Economic Dreams - Economic Nightmares

Kicking the Can Down the Road

The US House of Representatives Just passed what is best know as 'The $700 Billion Bailout Bill', now "larded up" sunstantially. Yves Smith, in an hour-long videoblog interview with Megan McArdle (Oct 1), argues that all that they have done is to kick the can done the road — problems will return again as early as November/December. Watch the hour-long interchange to gain a better pespective as to how we got into this mess over the last 40 years, what it means now and going forward.

Paul Krugman seems to agree that all this Bill will do, at best, is to buy time saying in The Edge of the Abyss (NY Times Oct 2)

… [A]t best, the plan will buy some time to seek a real solution to the crisis.

And that raises the question: Do we have that time?

A solution to our economic woes will have to start with a much better-conceived rescue of the financial system — one that will almost surely involve the U.S. government taking partial, temporary ownership of that system, the way Sweden’s government did in the early 1990s. Yet it’s hard to imagine the Bush administration taking that step.

We also desperately need an economic stimulus plan to push back against the slump in spending and employment. And this time it had better be a serious plan that doesn’t rely on the magic of tax cuts, but instead spends money where it’s needed. (Aid to cash-strapped state and local governments, which are slashing spending at precisely the worst moment, is also a priority.) Yet it’s hard to imagine the Bush administration, in its final months, overseeing the creation of a new Works Progress Administration.

So we probably have to wait for the next administration, which should be much more inclined to do the right thing — although even that’s by no means a sure thing, given the uncertainty of the election outcome. (I’m not a fan of Mr. Paulson’s, but I’d rather have him at the Treasury than, say, Phil "nation of whiners" Gramm.)

Nobody I read likes the "Plan" much, but many seem to think it will buy time. Some like Dean Baker don't think it was needed at all. See Baker's Sept. 29 Wall Street Held a Gun to our Heads. We'll never know whether those who wanted us to let-it-ride were correct. But we can wait and see whether this does little long-term to solve the big problems of tightly-coupled, structured-finance markets that were badly designed to cope with the mechanisms by which Wall Street insiders, big Hedge Fund managers, and others stole so much from too many of us.

NPR Does Subprime

If you want a very good lay person's edition of the Credit Bubble mess, listen to NPR's Global Pool of Money Got Too Hungry (audio, 13 min., All Things Considered, May 9): "Adam Davidson and This American Life's Alex Blumberg jointly report on how rising defaults on subprime mortgages in the U.S. have became a global financial crisis. This American Life host Ira Glass talks with Michele Noris".

NPR demystifies SEVs, CDOs, MBSs, "Liar Loans," and more. The narrative concludes: "… Nobody really questioned things. And why should they? Everybody was making money — right up to the day the bottom fell out."

An hour-long version — The Giant Pool of Money — airs this weekend on This American Life.

Fed's 'Historic Steps' into Uncharted Waters

Unless I'm mistaken, the Fed just took a first step toward Thomas Palley's suggested solution to our current mess:

Central Bank Offers Loans To Brokers … Historic Steps, Greg IP, WSJ, March 17: … It took a unanimous vote by the Fed's five governors yesterday to invoke a Depression-era clause in the Federal Reserve Act to waive the usual prohibition on Fed loans to nonbanks. A Fed official told reporters today's circumstances couldn't have been envisioned when the Fed was created, and noted newer central banks like Europe's have many of these powers. But these steps also take the central bank into uncharted territory with new and potentially troublesome risks.

Those risks include the possibility that with the credit crunch showing no sign of lifting, the Fed will be called on to lend to other troubled firms and end up a major creditor of Wall Street, even if at present the risk of any substantial loss appears small. Another risk is that while the Fed used a loophole yesterday in the Federal Reserve Act to expand its lending to nonbanks in "unusual and exigent" circumstances, it has in effect expanded the federal safety net with no political debate. However, the Fed sought and received agreement over the $30 billion loan from Treasury Secretary Henry Paulson, who informed President Bush.

Bigger Test

For now, though, the bigger test will be how the markets greet the initiatives today: with relief at the bold steps taken to shore up the financial system, or with alarm at how unstable the financial system had to be to invite such action.

Officials appear to hope the initiatives will restore enough confidence to markets to allow a smaller rather than larger rate cut tomorrow, but they acknowledge it will depend partly on how markets evolve over coming days.

On Wall Street, there is likely to be some relief that the Fed has finally opened the discount window to securities dealers, something they have long clamored for. The Fed has been reluctant because the move was outside its explicit mandate. "This is a five-vodka event," said a senior executive at one big brokerage firm that previously didn't have access to this funding source. "Liquidity is no longer an issue."

Federal Reserve Bank of New York President Timothy Geithner told reporters: "This is designed to help get liquidity to where it can help play an appropriate role in helping address the range of challenges" in the markets, especially in the mortgage-backed securities market.

Mr. Paulson said in a statement, "I appreciate the additional actions taken this evening by the Federal Reserve to enhance the stability, liquidity and orderliness of our markets."

For all their creativity, the Fed moves are also an acknowledgment that its previous steps have failed to stem the collapse in investor confidence, forcing it to abandon many of its original principles, such as not favoring particular firms or market sectors and sticking within its explicit statutory authority.

Last Tuesday, it announced what Wall Street called its most creative initiative yet: It lent up to $200 billion of its much-sought Treasurys to investment banks starting March 27 in return for a like amount of now-shunned mortgage backed securities for up to 28 days. The announcement led to a huge rally in stocks. But within days dealers were telling the Fed it didn't go far enough. They wanted longer term, more immediate funding against a broader range of collateral.

It also came too late to save Bear Stearns. On Thursday evening, Bear Stearns informed the Securities and Exchange Commission and Fed that it had experienced a dramatic loss of cash reserves and now saw no option other than to file for bankruptcy protection Friday morning. Fed officials at that point saw just two options. They could try to wall off the rest of the financial system. If the environment had been less tumultuous they might have chosen that option.

But in the current period they feared that a failure by Bear to make good on billions of dollars of contracts could severely dislocate critical markets, especially garden-variety repo loans -- overnight loans secured by various collateral that are the grease of the credit markets.

Too Interconnected

Officials grimly concluded that while Bear Stearns wasn't too big to fail, it was too interconnected to be allowed to fail in just one day. They spent Thursday night going over Bear's books and huddling with the SEC and Treasury. By Friday morning it had settled on its second option: a 28-day secured loan via J.P. Morgan to give time for a sale or wind up of the firm.…

Doug Noland: 'Breakdown of Wall Street Alchemy'

In his latest Credit Bubble Bulletin, Doug Noland concludes that "GSEs are poised as the next shoes to drop — the next Dominoes in an Escalating Contagion. … Simplifying highly complex circumstances, the various risk models that empowered the greatest leveraging of risk in the history of finance no longer function as expected — or as required to maintain highly leveraged exposures to a multitude of escalating risks. And it was all just only a matter of time. The overriding flaw was to ignore that a runaway Bubble in market-based finance ensured that various market and Credit risks all coalesced into One Massive, Unmanageable, Highly Correlated, Unhedgable, Undiversifiable Association of Interrelated Systemic Risks. "

Although Noland's assessments continue to be bleak, I find them to be more 'on the mark' week-on-week than any other source I go to. Maybe I'm just hearing what I confirms my preconceived biases. Or maybe not? More from Noland (emphasis added):

The Breakdown of Wall Street Alchemy, Doug Noland, Feb 15: This week provided further confirmation of ongoing momentous Credit market developments. … Like the asset-backed commercial paper market that was popular with structured investment vehicles until last summer, auction-rate securities, a form of rolling short-term funding for long-term municipal commitments, have become fashionable in recent years."

"Auction-rate securities" has joined the beleaguered ranks of "subprime," "asset-backed commercial paper," "SIVs," and the "monolines" — financial structures that flourished during the prolonged Credit Bubble but no longer pass market muster in today's Post-Bubble Risk Revulsion Backdrop. This week's "unwinding" of the "auction-rate" market and the blowing out of Credit spreads should be seen as an escalation of the ongoing unwind of "Contemporary finance" and its many avenues of Risk Intermediation.

On numerous fronts, the markets and economy confront a Highly Problematic Breakdown in "Wall Street Alchemy" — the disintegration of key processes that had for some time transformed ever-increasing quantities of risky loans into perceived safe and liquid debt instruments that enjoyed insatiable demand in the marketplace. In the case of the “auction-rate securities,” it was a clever restyling of long-term and generally illiquid municipal debt (as well as student loans and other borrowings) into perceived liquid securities that could be easily sold at regularly recurring auctions (every one to a few weeks). With scores of flush corporate treasury departments and wealthy clients (managing huge Credit Bubble-induced cash-flows) keen to earn extra (after-tax) yield on "cash equivalents," the Wall Street firms had been diligent in ensuring (making markets for clients, when necessary) a highly liquid and enticing marketplace. Now, with the onset of Risk Revulsion and Acute Financial Sector Balance Sheet Pressures, investors are running for cover and Wall Street firms are shunning the use of their own capital to support this and other markets. Market liquidity has evaporated, confidence has been shattered, and we are witnessing yet another "run" on a previously popular risk market/asset class. The music has stopped for another game of musical chairs.

This week saw heightened systemic stress stampede toward the epicenter of the U.S. Credit system. It certainly didn't help that insurance behemoth AIG Group reported an almost $5bn writedown of its Credit default swap portfolio or that international securities dealer behemoth UBS reported massive losses on its U.S. Credit positions. Confidence was further shaken by huge losses reported by mortgage insurers, as well the twists and turns of the "monoline" bust turned apparent bailout. In the markets, various indices of investment grade Credits widened sharply to record levels. The key "dollar swap" (interest-rate derivative hedging) market saw spreads widen sharply. Agency spreads also widened significantly. Benchmark Fannie Mae MBS spreads widened a remarkable 20 bps against 10-year Treasuries, while agency debt spreads widened a noteworthy 12.5 basis points to 69.5 bps (high since November). The Breakdown of Wall Street Alchemy is now pushing the Credit Market Dislocation uncomfortably close to the core of our monetary system.

I'll return to financial aspects of this crisis, but I definitely feel the economic ramifications of the unfolding Credit Crisis are receiving short shrift in the media. This week saw parts of the municipal debt market grind to a virtual halt and the corporate debt market take another significant blow. Investment grade debt issuance has now slowed markedly after beginning the year at near record pace. At this point, the junk, CDO, ABS, "private-label" MBS, muni, and even investment grade debt markets are all somewhere between impaired, dislocated and completely dysfunctional. There is no mystery behind the recent string of abysmal economic reports.

The preliminary reading on February University of Michigan Consumer Confidence dropped 8.8 points to the lowest level since the 1992 recession. The Economic Conditions index sank and the Economic Outlook index plunged, while one-year Inflation Expectations rose from 3.4% to 3.7%. The Economic Outlook has sunk a remarkable 22 points since July. Falling national home prices are clearly wearing on confidence. This week, Dataquick reported that home sales throughout much of California have collapsed to more than 20-year lows, while home price declines accelerate. This is a huge unfolding issue/debacle for the MBS, agency, mortgage insurance, CDO, and Credit derivatives markets, not to mention the U.S. banking system and real economy. Countrywide Financial reported delinquencies on its $1.5 TN mortgage servicing portfolio had jumped to 7.47%, up from the year ago 4.32%. The New York "Empire" Manufacturing index sank to the lowest levels since April 2003.

The economy is now faltering badly and there is every reason to expect the downturn to gather pace — negative real interest rates compliments of the Fed and stimulus package compliments of the federal government notwithstanding. While fourth quarter data is not yet available, one can look to the first nine months of 2007 to gain important perspective. Despite the dislocation in the subprime mortgage market, Non-Financial Debt Growth accelerated from Q2's 7.2% to Q3's 8.9% (from the Fed’s Z.1 report). And while Household Debt Growth had slowed to a 6.9% pace, Business Borrowings accelerated to a blistering 11.9% annualized rate in the third quarter. This was the strongest corporate debt growth since the tech/telecom boom in the late nineties. Importantly, total (financial and non-financial) Corporate Debt expanded at an 11.1% rate during the first three quarters of 2007, followed by 9.3% growth in State & Local government borrowings. And while residential mortgage debt was slowing meaningfully, Commercial Mortgage Debt was expanding at an almost 13% rate.

Total (financial and non-financial) Credit expanded a seasonally-adjusted and annualized record $5.0 TN during the third quarter — as nominal GDP expanded at a 6% pace. While many trumpeted the "resiliency" of the U.S. economy in the face of mortgage and housing woes — more adept analysis would have focused on the massive Credit creation that had come to be required to sustain the Bubble Economy. Importantly, the faltering subprime market initially instigated only greater excesses throughout commercial real estate, municipal finance, M&A finance, and corporate lending more generally. The Credit Bubble was sustained at the great cost of heightened instability and weakened structures — especially throughout leveraged lending, state & local finance, and investment-grade corporate borrowings. Keep in mind that through the third quarter CDO issuance was actually running ahead of 2006's record pace. Until the fourth quarter, record Credit growth continued to fuel the finance-driven economy. This is all now coming home to roost.

Today, with bursting bubbles in corporate and municipal finance joining the mortgage bust, the U.S. Bubble economy has quickly fallen desperately short of sufficient Credit and liquidity. And the greater the Credit market dislocation and broad-based tightness of Credit, the bleaker become economic prospects and the more intense the Revulsion to Wall Street's Credit instruments. The days of free-flowing cheap finance for home buyers, state and local governments, LBO firms, commercial real estate speculators, college students, risky auto buyers, and high-risk Credit card holders are over — and they will not be returning for some time to come.

When I have previously underestimated the "resiliency" of the U.S. Credit Bubble and economy, it was in each instance a failure to appreciate the capability of Wall Street finance to expand to ever greater degrees of Bubble excess. Today, with "contemporary finance" mired in a historic collapse, I am confident that the Credit system is today only in a position to surprise on the downside. It is this framework that shapes my view of a rapidly escalating Credit crisis feeding an arduous economic adjustment period.

And while it could undoubtedly prod a highly speculative stock market, there is no resolution to the "monoline" dilemma that would meaningfully influence the trajectory of the unfolding Credit and economic bust. As we've been saying for awhile now, confidence in Wall Street finance has been irreparably shattered. Trust has been broken in "AAA" ratings, "mark-to-model," CDO structures, myriad risk models, Credit insurance, counter-party risk, and various instruments and vehicles for intermediating risk in the markets. Moreover, old fashioned lending will not come close to sufficing the demands of a highly imbalanced Bubble economy, especially with bankers nervous and retrenching. Again, we're witnessing nothing less than the Breakdown of Wall Street Alchemy — one that took a turn for the worst this week.

In a disconcerting development, recent market developments seem to confirm that the leveraged speculating community and the GSEs are poised as the next shoes to drop — the next Dominoes in an Escalating Contagion. Along with the "monolines" and mortgage insurers, the "Credit default swap market" and GSE mortgage Risk Intermediation were at the epicenter of the most egregious Systemic Risk Distortions and Accumulations. They are now quickly moving to the forefront of Current Acute Fragilities. Simplifying highly complex circumstances, the various risk models that empowered the greatest leveraging of risk in the history of finance no longer function as expected — or as required to maintain highly leveraged exposures to a multitude of escalating risks. And it was all just only a matter of time. The overriding flaw was to ignore that a runaway Bubble in market-based finance ensured that various market and Credit risks all coalesced into One Massive, Unmanageable, Highly Correlated, Unhedgable, Undiversifiable Association of Interrelated Systemic Risks.

Two Minsky Disciples Differ on Bernanke's Leadership

Paul McCulley is once-again preaching the gospel of Keynes/Minsky. McCulley believes Fed Chairmam Bernanke is well aware of stumbling blocks and pitfalls in the path forward. While also preaching Keynes/Minsky, Doug Noland is, as usual, much less favorably inclined toward Bernanke's abilities/penchants to steer a thoughtful course forward. I'm still inclined to follow McCulley's bet on Bernanke.

A Reverse Minsky Journey, Paul McCulley, Oct 7: … Double Bubbles … Keynes … words some 70 years ago… are near-perfect, and prescient description of what undergirded dramatic United States growth in recent years: (1) asset securitization, notably of subprime loans, and (2) the shadow banking system, defined as the whole alphabet soup of non-bank levered intermediaries. … The joint growth of these two beasts into double bubbles was grounded in the irrational belief, nay exuberance in:

• Borrowers' and lenders' presumption of indefinite continuance of the existing state of affairs, notably ever-rising home prices, regardless of ever-retreating affordability for the first-time home buyer …, and;
• Levered lenders' presumption of unlimited command over money at the (low) market rate of interest.

Those two presumptions, or conventions, in Keynes' lexicon, did indeed provide, as he intoned, "a considerable measure of continuity and stability." Conventional wisdom Rule 1 held that rising home prices would cover all lax, even fraudulent mortgage underwriting sins. Conventional wisdom Rule 2 held that the "depositors" of the shadow banking system, more properly known as asset-back commercial paper holders, would forever roll their investments, content and confident in the low default experience of shadow banks' assets, per Rule 1.

In 2007, facts inconveniently neutered both of these Rules …

Just as Keynes predicted, when the conventional basis of valuation for the originate-to-distribute (to the shadow banking system) business model for subprime mortgages was undermined, the asset class imploded "violently." And the implosion was not, as both Wall Street and Beltway mavens predicted, contained. Rather it has become contagious, first on Wall Street, with all "risk assets" re-pricing to higher risk premiums, frequently in violent fashion, and now on Main Street, where the housing recession is taking a new leg down, with debt-deflation accelerating in the wake of a mushrooming mortgage credit crunch, notably in the sub-prime sector, but also up the quality ladder.

Yes, we are now experiencing a reverse Minsky Journey…, where instability will, in the fullness of time, restore stability, as Ponzi Debt Units are destroyed, Speculative Debt Units are severely disciplined, and Hedge Debt Units make a serious comeback (remember, in Minsky terms, Hedge Units are the good guys!). Meanwhile, rather than speaking of endogenous containment of the bursting of the double bubbles, the mission of policy makers, notably monetary policy, is to exogenously contain the contagion — cutting off the fat tails of systemic risk on Wall Street and of recession on Main Street.

Bottom Line… I have high confidence that Fed Chairman Ben Bernanke understands every Keynesian word quoted above! I also have high confidence that he fully understands that a reverse Minsky Journey lowers the neutral real Fed funds rate, in mirror image of how a forward Minsky Journey lifts it. He and his colleagues demonstrated that understanding in the most powerful way possible: deeds, not just words, with a 50 basis point cut in the Fed funds rate to 4¾% two weeks ago, when the Street consensus was for only 25 basis points.

There are many, many basis points of easing to come, as time and credit market dynamics prove that liquidity is indeed a state of mind, not some abstract measure of the money stock or pool of money putatively on the sidelines, ready to be put to work. Liquidity is all about the appetite of investors to assume risk with levered money and the appetite of savers to provide such investors the leverage they seek.

And until the housing sector recession — with inventories half the distance to the moon … and prices deflating in most major markets …, with debt-deflation/defaults in the wake — has run its course, liquidity will remain both scarce and expensive, even if it notionally remains plentiful.

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Not So Benign Neglect , Doug Noland, Oct. 12: … The serious issues associated with the current "reflation" are many. For one, the dollar is structurally quite fragile while the most robust Inflationary Biases are in non-Dollar Asset Classes. Previously, Fed reflationary policies provided a competitive advantage for U.S. risk assets that worked to incite sufficient financial flows to support or even boost the greenback. This proved a huge ongoing advantage for our expansionary Credit system. Today, the negative ramifications associated with dollar weakness more than offset the Fed's capacity to inflate U.S. securities prices. The Fed's recent rate cut proved a bonanza for most foreign markets (currencies, commodities, equities, bonds, etc.), especially relative to dollar-denominated mortgage securities (the previous Bubble asset class of choice).

The Flow of Finance will now pose extraordinary challenges and risks. The unfolding mortgage crisis (especially in "private-label"and jumbo) will prove stubbornly immune to "reliquefication" benefits. This dynamic places home prices, the consumer balance sheet, and the general U.S. economy in harm's way. At the same time, there are the stock market Bubble and an acutely vulnerable dollar. I will presuppose that the Fed is hopeful to ignore equities and currencies, while operating monetary policy with a focus on the Credit market and real economy. Such a policy course, however, implies at this point much greater currency, market instability, and inflationary risks than our central bankers seem to appreciate.

I would furthermore contend that the nature of current Risk Intermediation is seductively problematic. On a short-term basis, enormous bank and money-fund led financial sector expansion has been sufficient to over-inflate non-mortgage Credit. It’s been too easy — and Credit to sustain the boom too risky. Meantime, post-Bubble risk aversion festers in mortgage-related finance that will creep ever-closer to spilling over into an economic downturn and a reemergence of financial turbulence. We can expect foreign demand for our risk assets to remain tepid at best.

Despite current market euphoria, these processes are significantly elevating the systemic risks associated with today's ballooning financial sector balance sheet. A stock market Bubble beset by destabilizing speculative dynamics only compounds systemic vulnerabilities. Such a backdrop seems to beckon for a currency crisis, a risk that leaves our Federal Reserve policymakers with much less flexibility than they or the markets today appreciate. There are major costs associated with Not So Benign Neglect. The Fed had better at least start sounding like they've thought through some of the issues.

Alan Blinder: Who to Blame for the Mortgage Mess

Six Fingers of Blame in the Mortgage Mess, Alan Blinder, Ny Times, Sept. 30: SOMETHING went badly wrong in the subprime mortgage market. In fact, several things did. And now quite a few homeowners, investors and financial institutions are feeling the pain. So far, harried policy makers have understandably focused on crisis management, on getting out of this mess. But soon the nation will turn to recrimination — to good old-fashioned finger-pointing.

Finger-pointing is often decried both as mean-spirited and as a distraction from the more important task of finding remedies. I beg to differ. Until we diagnose what went wrong with subprime, we cannot even begin to devise policy changes that might protect us from a repeat performance. So here goes. Because so much went wrong, the fingers on one hand will not be enough.

The first finger points at households who borrowed recklessly to buy homes, often saddling themselves with mortgages that were all too likely to default. They should have known better. But what can we do to guard against it happening again?

Not much, I’m afraid. …

It seems more promising to point a finger directly at lenders. Some lenders sold mortgage products that were plainly inappropriate for customers, and that they did not understand. There were numerous cases of unsophisticated borrowers being led into risky mortgages.

Here, something can be done. For openers, we need to think about devising a "suitability standard" for everyone who sells mortgage products. …

[B]ank regulators deserve the next finger of blame for not doing a better job of protecting consumers and ensuring that banks followed sound lending practices. Fortunately, the regulators know they underperformed, and repair work is already under way.

Regulators also need to start thinking about how to deal with a serious incentive problem. In old-fashioned finance, a bank that originated a mortgage also held it for years (think of Jimmy Stewart in "It's a Wonderful Life"), giving it a clear incentive to lend carefully. But in newfangled finance, banks and mortgage brokers originate loans and sell them quickly to a big financial firm that "securitizes" them; in other words, it pools thousands of mortgages and issues marketable securities representing shares in the pool. These "mortgage-backed securities" are then sold to investors worldwide, to people with no idea who the original borrowers are.

Securitization is a marvelous thing. It has lubricated the market and made mortgages more affordable. We certainly don’t want to end it. But securitization sharply reduces the originator’s incentive to scrutinize the creditworthiness of borrowers. After all, if the loan goes sour, someone else will be holding the bag. We need to find ways to restore that incentive, perhaps by requiring loan originators to retain a share of each mortgage.

But wait. Don't the ultimate investors have every incentive to scrutinize the credits? If they buy riskier mortgage-backed securities in search of higher yields, isn’t that their business? The answer is yes — which leads me to point a fourth finger of blame. By now, it is abundantly clear that many investors, swept up in the euphoria of the moment, failed to pay close attention to what they were buying.

Why did they behave so foolishly? Part of the answer is that the securities, especially the now-notorious C.D.O.'s, for collateralized debt obligations, were probably too complex for anyone’s good — which points a fifth finger, this one at the investment bankers who dreamed them up and marketed them aggressively.

Another part of the answer merits a sixth finger of blame. Investors placed too much faith in the rating agencies — which, to put it mildly, failed to get it right. It is tempting to take the rating agencies out for a public whipping. But it is more constructive to ask how the rating system might be improved. That’s a tough question because of another serious incentive problem.
Under the current system, the rating agencies are hired and paid by the issuers of the very securities they rate — which creates an obvious potential conflict of interest. If I proposed that students pay me directly for grading their work, my dean would be outraged. Yet that’s exactly how securities are rated. This needs to change, but precisely how is not clear. … {emphasis added here}

The Public Be Damned

Last night Bill Moyers concluded his PBS Journal with the comment: "The Public Be Damned." After talking with, among others, NY Times Financial world columnist Gretchen Morgenson about fears of a financial meltdown and former Barry Goldwater speechwriter and advisor Victor Gold about his new book Invasion of the Party Snatchers: How the Holy Rollers and the Neocons Destroyed the GOP, it proves all to easy to see how Moyers comes to the conclusion that politicians and corporate moguls generally don't give a damn about the public interest. Public interest seems to be the farthest thing from their minds, almost all the time.

Like Gold, Moyers isn't a big fan of what politics has become in the USA. But we will leave the vetting of American politics to others. Here is a link to Bill Moyers' Journal, June 29, Morgenson (video and transcript). And here is part of the Morgenson/Moyers conversation (with my highlights):

… [W]oes on Main Street reach back to Wall Street and vice versa. That's behind the fear of a financial meltdown. Gretchen Morgenson covers the financial world for the New York Times. A former stockbroker, she's now a columnist and assistant business and financial editor at the Times. She won the Pulitzer Prize in 2002 for her trenchant and incisive coverage of Wall Street. Welcome to The Journal. …

BILL MOYERS: You ended your column this week saying, "Hold onto your hat. It's going to be an interesting summer." … What's going to happen?

GRETCHEN MORGENSON: We're just starting to see, I think, the shaky ground that is the result of what you just described, which was excessive amounts of loans made to people who could not afford them and excessive amounts of money thrown into the mortgage arena by investors who were very eager for high-yielding investments. I think it was a mania. It fed the real estate mania, the real estate bubble in many parts of the country.

BILL MOYERS: Is it conceivable to you that Bear Stearns and some of these other firms could trigger, in fact, a meltdown, a falling domino all the way through the economic cycle that everybody would be affected by this?

GRETCHEN MORGENSON: Well, I think the economy is already being affected by it, Bill, because real estate has been such a driver. The increase in home prices was such a driver of the economy for so long. You know, people were withdrawing equity from their homes. As they saw the value of their homes go up, they were taking them out. They were using them like an ATM, cashing out that equity and going to Europe on a vacation, maybe buying a second home. It was a way for the consumer to cash out of what he or she saw was an escalating asset. And that drove a lot of consumer spending. You're seeing it in the home builder stocks that are down. You're seeing it in Home Depot, companies like that that are not having the, you know, revenues and earnings that they did because people are not-- they're pulling back now. They're not buying the second home. They're trying to get rid of the second home. So it's already started to affect the economy in the overall.

BILL MOYERS: I mean, it's one thing for a homeowner out there in New Jersey or Denver or Dubuque to have to foreclose. Sad, personal tragedy. But what makes that and what makes Bear Stearns create what the New York Times editorial said is a dangerous financial time"?

GRETCHEN MORGENSON: So many things. But one thing is in the old days when you borrowed to buy a home, you had a one-on-one relationship with your banker. The banker knew you. You knew the banker. He knew or she knew whether you were money good on that loan. And it--

BILL MOYERS: That you could pay it back.

GRETCHEN MORGENSON: And that you could pay it back. And you would have a relationship with that person. Now, who knows who owns your loan? Wall Street has come up with this wonderful system of packaging mortgages into big, huge pools of thousands of mortgages. Slicing them up, cutting them up, and selling them to investors. I've talked to lawyers who are trying to help people out who are in foreclosure who can't even identify who owns the loan.

BILL MOYERS: So somebody lends money to a home buyer who's not a good credit risk, who can't really pay it back. But then that lender, as I understand it, sells the loan to Wall Street. And the lender walks away.

GRETCHEN MORGENSON: Correct. Correct.

BILL MOYERS: And that just escalates with a lot of people doing it?

GRETCHEN MORGENSON: It feeds into this idea that we need to make more loans. The lender in the old days kept the loan on the balance sheet, had an interest in seeing that it was repaid. Now this lender sells it to someone else. Not his problem anymore. Gets the money back to make another loan. The lenders now are more interested in earning the fees associated with the mortgages, which are extremely lucrative. And they have no credit risk because they have pawned off the loan on somebody else; it's somebody else's problem. That helped to feed this mania for mortgage produ-- mortgage securities that then played into this idea of giving a mortgage to anybody who was ambulatory.

BILL MOYERS: No questions asked.

GRETCHEN MORGENSON: No questions asked.

GRETCHEN MORGENSON: We had a situation where they would give money to people who could not document their income, who could not provide a down payment. Then you would have second loans on top of those loans. There was so much money around, Bill, that seeking, you know-- looking for a way to be deployed--

BILL MOYERS: To earn interest. …

GRETCHEN MORGENSON: There was so much money around that they just threw it at anybody.

BILL MOYERS: The chairman of the House Financial Services Committee, Barney Frank said on television this week that it's a pretty simple matter. Don't lend money beyond what they can expect to pay and don't lend money without verifying what people can pay back. That's pretty good advice, isn't it? Why don't they follow it?

GRETCHEN MORGENSON: Sounds pretty simple, right? Well, why didn't they follow it? Because there was so much money to be made in fees by not following it. Throw money at people who can't pay their loan back. It won't matter. I'm not going to own the loan. I'm not going to have it. It'll be somebody else's problem by the time it comes a cropper.

BILL MOYERS: So what's the effect down on Main Street? When you look out across the country, what does this mean to ordinary folks?

GRETCHEN MORGENSON: I think we're going to have a protracted decline in real estate prices. And whether or not it depends what your circumstance is. Each person's different. Do they have equity in their home? Then they don't have to worry so much. If they don't have equity in their home and they have a mortgage that's going to reset at a higher rate because interest rates have risen, maybe they can't afford the mortgage anymore. Maybe their house is going to go on the market. It's going to be a long, unwinding process. It's not going to be pretty. It's going to have a negative or a pressure effect on real estate. Continued. We've already seen it to some degree. And I just think that people are going to be less willing to take risk. And that will extend into the corporate bond market, the ability for companies to raise money, their interest costs will go up. They'll have to pay investors more because investors are going to say, "Wait a minute. I'm afraid of risk here. I'm going to demand more money for my investment dollar." Companies will have to pay more. It's going to have a major impact.

BILL MOYERS: So who's responsible for this fiasco?

GRETCHEN MORGENSON: Wall Street is responsible. Investors, to some degree, are responsible. They were clamoring for yield. They wanted more return on their investments. Regulators were asleep at the switch. Bond rating agencies were asleep at the switch. They're supposed to be out there telling people this is a solid company or this is a solid loan or this is not. There were a lot, a lot of fail safes that failed.

BILL MOYERS: Who's supposed to be minding the store?

GRETCHEN MORGENSON: Well, that's the problem. Again, we have a situation where there are regulatory loopholes or cracks in the system that allow this kind of speculation to take place. First of all, in the old days, a banker had to, of course, respond to his regulator and had to have the proper implementation of rules and regulations. Now we have mortgage brokers that are not regulated by anyone. We have mortgage appraisers who might have an interest in jacking up an appraisal on a property to get a fee. They're not regulated by anybody. So we have these cracks in the regulatory net that have allowed this mania to really go on.

BILL MOYERS: But where's the Fed in all this? I mean I was in Washington a number of years. The Fed had an office of banking. Its job, its mission was to try to make sure that there was some due diligence and some oversight of this kind of process. What's happened to that?

GRETCHEN MORGENSON: Well, the Fed is interested in the safety and soundness of the financial system, okay? And so in this particular situation, you have loans that are being made, then securitized, made into securities sold on Wall Street. So the bank is not at risk necessarily as much as it was in the old days when a bank might make a bad loan. Now it's the investor who owns the loan. The Fed is not about protecting investors. That's the Securities and Exchange Commission's job. So it's changed the whole way that mortgages are now sold, underwritten by banks and then securities firms has changed the entire makeup of this market, turned it into a mania, and now we're feeling the ill effects of the unwinding.

BILL MOYERS: Was Washington feeding this, fueling this, or welcoming this? I mean, after all, it is a good thing when people can buy homes that they couldn't afford otherwise. So if you're a politician there and people are happy in your district because they're buying a house, you'd feel pretty good about that, right?

GRETCHEN MORGENSON: Absolutely. And it's been a policy of the government to try to encourage home ownership. And under-- with this mania, with the subprime loans that were going on, we did reach a peak in home ownership of 69 percent.

BILL MOYERS: Right. The highest in history.

GRETCHEN MORGENSON: The highest in history. But I would ask you, "What's the good of getting people into a home if they can't afford it and they're then going to have to go into foreclosure?" It goes back to the idea of suitability. Are these loans suitable to the people that you're giving them to? Are these investments suitable to the investors who are buying them? There seem to have been a breakdown in that question.

BILL MOYERS: Is there anything anybody can do? The government? More regulation? What?

GRETCHEN MORGENSON: I'm not really a fan of more regulation when the existing one didn't work. I think smart regulation is the answer here. I think what you alluded to earlier is a really important point. In the securities industry, in Wall Street, when you buy a stock, you are supposed to-- your stock broker's supposed to say, "Bill, is that an appropriate stock for someone of your income? Your age? Your needs? Your-- you know, what are you looking for?"

You're not supposed to buy a sketchy stock if you're a person who only wants safety. Why can't we have that same kind of an idea with a mortgage? Is this mortgage product appropriate for you? In the securities laws it's called "know your customer." It's called-- you know-- is it appropriate for you? I think we need something like that--

BILL MOYERS: Because it--

GRETCHEN MORGENSON: --in lending.

BILL MOYERS: --doesn't the government have to ask it?

GRETCHEN MORGENSON: No.

BILL MOYERS: Who does?

GRETCHEN MORGENSON: It's left up to the bank, to the lender, to the mortgage broker, and that--

BILL MOYERS: Bear Stearns?

GRETCHEN MORGENSON: Yeah.

BILL MOYERS: To the hedge funds that Bear--

GRETCHEN MORGENSON: Yeah.

BILL MOYERS: But I mean, look what they've been doing. Their past experience is no indication that they will respond to what you're saying.

GRETCHEN MORGENSON: Only if they're held accountable.

BILL MOYERS: By?

GRETCHEN MORGENSON: And if they have to pay the bill that comes a cropper. Let's not make it a bail out where the taxpayer bails out Wall Street, please.

BILL MOYERS: Then Wall Street would be the winner and--

GRETCHEN MORGENSON: Then Wall Street would say, "Fine. I'll go do that again. I'll go throw money at a problem and let it blow up, and I don't mind."

BILL MOYERS: Does this contribute to what you and I both know are-- is growing inequality in the country? The gap between the rich and the poor? The greatest gap since 1929? Is this contributing to that gap?

GRETCHEN MORGENSON: To the degree that Wall Street made an awful, awful lot of money on these securities, yes, it contributes to that gap. To people who work on Wall Street, you saw the enormous bonuses, the enormous payouts to the CEOs of these firms. Absolutely. The mortgage mania contributed to that. The little guy doesn't have the benefit of all the powerful friends in Washington and the powerful friends on Wall Street. The little guy is just trying to be able to retire comfortably and not have to scrimp and worry about money. And he and she have a right to that. And if we're in an ownership society that's ballyhooed around, that should be a benefit. That should be who wins. But unfortunately, the little guy is the guy that's usually the bag holder.

BILL MOYERS: Are we living in a new gilded age?

GRETCHEN MORGENSON: Absolutely. A new gilded age. Except this time around, instead of when we had Vanderbilts and Goulds and Morgans and pick your name, building--

BILL MOYERS: Rockefellers.

GRETCHEN MORGENSON: --physical assets that produced goods that people bought or transported--

BILL MOYERS: Railroads-- railroad steel firms.

GRETCHEN MORGENSON: --goods. Correct.

BILL MOYERS: Right? Right.

GRETCHEN MORGENSON: Now, this gilded age is all about pushing paper around and making money on money.

BILL MOYERS: Financial engineering.

GRETCHEN MORGENSON: Financial engineering. Exactly.

Bernanke's Puzzle

Over at Econbrowser, James Hamilton suggests that the Fed may have trouble preventing cascading liquidity problems now that support for the dollar is so fragile. Such trouble could be close at hand given the unfolding subprime mess. Hamilton leads off by explaining how the Fed has averted past panics, but then goes on to explain how such power may not be available in the future. Hamilton's arguments on both fronts are worth a look:

Financial Crises, James Hamilton, 3/6/2007: … [W]hen the World Trade Center towers collapsed on September 11, many of the financial institutions [PDF] that played a key role in trades of government securities and interbank loans were wiped out or incapacitated, posing potentially huge liquidity problems [PDF]. The Fed reacted with an extremely aggressive temporary creation of reserves, which prevented those liquidity disruptions from having major consequences. Americans were appropriately focused on other concerns that day. But we can thank the Fed that among those concerns was not a financial panic. …

So does this have anything to do with current concerns about subprime mortgages and interlayered hedge fund risk? I would take away two points from this discussion. First, insofar as we are talking about solvency problems, there is little the Fed is able to do to prevent those— some subprime mortgages are going to default, and that's that. However, the Fed can and will prevent these from cascading into broader liquidity problems, by which I mean insolvencies created solely because of forced liquidation or unavailability of short-term credit. Even so, the Fed's capacity to move aggressively on this front is potentially limited by the need to avoid a precipitous collapse in the value of the dollar. Whether the outcome would look more like the U.S. in 2001 or Korea in 1997 remains to be seen.

ECB on Hedge Fund "Risky Business"

Ok, I admit it. I'm obsessed with the possibility of systemic breakdown led by too many (some deemed "too big to fail") playing too risky games in hedge funds. New Economist reports (as adapted with a "hat tip") :

Friday's Financial Times has this front page headline: "ECB warns of hedge funds risk to stability" [S]. Here is an excerpt from Ralph Atkins and Chris Giles' page one piece:

Hedge funds have created a "major risk" to global financial stability for which there are no obvious remedies, the European Central Bank warned yesterday in one of the bluntest official statements yet on the rapidly growing sector.

In a clear hint of rising official nervousness about the multi-billion-dollar industry, the ECB ranked an "idiosyncratic collapse of a key hedge fund or a cluster of smaller funds" in the same category as a possible bird flu pandemic as the type of shock that could trigger fresh disruption in financial markets.

The ECB's remarks will play to the hostility felt by some European political leaders over the growing influence of hedge funds. Last year, they were described as "locusts" by Franz Müntefering, now the German deputy chancellor. They come amid a debate among financial regulators around the world over the regulation of hedge funds.

The ECB's concern contrasts with a more relaxed attitude at the International Monetary Fund and the Bank of England, both of which have stressed the positive role of hedge funds while acknowledging possible dangers.

The ECB's comments came in the Frankfurt-based central bank's latest "financial stability review", which, for the first time, included a special section on hedge funds. The review highlighted an increasing tendency by funds to mimic strategies followed by others. It noted that the correlation of hedge fund returns had "surpassed levels seen just before the near collapse of Long Term Capital Management in 1998".

...Presenting the report, Lucas Papademos, ECB vice-president, said that if business conditions changed and many hedge funds reacted in a similar way, "because of the similarity of strategies, the implications for asset prices are going to be more pronounced". He stepped up ECB demands for greater transparency.

Here is the ECB media release for the report, and a link to the June 2006 Financial Stability Review [2.5Mb PDF]. (The section on hedge funds starts at page 133.) Here is the 'overall assessment' from that section. It's quite a stark warning, accompanied by some compelling analysis:

As the hedge fund industry keeps on growing, its expansion continues to raise questions about capacity constraints and the impact of hedge funds’ largely unconstrained investment strategies on financial markets. In addition to potentially high leverage, the increasingly similar positioning of individual hedge funds within broad hedge fund investment strategies is another major risk for financial stability which warrants close monitoring despite the essential lack of any possible remedies. This risk is further magnified by evidence that broad hedge fund investment strategies have also become increasingly correlated, thereby further increasing the potential adverse effects of disorderly exits from crowded trades.

It is difficult to gauge what could cause correlated sell-offs and how damaging these could be, but one possible trigger could be an abrupt end of the recent global search for yield possibly induced by the tightening of global liquidity conditions. A further slowdown of inflows into hedge funds or even widespread redemptions could also exert pressures on individual hedge funds to liquidate increasingly less liquid holdings, as more hedge funds seem to be venturing into less liquid markets in order to earn the associated liquidity premium. Since the valuation of such investments is often arbitrary, investors may not always be presented with an accurate picture of fund positions and performance.

Derivative Markets Jitters Again

The May 19 Financial Times notes [$]:

The recent sharp falls in stock markets appear to have been exacerbated by an unusual wave of derivatives activity on the part of hedge funds and big banks, traders yesterday indicated.

In particular, some banks and big investors appear to have been forced into selling large amounts of equity futures because they have been acting as counter-parties to large, leveraged bets on the direction of stock market volatility in recent months - and these bets are now unravelling because volatility has increased sharply.

As I begin, once again, to get nervous about derivatives, hedge funds, and risk concentration, Doug Noland chimes in to reinforce my nervousness with his latest Credit Bubble Bulletin. Somebody please provide help me understand why my nervousness is misplaced! Until then, here's a bit of Noland's thought:

...From the 1987 stock market crash, the Fed understood that it may very well be necessary to intervene in the marketplace to cushion the influence of some of the new financial "innovations." This certainly included interventions to forestall marketplace bouts of trend-following derivative-related selling and other forced liquidations. This policy insight served them well during the LTCM crisis. When the disintegration of a highly leveraged portfolio of international bond bets risked precipitating a global financial market dislocation, Greenspan hastily intervened. The Fed shielded the insolvent LTCM from liquidation, aggressively cut rates, added liquidity and, importantly, assured the markets that the U.S. government – the Greenspan, Rubin and Summers "Committee to Save the World" –– were ready and willing to employ unprecedented measures to guarantee liquid and continuous markets. I have in the past written extensively regarding the momentous moral hazard implications of this endeavor and will not delve further into this issue this evening.

With regard to policy implications, the Greenspan Fed emerged from the LTCM crisis resolution with an intrepid appreciation for the unparalleled power and control they now exercised over marketplace liquidity. Virtually on demand, Greenspan could incite risk-taking and leveraged speculation, both activities that would immediately add to marketplace liquidity, stimulate borrowing and risk-taking, boost asset prices, and only somewhat later stimulate economic activity.

The instantaneous actions of today's leveraged speculators can be compared to the influence adding reserves and tinkering with interest-rates – the Fed's old toolkit - previously had nudging along bank loan officers and businesspersons. I have always believed that the primary impetus for Greenspan's championing of derivatives, hedge funds and Wall Street finance was that they afforded him the most powerful policy device in the history of central banking. Besides, in post-LTCM analysis, the Fed could rationalize their intervention with the notion that their encroachment stemmed the forced liquidation of high-quality debt instruments held by Credit-worthy borrowers.

The next major financial crisis will be of much broader scope than 1998, just as LTCM was to 1987. I believe the probability for such a crisis during the next year is high, and I wouldn’t be surprised if recent market turbulence is a precursor to trouble ahead. With this in mind, I will briefly share some thoughts I have as to why the next crisis will be significantly more problematic for the Fed.

First of all, I cannot write enough times that the key to the so-called "resiliency" of the U.S. markets and economy has been due to the capacity for uninterrupted Credit growth and marketplace liquidity creation. While there have been a few instances where the flow of new finance was at risk, in each case the Credit wheels were greased with lower rates and assurances of a hospitable environment for risk-taking. The Fed enjoyed great flexibility during the LTCM crisis. The global backdrop (post-Mexico, SE Asia and Russian collapses) was quite disinflationary, especially in the energy and commodities markets. Oil was heading to $10, gold to $250, and the CRB index to multi-decade lows. And, importantly, while the dollar did weaken around the time of the worst of the LTCM scare, it had rallied 25% over the preceding three-year period (on its way to King Dollar highs). The Fed enjoyed the incredible luxury of inciting massive Credit inflation with confidence that dollar liquidity would readily find a home in U.S. securities markets (where the nature of its inflationary impact was largely contained).

The genesis of the problem for the market during 1998 was one of illiquidity and the forced unwind of various Credit spreads, derivatives, and interest-rate arbitrages. The potential collapse and liquidation of LTCM (and copycats) was hanging over the marketplace; players were either hastily liquidating positions or completely backing away from the market in anticipation of a marketplace dislocation. But this predicament was certainly amenable to lower rates, additional liquidity, and concerted Fed and Treasury assurances that a marketplace disruption would be avoided at all costs.

The next financial crisis will be much less agreeable. For one, I believe the general nature of leveraged speculating is different today. The type of the underlying assets being financed (distorted and inflating global assets) is altogether different, and the general inflationary/liquidity backdrop is unrecognizable from 1998. Whereas LTCM speculations were primarily Credit spreads and various rate-arbitrages, I fear the prominent trades today are more of the global carry trade variety. These involve borrowing in low-yielding currencies to finance speculations in instruments of higher-yielding currencies. This recalls SE Asia, Russia and Argentina.

Objectively surveying the global environment, one can surmise that today's leveraged speculations are financing gross and unsustainable distortions (including U.S. over-consumption and global asset inflation). This implies especially weak underlying Credit instrument fundamentals, basically a non-issue back in 1998. To what degree leveraged speculations have been financing our Current Account Deficit is unknown, but this could prove to be a huge issue in the event of a currency market disruption. One can envisage a scenario where the Fed's best intention of supporting the marketplace in providing Credit to "worthy borrowers," is undermined by the deteriorating view of U.S. creditworthiness. There is a huge risk associated with financing serial current account deficits and asset inflation with market-based leveraged speculations. To be sure, U.S. imbalances and policymaking are certainly held in much less regard these days.

I will suggest this evening that acute dollar vulnerability is poised to significantly curtail the Bernanke Fed’s flexibility. The ramifications for a policy approach that pushes the Credit system into overdrive to counter financial disruption are different going forward - perhaps much different. The greatest problem for the global financial system currently is enormous and relentless dollar liquidity excess. Inciting Credit growth and risk-taking may very well prove counter-productive, and it is likely that aggressive (1998-style) Fed actions would exacerbate a flight out of dollar securities. A flight from the dollar would only then worsen the deteriorating inflation backdrop. Not only is it possible that the Fed loses the luxury of lowering rates during the next crisis, it may very well be forced at some point to do what other countries are forced to do - raise rates to mitigate a run on its currency.

Perhaps we've already been somewhat privy to the backdrop for the next crisis: a sinking dollar, spiking metals prices, surging crude, and rising global bond yields. A scenario where marketplace dislocation manifests first in the currency markets (with a faltering dollar) is as reasonable as it would be problematic. Here, one would assume that the Fed’s proven modus operandi of adding liquidity, cutting rates, and inciting more Credit and liquidity would be only counter-productive. And, as we have witnessed, the nature and consequence of current leveraged speculation are more unsettling than those preceding 1998. Today's inflationary backdrop nurtures destabilizing speculative leveraging in all the "un-dollar" markets – certainly including the emerging markets and commodities. This creates a highly unstable situation prone to myriad and recurring Bubbles, volatility and busts. Accordingly, the characteristics of the underlying debt instruments are problematic and increasingly susceptible to wild price gyrations.

I read a lot about Bubbles these days: The "energy Bubble", the "metals Bubble", the "commodities Bubble", the "emerging market Bubble", the "hedge fund Bubble", and so on. But most of the analysis misses the more salient points. What we’re dealing with – the overriding issue is - The Dollar Liquidity Bubble. The combination of massive Current Account Deficits and outbound (investor and speculator) finance is inundating the financial world, and there is no way short of a major U.S. crisis to rein it in. This liquidity is fueling myriad dramatic global marketplace price inflations – as well as the occasional hiccup - along the way. I don’t view recent pull-backs in these markets as bursting Bubbles because I don’t yet see any change to the nature of underlying dollar liquidity excess. ...

Early this week, Stephen Roach also warned investors to be afraid of riding commodity bubbles, hedging his warning carefully, however, as to when such bubbles might burst:

…Price increases are begetting more price increases. Yes, it can go on for longer than we think -- speculative blow-outs usually do. But history tells us how it will end. Play the commodity bubble of 2006 at your own peril..

I still believe concentration of risk in derivatives markets remains a big danger to our financial system. I agree with many that the ability to hedge bets is useful, and that ultimately more and better derivative instruments, hedge funds etc. will make our system better, not worse. But I fear that our current regulatory system is not yet up to the task. We are still vulnerable. Maybe we live in one of those times when basic problems will not be fixed this side of severe crisis, just as John Kenneth Galbraith argued was the case in the Roaring Twenties. Or maybe some of us worry too much.

Two books that seem important, at least to me, are: Peter L. Bernstein's Against the Gods: The Remarkable Story of Risk, and Roger Lowenstein's When Genius Failed: The Rise and Fall of Long Term Capital Management. Neither of these books help to calm my nerves, but both give insight into our current plight. If others want to serve up other books (blog posts or whatever) to help calm my nerves, please do.

I heard early this week that more than eight in 10 US citizens are optimistic about their future, despite recent and continuing political messes, wars, etc. I wonder what drugs they've been taking. It all reminds me of Soma from Aldous Huxley's Brave New World, or better still Huxley's nonfiction follow-up Brave New World Revisited.