I’m watching the CEOs grovel in front of the House Finance Committee and its mostly sad, some scary, entirely frustrating.

http://c-span.org/Watch/C-SPAN3_wm.aspx

Only Goldman Sachs and Morgan Stanley said anything of interest. John Mack knows how to play the game. He saw the shit was hitting the fan early and got Morgan Stanley to institute policies such as the clawback penalty which would look real in front of the bureaucrats and main stream media before it was really talked about.

He also invited more and more uniform regulation very explicitly and when asked about bonuses by Frank he answered in an appoligietic yet firm response.

Any time an industry asks for regulation you should be very very causious. History shows it is for their own long term benefit.

http://www.businessweek.com/…

Can an interest rate of zero be too high? Unfortunately, yes. A new analysis by Goldman Sachs (GS) concludes that the Federal Reserve’s cut in the federal funds rate to a record low of zero to 0.25% on Dec. 16 isn’t going to be nearly enough to get the economy going again. The report says the Fed would need to reduce the federal funds rate to negative 6% by the end of 2010 to supply the needed amount of monetary stimulus.

Ordinarily when the economy slows, the Federal Reserve can juice it up by cutting short-term interest rates to below the rate of inflation, meaning that in inflation-adjusted terms, rates are actually negative. For example, if inflation is running at 6% per year and interest rates are at 4%, the “real” rate is negative 2%. Negative real rates entice people to borrow money for consumption or investment, which gets the economy going again and soaks up unemployed workers and equipment.

Right now, zero is about right for interest rates. But the economy is continuing to soften, so it will soon be too high, according to Goldman. Hatzius bases his calculation on Goldman’s own version of the so-called Taylor Rule, which is named after Stanford University economist John Taylor. Taylor says the Fed needs to lean against the wind by raising rates when the economy is overheating and lowering them when there’s a lot of slack.

Trouble is, the Federal Reserve can’t cut interest rates below the rate of inflation if inflation falls to zero, which many economists expect to happen soon. Clearly the Fed can’t take in $1,000 and pay back only, say, $950 a year later. Rational investors would simply keep their money in cash outside the banking system to preserve its value.

The solution is obvious: The Fed needs to deliberately raise the rate of inflation—maybe not all the way to 6%, but significantly above zero.

One way to do that is to print lots of money. The Fed can create money from thin air by purchasing assets such as Treasuries and mortgage-backed securities and paying for them by crediting the seller with newly created reserves at the central bank.

Unsurprising but still unnerving. Just about everyone from the Obama administration to Krugman to the random pundits on TV are calling for inflation as the cure to the effects of inflation.

Enjoy this deflation and price deflation while it lasts. If the inflationists do what they claim they want to we’ll be seeing much higher prices in the next couple years. Perhaps you should stock up on nonperishable foods.

http://online.wsj.com/…

Rick and Noreen Capp recently reduced their credit-card debt, opened a savings account and stopped taking their two children to restaurants. Jessica and Alan Muir have started buying children’s clothes at steep markdowns, splitting bulk-food purchases with other families and gathering their firewood instead of buying it for $200 a cord.

As layoffs and store closures grip Boise, these two local families hope their newfound frugality will see them through the economic downturn. But this same thriftiness, embraced by families across the U.S., is also a major reason the downturn may not soon end. Americans, fresh off a decadeslong buying spree, are finally saving more and spending less — just as the economy needs their dollars the most.

Usually, frugality is good for individuals and for the economy. Savings serve as a reservoir of capital that can be used to finance investment, which helps raise a nation’s standard of living. But in a recession, increased saving — or its flip side, decreased spending — can exacerbate the economy’s woes. It’s what economists call the “paradox of thrift.”

U.S. household debt, which has been growing steadily since the Federal Reserve began tracking it in 1952, declined for the first time in the third quarter of 2008. In the same quarter, U.S. consumer spending growth declined for the first time in 17 years.

That has resulted in a rise in the personal saving rate, which the government calculates as the difference between earnings and expenditures. In recent years, as Americans spent more than they earned, the personal saving rate dipped below zero. Economists now expect the rate to rebound to 3% to 5%, or even higher, in 2009, among the sharpest reversals since World War II. Goldman Sachs last week predicted the 2009 saving rate could be as high as 6% to 10%.

As savings increase, economists say, spending is likely to contract further. They expect gross domestic product to decline at an annualized rate of at least 5% in the fourth quarter, the biggest drop in a quarter-century.

These numbers are somewhat promising. Even with all the bullshit coming out of the mouths of the politicians and their cronies the American people aren’t listening. Lets hope the saving continues, those who need to fail do so and resources get reallocated ASAP.

http://www.reuters.com/…

Under fire for regulatory missteps, top U.S. securities regulator Christopher Cox defended his agency’s record but acknowledged some regrets over how he handled the worst financial crisis in decades.

The Securities and Exchange Commission has been lambasted by lawmakers and others for not doing enough to prevent the 2008 collapse of Bear Stearns and Lehman Brothers, interfering with markets and failing to detect the alleged $50 billion fraud at Wall Street financier Bernard Madoff’s firm.

Cox, a Republican and former California congressman, said the SEC’s focus has been customer protection and broker dealer regulation and that the agency “performed that traditional role superbly.”

However, Cox said he had some regrets over a drastic action the agency took as markets were hurtling downward in September. For a few weeks, the SEC stopped investors from making bearish bets on financial stocks like Morgan Stanley and Citigroup.

The SEC’s office of economic analysis is still evaluating data from the temporary ban on short-selling. Preliminary findings point to several unintended market consequences and side effects caused by the ban, he said.

“While the actual effects of this temporary action will not be fully understood for many more months, if not years, knowing what we know now, I believe on balance the commission would not do it again,” Cox told Reuters in a telephone interview from the SEC’s Los Angeles office late on Tuesday. “The costs appear to outweigh the benefits.”

The SEC imposed the temporary ban under intense pressure from the Federal Reserve and Treasury Department which insisted it was crucial to the short-term survival of these institutions, Cox said.

A few weeks after the temporary ban was lifted, global markets were again dropping precipitously, U.S. banks were begging the SEC to reinstate its short-sale ban and there was talk of shutting the markets down.

Cox said the chief executive of one major U.S. investment bank even urged suspension of normal trading rules across the entire U.S. market, likening the situation to how Abraham Lincoln suspended habeas corpus during the Civil War and Franklin Roosevelt sent Japanese-Americans to internment camps during World War Two.

The chief executive said, “that is how America made it through such crises, and we couldn’t be too focused on maintaining the rule of law,” Cox said. “That was advice we rejected.”

Wonderful. Comparing his their actions to that of outright tyrants. In one respect I agree. What was done was but a difference of degrees and not kind. But the level of degrees is so great it’s a bit of an insult to those who suffered as a result of Lincoln’s and FDR’s actions.

This was completely predicted by anyone with half an economic brain. The ban was obviously pushed for by John Mack of Morgan Stanley, Lloyd Blankfein of Goldman Sachs along with other major bank players. No net good can occur due to government interference. Only relative to the bad they caused prior.