Cast Aways: A Thought Experiment

Here is a thought experiment:

Imagine an Island with population for 4 people: Frank Farmer, Charlie Chef, Mike Miner, Sam Smith.

Frank grows grains for all the other three, Charlie bakes and cooks for all the other three, Mike Mines Iron & coal, and Sam makes tools for all the other three. They sleep in caves and live their lives.

Frank saves some grains for that proverbial rainy day. Mike saves some coal and steel, just in case the mine collapses, or if he falls sick. Charlie pickles some vegetables and meat, just incase. Sam keeps few extra tools, just in case he becomes handicapped.

One fine day, Barry Bum washes up the shore of the Island. The islanders welcome Barry. They had an overdose of confidence. Out of the goodness of their heart, they feed Barry the first day. Barry promises that he will pay them back with interest. Next day, Barry eats another meal and gives them an IOU. All of a sudden, Charlie realizes that there is more demand for his cuisines, he starts to serv up his savings. He realize that he needs more utensils, which comes from Sam's savings. Sam suddenly realizes that he needs to replenish his savings, and demands more from Mike's savings. Charlie demands more grain from Frank and that starts to deplete Frank's savings. This goes on for some time as everybody keeps themselves busy. Barry in the mean time takes a vacation to a near by island for a couple of days and comes back ( Home equity extraction ). Once the savings gets depleted, people work harder and produce a little bit more than they used to, to feed the extra person Barry.

Then proverbial rainy day arrives; Charlie falls sick and decides to cash the IOUs he has recieved from Barry. However, Barry has nothing to pay his debts with and hence no way for Charlie to repay his own debts back to Frank or Sam. This causes Sam to realize that he has no way of paying Mike. A credit crunch takes shape. They also realized that there is no need to do the extra work to keep feeding the unproductive Barry. Suddenly Charlie stop producing for Barry, hence he demands less from Frank and Sam.

Ed Empircal Economist comes to the picture and says, there is a lack of confidence. Charlie needs to start feeding Barry as if nothing has happened. He says aggregate demand is going down. See all the idle tools now? Government needs to take over and put these "idle" resources to use.

The reality is, economy was consuming more than it was producing, thus depleting the savings. It was malinvested in unproductive activities. May be, just may be, all the tools and savings allocated to making baking utensils need to re-allocated to some productive activity. May be they need to make pull-carts to transport the produce and iron ore.

If you introduce money into this island's economy, nothing changes. When the farmer produces 100 island dollars worth of grains and produce, converts it to cash and save 10 island dollars, that savings exist as real goods in the economy. Same goes for Mike Miner, Charlie Chef, Sam Smith. When an entreprenuer borrows money to invest, he is actually creating claims against these savings of real resources and putting them to use.

Printing a bunch of money and throwing into the island is not going to make the savings re-appear overnight. The depleted savings have to be rebuilt.

Real life characters are unlikely to lend to Barry the bum to the point of their ruin. Which is the reason why Garry Government, takes away the risk by guaranteeing all the loans, implicitly or explicitly.

Warren Buffet: Nobody Knows If Fiscal Stimulus will work

Susie Gharib: But there is debate about whether there should be fiscal stimulus, whether tax cuts work or not. There is all of this academic debate among economists. What do you think? Is that the right way to go with stimulus and tax cuts?

WB: The answer is nobody knows. The economists don’t know. All you know is you throw everything at it and whether it’s more effective if you’re fighting a fire to be concentrating the water flow on this part or that part. You’re going to use every weapon you have in fighting it. And people, they do not know exactly what the effects are. Economists like to talk about it, but in the end they’ve been very, very wrong and most of them in recent years on this. We don’t know the perfect answers on it. What we do know is to stand by and do nothing is a terrible mistake or to follow Hoover-like policies would be a mistake and we don’t know how effective in the short run we don’t know how effective this will be and how quickly things will right themselves. We do know over time the American machine works wonderfully and it will work wonderfully again.

( Via Calculated Risk: Click the subject line to read the whole thing )

Ascent of Money - Book Review

I finished reading this book last week. Niall Ferguson as always makes a very engaging read. Book covers a lot of ground in terms of monetary and banking history. Book tries to explain the role money, banking and finance has played in the development civilization. However, in the end, leaves the author with the impression that it has been put together too quickly, to get it to market before the current turmoil in the financial markets get too far ahead.

Book covers everything from the early history of money to the modern finance, from banking and it's italian origins to the rise of the Rothschild dynasty, and from Incas to the Chinese. I would definitely recommend this to anyone who wants read about the history of money & banking..

Personal disagreements aside about how he interpreted the history, and his solutions for the future, book leaves a lot to be desired in terms of organization. The last chapter on the "Descent of Money" was short and unconvincing to say the least. Mr. Ferguson has worked hard to remain unbiased, but his monetarist bias comes through every now and then.

Roubini Sees Global Recession

No Mercy!

Market Knoweth No Bounds To Its Fury :

1929-1932 chart is of the Dow Jones Industrial Average, as it collapsed 90%. That level of crash, if it were to occur now, will bring the DJIA down to about 1400. In otherwords, another 80% down from today's levels. That is an implausible scenario, if not impossible.

Rest of the charts are that of S&P500, which goes back only till 1957. It is a much broader index, more representative of the entire market. DJIA contains only 30 of some of the largest companies in the U.S., where as S&P 500 contains 500 of some of the largest companies in the U.S.

The tech crash at the earlier part of this decade happened over a period of 2.5 years.

On a positive note:
1. Dollar index staged a spectacular rally.
2. Option ARMs reset will be moderated by the collapse in interest rates, at least for now.

Big Three Update:

Executives at the Big Three flew into Washington in their corporate jets, carrying a tin cup
All three CEOs - Rick Wagoner of GM, Alan Mulally of Ford, and Robert Nardelli of Chrysler - exercised their perks Tuesday by flying in corporate jets to DC. Wagoner flew in GM's $36 million luxury aircraft to tell members of Congress that the company is burning through cash, asking for $10-12 billion for GM alone.

Writes IOUSA team:

“We have to face reality,” admitted Senate Majority Leader Harry Reid. Not the reality that an automaker bailout is a bad idea… but the reality that no one outside of Washington supports it.

Congress will recess until the week of Dec. 8, so members can go home, collect bribes, patronize their constituents, sleep with young aides and so on. When they return, the “Big Three” will present their case -- make one last stand -- and maybe, just maybe, this thing will be over.

Kashkari in the Hot Seat:



During last week's congressional testimony about the 700 billion TARP program, one of the congressmen asked Kashkari if he is a chump. With millions watching them on TeeVee, congressmen were just swinging for the bleachers. Despite what Kashkari wants you to believe, neither he nor Hank Paulson could care less about the home owners.

Status Quo Update:

President Elect Obama is likely to pick President of the New York Fed, Timothy Geithner, for the post of the Treasury Secretary. Boyish looking Timmy has been part and parcel of the NY banking establishment for the last 20 years, wheeling and deeling for the bankers, even as an epic credit bubble was ballooning in his backyard. If there is a shining beacon of unchange anywhere, Timmy is where you are likely to find it.

In another act of unchange, Democrats have decided to keep Neocon Joe Lieberman at helm of Senate Committee on Homeland Security and Governmental Affairs.

Monday Mishmash

Underwater Mountain:

Mountain House, CA on the verge of collapse. A bankruptcy could mean an end to police, fire, sewage, water, garbage services. I am not sure if all of those services are provided by that City.

Here is International Herald Tribune:

This town, 59 feet above sea level, is the most underwater community in America.

Because of plunging home values, almost 90 percent of homeowners here
owe more on their mortgages than their houses are worth, according to figures
released Monday. That is the highest percentage in the country. The average
homeowner in Mountain House is "underwater," as it is known, by $122,000.

A visit to the area over the last couple of days shows how the
nationwide housing crisis is contributing to a broad slowdown of the American
economy, as families who feel burdened by high mortgages are pulling back on
their spending.

Fed's Balance Sheet:

In the mean time Federal reserve expanded it's balance sheet to 2 trillion. A year ago, the balance sheet was just over 800 billion, of mostly AAA rated U.S government securities, and an year later $2.2 trillion claims on dead donkeys.

Financial markets experienced a giant margin call over the last couple of months, it was deleveraging at warp speed, triggered by the collapse of Lehman Brothers. Most, including those who were predicting this crisis, didn't see it getting unglued as fast as it did.

Detroit's "Big" three :

Bankruptcy of GM or for that matter Ford or Chrysler, is not the end of the world. There will still be GM branded cars sold world wide, GM will still be number 2 auto maker for the foreseeable future, post-bankruptcy GM will be under new management, the current shareholders will be wiped out, and most of the short/long term obligations of the company will be wiped clean as the creditors take over the company. Bankruptcy will help GM with an opportunity to emerge as a stronger and more vibrant company. Pensions are unfortunately guaranteed by Pension Benefit Guarantee Corporation a.k.a Tax Payers. Some employees will lose jobs, others in UAW will have to accept a payscale commensurate with rest of the manufacturing industry.

Tax payers, most of whom are suffering from the current downturn, who make a lot less than UAWer, in terms of salary and long term benefits, should not be paying for UAW's extravagance. It is the other workers depicted in this chart, who will be paying for the extravagance of the big three.

The bigger the unproductive firm, more important that it fails sooner. Unproductive firms put gargantuan amounts of productive resources to unproductive use; they are a wealth sink. In other words, keeping these unproductive corporations alive will only help dissipate wealth at a fast rate.

GM couldn't make money in 2005 or 2006, when the Japanese automakers were making record profits, and auto industry as a whole was at it's peak. Why should they keep making more cars than the consumers are willing to buy?

However, that is a lot of wishful thinking. The man of the moment, who is going to the oval office to kill the influence of the lobbyist in washington, is totally in the hands of UAW lobby. What he probably meant by his rhetoric, was to replace lobbyists from Goldman Sachs, Haliburton, Exxon, Bible thumpers, Neocons etc. with those from Morgan Stanley, AARP, AFL-CIO, UAW, GE ( green energy aka general electric ), Climate Change Armageddonists, Neocons etc. Collective looting will continue, however, it will be mostly by a different set of collecives. How is that for change? Yeah baby! Change your dog can roll in.

Cash Carry In the Hot Seat

Is he a chump? asks one congressman.

Bloomberg: Rate Cut Down Under

Australia's central bank cut its benchmark interest rate by a larger-than-expected three quarters of a percentage point, the third reduction in as many months, amid evidence global financial turmoil is buffeting the economy.

Governor Glenn Stevens lowered the overnight cash rate target to a 3 1/2-year low 5.25 percent in Sydney today, adding to last month's 1 percentage point reduction. Fifteen of 16 economists surveyed by Bloomberg News forecast a half-point cut and one tipped a quarter-point drop.

( Click the subject line to read the article )

Mandelbrot & Taleb Interview on PBS

Mandelbrot & Nassim Taleb on the credit crunch. Watch it here

Taleb is the author of "Black Swan: The Impact of the Highly Improbable"

Fed Acts Irresponsibly, Again!

The root cause of the current financial crisis was a lose monetary policy pursued by the Federal Reserve for most part of this decade. What is their solution to the current crisis? More of the same. Americans have been borrowing and consuming too much, and saving and investing too little. So here comes Fed with an incentive to save - a drop in interest rate to 1%. That should give a shot in the arm to the saving habits of Americans!

The solution for an indebted society, as far as the bureaucrats at the Fed goes, is to get them into debt some more. Talk about insanity

Here is the FOMC statement.

The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 1 percent.

The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures. Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit.

In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters to levels consistent with price stability.

Recent policy actions, including today’s rate reduction, coordinated interest rate cuts by central banks, extraordinary liquidity measures, and official steps to strengthen financial systems, should help over time to improve credit conditions and promote a return to moderate economic growth. Nevertheless, downside risks to growth remain. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.

In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 1-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Cleveland, and San Francisco.

Did Laissez-Faire Cause the Great Depression?

The enemies of the free market often quote Andrew Mellon, the treasury secretary under Hoover as evidence that President Hoover's hands off approach is what prolonged the great depression.

"Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. . . . [That] will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people"

However, using the above quote as evidence of laissez-faire is distortion of the truth. In fact, President Hoover was too much of an activist to sit on his hands and let the markets work. Until the crash of 1929, the general policy of the federal government to an economic crisis was a relatively hands-off approach. However, Hoover wanted to bail out the failing enterprises. Here is what he said during one of his campaign speeches in 1932 on this matter.

"we might have done nothing. That would have been utter ruin. Instead we met the situation with proposals to private business and to Congress of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic. We put it into action. . . . No government in Washington has hitherto considered that it held so broad a responsibility for leadership in such times. . . . For the first time in the history of depression, dividends, profits, and the cost of living, have been reduced before wages have suffered. . . . They were maintained until the cost of living had decreased and the profits had practically vanished. They are now the highest real wages in the world. Creating new jobs and giving to the whole system a new breath of life; nothing has ever been devised in our history which has done more for . . . “the common run of men and women.” Some of the reactionary economists urged that we should allow the liquidation to take its course until we had found bottom. . . . We determined that we would not follow the advice of the bitter end liquidationists and see the whole body of debtors of the United States brought to bankruptcy and the savings of our people brought to destruction."

Again from Hoover's memoirs...

"We developed cooperation between the federal, state, and municipal governments to increase public works. We persuaded employers to “divide” time among their employees so that as many as possible would have some incomes. We organized the industries to undertake renovation, repair, and, where possible, expand construction."

"I determined that it was my duty, even without precedent, to call upon the business of the country for coordinated and constructive action to resist the forces of disintegration. The business community, the bankers, labor, and the government have cooperated in wider spread measures of mitigation than have ever been attempted before. Our bankers and the reserve system have carried the country through the credit . . . storm without impairment. Our leading business concerns have sustained wages, have distributed employment, have expedited heavy construction. The Government has expanded public works, assisted in credit to agriculture, and has restricted immigration. These measures have maintained a higher degree of consumption than would otherwise have been the case. They have thus prevented a large measure of unemployment. . . . Our present experience in relief should form the basis of even more amplified plans in the future."

Rhetoric is one thing and reality is another. Reality was a Keynesian's delight. Huge deficit spending by the Hoover administration. The following is from America's Great Depression by Murray Rothbard(PDF format).

Federal expenditures rose from $4.2 billion in 1930 to $5.5 billion in 1931—excluding government enterprises, it rose from $3.1 billion to $4.4 billion, an enormous 42 percent increase. In short, in the midst of a great depression when people needed desperately to be relieved of governmental burdens, the dead weight of government rose from 16.4 percent to 21.5 percent of the gross private product (from 18.2 percent to 24.3 percent of the net private product). From a modest surplus in 1930, the Federal government thus ran up a huge $2.2 billion deficit in 1931.And so President Hoover, often considered to be a staunch exponent of laissez-faire, had amassed by far the largest peacetime deficit yet known to American history. In one year, the fiscal burden of the Federal government had increased from 5.1 percent to 7.8 percent, or from 5.7 percent to 8.8 percent of the net private product.

Hoover's (not FDR) Glass-Steagal

One thing Hoover was not reticent about: launching a huge inflationist program. First, the administration cleared the path for the program by passing the Glass–Steagall Act in February, which (a) greatly broadened the assets eligible for rediscounts with the Fed, and (b) permitted the Federal Reserve to use government bonds as collateral for its notes, in addition to commercial paper.

Does the following sound familiar?

During 1932, President Hoover greatly stepped up his one man war on the stock market, particularly on shortsellers, whom he naïvely and absurdly persisted in blaming for the fall in stock prices. Hoover forgot that bulls and bears always exist, and that for every bear bet there must be an offsetting bull, and also forgot that speculation smooths fluctuations and facilitates movement toward equilibrium. On February 16, Hoover called in the leaders of the New York Stock Exchange and threatened governmental coercion unless it took firm action against the “bears,” the shortsellers. The Exchange tried to comply, but not aggressively enough for Hoover, who declared himself unsatisfied.

Having warned the Exchange of a Congressional investigation, Hoover induced the Senate to investigate the Stock Exchange, even though he admitted that the Federal Government had no constitutional jurisdiction over a purely New York institution. The President used continual pressure to launch the investigation of what he termed “sinister” “systematic bear raids,” “vicious pools . . . pounding down” security prices, “deliberately making a profit from the losses of other people.” Beside such demagogic rhetoric, constitutional limitations seemed pale indeed. Secretary of Commerce Lamont protested against the investigation, as did many New York bankers, but Hoover was not to be dissuaded. In answering the New York bankers, Hoover used some unknown crystal ball to assert that present prices of securities did not represent “true values.”

Federal Home Loan Bank, a Hoover creation

President Hoover, we remember, had wanted to establish a grandiose mortgage discount bank system to include all financial institutions, but the rejection of the scheme by insurance companies forced him to limit compulsory coverage to the building-andloan associations. The Federal Home Loan Bank Act was passed in July, 1932, establishing 12 district banks ruled by a Federal Home Loan Bank Board in a manner similar to the Federal Reserve System.
$125 million capital was subscribed by the Treasury, and this was subsequently shifted to the RFC.

It didn't end there...

Measures such as Federal and state and local public works, worksharing, maintaining wage rates (“a large majority have maintained wages at high levels” as before), curtailment of immigration, and the National Credit Corporation, Hoover declared, have served these purposes and fostered recovery. Now, Hoover urged more drastic action, and he presented the following program:
(1) Establish a Reconstruction Finance Corporation, which would use Treasury funds to lend to banks, industries, agricultural credit agencies, and local governments;
(2) Broaden the eligibility requirement for discounting at the Fed;
(3) Create a Home Loan Bank discount system to revive construction and employment measures which had beenwarmly endorsed by a National Housing Conference recently convened by Hoover for that purpose;
(4) Expand government aid to Federal Land Banks;
(5) Set up a Public Works Administration to coordinate and expand Federal public works;
(6) Legalize Hoover’s order restricting immigration;
(7) Do something to weaken “destructive competition” (i.e., competition) in natural resource use;
(8) Grant direct loans of $300 million to States for relief;
(9) Reform the bankruptcy laws (i.e., weaken protection for the creditor). Hoover also displayed anxiety to “protect railroads from unregulated competition,” and to bolster the bankrupt railroad lines. In addition, he called for sharing-the-work programs to save several millions from unemployment.

Did I mention Smoot-Hawley or Hoover Dam?

It should be obvious that the Keynesian "improvements" at best did nothing to help the situation during the depression, and at worst worsened the depression. 10 years after the crash of 1929, the unemployment still hovered around 20%.

Now, let's look at the Japanese experience. We all have heard the expression Japan's lost decade - 1990s. Is that description really accurate? Japanese stock market recently hit the 1982 levels just last week. So it is more like 3 lost decades. Japanese followed the advise of the Keynesian and Monetarist economists. They started running huge deficits and public works programs ( Keynesian ) and dropped interests rate to effectively zero and printed money like it was going out of style ( monetarist ) and yet 20 years after the crash in Japan, the economy still sputters. The public works program has put the entire country under a think layer of concrete ( Isn't it amazing that the evironmentally friendly Keynesians would put whole nation under layer of concrete, to stimulate consumption? ), and yet it had no stimulatory effect.

Tractors for Stockbrokers, Maseratis for Farmers

Says Jim Rogers...

RIP: Good Times

Silicon Valley has been trying to digest news of a secret meeting held by top venture firm Sequoia Capital earlier this week. At the meeting, leading Sequoia partners laid out bleak short and long-term scenarios for the world economy — and strong medicine for the firm’s portfolio companies.(HT: venture beat )

Sequoia Capital on startups and the economic downturn

View SlideShare presentation or Upload your own. (tags: depression recession)

Greenspan's Flaw

Alan "Serial Bubble Blower" Greenspan, being an early admirer of Ayn Rand was for a Gold standard and hard money. In 1966, he wrote an essay titled "Gold and Economic Freedom". Ironically, went on to become a Central Banker. He supervised the biggest expansion of credit and money out of thin air backed by nothing.

Early Greenspan was not a free-marketer in the Friedmanite mold, instead, he was even more rooted in free market in the Misesian mold.

His whole life became a lie, the moment he became and advisor to President Richard Nixon.
Recently, Fox business interviewed Mr. Bubbles, where Alan, in a moment of honesty, revealed that he still believes in Gold standard. His 19 years at the helm of the politbureau, was a complete lie, he was doing something he never believed in.

Watch it here for yourself - the admission comes at 6 minutes and 35 seconds into the video.



In addition, in the above video, Greenspan asserted that he never discussed with his mentor Ayn Rand, the proper role of central banks in an economy; thats something really hard for me to believe.

Mike "Mish" Shedlock has a very interesting take on all this...

Only the free market can judge risks. The failures are not of the free market,
the failures happened because we did not have a free market.
Instead we had
governments sponsorship of the GSEs, government sponsorship of the ratings
agencies, micro management of interest rates by the Fed, fractional reserve
lending compounded by Greenspan himself authorizing sweeps of checking
accounts.
Sweeps permitted nearly every penny of money that is supposed to be
available on demand to be lent out. Money that you think is in your checking
account is simply not there. It has been lent out.

Here is congressman Ron Paul on Neil Cavuto discussing Greenspan's lies.

Minneapolis Fed: Credit Crisis is Made Up

According to this study by Minneapolis Fed, ponzi Credit is still flowing through the arteries of the economy.

Bloomberg: Morgan Stanley's Bonuses Get Saved By You and Me

Wall Street had it wrong: An investment bank's most precious asset isn't the army of employees who head down the elevators each day. It's the paychecks they take with them out the door.

You can imagine the devilish grins on the faces of Morgan Stanley employees last week, after the Treasury Department said it would pump $10 billion into the bank. Not only did we, the taxpayers, save their company, with the help of a Japanese bank named Mitsubishi UFJ Financial Group Inc. More importantly, we funded their 2008 bonus pool.

( Click the subject line to read the whole article. )

Chavez Calls President Bush a Comrade

Reuters: Chavez says "Comrade Bush" turns left in crisis (via drudge report )

Socialist Venezuelan President Hugo Chavez mocked George W. Bush as a
"comrade" on Wednesday, saying the U.S. president was a hard-line leftist for
his government's intervention of major private banks in the U.S. financial
crisis.

Chavez, who calls capitalism an evil and ex-Cuban leader Fidel Castro
his mentor, ridiculed Bush for his plan for the federal government to take
equity in American banks despite the U.S. right-wing's criticism of Venezuelan
nationalizations.

Hugo is right for a change

Biggest % Gain Days for the DJIA

The rally that I have been expecting, is finally here. Howeverm, it is likely to be a short term phenomenon. Here is an interesting set of historic data for the dow, shows a list of biggest percentage gain days for the DJIA.

1. 1933-03-15 62.10 +8.26 +15.34
2. 1931-10-06 99.34 +12.86 +14.87
3. 1929-10-30 258.47 +28.40 +12.34
4. 1932-09-21 75.16 +7.67 +11.36
5. 2008-10-13 9,387.61 +936.42 +11.08
6. 1987-10-21 2,027.85 +186.84 +10.15
7. 1932-08-03 58.22 +5.06 +9.52
8. 1932-02-11 78.60 +6.80 +9.47
9. 1929-11-14 217.28 +18.59 +9.36
10. 1931-12-18 80.69 +6.90 +9.35
11. 1932-02-13 85.82 +7.22 +9.19
12. 1932-05-06 59.01 +4.91 +9.08
13. 1933-04-19 68.31 +5.66 +9.03
14. 1931-10-08 105.79 +8.47 +8.70
15. 1932-06-10 48.94 +3.62 +7.99
16. 1939-09-05 148.12 +10.03 +7.26
17. 1931-06-03 130.37 +8.67 +7.12
18. 1932-01-06 76.31 +5.07 +7.12
19. 1932-10-14 63.84 +4.08 +6.83
20. 1907-03-15 81.33 +5.10 +6.69

October 13, 2008 was number 5 in ranking. Most of the biggest rallies in the stock market have come in the midst of furious bear markets.

Government Solutions

In trying times like this, we need some real inspiration :)

Central Banking in a Nutshell

Just for a laugh..... ( via campaignforliberty.com )

Collateral Damage

Chesapeak CEO Sold All Stock to Meet Margin Calls

Chesapeake Energy Corp. said its chief executive officer, Aubrey McClendon, involuntarily sold ``substantially all'' of his common shares of the company's stock over the past three days to meet margin loan calls.

``These involuntary and unexpected sales were precipitated by the extraordinary circumstances of the worldwide financial crisis,'' McClendon said in today's statement. ``In no way do these sales reflect my view of the company's financial position or my view of Chesapeake's future performance potential.''

McClendon, 49, owned 33.5 million shares, or 5.8 percent of the company's common stock, according to a Sept. 30 filing with the U.S. Securities and Exchange Commission. He was the company's third-largest shareholder.

Chesapeake, this year's worst-performing petroleum producer in the Standard & Poor's 500, fell 6.7 percent in New York trading today amid concern hedging contracts won't protect the company against a plunge in natural-gas prices. McClendon's divestiture was announced after the close of regular trading on U.S. stock markets.

``You have to imagine Aubrey's lost a large portion of his fortune,'' Benjamin Dell, an analyst at Sanford C. Bernstein & Co., said today in a telephone interview. He rates the stock at ``market perform'' and owns none.

The Oil Drum has a good thread on this

Admission of Guilt! A Reply to Mish

Mish over at the Global Economic Analysis asks the following in the comments section:

“Can I ask a question?

With oil at $84 ....
Where is Oil Shock?

Mish
Like this comment?
link to the post

Oil Shock was indeed wrong. Yes, I called the bottom at $90 for oil. It was indeed the bottom until Oil declined one more time. Yes, so far it about 7% below that price. I still have called a perfect bottom in gold. Dollar index is about 2% higher than my prediction top.

Australian Dollar cliff dived yesterday, partly due to the unwinding of the carry trade. Just two months ago, the Ozzie was at near parity with the USD, but today you could buy 1 Ozzie for 64 cents U.S. Do you think Australian economy is fundamentally a lot weaker than the U.S economy? Do you think what happened to Iceland and Australia are impossible to happen here?

Much of the strength in dollar index is due to the weakness of Euro, it is not an indication of Dollar strength. Euro is a doomed currency. I heard somebody put it as the Deutsche Mark + some parasites, and that is very true.

Was my bottom and top calls based on any specific formula? No. It was just rhetoric meant to say that inflation is still in play. Did I strongly believe in my prediction? Yes I did. Did I know that for 100% sure that Oil will bottom at $90.00, and Gold at $750? No I did not.

As for all those deflationary derivatives worth 500 trillion floating around, it is all hogwash. Derivatives can go to zero and 80-90% of them do, even in a bull market. Have you read stats on options? Most of them go to zero? If one were to really believe that those derivatives are part of the money supply, what do you think the price of a refrigerator full of groceries would be?

Is there an unwillingness to lend right now? Yes. But all the debt will be monetized away, and some more will be accumulated by the local, state, and federal governments and monetized.

Stop kidding yourself. Oil at $84 is a lot higher than were it was, when Mish started denying that inflation was non-existent, go back, he has a lot of charts and graphs starting from 2005 to prove his point.

Mish has been consistently wrong for many years with his predictions, and yet he needs a great deal of credit for predicting the crisis very accurately as it unfolded. There were a lot of guys predicting shallow recessions, muddle throughs etc. But Mish could see a lot further than those others; he predicted a deeper recession. He was just a little early. Mish is still wrong about deflation.

Real wealth is ability to produce real goods, and that is one area that American economy lacks clearly. Yes, America has a lot of productive capacity, but no where close the purported size of the economy. So, what really is backing our dollar? yes,a lot of productive capacity, and a lot more of hot air.

SNL on the bail out.

SNL on the bail out. THe skit was so truthful, NBC apparently pulled it from their website.

Who is the stupid person in the cartoon?

Stupid person is not in the picture. The cigar smoking expensive suit got bailed out by those who are not in the cartoon, and the dude signing the paper lived rent free for a few months.

Is it a "Freeze Up" or a "Meltdown"?

CNN: Market meltdown: Global problem, global cure

Independent: Europe shivers as credit freeze hits Iceland

Which one is it?

A Market Bottom?

Scary time in the financial markets, fear reigns supreme, usually an indication that market is close to a short term bottom. I am not clairvoyant, but this level of pessimism usually marks at least a short term bottom. Market's biggest Panglossian cheerleaders I know of, are peeing in their pants.

Market has a fear index - it is calculated based on the price premiums on 'options' - a form of stock derivative. The fear index ( VIX ) is at a record high. Fed might cut the funds rate this week, just a speculation.

I could be totally wrong, which happens more often than I am willing to admit.

Inflation or Deflation?

Mish at Global Economic Analysis is still convinced that we are headed for deflation. I am not so sure. Here is why:

What will be the effect of all the deficits that the local, state, and Federal governments will be running. The fact that we are entering this recession/depression from a period of high levels of deficits, don't give me much confidence in deflationary theory.

All the Keynesians and Monetarists infesting the government wouldn't want government to shrink, people wouldn't want it either. What will that do to the dollar?

What if the Chinese and Japanese governments use their dollar reserves to stimulate their economies? What impact will it have on the dollar?

I also believe, that it's not just subprime borrower, but our whole country is broke. How could that be good for us as a borrower? How can that be good for the dollar? Do you think, given the conditions, it will be easy for the deficit spending government to knock on the door of People's Bank of China, Bank of Japan or Saudi Arabian Monetary Agency, and get approved for credit as we frequently as we will need them?

The fact that no player in the market wants to buy the subprime loans is telling. It is worthless. Who would want to buy the currency ( increasingly backed by failed mortgages ) of a country that is essentially bankrupt?

There is no doubt that the credit turmoil in America will have it's ripple effects across the rest of the world, but does it change the fact that we still are the subprime borrower ?

Addendum 10/04/08 12:04AM pacific:

Another way to look at USD as a CMO backed by the worst mortgages in America. A mortgage backed currency called Assignat was once tried in france. It led to hyperinflation and a collapse.

Seeds of The Crisis Were Planted a Long Time Ago

Here is a 1999 article from NY Times.

Fannie Mae Eases Credit To Aid Mortgage Lending

In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

Tragedy of The Housing Crisis

Story from the Foreclosure Alley, Southern California's Inland Empire.

Peter Schiff versus Diane Swonk ( 06/13/06)

Loose Money And the Roots Of the Crisis

Judy Shelton writes for the WSJ

If capitalism depends on designating a person of godlike abilities to manage demand and supply for all forms of money and credit -- currency, demand deposits, money-market funds, repurchase agreements, equities, mortgages, corporate debt -- we are as doomed as those wretched citizens who relied on central planning for their economic salvation.

Think of it: Nothing is more vital to capitalism than capital, the financial seed corn dedicated to next year's crop. Yet we, believers in free markets, allow the price of capital, i.e., the interest rate on loanable funds, to be fixed by a central committee in accordance with government objectives. We might as well resurrect Gosplan, the old Soviet State Planning Committee, and ask them to draw up the next five-year plan.

Bail-Out: What's the alternative?

Comrades,

I was asked by a couple of readers, what the alternative to the bail-out is. The concerns are well placed. If the credit dries up, even good businesses will suffer, it will affect their day to day operations, ability expand, and make good on payments including salaries.

By taking away the bad debts from the books of the banks, one is not only rewarding bad behaviour, but also ignoring the fundamental problem - the cartelization of credit. It is a bad system; it is pyramiding of credit; and it creates a set of winners and losers, not according to their merits and demerits, but according to their ability or inability to pervert the system.

The main cause of the banking crisis is the inability of the borrowers to repay their debts.Too much credit shoved down the throat of undeserving borrowers is what caused the crisis; more of the same isn't going to solve it. The bubble also created a glut in housing and related industries, malinvestmets as Austrian Economists would call it; and that needs to be purged.

Bailing out the banks will not reverse the tightening of the credit standards. 20% downpayment will be the standard, one would hope. More over, the option-ARMs are still adjusting, which means housing prices will continue to sink, leading to further pressure on the banks. Commercial real estate, credit cards and autoloans are under stress, as we speak. So this staggering 700 billion price tag is only just the beginning.

Further more, Fed is injecting staggering amounts of credit into the banking system, with out any Congressional approval I might add. Fed's balance sheet is chock full of bad loans. The bail-out bill was intended to provide the power to the treasury to do targeted operation to permanently take the bad debt off the balance sheet, rather than general injection of new credit into the system.

Last but not least, there will be opportunity costs to the bail-out. By diverting real resources, either through taxation or through inflation, the government will be taking capital resources away from successful companies and directing it towards failed enterprises.

Chart: Monetary base

The regulators have a decision to make, whether they want to prolong the agony of pulling off a band-aid.

Contrary to popular belief, the current group of goons managing the economic policy are not freemarketers. Which is why I have often said time and again that Milton Friedmanites are Keynesians in drag. Keynes is a fabian socialist whom most leftwing economists worship openly, and their right wing counterparts worship secretly. Sure, they all talk-up a good game.

Finally, if bureaucrats and politicians are such supermen/superwomen, who could solve any real crisis in the economy ( a creation of these very people ) by waving a magic wand, shouldn't we just transfer the responsibily of planning the economy ( as to how many pencils and lipsticks to be produced per year ) to these very same superdudes and superdudettes? In other words, comrades, shouldn't we all embrace Marxism?

Why did Keynesians and Monetarists Get It All Wrong?

Bailout marks Karl Marx's comeback ( click to read the whole article )

In his Communist Manifesto, published in 1848, Karl Marx proposed 10 measures to be implemented after the proletariat takes power, with the aim of centralizing all instruments of production in the hands of the state. Proposal Number Five was to bring about the “centralization of credit in the banks of the state, by means of a national bank with state capital and an exclusive monopoly.”

If he were to rise from the dead today, Marx might be delighted to discover that most economists and financial commentators, including many who claim to favour the free market, agree with him.

Indeed, analysts at the Heritage and Cato Institute, and commentators in The Wall Street Journal and on this very page, have made declarations in favour of the massive “injection of liquidities” engineered by central banks in recent months, the government takeover of giant financial institutions, as well as the still stalled US$700-billion bailout package. Some of the same voices were calling for similar
interventions following the burst of the dot-com bubble in 2001.

“Whatever happened to the modern followers of my free-market opponents?” Marx would likely wonder.

Blast From The Past

Peter Schiff on Neil Cavuto:



All these fools, who didn't see the crisis coming, are claiming they can solve the problem with 700B. Not counting all the bad debt that the Fed has already accumulated already, this 700B will be just the start. THere is a commercial real estate collapse still ahead of us, So is it with all the Alt-A, Option-ARM and then prime mortages.

The guy with the long hair apparently is on monetarist/supply-side kool-aid and Mike Norman is a Keynes cultist.

Peter Schiff versus Art Laffer:


Here is another one - Debate with Art Laffer. "Libertarian" Art Laffer's expertise will be sought by the GOVERNMENT to "solve" the current crisis.

Art Laffer said Economy is working beautifully, because of good monetary policy, good economic policy, good trade policy etc. He and his supply-side statists have no right to blame democrats or the government for the current crisis. He quotes GOVERNMENT produced lies, damn lies and statistics to "buttress" his statements.

Peter Boockvar: Let The Market Fix The Crisis

Peter Boockvar makes a case against the bail out of the plutocrats.

Fed Seize WAMU & Bail Out In Shambles

Bail Out In Shambles:

Plutocrats, by that I mean the punters on Wall Street and the plunderers in D.C. have underestimated the will of the general public. Protests are breaking out all over the country, especially in D.C. and on Wall Street. Congressmen and Senators have their phone lines, fax lines and email inundated with calls, faxes and emails from their constituents.

An email from Manhattan: "I just walked by the New York Stock Exchange. Hundreds of demonstrators have gathered to protest the government's bailout of Wall Street. Several were holding placards that read "Stop the bailout! Read The Road to Serfdom by FA Hayek. Read mises.org " They were also handing out copies of Ron Paul's 2003 speech introducing his bill to eliminate subsidies to Fannie Mae and Freddie Mac. ( from blog.mises.org/blog )

Republicans have grown cojones ( pardon my French ) and decided to not go along, at least for now. Even if that is just a political stunt, if it really works, there is still hope for the rest of us mere mortals.

WAMU No More:
In the mean time, in an instance of biggest retail banking collapse in history, the Feds have seized the operations of Washington Mutual. A deal has been struck to transfer most of the operations to JP Morgan Chase.

Your Daddy's Financial Crisis?

The best case scenario for a way out of the current mess, at least as this amateur sees it, is a 1970s style high inflation decade. If the bail out goes through, there is a real possibility of a currency collapse. America is addicted, not just to foreign oil, but to foreign credit.

If bank collapses cascade, that in itself is negative for confidence in the dollar. Shrinking government revenues at local, state and federal level is enough incentive to run the printing presses. When push comes to shove, some form of bail out will happen anyway. But 700 billion price tag is a staggering start, not counting all the bad paper that the Federal reserve has already accumulated.

In conclusion, daddy's Financial Crisis is the best possible scenario. Let's hope that it doesn't get any worse.

War on Your Wallet

Comrades,

When government declares war on something or somebody, whether it is war on drugs, war on poverty, war on terror, that means they are about to pick your wallet. Today, the government declared war, almost literally, against the turmoil in the financial markets. The Government, like mafia or a protection racket, is always looking for dragons to slay. It is on the prowl, looking for the next enemy.

The Government will use Tax Payers wallets as a sink for illiquid, financial carcasses. Every attempt will be made to keep a semblance of stability until after the presidential election. For instance, short selling - a strategy used by speculators to make profit from falling price of a financial instrument, will be banned until Friday Jan 16, 2009. Coincidence? You decide.

Recently Steve Jobs blamed short sellers for the falling price of Apple stock ( which is often a red flag - Execs sometimes use short sellers as a cover for their own incompetence. Not suggesting that as a certainty in this case ). A healthy number of short sellers a.k.a bears a.k.a skeptics is what keeps markets in balance. The skeptics usually pick apart the reports, they read the fine print, they read between the lines and they usually are the ones who blow the whistle at corporate corruption.

Policing Short Sales :

Companies are now lining up at SEC to add their ticker to the list that will be "protected" from short selling. Pakistani state apparatus recently tried to police short selling during their own version of market tumult. Immediate reaction of the punters was to drive up the markets, soon followed by a 25% crash. Later on, angry mob vandalized the Karachi stock market.

Don't be Fuld again:

"They called him the Gorilla - the brawler known as the scariest man on Wall Street," writes the Times of London about Richard Fuld, CEO of Lehman, and the story tells of his rise and fall. Here is a striking annotated painting posted outside Lehman offices for staff to post their comments on. Click here to view. (Thanks to mises.org)

Meredith Whitney: More Write Downs Ahead

Oil Shock is here!

"Inflation is always and everywhere a monetary phenomenon" - Milton Friedman.

It is not the price of things that is going up, it is the value of money going down. See the chart. (Money supply in green and Gasoline price in Red). Price of gasoline futures are up a good 14 cents, just today.

I believe there is enough evidence to suggest that peak oil is here. But the mainstream public or the financial markets have not bought it completely. There has not been any serious declines in global oil production. Given that scenario, peak oil alone could not possibly explain the current prices.

Oil is bubbling according to the "experts", at the moment. It would seem as though it will climb until it breaks the back of the U.S economy. Prices are likely to be higher 2-3 years from now, regardless of whether it goes down in the near term. Peak Oil come to mind. An attack on Iran and all bets are off.

Bernanke's "strategy" of bailing out crooks through inflation, is clearly not working. Benny is not as fortunate as his predecessor - when greenspan expanded money supply, the price of stocks, bonds and housing (later on) went up. Now, real tangible things have a lot of catching up to do.

Could Wolves be Trusted to Guard The Sheep?

Market watch reports that Brokerage firms may be regulated like banks

Big brokerage firms like Goldman Sachs, Lehman Brothers and Morgan Stanley are
facing increasing calls this week that they should be regulated the same way as
banks because they're so important to the health of the world's financial
system.

Timothy Geithner, president of the Federal Reserve Bank of New
York, said in a speech on Monday that all institutions that play a central role
in financial markets -- including the largest global brokerage firms -- should
operate under a unified regulatory framework.

Could the same goons who created the problems be trusted to solve them?

Colbert on the economy

Fed Says What It Means -- No Interest Rate Cut: John M. Berry

The Federal Reserve has demonstrated over the past three weeks that even with the best of intentions, communicating the nuances of monetary policy decisions often isn't easy.

It took the Fed three attempts after the March 20-21 Federal Open Market Committee meeting -- the FOMC statement issued the day of the meeting, congressional testimony by Fed Chairman Ben S. Bernanke on March 28 and release of the minutes on April 11 --before investors and traders finally understood that an interest rate cut isn't in the cards.

How Mortgage Troubles Impact U.S. Banks -- Part One

If you have picked up the paper in the past month, you know that the subprime (also called nonprime) mortgage business has blown up in recent weeks. New Century Financial (NEWC), one of the largest players in the industry, filed for bankruptcy protection on April 2. At first, it seemed like the problems were confined to the low-quality subprime business, mainly stemming from firms that were funding mortgages with short-term borrowings. However, we're starting to see problems creeping into higher-quality mortgages, and as a result, we've identified two short-term risks for our bank coverage universe.

Bubble must be set to pop

So the Blackstone Group, which grew rich preaching the advantages of being private, now wants to go public.

If you needed any proof that the market has peaked, that the bubbles in private equity, hedge funds, real estate and credit derivatives are about to burst, this is surely it.

Don’t fall for all those explanations about how Blackstone needs to raise capital or find a way to allow its visionary founders to cash out. Blackstone has a proven record of being able to raise all the private capital it needs.

Citigroup tightens mortgage lending standards

Citigroup Inc., the largest U.S. bank and one of the largest U.S. mortgage lenders, is telling brokers that on Monday it will stop making some riskier home loans, documents obtained by Reuters show.

The move follows decisions by Countrywide Financial Corp., Wells Fargo & Co. and other major mortgage lenders to tighten their underwriting standards as homeowner delinquencies and defaults increase.