat of our pants, on the fly, when the time comes. We have plenty of time because Bernanke's strategies have proven to be ineffective and the recession will be deeper and last longer than we expected."

The Fed has said it is willing to expand extensive purchases of mortgage-related and longer-term Treasury securities to support any nascent recovery.

"The preliminary evidence suggests that our program so far has worked," Kohn said referring to the commitments to buy securities to date. He said he believes they have held down long term interest rates by as much as 1 percentage point.

My Comment: The fed is holding down mortgage rates by being the lender of only resort. Ignoring all the other bloated garbage on the Fed's balance sheet, I guarantee the exit strategy from mortgage backed securities alone is going to be a nightmare.

Kohn said government spending is likely to have a more powerful effect in helping pull the economy out of recession now -- with interest rates near zero -- than it would if the Fed were still in a position to lower interest rates further.

My Comment: Excuse me for pointing out the obvious, but if interest rates were not at zero, perhaps we wound not be in a recession.

In its actions to buttress the economy through a period of crisis, the Fed has taken on some risks both from swings in interest rates as well as from the possibilities that some borrowers could default, Kohn said, adding the Fed has sought to minimize those risks.

My Comment: Excuse me once again for asking such pointed questions but exactly how have you minimized the risks?

Even specialized vehicles such as three "Maiden Lane" limited-liability companies set up at the New York Fed to hold so-called toxic assets from two firms the central bank stepped in to prevent from failure -- investment bank Bear Stearns and insurer American International Group, Inc -- may not result in losses, he said, since the Fed is holding the assets to maturity.

BlackRock Inc, the firm that is managing those vehicles, has told the central bank those holdings are likely to eventually turn a profit, Kohn added.

My Comment: Oh Really? How much did you pay Blackrock to say that?

Let's take a look at Maiden Lane and other assets...

Bloomberg is reporting Bear, AIG Dumped $74 Billion in Subprime, CDOs on Fed

April 24 (Bloomberg) -- The Federal Reserve took on more than $74 billion in subprime mortgages, depreciating commercial leases and other assets after Bear Stearns Cos. and American International Group Inc. collapsed.

In its biggest disclosure of the securities accepted to stabilize capital markets, the Fed said yesterday it had unrealized losses of $9.6 billion on the assets as of Dec. 31. The bonds, swaps and notes were taken in from Bear Stearns, once the fifth-biggest Wall Street firm by capitalization, and AIG, which had been the world’s largest insurer.

The losses on securities backed by assets such as home loans in Florida and California signal that U.S. taxpayers may be forced to reimburse the central bank through the Troubled Asset Relief Program, according to Christopher Whalen, managing director of Torrance, California-based Institutional Risk Analytics.

“The numbers basically confirm that Treasury is going to have to take some TARP money and reimburse the Fed,” said Whalen, whose financial-services research company analyzes banks for investors. “It is essentially up to the Treasury to get the Fed out of this.”

My Comment: Whalen hits the heart of Kohn's plan. The only way the Fed will not suffer losses is if taxpayers will bail out the Fed.

The central bank lent $2 trillion to financial institutions and hasn’t disclosed information about most of the collateral backing those loans.

The Fed report follows requests from lawmakers to identify the collateral and a lawsuit by Bloomberg News. Fed Chairman Ben S. Bernanke pledged to expand disclosure, assigning Vice Chairman Donald Kohn to lead the effort.

My Comment: Kohn leading the effort to expand the disclosure sure is a comforting thought. I am sure the truth will come out now.

The central bank has refused to name the borrowers, the amounts of loans or the assets banks put up as collateral under most of its programs, arguing that doing so might set off a run by depositors and unsettle shareholders.

My Comment: So no one has any idea what the assets the Fed is holding, yet we are supposed to believe there will not be losses, yet the only way there won't be losses is if the Treasury via the TARP (taxpayers) bail out the Fed.

Maiden Lane I is a $25.7 billion portfolio of Bear Stearns securities related to commercial and residential mortgages. JPMorgan refused to buy them when it acquired Bear Stearns to avert the firm’s bankruptcy.

The Fed’s losses included writing down the value of commercial-mortgage holdings by 28 percent to $5.6 billion and residential loans by 38 percent to $937 million as of Dec. 31, the central bank said. Properties in California and Florida accounted for 45 percent of outstanding principal of the residential mortgages.

Maiden Lane II contains almost $11 billion of outstanding subprime mortgage-backed securities from the AIG transaction that the Fed said lost $180 million so far. The fund also contains $6.2 billion of Alt/A adjustable-rate mortgage-backed securities that the report said has $936 million of unrealized losses. The Fed values $11.4 billion of assets in Maiden Lane II with mathematical modeling, the same methods used by banks and AIG itself.

About 19 percent of the mortgage-backed securities are rated speculative grade, or BB+ at Standard & Poor’s, according to the Fed. About 40 percent are given the top rating of AAA.

Maiden Lane III has lost $2.6 billion after being created Oct. 31 to buy collateralized debt obligations from AIG counterparties, according to the Fed. CDOs in this unit include three parts of a high-grade asset-backed security known as TRIAX 2006-2A, totaling about $3.2 billion. Maiden Lane III also has two parts of a commercial mortgage-backed CDO called MAX 2007-1 A-1 with a face value totaling $7.5 billion. The fair value of those two is less than half that much, or $3.3 billion, according to the central bank.

A third of the amount outstanding in the Maiden Lane III CDOs are speculative grade, or deemed by ratings companies as having a greater chance of default. Another 27 percent are rated AA+ to AA-, the second-highest tier of S&P’s scale, the Fed said in its report. All but $155 million of the $26.8 billion in CDOs are classified as Level 3 assets, or those valued with mathematical models instead of market prices.

Ridiculous Statements by Kohn and Blackrock

It is ridiculous for Kohn and Blackrock to suggest there may be a profit on Bear Stearns and AIG assets held by the Fed.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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