From the Dallas Fed…

You can see the size and breadth of the Fed’s efforts to counter the collapse of the credit mechanism in our balance sheet. At the beginning of this year, the assets on the books of the Fed totaled $960 billion. Today, our assets exceed $1.9 trillion. I would not be surprised to see them aggregate to $3 trillion—roughly 20 percent of GDP—by the time we ring in the New Year. The composition of our holdings has shifted considerably. Previously, almost 100 percent of our holdings were in the form of core holdings of U.S. Treasuries; today, less than a third are. The remainder consists of claims deriving from our new facilities.

(h/t Calculated Risk)

From Naked Capitalism…

Notice how Keynes expected employment to fall in capital goods industries. We have no version 2.0 for an economy so heavily dependent on financial services. I also wonder, even though the US badly needs infrastructure, if any of these newfangled theories allow for how specialized labor has become. One of the reasons that employment didn’t fall sooner is that even seemingly mundane jobs now require employer specific knowledge (computer systems, internal procedures) that make it more costly to bring a new person on board and deters firing.

Put more simply, how is creating jobs in repairing infrastructure going to help unemployed bank workers? Even if they were willing, many will prove not to be able, and will also be living at a remove from where the jobs would be. In an advanced economy, labor is not terribly fungible.

I have never been a fan of Keynes for reasons that are similar to this. Only my objections have always been based around the fact that real capital is not terribly fungible. I feel that the primary cause of recessions and depression is a misalignment of the capital structure and I don’t think those types of problems can be cured by creating more “demand”.

Yves Smith is simply pointing out the human capital has similar problems. If you train too many people to be lawyers and bankers and not enough to be construction workers, you can’t fix that problem by stimulating the economy.

From the Washington Post…

In the initial weeks of the global financial crisis, Chinese officials resolutely declared that they were not significantly affected. But now, as factory closings, dire corporate earnings reports and stock market losses continue to mount, the Communist Party’s confidence has changed to another feeling entirely: fear.

For the first time in the 30 years since China began its capitalist transformation, there is a perception that the economy is in real trouble. And for the Communist Party, the crisis is not just an economic one, but a political one. The government’s response offers a glimpse into its still ambiguous relationship with capitalism — relatively hands-off in good times, but quick to intervene directly at the first signs of a downturn in order to prevent popular unrest.

Read the whole article.

From Bloomberg….

Borrowing needs are expected to rise to $550 billion in the three months to Dec. 31, compared with the $142 billion predicted in July, the Treasury said in a statement in Washington. That follows a $530 billion record in the July-September quarter.

As Calculated Risk says…

As I noted over the weekend, these huge financing needs combined with foreign governments need to stimulate their domestic economies (and maybe even selling foreign reserves) could lead to higher intermediate to long term rates in the U.S. next year – right in the middle of a recession.

We have been preaching that for a while. People should not be fooled by the current low rates interest rates on the Federal Debt. They will not last.

From Market Watch….

General Motors Corp said Monday that October U.S. light vehicle sales fell 45.1% to 168,719 units from 307,408 a year ago.

From Bloomberg….

Ford reported a 30 percent decline and Toyota posted a 23 percent drop. Honda Motor Co.’s were down 25 percent and Nissan Motor Co.’s slid 33 percent.

From the New York Times…

The Treasury Department has turned down a request by General Motors for up to $10 billion to help finance the automaker’s possible merger with Chrysler, according to people close to the discussions.

As Calculated Risk Says…

A possible GM-Chrysler merger probably only makes sense to GM with government help – and with tens of thousands of projected layoffs (some estimates are 200 thousand job losses including suppliers and other service providers), this deal probably isn’t very appealing to lawmakers.

Without this deal, Chrysler will probably go bankrupt – and the jobs will be lost anyway – and some lenders will be stuck with Chrysler pier loans (more write downs for some banks).

From the Economist….

The cut also means that Japan is once again approaching a point where it has a de facto zero-interest-rate policy (ZIRP). With nowhere else for rates to go once ZIRP is achieved, there is a higher probability that the BOJ might have to return to its unorthodox policy of “quantitative easing”—introduced in 2001 and abandoned in 2006—under which the bank attempted to control monetary policy not through interest rates but by targeting current-account balances held with it by banks. Under quantitative easing the BOJ flooded the banking system with liquidity, raising its target for banks’ current-account balances far above the statutory minimum. The policy reflected recognition that zero or near-zero interest rates were insufficient on their own to stimulate Japan’s economy.

Insanity is doing the same thing over and over again and expecting different results. Zero interest rate policy did not help Japan the first time around, and it will not help things the second time around.

I explained some of the reasons why this is so here.

From the Wall Street Journal…

As recently as 1995, 73.5% of Berkshire’s total assets consisted of a portfolio of publicly traded stocks that (at least in theory) any investor could have replicated. As of June 30, though, Berkshire’s stockholdings made up just 25% of its total assets.

The whole thrust of the article is that it is hard to tell how good of a stock picker Warren Buffett is now because he invests in so many private deals. But Warren was saying since the late 90’s that the stock market was overpriced. So it is no surprise that he sought to make money elsewhere.

More to the point, Berkshire is so big that it is hard for Buffett to make money in the stock market. The stock market is not a big enough pool for a whale like Berkshire to play in. Berkshire’s shareholders are better off if Buffett uses Berkshire’s size to bully good terms out of people who are desperate for large amounts of cash.

Sooner or latter Buffett is going to fail and fail spectacularly. It is the nature of being human and I think that Buffett is to attached to the game to get out while he is on top. Still, his run so far has been amazing.

In this rant, Steve Waldman laments the fact that we lack a real financial system.