The present recession is undoubtedly the severest since World War 2. That is well established by now. But, doesn’t the chart show why those, who take a more optimistic view of the future, have good grounds for doing so?
The chart shows 10 recessions in the U.S. since 1948 prior to the current one. OK, this one is the biggest, but some of the others weren’t far short. But, the one thing they all have in common is that the fall in employment stopped after about 2 years maximum, and was then followed by a period of rising employment that brought total employment back to above its pre-recession peak in about the same length of time that it took to fall from peak to trough. In many of the case, the turnaround from falling employment to rising employment appears to have occurred very suddenly.
The one person who should be pleased looking at this chart is Barak Obama. If the previous 10 recessions are any guide, by the time of the next Presidential election in November 2012, employment in the U.S. may well have hit a new peak.
Thanks again for the link Kevin.
I am listening to this on the MIT World website at the moment, which deals with the subject.
Financial Services: Prospects for Your Future
Lawrence K. Fish
Simon Johnson PhD
What I find a little worrying is the jobs revision. It only covers the period up to March 09. The Birth/Death model also added 781,000 jobs April-August. If the bottom really has been reached in US unemployment, then fine, small businesses may be creating those jobs. The trouble is that it is an untested assertion that those jobs are being created and the truth of it won’t be known until this time next year.
At which point, hopefully, it won’t matter as a genuine (as in not government liquidity) recovery will be on the way.
@ Brian L
That would be ‘Dead Roots’
Al
@John
The US needs to create 127,000 new jobs a month to cope with population growth. 8,000,000 jobs have been lost since peak employment in December 2007. Thirty-seven months to the election. That’s 343,000 jobs a month on average to be created between now and then (to get back to the same proportion of the population in employment). Even if you want to just get back to the absolute figure, it’s 216,000 a month.
I make the job growth numbers on average per month for each year to be:
1981 63.4
1982 -134.3
1983 50.2
1984 354.1
1985 248.4
1986 163.5
1987 217.8
1988 271.4
1989 222.4
1990 122.7
1991 -92.6
1992 29.2
1993 176.5
1994 287.2
1995 250.5
1996 200.8
1997 255.6
1998 262.8
1999 255.2
2000 232.6
2001 3.4
2002 -123.7
2003 -28.5
2004 119.6
2005 189
2006 198.5
2007 126
2008 -44.3
2009 -640
(From the BLS – get the NFP one year subtract the NPF the previous year, divide by 12. http://data.bls.gov/cgi-bin/surveymost. 2009 data based on 9 months data).
The first year of recovery seems to be quite anemic, I suppose because it comprises partly months of losses and partly of gains. Given that we are hopeful of seeing a bottoming end Q2 or Q3 (do you agree/disagree?), that makes next year mostly a writeoff meaning over 300,000 jobs to be created per month in 2011 and 2012.
I think it unlikely! I think the recovery will look more than likely still have an average negative job creation/month next year, with jobs created in 2011 and lift-off in 2012. At least that is what I hope, based more on historical thoughts than on hard data. I’ve yet to see hard data that is indicative of a recovery…
A quick summary of the Larry Fish talk at MIT I listened to.
Larry Fish said, this crisis is the first time in his experience in banking over 40 years, it was a consumer led crisis. In the past it was all commercial crises, telecom bubbles etc. This is the first time the banking crisis has been consumer led.
But said the regulatory model worked in Canada, Brazil, Australia and Spain where the banks are state owned. Even though the banking directors in those four countries received enormous pressure to loosen regulations in those four countries, in the end it served them well.
Fish talks about the relationship between ‘permissible activities’ and what will be considered adequate ‘Tier 01’ capital for banks to hold. If permissible activities involve overnight positions via derivatives in foreign exchange rates, then the capital requirement should be in double digits, very high.
But Fish is firm on one thing. A minimum of 5.0% equity based capital rather than risk based capital should be demanded. It was this change over to risk-based capital away from equity based capital that got us into the mess in the first place. Simon Johnson suggested that venture capital, an equity based enterprise might play a bigger role in the future. It is a different kind of risk capitalisation.
But the banking industry in the United States is already one of the most leveraged industries in all. Deutch bank leveraged by 70 to one. But the banking industry in the US is already one of the most regulated industries. It is like the power utilities. What isn’t regulated? Hedge funds, private equity funds aren’t regulated. Investment banks were lightly regulated.
Fish talks a lot about the competitiveness of the American banking system which will not be the same as in other countries. Of course, this ties back in some way to Ireland the ECB, where they try to ‘harmonise’ banking systems across the one EU zone. Fish is concerned that financial services is the one industry the United States can still compete in. Because the US doesn’t have a huge export of other manufactured goods any more. He suggested it would be a good idea if the major industrial countries coordinated in some way on capital to ensure equal competitiveness across those countries in the banking sector.
On the problem of ‘over-regulation’ Fish commented that the US may protect the consumer so well, the same consumer may no longer be able to borrow. In recent times, in the US there has been disproportionate hardship on under-served communities. While there has been modest foreclosures in middle to upper class neighbourhoods. There is a real concern that a future contraction of credit will be felt most in certain communities.
There’s a report out today that says that the current methods of gathering payroll data aren’t keeping up with the losses. The job loss numbers might be under estimated by over 800,000 jobs. In otherwords that graph might be overly optimistic about where the US is right now.
Having finished listening to all the Larry King piece, I think he was sitting in the MIT Sloan business school talking to the young people about ethics and the current crisis because:
A) The US has the capacity as a nation to compete globally in the financial services industry and therefore create much employment.
B) It is a question for us at this point in time, and for the youngest and brightest at such 3rd level institutions to sign up now to some kind of ethical agreements. He read out a simple code of ethics that graduates of Harvard Business School were asked to sign recently and only half of all graduates signed. Mr. Fish was disappointed in that. He read out the simple code, which was only a line or two, twice to his audience of students and asked them the question, what in that could you not sign up to?
Does anyone know of a similar graph showing changes in average wages from their peak?
Also, if the graphs for Ireland were to look similar to this and the recovery was to be somewhat symmetric as seems to be the case in other recessions, then we can look forward to a sustained period of extremely high social welfare payments for (at the very least) 12 months and potentially much longer! This is bound to increase pressure to reduce payment levels!
If we also see significant wage reductions, then high levels of personal debt could begin to have very worrying effects as I suspect we have not really began to see high default rates by those in lower income deciles (I could be wrong?). Perhaps we wlll save the banks from bad development loans just to have to save them again from private loans.
Linked to this though is the idea that if we really are in a consumer led recession – what proportion of consumers are in a position to get us out of it? Do we have any idea of the distribution of private debt across income?
@Tony
Can’t help you with the graphs.
High social welfare payments will be reduced by exhaustion of benefits. The maximum amount of benefit payment is, I believe 9 months having been reducted from 12 (or is it 12 reduced from 15?). Anyway, once JB is finished, you move onto Jobseeker’s Allowance. This is means tested on household income and savings and takes no account of debt levels. The payments are likely, therefore, to be significantly smaller.
Personally, I would be more worried about middle/high income earners. Not only are their absolute levels of debt higher, their ability to make a meaningful contribution towards the debt is much lower if their income disappears. There is a harrowing case at the moment of a former hedge-fund bank manager whose bank went bust leaving him with personal debts of 106 mn euro. The poor man hasn’t a bean to his name to afford the 400k interest payments. Because he owns assets (oil wells, bars and the like) he’s not entitled to JA and he will shortly exhaust his JB…
yoganmahew Says:
October 4th, 2009 at 1:53 pm
That’s a tragic tale. Maybe we should have a whip round and give him a digout.
@Greg
Yeah, I’m sure none of us would mind picking up the CAT for him either…
@ Yoga
Perhaps we could organise a charity auction for his car and golf clubs etc.
Or maybe he should lobby his TD to set up an institution to prevent his assests being undervalued, so that he can get a more long term valuation.
Al
@ Tony: You’ve hit the correct nails square on! Funny how few people have penetrated the fog of fantasy which is enveloping the current economic disaster – yes, it is a disaster!
The first phase of monetary deflation is underway, but is obscured by the so-called ‘stimuli’. The correct course of action would have been to demand that the excess debt be crammed down and written off. Private individuals should have been given the option of a short-duration (3 year) bankruptcy, or possibly a Debt Jubilee. The longer the debt is retained the more difficult it will be to resolve, and the worse it will be – financially, socially and most particularly, politically.
When the sediment finally settles its going to look real ugly. Middle-income groups and pensioners will likely be hardest hit. These were the ‘consumers’ and the would be consumers. With less -or even no – income and increased taxes, they will transform themselves either into nett savers or debt-slaves. This will put a gaping hole below the waterline of an economy which relies predominantly on ‘services’ (aka: consumer spending).
BL above asked about green shoots (sic) – Ah! Yes!. Thems those artificial decoration things, beloved of window dressers! Yes indeed!
The real concern is about the availability of energy at a reasonable cost. At present we have a lull, particularly wrt Nat Gas: this will not last. Oil is hovering on the edge of the green zone ($70bl). The orange zone is anything above $80bl; >$100bl is the red zone: we crash again.
There appears to be – according to whom you care to trust – a causal relationship between economic activity and energy prices (or availability). We, (western economies), are quite sensitive to high energy prices given our propensity to use credit and leverage as a surrogate for real growth. The relationship is subtle and comprehensive. Not something you can cram into a 30 sec TV soundbite.
Brian P
yoganmahew Says:
October 4th, 2009 at 3:11 pm
“Yeah, I’m sure none of us would mind picking up the CAT for him either…”
I think that’s going too far.
The ISPCA probably have expertise in that area.
@ Brian Woods,
I think you’re right Brian.
We’re being sucked into a vortex.
Nothing has been solved, and I don’t just mean Ireland.
Off topic….
$1.4 Quadrillion of derivative (notional value) outstanding, and growing. Almost entirely unregulated. Is that why Western banks are being kept afloat?
A one percent hit on that is $14Tn. Bye bye system.
The unemployment rate for 16 to 19-year-olds hit 25.9% in September, the highest rate recorded since at least 1948 (the earliest data the Labor Department supplies). It compares with 16.9% in December 2007, at teh start of the recession.
Steven Blitz, an analyst at US firm Pangea Market Advisory said: “the percentage of unemployed that have been out of work more than 27 weeks has jumped to 35.6%… This is the first recession where those out of work more than 27 weeks not only exceeds the under 5 week group (19.4%) it exceeds the short-term unemployed by extraordinary proportions… The trend for the unemployed since 1980 has been to be out of work an increasingly longer period of time. When these data are lined up with the $385 billion drop in wage and salary disbursements in the past 12 months, it is difficult to imagine consumer spending at the starting line of a cyclical upswing.”
Civilian Labor Force: 154,879 to 153,617 this month.
Employed: 140,074 down to 139,079 this month.
That’s a loss of 995,000 jobs, not 263,000, and the labor force contracted by 1,262,000 people!”
Now, Mr. Denninger is a little sensationalist at times, but the numbers are there to back this up. Unlike in Ireland, this is unlikely to be emigration, so one must assume that there are a lot of discouraged people out there…
@ yoganmahew
I agree that the major problem is likely to be with the middle class – I’m not so sure about the importance of high earners because they make up a smaller proportion of total consumption I would presume.
While the lower class may have less debt in absolute terms I would imagine any debt which they have represents a higher proportion of their disposable income than for higher earners. Also they are more likely to be in jobs where they face the prospect of reduced hours/pay and so may be loath to spend what income they have on the type of non-essential consumption required to get the economy moving again.
A more long-term effect of this crisis is that middle-lower classes are unlikely be in a position to contribute significant sums to their pension plans in the forseeable future – missing out on the equity upswing – a similar comment may apply to the national pension fund being forced to aid in the bail out of banks rather than investing across the board. Ironically gambling on the stock market to rise over the coming year or two is likely to be a better bet than buying a house in 2007 with the intention of selling it on for profit – yet I suspect no banks will be rushing to hand me a 100% 300k loan!?
Brian Lucey Says:
October 3rd, 2009 at 7:03 pm
“whats the obverse of a green shoot?”
Orange.
Agent Orange.
@Tony
I agree that proportionally lower income households are going to have the biggest gap in years of earnings to fill, but the absolute numbers will be smaller and through the magic of relative numbers will look more manageable.
Look at it this way:
Lower income earner on 30k – mortgage 180k, negative equity 80k.
Middle income earner on 60k – mortgage 360k, negative equity 120k.
The lower income earner has 2.7 years of gross negative equity, the middle income earner has 2 years. The net figures probably bring them closer as the middle income earner has higher taxes to factor in. But the middle income earner is also likely to have a higher proportion of income tied up in what they see as non-discretionary items – private school fees, health insurance, healthy eating, newer, bigger car.
So who does the debt burden look biggest to?
If consumer spending is going to fall and pensions are going to be skimped on, where is the equity upswing going to come from?
@ yoganmahew
To be honest i would imagine the debt burden looks higher to the person with 2.7 years of negative equity rather than 2 – but I suspect thats not how you see it. If you factor in car loans etc for these people I would think a huge chunk of the middle-lower class income is going on repayments!
Also what the middle class now view as non-discretionary will become discretionary as the squeeze takes hold surely?
I suspect the equity recovery will be based on sales abroad so would expect to see a quicker recovery there but its a good point alright!! Must admit I’m not sure what proportion of their business is foreign but presume a substantial proportion!?
@Tony
“Also what the middle class now view as non-discretionary will become discretionary as the squeeze takes hold surely?”
I’ve already heard anecdotally that some hard choices are having to be made – it’s the house or the school sort of thing.
You may be right about the sums perspective, but my experience is that Irish people aren’t good at doing sums (whether they are numerate or not!).
The USA has had no increase in real wages for 30 years. Real wages. Not alone do they invent jobs being created in the building and other industries, they rig the CPI so that hedonic pricing means that it was understated.
Kondratieff showed the 50-70 year wave of depressions existed and was endemic to capitalism when unregulated. Regulations in the USA were all disbanded. What regulations? Those enforced the reforms after the last depression!
Naivety is exculpable, but stupidity is not! Could I be referring to the US population or to those who rely on the mainstream media for their news?
Brian Lucey
The green shoots exist alright and they are of Kudzu. No one can see what has been happening for the last few decades and the new shoots are the regulation of the banking sector now that governments etc are blowing bubbles.
[…] of jobs lost, one the has since been modified and extended by a number of economists. One just out, hat tip Kevin and the Irish Economy blog, is Calculated Risk’s comparison of every recession from 1948 on, by percentage of job […]
All credit to Credit. Most western countries appear to have depended on spending tomorrow’s money to grow GDP. At a certain point a limit will be reached.
Perhaps it’s not really a confidence issue between banks that is the problem (a commonly cited cause of the credit crunch), but our dependence on credit growth to sustain our economies.
If the US depends on getting their consumers to borrow again in order to create jobs, there’s a big flaw. At some point lenders will figure out that the borrower isn’t a good bet.
(I’d welcome criticism of these numbers as I’m taking them at face value and fear they may be produced by someone sporting a tinfoil hat)
@Ahura
Ah, is this become a scary chart thread?
The one criticism I would have of such a chart is that multiple counting goes on:
Individual owes bank. Bank owes depositors.
This looks like two debts, but, aside from the interest component it is one debt.
I’m sure the chains can be longer than two steps, so there’s triple of quadruple counting going on (can’t think of an example at the mo, but you get the idea!).
I think a safer way would be to count the debt that people are owed, but I have no idea how you’d go about doing that.
I guess, though, that the end result will still be that the amount of debt outstanding has grown faster than the income to support it. It’s hardly surprising we have interest rates as near zero, is it?
@yoganmahew,
Absolutely agree that there is likely to be some double counting going on. Though I’m not sure that it would be on the scale you suggest. Do you think Household, Muni, state and federal would hold each others debt? Certainly possible that business/financials may include debt counted elsewhere.
If US households were increasing debt at such a high rate and consumer spending accounts for 2/3s of the US economy, (aside from wages) increasing consumer debt is necessary to sustain the economy. It could be argued that Government deficits are temporarily filling this gap. This doesn’t necessarily mean the US is broke as much of this debt is held internally. Though with such imbalances this debt mightn’t be worth what the holders would like to think it is (i.e. not broke but a lot poorer).
@Ahura
My main beef would be with counting bank debt where it is really leveraged consumer, business, state, muni and federal debt. The LTCM strategy has been writ large in recent times. And in the way total derivatives amount to the slicing and dicing of the same obligation over and over, I suppose it is possible that there is debt that is the same. I’ve been trying to come up with examples –
Depositor puts cash into a high yield fund. High yield fund borrows from bank to buy corporate debt. Bank borrows from money market fund with commercial paper. Three debts exist – bank, high yield fund and corporation. But really it is the corporate debt value that is outstanding (i.e. if it is paid off, so are the other two).
I read an interesting article about the dangers of being the reserve currency. Basically, you always have a current account deficit as your currency leaves your country to do the work of the reserve currency.
Now, as you point out households in the US (who are at the bottom of the debt pyramid (i.e. they are not owed another debt on which their household debt is based) are bust. And not just a little bust, but extraordinarily bust. Elizabeth Warren has been pointing out for a while that the figures on saving and on average debt don’t even come close to showing the reality. As Kevin Denny was saying in the negative equity comments, there’s a huge fat tail that is skewing the averages, in the case of US households, it is the wealthy – there’s a huge chunk of wealth that is distorting up the figures. As NN Taleb points out, the risks are not seeing a fat tail with no upside. Take out Bill Gates, Warren Buffet and a few thousand other super wealthy people and what do the averages look like then? Take out the top 10% and where are you?
So I think any recovery that is dependent on US consumers debt financing it is going to struggle. So what we need is a new kind of recovery. You might call it a new paradigm, something different this time. Probably it will be a green R&D knowledge-based micro-business paid-leisure back-to-the-soil solar powered recovery, or “watching grass grow” as it is otherwise known…
@ yoganmahew & Ahura
Please excuse my interruption.
It seems to me that double counting (how much accounting/audit fraud is really going on) or not the average Joe/Josephine is completely maxed out and is now evading the bailiff, about to lose their job (to the East) or knows better than to get into more debt just to buy some Chinese tat.
Yes I know, that is a slight on the glory of “Globalism”
Apart from the ludicrous idea that consumer credit is necessary to benefit of the “Nation” the entire Western World is hanging on by its fingernails.
Is it not time to cancel the debt?
What is all this “Global” debt about?
As I have commented earlier,
“$1.4 Quadrillion of derivative (notional value) outstanding, and growing. Almost entirely unregulated. Is that why Western banks are being kept afloat?
A one percent hit on that is $14Tn. Bye bye system.”
Who is auditing this?
The debts of the American/Irish consumer (we are no longer citizens) are insignificant.
Do you have any links that will give me comfort that the entire financial system is nothing more that a ponzi scheme / house of cards?
I have looked. I’m coming up empty.
If LTCM was a problem. What have we got now?
Pat Donnelly Says:
October 5th, 2009 at 1:52 am
😮 The “mile-a-minute vine”
That’s exponential debt for ya.
Bind weed.
All bound by the weed (or web) of debt.
@Greg
No links. Plenty of links that you should wear your tinfoil beanie while reading!
This is LTCM-heavy…
@ yoganmahew
Disappointing that one would have to spend money on tin foil to find out whether derivatives really are “financial weapons of mass destruction” as Buffet suggests.
We could all wake up one morning to find out that some counterparty we’ve never heard of just powered the weapon.
@Greg
There’s only one counterparty in Ireland that has the weapon sufficiently tooled up. Let’s do it in University Challenge format:
Your starter for ten:
Which Irish bank increased it’s notional derivative exposure by 70% in 2006 and by another 70% in 2007?
Congrats, now your bonus questions:
Was that bank buying or selling derivatives at a time when the derivatives markets were shutting down? Or both?
Who are the counterparties to the sales? (i.e. who bought them)
Who now owns this bank?
Your next starter for ten:
Which Irish bank has an unrecognised 6 bn derivative loss? (though it is noted in their annual accounts)
And your bonuses:
What would the effects of a derivative counterparty failing to pony up on the big two banks?
What is their concentration of risk exposure?
What new semi-state organisation will taken on derivatives from the banks as part of its loan purchases?
Yoganmahew,
I agree with your example on how the actual amount owed can get reported multiple times. (Although I’m losing my initial enthusiasm for the website I’m referencing) this linked chart shows ‘non-financial sector debt’. http://mwhodges.home.att.net/nat-debt/natdebt-less-finance-sect-vs-natincome.gif
I think this should exclude significant double counting. It still doesn’t look pretty.
The main point I’m making is that the US (and a number of other western countries) require increasing levels of private sector debt to prop up their economies. It’s like a person supplementing their wages with credit card debt in order to pay the bills. At an individual level, it’s clear that this is not a sustainable model. Where this gets interesting is what happens when you call in the credit card debt. The individual can’t pay. You might be able to liquidate some of the individual’s assets or attach to their future income, but the likelihood is that you won’t recover the full amount. Therefore you’re poorer as well. Or to put it another way, your asset (the credit card receivable) isn’t worth face value. This kinda calls into question why private funds will want to continue extending credit. In the short term, government guarantees may be adequate, but it doesn’t address the underlying flaw.
Perhaps, the current crisis will pass but at some point this will come to a head.
yoganmahew Says:
October 6th, 2009 at 11:34 am
“Which Irish bank increased it’s notional derivative exposure by 70% in 2006 and by another 70% in 2007?”
Between 2006 and 2007 Anglo Irish Bank Group increased it notional derivative exposure from €102Bn to €174Bn.
Was that bank buying or selling derivatives at a time when the derivatives markets were shutting down? Or both?
Can I confer? No! OK I have a guess.
Yes
“Who are the counterparties to the sales? (i.e. who bought them)”
Still no conferring? OK.
Would that be AIB & BOI?
“Who now owns this bank?
We do.
How many points do I get?
Your next starter for ten:
“Which Irish bank has an unrecognised 6 bn derivative loss? (though it is noted in their annual accounts)”
Can I call a friend? Oh, wrong show.
Don’t know.
And your bonuses:
“What would the effects of a derivative counterparty failing to pony up on the big two banks?”
They would by vaporised by the Derivative Death Star.
“What is their concentration of risk exposure?”
The stuff of nightmares.
“What new semi-state organisation will taken on derivatives from the banks as part of its loan purchases?”
Wait. I know this one. I know this one.
Is it NAMA? Is it us again?
@Greg
Excellent work. Go to the dunces corner (this is DoF Challenge…).
You passed on one question: the bank that looks like it has an unrecognised derivatives loss of 6 bn is BoI…
For the rest, much is supposition, I suppose! But why else would Anglo be systemic to BoI and AIB if it is not that it has underwritten their derivatives?
@Greg
Perhaps someone else can confirm if it is or is not an unrecognised loss?
Actually it’s about 5.7 bn… sorry about the false alarm..
@ yoganmahew
Yeah,
Saw that following your lead.
I don’t like the sound of this.
“The hedged cash flows are expected to impact the income statement in the following periods, excluding any hedge accounting adjustments that may be applied:”
I’ll have to look up some, no doubt impenetrable, accounting rules on derivatives.
€5.7Bn “expected to impact the income statement”…….Scary.
“excluding any hedge adjustments”…….Does this mean they are “hoping” the impact will be reversed by a market adjustment in the value of the hedges? Your guess is probably better than mine.
But, if that is what it means. What if the market goes the other way?
It’s probably nothing, but now I want to know. Curiosity killed the curious.
Did you notice how it moved from €1.1Bn in 2008 to €5.7Bn in 2009?
AIB have a slightly different presentation which is less scary.
@Greg
“Curiosity killed the curious.”
Indeed! And it has been killing me since I saw it! Like yourself, I am over-anxious about derivatives. Not so much about their aggregate effect, but on their specific effects on idiots. AIG has already been exposed as an idiot. Anglo, from the movements in the size of its book has drool on its chin. Do we now have BoI looking slack-jawed and glassy eyed?
““excluding any hedge adjustments”…….Does this mean they are “hoping” the impact will be reversed by a market adjustment in the value of the hedges? Your guess is probably better than mine.”
My guess would be just a guess too. I’ve no finance or economics background, so I frequently get caught out! But anyone else who has seen the figures is alarmed by them.
I have a vague notion that some of these losses might be related to a presumption of Anglo not paying out, that NAMA is a giant game of hide the rotten sausage, and that the hope is that cancelling all the unpayable debts together will somehow turn negative numbers everywhere positive (the NAMAjack are on their way…). If so, we might yet have a Nobel prize winner for mathematics…
yoganmahew Says:
October 9th, 2009 at 8:43 am
“AIG has already been exposed as an idiot.”
An idiot that was taken down by a VERY small group of people working in virtual secrecy.
“ Anglo, from the movements in the size of its book has drool on its chin. Do we now have BoI looking slack-jawed and glassy eyed?”
With a movement from a negative €1.1Bn to a negative €5.7Bn (of hedged cash flows are expected to impact the income statement) is it possible that BOI are already at the stage of doubling down at the roulette wheel?
Again speaking in ignorance here, need to look up derivative accounting rules, do the rules allow banks to avoid recognising “potential” losses on derivatives until they have been called or have “matured”.
“I have a vague notion that some of these losses might be related to a presumption of Anglo not paying out”
Just a guess, but I don’t think so. They just happened to be in the same casino at the same time.
48 replies on “US job losses”
whats the obverse of a green shoot?
The present recession is undoubtedly the severest since World War 2. That is well established by now. But, doesn’t the chart show why those, who take a more optimistic view of the future, have good grounds for doing so?
The chart shows 10 recessions in the U.S. since 1948 prior to the current one. OK, this one is the biggest, but some of the others weren’t far short. But, the one thing they all have in common is that the fall in employment stopped after about 2 years maximum, and was then followed by a period of rising employment that brought total employment back to above its pre-recession peak in about the same length of time that it took to fall from peak to trough. In many of the case, the turnaround from falling employment to rising employment appears to have occurred very suddenly.
The one person who should be pleased looking at this chart is Barak Obama. If the previous 10 recessions are any guide, by the time of the next Presidential election in November 2012, employment in the U.S. may well have hit a new peak.
Thanks again for the link Kevin.
I am listening to this on the MIT World website at the moment, which deals with the subject.
Financial Services: Prospects for Your Future
Lawrence K. Fish
Simon Johnson PhD
What I find a little worrying is the jobs revision. It only covers the period up to March 09. The Birth/Death model also added 781,000 jobs April-August. If the bottom really has been reached in US unemployment, then fine, small businesses may be creating those jobs. The trouble is that it is an untested assertion that those jobs are being created and the truth of it won’t be known until this time next year.
At which point, hopefully, it won’t matter as a genuine (as in not government liquidity) recovery will be on the way.
@ Brian L
That would be ‘Dead Roots’
Al
@John
The US needs to create 127,000 new jobs a month to cope with population growth. 8,000,000 jobs have been lost since peak employment in December 2007. Thirty-seven months to the election. That’s 343,000 jobs a month on average to be created between now and then (to get back to the same proportion of the population in employment). Even if you want to just get back to the absolute figure, it’s 216,000 a month.
I make the job growth numbers on average per month for each year to be:
1981 63.4
1982 -134.3
1983 50.2
1984 354.1
1985 248.4
1986 163.5
1987 217.8
1988 271.4
1989 222.4
1990 122.7
1991 -92.6
1992 29.2
1993 176.5
1994 287.2
1995 250.5
1996 200.8
1997 255.6
1998 262.8
1999 255.2
2000 232.6
2001 3.4
2002 -123.7
2003 -28.5
2004 119.6
2005 189
2006 198.5
2007 126
2008 -44.3
2009 -640
(From the BLS – get the NFP one year subtract the NPF the previous year, divide by 12. http://data.bls.gov/cgi-bin/surveymost. 2009 data based on 9 months data).
The first year of recovery seems to be quite anemic, I suppose because it comprises partly months of losses and partly of gains. Given that we are hopeful of seeing a bottoming end Q2 or Q3 (do you agree/disagree?), that makes next year mostly a writeoff meaning over 300,000 jobs to be created per month in 2011 and 2012.
I think it unlikely! I think the recovery will look more than likely still have an average negative job creation/month next year, with jobs created in 2011 and lift-off in 2012. At least that is what I hope, based more on historical thoughts than on hard data. I’ve yet to see hard data that is indicative of a recovery…
A quick summary of the Larry Fish talk at MIT I listened to.
Larry Fish said, this crisis is the first time in his experience in banking over 40 years, it was a consumer led crisis. In the past it was all commercial crises, telecom bubbles etc. This is the first time the banking crisis has been consumer led.
But said the regulatory model worked in Canada, Brazil, Australia and Spain where the banks are state owned. Even though the banking directors in those four countries received enormous pressure to loosen regulations in those four countries, in the end it served them well.
Fish talks about the relationship between ‘permissible activities’ and what will be considered adequate ‘Tier 01’ capital for banks to hold. If permissible activities involve overnight positions via derivatives in foreign exchange rates, then the capital requirement should be in double digits, very high.
But Fish is firm on one thing. A minimum of 5.0% equity based capital rather than risk based capital should be demanded. It was this change over to risk-based capital away from equity based capital that got us into the mess in the first place. Simon Johnson suggested that venture capital, an equity based enterprise might play a bigger role in the future. It is a different kind of risk capitalisation.
But the banking industry in the United States is already one of the most leveraged industries in all. Deutch bank leveraged by 70 to one. But the banking industry in the US is already one of the most regulated industries. It is like the power utilities. What isn’t regulated? Hedge funds, private equity funds aren’t regulated. Investment banks were lightly regulated.
Fish talks a lot about the competitiveness of the American banking system which will not be the same as in other countries. Of course, this ties back in some way to Ireland the ECB, where they try to ‘harmonise’ banking systems across the one EU zone. Fish is concerned that financial services is the one industry the United States can still compete in. Because the US doesn’t have a huge export of other manufactured goods any more. He suggested it would be a good idea if the major industrial countries coordinated in some way on capital to ensure equal competitiveness across those countries in the banking sector.
On the problem of ‘over-regulation’ Fish commented that the US may protect the consumer so well, the same consumer may no longer be able to borrow. In recent times, in the US there has been disproportionate hardship on under-served communities. While there has been modest foreclosures in middle to upper class neighbourhoods. There is a real concern that a future contraction of credit will be felt most in certain communities.
There’s a report out today that says that the current methods of gathering payroll data aren’t keeping up with the losses. The job loss numbers might be under estimated by over 800,000 jobs. In otherwords that graph might be overly optimistic about where the US is right now.
Having finished listening to all the Larry King piece, I think he was sitting in the MIT Sloan business school talking to the young people about ethics and the current crisis because:
A) The US has the capacity as a nation to compete globally in the financial services industry and therefore create much employment.
B) It is a question for us at this point in time, and for the youngest and brightest at such 3rd level institutions to sign up now to some kind of ethical agreements. He read out a simple code of ethics that graduates of Harvard Business School were asked to sign recently and only half of all graduates signed. Mr. Fish was disappointed in that. He read out the simple code, which was only a line or two, twice to his audience of students and asked them the question, what in that could you not sign up to?
Does anyone know of a similar graph showing changes in average wages from their peak?
Also, if the graphs for Ireland were to look similar to this and the recovery was to be somewhat symmetric as seems to be the case in other recessions, then we can look forward to a sustained period of extremely high social welfare payments for (at the very least) 12 months and potentially much longer! This is bound to increase pressure to reduce payment levels!
If we also see significant wage reductions, then high levels of personal debt could begin to have very worrying effects as I suspect we have not really began to see high default rates by those in lower income deciles (I could be wrong?). Perhaps we wlll save the banks from bad development loans just to have to save them again from private loans.
Linked to this though is the idea that if we really are in a consumer led recession – what proportion of consumers are in a position to get us out of it? Do we have any idea of the distribution of private debt across income?
@Tony
Can’t help you with the graphs.
High social welfare payments will be reduced by exhaustion of benefits. The maximum amount of benefit payment is, I believe 9 months having been reducted from 12 (or is it 12 reduced from 15?). Anyway, once JB is finished, you move onto Jobseeker’s Allowance. This is means tested on household income and savings and takes no account of debt levels. The payments are likely, therefore, to be significantly smaller.
Personally, I would be more worried about middle/high income earners. Not only are their absolute levels of debt higher, their ability to make a meaningful contribution towards the debt is much lower if their income disappears. There is a harrowing case at the moment of a former hedge-fund bank manager whose bank went bust leaving him with personal debts of 106 mn euro. The poor man hasn’t a bean to his name to afford the 400k interest payments. Because he owns assets (oil wells, bars and the like) he’s not entitled to JA and he will shortly exhaust his JB…
yoganmahew Says:
October 4th, 2009 at 1:53 pm
That’s a tragic tale. Maybe we should have a whip round and give him a digout.
@Greg
Yeah, I’m sure none of us would mind picking up the CAT for him either…
@ Yoga
Perhaps we could organise a charity auction for his car and golf clubs etc.
Or maybe he should lobby his TD to set up an institution to prevent his assests being undervalued, so that he can get a more long term valuation.
Al
@ Tony: You’ve hit the correct nails square on! Funny how few people have penetrated the fog of fantasy which is enveloping the current economic disaster – yes, it is a disaster!
The first phase of monetary deflation is underway, but is obscured by the so-called ‘stimuli’. The correct course of action would have been to demand that the excess debt be crammed down and written off. Private individuals should have been given the option of a short-duration (3 year) bankruptcy, or possibly a Debt Jubilee. The longer the debt is retained the more difficult it will be to resolve, and the worse it will be – financially, socially and most particularly, politically.
When the sediment finally settles its going to look real ugly. Middle-income groups and pensioners will likely be hardest hit. These were the ‘consumers’ and the would be consumers. With less -or even no – income and increased taxes, they will transform themselves either into nett savers or debt-slaves. This will put a gaping hole below the waterline of an economy which relies predominantly on ‘services’ (aka: consumer spending).
BL above asked about green shoots (sic) – Ah! Yes!. Thems those artificial decoration things, beloved of window dressers! Yes indeed!
The real concern is about the availability of energy at a reasonable cost. At present we have a lull, particularly wrt Nat Gas: this will not last. Oil is hovering on the edge of the green zone ($70bl). The orange zone is anything above $80bl; >$100bl is the red zone: we crash again.
There appears to be – according to whom you care to trust – a causal relationship between economic activity and energy prices (or availability). We, (western economies), are quite sensitive to high energy prices given our propensity to use credit and leverage as a surrogate for real growth. The relationship is subtle and comprehensive. Not something you can cram into a 30 sec TV soundbite.
Brian P
yoganmahew Says:
October 4th, 2009 at 3:11 pm
“Yeah, I’m sure none of us would mind picking up the CAT for him either…”
I think that’s going too far.
The ISPCA probably have expertise in that area.
@ Brian Woods,
I think you’re right Brian.
We’re being sucked into a vortex.
Nothing has been solved, and I don’t just mean Ireland.
Off topic….
$1.4 Quadrillion of derivative (notional value) outstanding, and growing. Almost entirely unregulated. Is that why Western banks are being kept afloat?
A one percent hit on that is $14Tn. Bye bye system.
The broad measure of unemployment rose to 17%.
http://www.bls.gov/news.release/empsit.t12.htm
The unemployment rate for 16 to 19-year-olds hit 25.9% in September, the highest rate recorded since at least 1948 (the earliest data the Labor Department supplies). It compares with 16.9% in December 2007, at teh start of the recession.
Steven Blitz, an analyst at US firm Pangea Market Advisory said: “the percentage of unemployed that have been out of work more than 27 weeks has jumped to 35.6%… This is the first recession where those out of work more than 27 weeks not only exceeds the under 5 week group (19.4%) it exceeds the short-term unemployed by extraordinary proportions… The trend for the unemployed since 1980 has been to be out of work an increasingly longer period of time. When these data are lined up with the $385 billion drop in wage and salary disbursements in the past 12 months, it is difficult to imagine consumer spending at the starting line of a cyclical upswing.”
http://market-ticker.org/archives/1485-September-Unemployment-ACTUAL-LOSS-995k.html
“But the Household Data is VASTLY worse than reported. Here are the month-over-month changes, and they’re in the realm of frightening. (all numbers in thousands)
Civilian Labor Force: 154,879 to 153,617 this month.
Employed: 140,074 down to 139,079 this month.
That’s a loss of 995,000 jobs, not 263,000, and the labor force contracted by 1,262,000 people!”
Now, Mr. Denninger is a little sensationalist at times, but the numbers are there to back this up. Unlike in Ireland, this is unlikely to be emigration, so one must assume that there are a lot of discouraged people out there…
@ yoganmahew
I agree that the major problem is likely to be with the middle class – I’m not so sure about the importance of high earners because they make up a smaller proportion of total consumption I would presume.
While the lower class may have less debt in absolute terms I would imagine any debt which they have represents a higher proportion of their disposable income than for higher earners. Also they are more likely to be in jobs where they face the prospect of reduced hours/pay and so may be loath to spend what income they have on the type of non-essential consumption required to get the economy moving again.
A more long-term effect of this crisis is that middle-lower classes are unlikely be in a position to contribute significant sums to their pension plans in the forseeable future – missing out on the equity upswing – a similar comment may apply to the national pension fund being forced to aid in the bail out of banks rather than investing across the board. Ironically gambling on the stock market to rise over the coming year or two is likely to be a better bet than buying a house in 2007 with the intention of selling it on for profit – yet I suspect no banks will be rushing to hand me a 100% 300k loan!?
Brian Lucey Says:
October 3rd, 2009 at 7:03 pm
“whats the obverse of a green shoot?”
Orange.
Agent Orange.
@Tony
I agree that proportionally lower income households are going to have the biggest gap in years of earnings to fill, but the absolute numbers will be smaller and through the magic of relative numbers will look more manageable.
Look at it this way:
Lower income earner on 30k – mortgage 180k, negative equity 80k.
Middle income earner on 60k – mortgage 360k, negative equity 120k.
The lower income earner has 2.7 years of gross negative equity, the middle income earner has 2 years. The net figures probably bring them closer as the middle income earner has higher taxes to factor in. But the middle income earner is also likely to have a higher proportion of income tied up in what they see as non-discretionary items – private school fees, health insurance, healthy eating, newer, bigger car.
So who does the debt burden look biggest to?
If consumer spending is going to fall and pensions are going to be skimped on, where is the equity upswing going to come from?
@ yoganmahew
To be honest i would imagine the debt burden looks higher to the person with 2.7 years of negative equity rather than 2 – but I suspect thats not how you see it. If you factor in car loans etc for these people I would think a huge chunk of the middle-lower class income is going on repayments!
Also what the middle class now view as non-discretionary will become discretionary as the squeeze takes hold surely?
I suspect the equity recovery will be based on sales abroad so would expect to see a quicker recovery there but its a good point alright!! Must admit I’m not sure what proportion of their business is foreign but presume a substantial proportion!?
@Tony
“Also what the middle class now view as non-discretionary will become discretionary as the squeeze takes hold surely?”
I’ve already heard anecdotally that some hard choices are having to be made – it’s the house or the school sort of thing.
You may be right about the sums perspective, but my experience is that Irish people aren’t good at doing sums (whether they are numerate or not!).
The USA has had no increase in real wages for 30 years. Real wages. Not alone do they invent jobs being created in the building and other industries, they rig the CPI so that hedonic pricing means that it was understated.
Kondratieff showed the 50-70 year wave of depressions existed and was endemic to capitalism when unregulated. Regulations in the USA were all disbanded. What regulations? Those enforced the reforms after the last depression!
Naivety is exculpable, but stupidity is not! Could I be referring to the US population or to those who rely on the mainstream media for their news?
Brian Lucey
The green shoots exist alright and they are of Kudzu. No one can see what has been happening for the last few decades and the new shoots are the regulation of the banking sector now that governments etc are blowing bubbles.
[…] of jobs lost, one the has since been modified and extended by a number of economists. One just out, hat tip Kevin and the Irish Economy blog, is Calculated Risk’s comparison of every recession from 1948 on, by percentage of job […]
All credit to Credit. Most western countries appear to have depended on spending tomorrow’s money to grow GDP. At a certain point a limit will be reached.
Perhaps it’s not really a confidence issue between banks that is the problem (a commonly cited cause of the credit crunch), but our dependence on credit growth to sustain our economies.
If the US depends on getting their consumers to borrow again in order to create jobs, there’s a big flaw. At some point lenders will figure out that the borrower isn’t a good bet.
Kevin, I call your graph and raise you this one: http://mwhodges.home.att.net/natdebt-vs-natincome.gif
It’s from this website http://mwhodges.home.att.net/summary.htm
(I’d welcome criticism of these numbers as I’m taking them at face value and fear they may be produced by someone sporting a tinfoil hat)
@Ahura
Ah, is this become a scary chart thread?
The one criticism I would have of such a chart is that multiple counting goes on:
Individual owes bank. Bank owes depositors.
This looks like two debts, but, aside from the interest component it is one debt.
I’m sure the chains can be longer than two steps, so there’s triple of quadruple counting going on (can’t think of an example at the mo, but you get the idea!).
I think a safer way would be to count the debt that people are owed, but I have no idea how you’d go about doing that.
I guess, though, that the end result will still be that the amount of debt outstanding has grown faster than the income to support it. It’s hardly surprising we have interest rates as near zero, is it?
@yoganmahew,
Absolutely agree that there is likely to be some double counting going on. Though I’m not sure that it would be on the scale you suggest. Do you think Household, Muni, state and federal would hold each others debt? Certainly possible that business/financials may include debt counted elsewhere.
Perhaps to focus on one element – household debt http://mwhodges.home.att.net/nat-debt/household-ratio.gif
If US households were increasing debt at such a high rate and consumer spending accounts for 2/3s of the US economy, (aside from wages) increasing consumer debt is necessary to sustain the economy. It could be argued that Government deficits are temporarily filling this gap. This doesn’t necessarily mean the US is broke as much of this debt is held internally. Though with such imbalances this debt mightn’t be worth what the holders would like to think it is (i.e. not broke but a lot poorer).
@Ahura
My main beef would be with counting bank debt where it is really leveraged consumer, business, state, muni and federal debt. The LTCM strategy has been writ large in recent times. And in the way total derivatives amount to the slicing and dicing of the same obligation over and over, I suppose it is possible that there is debt that is the same. I’ve been trying to come up with examples –
Depositor puts cash into a high yield fund. High yield fund borrows from bank to buy corporate debt. Bank borrows from money market fund with commercial paper. Three debts exist – bank, high yield fund and corporation. But really it is the corporate debt value that is outstanding (i.e. if it is paid off, so are the other two).
I read an interesting article about the dangers of being the reserve currency. Basically, you always have a current account deficit as your currency leaves your country to do the work of the reserve currency.
Now, as you point out households in the US (who are at the bottom of the debt pyramid (i.e. they are not owed another debt on which their household debt is based) are bust. And not just a little bust, but extraordinarily bust. Elizabeth Warren has been pointing out for a while that the figures on saving and on average debt don’t even come close to showing the reality. As Kevin Denny was saying in the negative equity comments, there’s a huge fat tail that is skewing the averages, in the case of US households, it is the wealthy – there’s a huge chunk of wealth that is distorting up the figures. As NN Taleb points out, the risks are not seeing a fat tail with no upside. Take out Bill Gates, Warren Buffet and a few thousand other super wealthy people and what do the averages look like then? Take out the top 10% and where are you?
So I think any recovery that is dependent on US consumers debt financing it is going to struggle. So what we need is a new kind of recovery. You might call it a new paradigm, something different this time. Probably it will be a green R&D knowledge-based micro-business paid-leisure back-to-the-soil solar powered recovery, or “watching grass grow” as it is otherwise known…
@ yoganmahew & Ahura
Please excuse my interruption.
It seems to me that double counting (how much accounting/audit fraud is really going on) or not the average Joe/Josephine is completely maxed out and is now evading the bailiff, about to lose their job (to the East) or knows better than to get into more debt just to buy some Chinese tat.
Yes I know, that is a slight on the glory of “Globalism”
Apart from the ludicrous idea that consumer credit is necessary to benefit of the “Nation” the entire Western World is hanging on by its fingernails.
Is it not time to cancel the debt?
What is all this “Global” debt about?
As I have commented earlier,
“$1.4 Quadrillion of derivative (notional value) outstanding, and growing. Almost entirely unregulated. Is that why Western banks are being kept afloat?
A one percent hit on that is $14Tn. Bye bye system.”
Who is auditing this?
The debts of the American/Irish consumer (we are no longer citizens) are insignificant.
Do you have any links that will give me comfort that the entire financial system is nothing more that a ponzi scheme / house of cards?
I have looked. I’m coming up empty.
If LTCM was a problem. What have we got now?
Pat Donnelly Says:
October 5th, 2009 at 1:52 am
😮 The “mile-a-minute vine”
That’s exponential debt for ya.
Bind weed.
All bound by the weed (or web) of debt.
@Greg
No links. Plenty of links that you should wear your tinfoil beanie while reading!
This is LTCM-heavy…
@ yoganmahew
Disappointing that one would have to spend money on tin foil to find out whether derivatives really are “financial weapons of mass destruction” as Buffet suggests.
We could all wake up one morning to find out that some counterparty we’ve never heard of just powered the weapon.
@Greg
There’s only one counterparty in Ireland that has the weapon sufficiently tooled up. Let’s do it in University Challenge format:
Your starter for ten:
Which Irish bank increased it’s notional derivative exposure by 70% in 2006 and by another 70% in 2007?
Congrats, now your bonus questions:
Was that bank buying or selling derivatives at a time when the derivatives markets were shutting down? Or both?
Who are the counterparties to the sales? (i.e. who bought them)
Who now owns this bank?
Your next starter for ten:
Which Irish bank has an unrecognised 6 bn derivative loss? (though it is noted in their annual accounts)
And your bonuses:
What would the effects of a derivative counterparty failing to pony up on the big two banks?
What is their concentration of risk exposure?
What new semi-state organisation will taken on derivatives from the banks as part of its loan purchases?
Yoganmahew,
I agree with your example on how the actual amount owed can get reported multiple times. (Although I’m losing my initial enthusiasm for the website I’m referencing) this linked chart shows ‘non-financial sector debt’.
http://mwhodges.home.att.net/nat-debt/natdebt-less-finance-sect-vs-natincome.gif
I think this should exclude significant double counting. It still doesn’t look pretty.
The main point I’m making is that the US (and a number of other western countries) require increasing levels of private sector debt to prop up their economies. It’s like a person supplementing their wages with credit card debt in order to pay the bills. At an individual level, it’s clear that this is not a sustainable model. Where this gets interesting is what happens when you call in the credit card debt. The individual can’t pay. You might be able to liquidate some of the individual’s assets or attach to their future income, but the likelihood is that you won’t recover the full amount. Therefore you’re poorer as well. Or to put it another way, your asset (the credit card receivable) isn’t worth face value. This kinda calls into question why private funds will want to continue extending credit. In the short term, government guarantees may be adequate, but it doesn’t address the underlying flaw.
Perhaps, the current crisis will pass but at some point this will come to a head.
yoganmahew Says:
October 6th, 2009 at 11:34 am
“Which Irish bank increased it’s notional derivative exposure by 70% in 2006 and by another 70% in 2007?”
Between 2006 and 2007 Anglo Irish Bank Group increased it notional derivative exposure from €102Bn to €174Bn.
Was that bank buying or selling derivatives at a time when the derivatives markets were shutting down? Or both?
Can I confer? No! OK I have a guess.
Yes
“Who are the counterparties to the sales? (i.e. who bought them)”
Still no conferring? OK.
Would that be AIB & BOI?
“Who now owns this bank?
We do.
How many points do I get?
Your next starter for ten:
“Which Irish bank has an unrecognised 6 bn derivative loss? (though it is noted in their annual accounts)”
Can I call a friend? Oh, wrong show.
Don’t know.
And your bonuses:
“What would the effects of a derivative counterparty failing to pony up on the big two banks?”
They would by vaporised by the Derivative Death Star.
“What is their concentration of risk exposure?”
The stuff of nightmares.
“What new semi-state organisation will taken on derivatives from the banks as part of its loan purchases?”
Wait. I know this one. I know this one.
Is it NAMA? Is it us again?
@Greg
Excellent work. Go to the dunces corner (this is DoF Challenge…).
You passed on one question: the bank that looks like it has an unrecognised derivatives loss of 6 bn is BoI…
For the rest, much is supposition, I suppose! But why else would Anglo be systemic to BoI and AIB if it is not that it has underwritten their derivatives?
@Greg
Perhaps someone else can confirm if it is or is not an unrecognised loss?
The BoI annual report on P.208:
http://online.hemscottir.com/ir/bir/ar_2009/ar.jsp
The difference between forecast receivable cash flows and forecast payable cash flows.
Actually it’s about 5.7 bn… sorry about the false alarm..
@ yoganmahew
Yeah,
Saw that following your lead.
I don’t like the sound of this.
“The hedged cash flows are expected to impact the income statement in the following periods, excluding any hedge accounting adjustments that may be applied:”
I’ll have to look up some, no doubt impenetrable, accounting rules on derivatives.
€5.7Bn “expected to impact the income statement”…….Scary.
“excluding any hedge adjustments”…….Does this mean they are “hoping” the impact will be reversed by a market adjustment in the value of the hedges? Your guess is probably better than mine.
But, if that is what it means. What if the market goes the other way?
It’s probably nothing, but now I want to know. Curiosity killed the curious.
Did you notice how it moved from €1.1Bn in 2008 to €5.7Bn in 2009?
AIB have a slightly different presentation which is less scary.
@Greg
“Curiosity killed the curious.”
Indeed! And it has been killing me since I saw it! Like yourself, I am over-anxious about derivatives. Not so much about their aggregate effect, but on their specific effects on idiots. AIG has already been exposed as an idiot. Anglo, from the movements in the size of its book has drool on its chin. Do we now have BoI looking slack-jawed and glassy eyed?
““excluding any hedge adjustments”…….Does this mean they are “hoping” the impact will be reversed by a market adjustment in the value of the hedges? Your guess is probably better than mine.”
My guess would be just a guess too. I’ve no finance or economics background, so I frequently get caught out! But anyone else who has seen the figures is alarmed by them.
I have a vague notion that some of these losses might be related to a presumption of Anglo not paying out, that NAMA is a giant game of hide the rotten sausage, and that the hope is that cancelling all the unpayable debts together will somehow turn negative numbers everywhere positive (the NAMAjack are on their way…). If so, we might yet have a Nobel prize winner for mathematics…
yoganmahew Says:
October 9th, 2009 at 8:43 am
“AIG has already been exposed as an idiot.”
An idiot that was taken down by a VERY small group of people working in virtual secrecy.
“ Anglo, from the movements in the size of its book has drool on its chin. Do we now have BoI looking slack-jawed and glassy eyed?”
With a movement from a negative €1.1Bn to a negative €5.7Bn (of hedged cash flows are expected to impact the income statement) is it possible that BOI are already at the stage of doubling down at the roulette wheel?
Again speaking in ignorance here, need to look up derivative accounting rules, do the rules allow banks to avoid recognising “potential” losses on derivatives until they have been called or have “matured”.
“I have a vague notion that some of these losses might be related to a presumption of Anglo not paying out”
Just a guess, but I don’t think so. They just happened to be in the same casino at the same time.
“the NAMAjack”?
NAMAjacks – sorry, problem of having small children watching CBeebies
http://www.bbc.co.uk/cbeebies/numberjacks/index.shtml
Got a problem with misbehaving numbers? The Numberjacks will fix it for you.
You may be right about the derivatives loss – I just find it suspicious that Anglo was mostly selling and the other two mostly buying…
I think this is the one for Brian Lenihan.
http://www.bbc.co.uk/cbeebies/numberjacks/games/jumping_generator.shtml
How To Play:
Match the NAMAjack with the correct picture from the real world.
🙂
🙂
€14.7Bn notional value of derivatives to be taken on by NAMA.
Let us pray.