Rick Santelli: Rant of the Year

On CNBC

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.

Amity Shlaes: The Forgotten Man - Interview

I recenlty ordered "The Forgotten Man". Amity Shlaes, the author is an adjunct associate professor at NYU's Stern Business School.

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 )

Do You Have Performance Issues?

Stimulis may be right for you.

An Austrian Case Against Stimulus

I found the following comment on Austrian Economists Blog the most compelling case against economic stimulus I have seen so far.

There needs to be a in-depth comparison between the market and policy response of the 1921 depression and the Great Depression and what it means for the current crisis. Here it is:

Someone should really point to the 1921 depression for President Obama to study rather than the Great Depression of 1929-1933.

According to J.R. Vernon in "The 1920-21 Deflation: The Role of Aggregate Supply," the one-year deflation of this time is the largest ever recorded: “This is true whether the Department of Commerce [ 1986 ] estimates or the recently provided Balke and Gordon [ 1989 ] or Romer [ 1989 ] estimates are used. These estimates produce one-year deflation figures of 18 percent, 13.0 percent, and 14.8 percent, respectively. The closest competitor is the 11.5 percent deflation recorded for 1931-32, the third year of the Great Depression.” Furthermore, the "ratio of the percentage decline in the GNP deflator for 1920-21 to the percentage decline in real GNP is 2.6 using the Department of Commerce figures, 3.7 using the Balke and Gordon data, and 6.3 using the Romer data." But "the ratios of the percentage decline in GNP prices to the percentage decline in real GNP for 1930-31, 1931-32, 1932-33, and 1937-38, the other Great Depression years in which real GNP declined, were 1.0, 0.9, 1.2, and 0.3, respectively, all well below the 1920-21 figures."

According to the monetarist story, the sharp deflation of the Great Depression is the dis-equilibrating factor which the Fed did not fix by counteracting with aggressive money supply inflation. The Austrians, however, saw the sharp deflation as the equilibrating factor to the great inflation of the 1920s.

Whatever the take on whether the deflation was "good" or "bad," both schools seemed to agree that what really mattered was how prices reacted to the change in the money supply. Monetarists (and Keynesians) seemed to believe that prices were "sticky" downward, especially wage rates. Therefore, in a sharp deflation, a monetarist wouldn't trust the market to adjust nominal wages down fast enough to keep up with the deflation, so the policy response should be to "reflate" the money supply back up to the pre-deflation levels to avoid massive unemployment.

For example, using the figures for the 1921 deflation, real wages would be in the range of being 15%-22% higher after one year if the nominal wage rates didn't decline at all. The sudden increase in the real wage would not be a product of higher productivity, so therefore would not be sustainable, and for such a large amount in a short period of time, firms would have to lay off workers quickly to remain profitable.

Austrians also recognize this fact about deflations and wage rates, but instead argue that wage rates will fall to reflect the fall in the money supply. There will be unemployment for a time because a worker's wage is not like the price of wheat, meaning there is some stickiness downward, but not enough to be economically destructive. Furthermore, since Austrians believe that the inflation is the dis-equilibrating factor, reflation will just sow the seeds for the next bust in the economy, so it is better to swallow the bitter pill of temporary unemployment and move forward on a sustainable path after that rather than endure chronic boom-bust cycles caused by the inflation-deflation-reflation-inflation-etc. cycle.

Now that the severity of the 1921 deflation has been shown to be greater than the Great Depression deflation and that a severe deflation forces markets and policymakers to adjust quickly to reassert a sustainable economic path, let’s compare how the market and the government reacted to the 1921 depression and to the Great Depression. In any account that I have seen of the 1921 depression, even though the deflation was the sharpest ever seen, wage rates fell to accomadate the deflation and the depression was over before the government could even do anything. In fact, it is noted that under the Harding administration, the response was to lower taxes and government expenditures and to not hector businesses into keeping wages high, against the “wisdom” of then-Commerce secretary Herbert Hoover. Hoover laid the groundwork for such meddling by having many conferences and committees study how to get out of the depression (the President's Conference on Unemployment being the lead conference). Unfortunately for Hoover (and fortunately for the economy), all his hard work was for naught because the economy had fixed itself too quickly.

But as President, Hoover would be able enact the policies for the Great Depression that he dreamt up for the 1921 depression. Chapters 7-12 of Murray Rothbard’s “America’s Great Depression” detail his numerous interventions to keep nominal (and thus, real) wages high during a sharp deflation as well as prices in general for crops and other products. And the bite of government steadily increased during his term, as reflected on page 347 of the book:

1929 – 14.3% of gross private product, 15.7% of net private product
1930 – 16.4% of gross private product, 18.2% of net private product
1931 – 21.5% of gross private product, 24.3% of net private product
1932 – 24.8% of gross private product, 28.9% of net private product

Lots have said that the Hoover administration was a repudiation of the laissez-faire approach to dealing with an economic downturn, particularly one of the size of the Great Depression. By reading the chapters noted above and looking at the increasing burden of government during the Hoover administration, it is safe to say that laissez-faire wasn’t found wanting because it isn’t anywhere to be found at all. Hoover, “the Great Engineer,” had by his words in 1921 and his actions in his presidency was the antithesis of laissez-faire. In fact, Rexford Tugwell, leading advisor to Franklin Roosevelt, said "The ideas embodied in the New Deal legislation were a compilation of those which had come to maturity under Hoover's aegis... We all of us owed much to Hoover."

But, there are some who might look at the data and say that, yes, Hoover was a proto-New Dealer, but that he didn’t do enough. But by looking at the 1921 depression, we can see that the laissez-faire reaction did not lead to chronically high unemployment, unlike the Great Depression years of 1929-1940, when unemployment hit 24.9% in 1933 and the best unemployment numbers afterwards were at about 14% for 1937 and 1940. If “doing something” is better than “doing nothing,” then the “Hoover-didn’t-do-enough” crowd would have to explain why the “do-nothing” policy of Harding was a success (at least in the relative sense, but also in the absolute sense) and Hoover’s “did-something-but-not-enough” policy was a complete failure, rather than the reverse. I do not see how a completely unrestrained Keynesian prescription could have solved the 1921 depression in substantially less time than the laissez-faire policy.

If President Obama wishes to come out of this recession as quickly as the 1921 depression, he should adopt the policies of Harding and not those of Hoover-Roosevelt. But we know that he won’t because he, like 99.99% of Americans, has no knowledge of the 1921 depression, its wise remedy, and its good results. Unfortunately, he will choose the policies of persistent stagnation/depression that should have been discredited long ago by doing a simple comparison case study.

(by Logan Boettcher - a commenter at AustrianEconomists.typepad.com )

Republican "Laissez Faire" Legacy

Bush, the Federal Reserve and the Congress have spent the last 8 years following an aggressively liberal economic policy that makes anything attempted by Lyndon Johnson pale into insignificance.

For instance, the last 8 years has seen the following:
1)Massive increase in the welfare state through the establishment of a vast new entitlement program, the prescription drugs for seniors, as well as ongoing increases in spending for Medicaid and SCHIP. Health expenditures in the last 8 years have increased 85.6%, an increase of $327.1 billion.
2) Massive increase in Federal spending on Education, up 103.3%, an increase of $34.6 billion
3) Expansion of farm subsidies. Agriculture expenditures up 26.2%, an increase of $19.7 billion
4) Substantial increase in Federal spending on public housing and urban development. Housing and Urban development spending is up 69.8%, an increase of $21.5 billion.
5) Huge increase in spending on Transportation, which is up 65.1%, an increase of $27.1 billion.
6) Total Federal spending has increased 63.8%, an increase of $1.149 TRILLION per year.
Source: Federal Spending Pages 78 - 79
7)We’ve had a continuation of the “Affirmative action mortgage loan program” that was given teeth by the Clinton administration. Government-sponsored entities Freddie and Fannie have purchased trillions of dollars in questionable loans, while Congress assured us there was no risk from these agencies.
8) Along with the spending increases, the income tax system has gotten even more “progressive”. Despite some tax rate cuts, the upper income earners are paying more of the tax burden than ever before.
* The top 1% of income earners pay 39% of all income taxes, up from 37% when Bush took office.
* The top 25% of all income earners now pay 86% of all income taxes, up from 84% when Bush took office.
* Individual income tax collections are up 21.4% and corporate tax collections are up 66.6% since Bush took office.
Source: Tax Collections Page 31
9) Along with the spending and tax increases, government regulations have increased enormously. The Code of Federal Regulations (CFR) -- the master set of books containing all the federal regulations -- occupies 25 feet of shelf space at the library of Congress and has over 73,000 pages. It's pages of regulations -- which are double-columned, double-sided, fine print -- would stretch 4.5 miles if laid end to end.

Over 51,000 new regulations have been added since 1995, when Republicans took control of Congress. The Bush administration has added over 30,000 of these. So much for "Republican deregulation. Right now, some 50+ federal agencies, commissions, departments etc are working on finalizing over 3000 additional regulations.

Source: Competitive Enterprise Institute

These regulations are promulgated and pushed by regulators and bureaucrats from over 100 federal agencies and commissions, the most well-known of which include, besides the IRS, the FRB and FDIC, the EPA, FDA, SEC, CFTC, NLRB, FTC, FCC, FERC, FEMA, FAA, CAA, INS, OHSA, CPSC, NHTSA, EEOC, BATF, DEA, NIH, FNMA, FHA and the FLMA.

In addition to these economic regulatory agencies and their interference, we have a fiat money supply under the control of a central bank with virtually unlimited power to manipulate that currency as it sees fit. First Greenspan, and then Bernanke, piloted the Fed on a relentless course of expanding the money supply and credit.

And now that we are at the end of Bush’s administration, all the politicians in the halls of power want us to believe that because Bush has an “R” after his name, the last 8 years have been an orgy of “laissez-faire” “deregulation“, cutting of government services and spending, “tax cuts for the rich” and “tax cuts for big business”.

And what do they think we need to solve our problems? More government spending and more regulation!

Did I even mention the Billions that is being squandered in Iraq?

(HT to a commenter Michael Smith @ Cafe Hayek )

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.

Random Rambling

Michael Crichton, RIP

Michael Crichton passed away on November 4th, 2008. Mr. Crichton, “the father of the techno-thriller,” is the author of 21 books including The Andromeda Strain, Congo, Jurassic Park, Timeline, The Lost World, Prey, and State of Fear, selling more than 150 million copies and translated into 36 languages, with twelve made into films. The recipient of an Emmy, a Peabody, and a Writer’s Guild of America award for the TV series, ER, he is a graduate of Harvard Medical School, and has been Visiting Lecturer in Anthropology at Cambridge University; Henry Russell Shaw Traveling Fellow; post-doctoral fellow at the Salk Institute for Biological Sciences; and Visiting Writer, Massachusetts Institute of Technology.

Michael Crichton’s latest best-seller, State of Fear, an indictment of Climate Change Fear Mongering, may in time be viewed as a landmark, both cautionary and prophetic. Is environmental debate today, including global warming, bio-technology, and other issues, based on science or politics? Are popular accounts of such issues rooted in science or phantom risks? Are government policies focusing on the trivial while ignoring the real, and in the process wasting limited resources, crippling human innovation to address true dangers, and inviting tyranny?

Statistical Illusions:

There is nothing scientific about Climate Models. Climate Models in many ways resemble econometrics and statistical modeling used by Keynesian and Monetarist economists. Models are statistical illusions. Economists who make prognostications about the future based on econometric models are often proven wrong, and when they are right, it is purely out of luck. That doesn't stop economists from continuously making new statistical predictions about the future.

There is no denying that certain trends in economy can be prescienlty predicted, but that always comes from understanding of the laws of economics and an understanding of human behavior. These factors are subjective and impossible to quantify.

Then there is the Heisenberg's uncertainity principle: Observation affects the observed - Heisenberg was speaking about subatomic particles. Mises spoke about the same certainity regarding human behavior. Once people get the wind of certain trends, crowding into that trend will make the trend null and void. Or if human beings get to know that they are being observed for certain purposes, they consciously or subconciously adjust their behavior.

Statistics is one of the most misused branch of mathematics. You can look at data from the financial markets correlate it to planetory positions and may be able to find that they follow some obscure patterns, but that doesn't make it a scientific truth. There are infact financial advisors who help you make investments based on astrology ;-)

Statisticians look at patterns in the past and they project it into the future, but often to their dismay, the future fail to resemble the past. According to these geniuses, if market has been going up, their models will predict that they will continue to go up. If globe has been warming, it will continue to heat up. Then much to their chagrin, future fails to resemble the past.

Black Swan is a term popularized by statistician finance professor Nassim Nicholas Taleb, who wrote a book by the same title - "Black Swan: Impact of the Highly Improbable." The term Black Swan would have been an oxymoron in the good old days a few centuries ago, because swans by definition were always white. Then the Europeans started colonizing australia in 1788, and they found black swans for the first time.

Once of the recent black swan event was the historical election of Mr. Barack Obama to the presidency of the United States of America. It was a statistical impossibility. If you sample the data, none of the previous 43 U.S Presidents were of African American ethnicity, which should make some statisticians conclude that probability of a black person getting elected as the Commander in Chief is 0. Yes, Mr. Obama overcame great odds, but it is impossible to overcome zero odds, and one would be crazy to even attempt. We know there are more factors affecting the electability of a person than just his/her race.

Another example that Mr. Taleb sites in his book is the life of a Turkey. Turkey grows up on a farm. It's life is rather easy - the farmer takes care of it, every morning it wakes up and there is enough food to eat, provided by the farmer of course. One day is hardly different from the other. Then, one fine morning in november, Turkey gets jolted from it's sleep and gets its head chopped off - Happy Thanks Giving.

Global Warming theory is nothing like Theory of Relativity or Boyle's law. There are very little if any, absolute, proven, and quantifiable relations between the various factors that affect the climate. Scientists may not even know entire list of factors that affect global climate and how precisely these factors interact with each other.

Is it really random rambling? or is there a statistical pattern to it?

Is Bullishness Unwarranted?

Mish at the Global Economic Analysis suggests that there is unwarranted bullishness.

Here is what I think:

There is a technical reason, may be two for the bullishness.

First, "Change" is coming to White house, most likely. Do you think political hacks like Paul Krugman will be bearish once messiah "O" is declared the next president of the U.S?

Second, The sell off in the financial markets were spectacular and they are way oversold. The rally, even if it is very unlikely to take the markets to a new high this year, is likely to be just as spectacular. That's what volatile markets do.

Bulls are right; at least for a while they will be. Messiah "O" will instill confidence until he takes office, he will propose mesmerizing grandiose schemes to "save" the economy. It will all work until he gets into office. A rally is coming, and how long it will last or how far it will go is anyone's guess. Some time in the next 2-4 months, there will be another opportunity to go short, at is my speculation.

(Nothing personally against "O", I am not a big fan of his rival either. I supported Ron Paul during the primaries.)

The 2002 lows in S&P and Dow is likely to be taken out, possibly in 2009 or 2010. Ultimately the entire Dow could be bought for 1-2 ounce of Gold. Do you think that is a fantasy? In the last century it happened twice - once in the early 30s and again in the early 80s.

As for inflation, it is likely catch the deflationistas with their pants down.
Shorting long term U.S government bonds looking like a nice trade to go into. It is not a short term trade, instead a long term one. Tremendous supply of new treasuries coming to market, as the treasury tries to raise funds to fill the humongous budget gap. Also, watch out, Chinese, Indian, Russian and Saudi governments are likely to use some of their reserves to stimulate their economies.

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...

Peter Schiff Interview On Glenn Beck Radio

Part I



Part II

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.

Answers From Schlumberger's Top Brass (SLB)

During the conference call held to discuss the quarter, Chairman and CEO Andrew Gould initial statements included:

• The deterioration in the credit markets will have an effect on its customers, but this will largely impact North America only.
• Management does not know the extent to which current events will hurt 2009 drilling activity.
• Management is still looking for a slowing in the rate of growth in customer spending - not a decline.
• Even if activity is curtailed, due to the "age of the production profile and the decrease in reserve replacement ratios", any significant slowdown in exploration and production investment will cause a sharp drop in production, which will lead to a recovery.

Gould and the other executives were then questioned, some may say "interrogated", by analysts as to the extent and duration of any downturn.

( Click subject line for the entire article )

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. )

Highway to Serfdom in Cartoons

Flash presentation provided by the Mises Institute

What Would You Do?

Penn Jillette asks an interesting question on Big government and Taxation.

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

Government Solutions

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

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.

Bail Out: What the Media didn't report

People protesting against the bail out. Why was this not reported in the MSM?

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.

What caused the credit crisis?

Even though I don't completely agree with every argument/statments expressed in this video, I still believe it has a lot of merit.

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)

Road to Serfdom - 2

BBC on Hayek

Road to Serfdom - 1

A BBC story on FA Hayek

U.S. Farmland Values Reach Record on High Crop Prices

U.S. farmland values are at a record high even as the rest of the country suffers the worst housing crisis since the Great Depression, with the highest crop prices ever pushing up agricultural real estate.

The value of all land and buildings on farms averaged $2,350 an acre at the start of this year, up 8.8 percent from a year earlier, the U.S. Department of Agriculture said today in an annual report. Surging corn, wheat and soybean prices boosted values in the Northern Plains, which includes Kansas, Nebraska, North Dakota and South Dakota, by 15.5 percent, the biggest increase in the country, according to the report.

(Click the subject line to read the full bloomberg article.)

Meredith Whitney: More Write Downs Ahead

Naomi Klein Debates Milton Friedman

Part I



Part II



These are must watch.

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?

David Walker on CNBC

Click here to watch

Former Comptroller General of the U.S David Walker talks about future unfunded liabilities and peak oil.

Colbert on the economy

Art Laffer Owes a Penny to Peter Schiff

Art Laffer is a Nobel Prize winning economist and father of Supply side economics. Peter Schiff is a investment advisor/Broker with an Austrian perspective on Economics.

Jim Rogers on Federal Reserve

Part - I:


Part - II

Monetary Deja Vu

Ron Paul Asks Tough Questions - 11/08/07

House finance committee testimony of Fed Chairman Bernanke

Greenspan babbles, also questions the need for a central bank

Gold and Economic Freedom - Dr. Alan Greenspan

Subprime Explained - Hilarious

The Bubble Man

Enjoy the music.

Ron Paul To Bernanke: What is the moral justification for debasing the dollar?

David Walker on Fiscal Responsibility ( lack of it )

Credit Bubble Update - 08/26/07

'Notional' value - like trying to nail down Jell-O

It's hard to think of anything more discretionary, non-vital or even downright unnecessary than a BlackBerry.

Oh sure, they're convenient. Your spouse can e-mail you a to-do list and you can't pretend you didn't get it. You can settle bar bets on the spot with a quick Google search. You can thumb away on the putting green like a big shot. Sometimes you even get work done with it.


Drowning in debt? Lifeguard is credit counseling service

The good news for the Consumer Credit Counseling Service is it's hiring like crazy.

The bad news is, it has to do that.

overwhelmed by desperate homeowners across the country teetering on the brink of foreclosure as the subprime mortgage industry implodes.


Indian outsourcers start to feel subprime fallout

Ripples from the U.S. subprime mortgage crisis have reached India's back-office outsourcing sector, where mostly smaller firms are feeling the pinch as U.S. companies cut back or stop some spending on services.

Already struggling with a stronger rupee and rising wages, the fear for outsourcers is that the subprime woes will spread, although larger players such as Infosys Technologies say this could open up new opportunities.


Sub-prime mortgages catalyst for freefall

For a while there, it seemed like the fair-weather types on Bay Street, and elsewhere in the financial world, had it right. We could all sit back, put our feet up and relax.

The tempest that convulsed the world's capital markets in late July and early August would be short-lived. Even those of us who were enjoying family vacations when the turbulence hit could hardly overlook the alarming reports on TV and radio newscasts and the startling headlines that appeared on the front pages of our newspapers.


Foreclosure fallout: Rescue scams

Jennifer Falke and her family had been in their Columbus, Ohio, home for nearly 12 years when they hit a rough patch in 2006. Falke was out of work and fell behind on the mortgage.

Falke said a flood of mailings and flyers then arrived at her door promising help from foreclosure rescue companies claiming to act as an intermediary between her and her lender to keep her from losing her home.


Moody's cuts 120 subprime RMBS tranches from 2005

Moody's on Wednesday cut the ratings on 120 subprime residential mortgage-backed securities tranches, citing higher-than-anticipated delinquency rates of first-lien subprime mortgage loans securitized in the second half of 2005.

The action affects over $1.5 billion of securities.


Ben Bernanke Walks the Line

Much of what Ben Bernanke spends his days doing oscillates between the incomprehensibly arcane and the unspeakably dull. Lately, though, the Federal Reserve chairman has a stark, even exciting task at hand. He's been imitating Jimmy Stewart in It's a Wonderful Life and trying to halt a bank run.

While Stewart's George Bailey had to make do with his powers of persuasion and his honeymoon fund to save the Bailey Building and Loan, Bernanke has the full faith and credit of the U.S. government behind him. The Fed can effectively print U.S. dollars at will. It can even, as Bernanke famously suggested in 2002, drop them out of helicopters, if that's what it takes.


Realtor numbers thin during slump

Victoria Rodriguez was not only a thriving real-estate agent in recent years, she was honored as one the area's top-selling real-estate agents four years in a row.

That was in the boom time, and that spigot shut down to a trickle nearly two years ago.


Mortgage Mess Hurts Main Street, Beyond

The walls are bare, the closets are empty, and Connie and Timothy Pent and their two teenage children are living out of boxes as they wait for a dreaded knock at the door of their three-bedroom house in Ocala, Fla.

They've fallen behind in payments on a their home loan, and their lender told them in July that foreclosure was imminent.

Crack Up Boom!

One of the greatest free market economists that ever lived, Ludwig von Mises, had this to say about credit expansion ( a.k.a Ponzi finance )

The boom can last only as long as the credit expansion progresses at an ever-accelerated pace. The boom comes to an end as soon as additional quantities of fiduciary media are no longer thrown upon the loan market. But it could not last forever even if inflation and credit expansion were to go on endlessly. It would then encounter the barriers which prevent the boundless expansion of circulation credit. It would lead to the crack-up boom and the breakdown of the whole monetary system.

The credit expansion boom is built on the sands of banknotes and deposits. It must collapse. If the credit expansion is not stopped in time, the boom turns into the crack-up boom; the flight into real values begins, and the whole monetary system founders. Continuous inflation (credit expansion) must finally end in the crack-up boom and the complete breakdown of the currency system.

Of course, Milton Friedman would disagree. Friedman, and his socialist counterparts, believe that ponzi finance schemes can continue forever without ever causing a credit contraction (deflation) or even a crack up boom ( hyperinflation ). He even won a nobel prize for that theory. Central bankers have revered Friedman ever since, but, have we gotten rid of bubbles and their subsequent busts? Answer is a resounding No!

In 1967, Ayn Rand published her non-fiction book, Capitalism, the Unknown Ideal. In it, she included Gold and Economic Freedom, the essay by her close friend Alan Greenspan (Mr. Bubbles). In that essay, Greenspan argues persuasively in favor of a gold standard and against the concept of a central bank. Is it ironic that the Maestro became a central banker himself and precided over the biggest expansion of money supply ever witnessed in America? Printing Press Benny has taken over the reigns from Easy Al, and, we get more of the same. Will it work for Benny the way it did for Easy Al? I doubt it!