Rick Santelli: Rant of the Year

On CNBC

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 )

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 )

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.

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. )

Government Solutions

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

Central Banking in a Nutshell

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

Poll: Whither Price Of Oil?

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?

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?

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.

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.

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

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?

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

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!

Credit Bubble Update - 08/11/07

Japanese Stocks Drop on Concern Subprime Losses Will Spread

Japanese stocks dropped, joining a global sell-off, after BNP Paribas SA halted withdrawals from funds that owned subprime loan-backed securities.

Declines by lenders and brokerages including Mitsubishi UFJ Financial Group Inc. pushed the Topix index to an eight-month low. Exporters such as Canon Inc. declined on concern mortgage losses will lead to tighter lending conditions and slower global economic growth.


WaMu's shares decline on mortgage woes

Washington Mutual was among a group of U.S. mortgage companies whose stock fell Friday as demand for loans and sources of new money dried up.

The shares of Seattle-based Washington Mutual, the largest U.S. savings and loan, lost 81 cents, or 2.2 percent, to $35.95.

Shares of Countrywide Financial, the biggest U.S. mortgage lender, fell 2.8 percent, while MGIC, the No. 1 mortgage insurer, fell 13 percent.


German Prosecutors Probe Suspects Over IKB's Subprime Losses

German prosecutors opened a formal probe against several people in connection with IKB Deutsche Industriebank AG, the German lender facing a bailout over subprime mortgage losses.

The Dusseldorf prosecution office is investigating whether they may have breached their fiduciaries duties at IKB, Peter Lichtenberg, a spokesman for the office, said in an interview. He declined to identify the suspects or say how many people are under investigation.


Yen Heads for Weekly Gain Against Major Currencies on Credit

The yen headed for a weekly gain against the 16 most-traded currencies as widening credit-market losses prompted investors to unwind carry trades.

The Australian and New Zealand dollars and Norway's krone fell the most against the yen as traders paid back loans in Japan used to fund investments in higher-yielding assets elsewhere. The Bank of Japan joined central banks in Europe and the U.S. in providing cash to ease a credit crunch as a stream of news on subprime mortgage losses roiled the market.


Gold futures close with gains on safe-haven buying

Gold futures rallied Friday, as traders recognized the metal's allure as a safe haven amid worsening credit market troubles that prompted a fresh injection of cash by several central banks.

"Suddenly, the world is realizing that gold is still a safe haven asset," said James Moore, metals analyst at TheBullionDesk.com. "We've seen pretty substantial losses in equity markets."


Shares plunge after ECB pumps a record €95bn into markets

Shares slumped again on both sides of the Atlantic today after the European Central Bank was forced to inject a record 95 billion euros (£65 billion) into money markets as mounting global credit jitters sparked an abrupt scramble for cash by financial institutions.

The unprecedented emergency action by the Frankfurt-based ECB outstripped even the scale of its intervention on the day after the September 11, 2001, terrorist strikes on the US, when it pumped in 69 billion euros of liquidity to stabilise credit markets.


BNP Freeze Causes Carry Trades to Plunge and Central Banks to React in Liquidity Squeeze

There is no denying the fact that the subprime problems have now gone global. This morning, France’s largest bank, BNP Paribas SA announced that they were freezing withdrawals from three of their investments funds following the “complete evaporation of liquidity.” For BNP, this may not be a big deal because the three funds represent only 1.6 billion out of the 356 billion euros that they have under management, but for the rest of the world, this is huge.

Credit Bubble Update - 07/13/07

Banks losing up to $52 bln over subprime
Credit Suisse analysts estimated banks could lose up to $52 billion over time due to their exposure to collateralized debt obligations that invested in U.S. subprime mortgages.

Most of the losses would stem from loans to hedge funds, compared with an expected $5 billion to $10 billion from banks' direct investment in subprime CDOs, the Credit Suisse analysts said in a report dated July 6.


1,300 arrested in Zimbabwe prices crackdown
More than 1,300 shop owners and business managers have been arrested in Zimbabwe as part of a crackdown on firms accused of flouting government-imposed price controls, police said Monday.

Most of the 1,328 bosses had been fined but the number also includes around two dozen company executives arrested since Friday who are due to appear before magistrates, said police spokesman Chief Superintendent Oliver Mandipaka.


Sarkozy's blitz puts paid to pact on policy

French President Nicolas Sarkozy threw down the gauntlet in Brussels last night, vowing to press ahead with his plans for a "fiscal shock" regardless of EU rules on budget policy.

Softening his tone slightly after a blizzard of criticism, he told eurozone finance ministers that his government would "aim" for a balanced budget by 2010, but refused to give real ground.


Bernanke: Anchored expectations mute price swings

Swings in volatile energy and food prices will have minimal impact on inflation as long as expectations of future price gains are held steady, Federal Reserve Chairman Ben Bernanke said on Tuesday.

"If inflation expectations are well anchored, changes in energy (and food) prices should have relatively little influence on 'core' inflation, that is, inflation excluding the prices of food and energy," Bernanke told the National Bureau of Economic Research.


Japan Should Diversify Reserves, Abe Adviser Ito Says

Japan, the largest overseas holder of U.S. Treasuries, should invest $700 billion of its currency reserves in higher-yielding assets such as stocks and corporate bonds, said Takatoshi Ito, an adviser to the prime minister.

The reserves should be managed by a special fund that will gradually diversify into euros, Australian dollars and emerging- market currencies, Ito said in an interview in Tokyo.


Russians Selling Off US Currency

The Central Bank of Russia says the amount of U.S. dollars held by individual citizens of this country is rapidly declining. The bank says Russians are also moving increasing sums abroad. Moscow correspondent Peter Fedynsky follows the money trail and reports that Russians are gaining confidence in their own economy.

New figures released by the Russian Central Bank indicate the amount of U.S. dollars held by private Russian citizens has dropped since 2002 from $35 billion to less than $12 billion as of July 1.

Australian hedge fund warns about withdrawals

An Australian hedge fund manager with $1bn in structured credits and junk-rated loans warned investors yesterday it could restrict withdrawals to ensure its survival as it reported losses of 14 per cent in one fund in June.

Basis Capital, based in Sydney, said in a letter to investors it had been hit by “indiscriminate” repricing of “otherwise fundamentally sound collateral” amid the crisis in US home loans to less creditworthy investors. It said it had deliberately avoided the worst-hit 2006 subprime loans.


Kuwait revalues as dollar weighs on Gulf currencies

Kuwait allowed its dinar to appreciate against the dollar for a second time this year after the US currency’s slide raised pressure on pegged exchange rates throughout the world’s biggest oil exporting region.

The dinar would trade at 0.28690 per dollar from Thursday, an appreciation of 0.4 percent, the central bank said, confirming expectations it would respond to the dollar’s tumble to record lows against the euro this week.


LBO Credit Quality Falls to Lowest in Nine Months

Loans used to finance leveraged buyouts are the riskiest in at least nine months on speculation that losses on subprime mortgage securities will spread to other markets, according to traders of credit-default swaps.

The iTraxx LevX Index of credit-default swaps on loans to 35 European companies fell as much as 1 percent to the lowest since the index started last October, according to Deutsche Bank AG prices. The LCDX index of loans to 100 U.S. companies dropped as much as 0.57 percent to 96, Phoenix Partners Group in New York said.


Dollar Slumps to Record Low Versus Euro as Retail Sales Drop

The dollar dropped to a record low against the euro and slumped versus the yen after a government report showed retail sales fell last month by more than analysts expected.

The data may add to concern that the U.S. economy will slow, lifting speculation the Federal Reserve will cut borrowing costs this year.


Retail sales drop worst in 2 years

Retail sales posted the biggest drop in nearly two years in June, the government reported Friday, fanning worries that consumers were starting to feel the pinch of higher gas prices and the slumping housing market.

"This report is a much weaker report than most analysts expected, and presumably it will come as a shock to people who bought retail stocks yesterday on the basis of [some] 'better' chain store numbers," Ian Shepherdson, chief U.S. economist with High Frequency Economics, wrote in a note Friday.


Foreclosure activity rises dramatically

Foreclosures continued to rise throughout the country, the state and the Bay Area in June, according to a report to be released today. Nationally, 164,644 foreclosure notices were filed in June, up 87 percent from June of last year, said RealtyTrac.com, an online marketplace for foreclosure properties. In the Bay Area, the number of foreclosure notices was 5,018, almost triple the 1,780 in June 2006.


The greatest economic boom ever

Just how red-hot is the current worldwide expansion? "This is far and away the strongest global economy I've seen in my business lifetime," U.S. Treasury Secretary Hank Paulson declared on a recent visit to Fortune's offices.

That may come as news to many Americans, whose boom-time memories are stuck in the 1990s, when Silicon Valley was the epicenter of our growth fantasies. But the fellow now occupying Paulson's old office at 85 Broad Street in downtown Manhattan shares that upbeat view. Just returned from a ribbon-cutting ceremony in the Middle East, Goldman Sachs (Charts, Fortune 500) CEO Lloyd Blankfein waves out toward the East River as he explains how the rise of the "BRICs" has altered his strategy and his travel schedule. (BRIC is an acronym Goldman coined in 2001 reflecting the rising economic power of Brazil, Russia, India, and China.)


U.S. trade deficit widens

The U.S. trade deficit widened to $60 billion in May as oil prices jumped and the volume of foreign oil coming into the country rose, the government said Thursday. But the overall trend still appears to be improving, economists said.

The Census Bureau said that the trade imbalance - the gap between what is imported and exported - grew 2.3 percent from April in seasonally adjusted terms. For the first five months of the year, however, the deficit grew at a slower pace than it did last year. From January through May, the deficit was $295.5 billion, compared with $317.8 billion in the first five months of 2006.


Moody's May Cut $5 Billion of Subprime-Backed CDOs

Moody's Investors Service may cut $5 billion of collateralized debt obligations after lowering the ratings of subprime mortgage bonds that make up the securities.

A downgrade would affect 184 pieces of 91 CDOs, representing about 3.6 percent of rated CDOs containing asset-backed securities, Moody's said in a statement today. Moody's yesterday sliced ratings on $5.2 billion of subprime bonds that back CDOs, which are also sliced into pieces to allow investors to choose how much risk they bear for the returns they receive.


D.R. Horton home sales plunge; expects loss

Home builder D.R. Horton said Tuesday declining home values would lead to its first quarterly loss since it listed on the New York Stock Exchange in 1995, sending its shares to a three-year low.

Hurt by the deteriorating U.S. housing market, the No. 1 U.S. home builder said net sales orders in its fiscal third quarter, ended June 30, fell 40 percent to 8,559 homes. The dollar value of the orders dropped 47 percent to $2.0 billion.


Zimbabwe: Inflation - the Endless Battle of the Zeros

WHEN Princess Nyathi retired to her rural home after a 20-year flirtation with a furniture shop, she was confident monthly payments in pension would be enough to buy the basic commodities.

But five years down the line, Nyathi is bitter after watching her monthly pension eroded heavily by inflation. "Six hundred dollars five years ago would buy you groceries, now with the $12 900 payment, you can only buy half a loaf of bread," she said.


Jeff Saut Presents: Subprime Sublime?

"Liquidity is a coward, when you need her most she runs away and hides.” That old market axiom has clearly stood the test of time. Most recently, the “liquidity cowardess” ran and hid from the subprime complex, causing the ABX-HE.BBB-Subprime Index to lose nearly 50% of its value. Concurrent with that price decline has been a sentiment slide, as reflected in The New York Times, whose reference to the subprime woes has seen a downward verbiage skein that has the glide path of a stone. To wit, “Largely contained,” “mostly contained,” “reasonably well-contained,” “severe but contained.” “Contained?” ... Well, maybe on a macro basis, but try telling that to investors in certain subprime-focused investment funds that have seen their principal erode and in some cases evaporate. Indeed, just a few weeks ago the Bear Stearns (BSC) “bombshell” brought the issue home to roost with the implosion of a couple of highly-leveraged subprime hedge funds. "

Credit Bubble Hysteria - 07/02/07

S&P, Moody's Mask $200 Billion of Subprime Bond Risk

Standard & Poor's, Moody's Investors Service and Fitch Ratings are masking burgeoning losses in the market for subprime mortgage bonds by failing to cut the credit ratings on about $200 billion of securities backed by home loans.

The highest default rates on home loans in a decade have reduced prices of some bonds backed by mortgages to people with poor or limited credit by more than 50 cents on the dollar and forced New York-based Bear Stearns Cos. to offer $3.2 billion to bail out a money-losing hedge fund. Almost 65 percent of the bonds in indexes that track subprime mortgage debt don't meet the ratings criteria in place when they were sold, according to data compiled by Bloomberg.


Pound hits 26-year high against dollar

The pound today hit a new 26-year high against the dollar, lifted by expectations that the Bank of England will hike interest rates on Thursday, to 5.75 per cent.

Sterling hit $2.0160 in afternoon deals. The dollar was also weaker against the euro, falling to within half a cent of a record low against the shared currency.


Who's behind the global credit bubble?

The storm warnings are coming thick and fast.

The Telegraph business section this morning has a distinctly bearish tone - even by The Telegraph’s standards.

We’re certainly not ones to criticise - it’s refreshing to see the concerns we’ve been raising for a considerable length of time now getting a serious airing in the mainstream press.


India May Trade Gap Widens to $6.2 Billion on Imports

India's trade deficit widened in May from a year earlier as imports of machinery and other goods surged in an economy that's growing at the fastest pace in almost 20 years.

The trade deficit was $6.22 billion in May compared with $4.26 billion a year earlier, the Ministry of Commerce and Industry said in a statement in New Delhi today. Imports grew 26.4 percent, outpacing an 18.1 percent rise in exports. The trade deficit reached a record $7.1 billion in April.


Wall Street played role in creating subprime troubles

Some on Wall Street want to blame the little guy for the latest hedge-fund mess. People with shoddy credit histories couldn't pay their mortgages so that pushed some funds to the brink of collapse and sent shock waves through financial markets.

Talk about a cop-out — that shifts blame away from the Wall Street firms and banks that had a hand in creating the subprime-mortgage mess but aren't taking responsibility for it.


When will the credit bubble burst?

To understand why there’s a credit bubble, how it’s inflating the price of stocks and what it will mean for you when it bursts, let’s consider the acquisition of Avaya.

The large telecommunications equipment maker recently announced it is being acquired by two private-equity firms, Texas Pacific Group and Silver Lake Partners.


Subprime problems hit WaMu

The Chicago job market continues to be haunted by problems in the nation's subprime mortgage industry, even as federal regulators fashion guidelines they hope will improve conditions in the sector.

Washington Mutual Inc. has disclosed that it is closing a subprime mortgage office at One Pierce Place in Itasca, leaving more than 100 employees out of work, according to a filing this week with the Illinois Department of Commerce and Economic Opportunity.


Liquidity Nightmare... Drowning In Cash

In 2005, Stephen King, managing director of economics at HSBC and also a columnist for the Independent.uk news site stated that there was a crisis of faith among central bankers. Two years later, we can see why this confession should have read as: central bankers must stick to their pseudo-religious tones to proliferate public delusions of invincibility.


Zimbabwe: IMF Says Govt Inflation Figures Understated

THE International Monetary Fund (IMF) this week painted a bleak picture of Zimbabwe's economic crisis predicting that annual inflation will hit the five-digits mark by year-end.

The Bretton Woods institution in written responses to the Zimbabwe Independent on Wednesday said the country was now experiencing hyperinflation as its month-on-month rate had shot above 50%.


Inflation risks still skewed to the upside

US. Core inflation fell more quickly than anticipated so far thanks to lower owners’ equivalent rents and the markdowns for apparel. In the short term, it could even still slide into the Fed’s comfort zone. But the tight labor market, recordhigh energy prices as well as strongly rising import prices will lead to higher trend inflation again over the medium term (pages 4-6).


Move away from U.S. dollar reserves still all talk

Central bank holdings of U.S. dollars continue to mount, despite talk of diversification into other currencies, but questions remain about the sustainability of the rise in dollar reserves.

On Friday, the International Monetary Fund said global central banks' hit a new record in reserves held in U.S. dollars at $2.24 trillion in the first quarter, a 4.0 percent increase from the final quarter of 2006.


Rolling in gold but still poverty-stricken

IN 1865, Jamsetji Nusserwanji Tata - a one-time opium trader and scion of a sparkling line of Parsee priests, Zoroastrians who had fled to western India from persecution in Iran - attended a lecture in Manchester given by Thomas Carlyle.

Carlyle, a cantankerous Scot, was known for his historical and philosophical essays, but he also put his mind to the budding field of political economy.


Report: China raises minimum wages

China's government has ordered minimum wages raised to help the poor cope with soaring food costs, a state news agency reported Friday.

Chinese leaders have been alarmed by a spike in inflation that saw the price of eggs rise 37.1 percent in May from their price in the same month last year. Meat and poultry were 26.5 percent more expensive in May compared to a year ago.

Debt, Deficits, Derivatives & Delusions - 06/01/07

ATI Funding Says Dollar's Free Fall Creates Once in a Lifetime Opportunity for Overseas Countries

ATI Funding is able to finance foreign companies as well as foreign governments on equipment and construction loans originating from the USA without collateral up to 100% Financing . ATI Funding's new program will also finance US companies exporting US products at rates and conditions never seen before.

SHINE A LIGHT ON THE PLUNGE PROTECTION TEAM

Dear John: Although I admire your quest to get information on the Plunge Protection Team, I'm not sure why you are doing so. Seems to me, if you consider it OK - in the public interest, as you say, - for the PPT to intervene in some emergencies, then you essentially consider it OK to intervene at all times.

Because who determines what a real emergency is? Where do you draw the line? You either believe in a free market or you don't. I.G.

J.P. Morgan Settles Copper Lawsuit

J.P. Morgan Chase & Co. has settled a long-running antitrust lawsuit filed by copper companies who claimed the bank's predecessor conspired with a Japanese trading house to manipulate the copper market in the 1990s.

A trial had been scheduled to begin Tuesday in federal court in Madison but court officials said the companies settled late Friday. The details of the settlement are confidential.

Bill seeks new US approach to currency battles

Senate leaders are close to finalising legislation that they hope will lead to a reversal of long-standing US policy of opposing intervention in currency markets, according to people familiar with the matter.

The Senate bill is to be introduced in the next month and will put pressure on the US Treasury to intervene in global markets if currencies become fundamentally “misaligned”, people invol­ved in the process said.

Italians claim country run by Goldman Sachs

Italians grumble that Goldman Sachs runs their country, much as the Jesuits ran countries during the Counter-Reformation.

Premier Romano Prodi is an ex-Goldman Sachs man, as is central bank president Mario Draghi and the deputy treasury chief Massimo Tononi.

Funds attack banks’ aid for subprime borrowers

Hedge funds are attacking bank decisions that help delinquent US mortgage borrowers remain in their homes in a move that pits some of the country’s richest people against its least well-off.

The dispute centres on derivatives contracts that pay money to investors when bonds backed by subprime mortgage loans – extended to people with past credit problems – run into trouble. The $1,200bn (€890bn) US subprime mortgage bond market has been hit recently by rapidly growing defaults, and hedge funds have profited from the crisis by buying such derivatives.

Banks are lending to private equity at below the interest rate

UK banks are taking the unprecedented step of lending to the private equity and hedge fund sector at below the official UK interest rate.

Experts said it was a sign of City institutions' growing desperation to buy into the booming alternative investments market.

U.S. Bank Loan Risk Falls on First Day of Derivatives Index

A credit-default swap index based on the U.S. high-yield, high-risk loan market rose in its first day of trading as hedge funds and other investors used the contracts to bet on the ability of companies to repay their bank loans.

The LCDX index rose 0.63 to 100.63 as of 4 p.m. in New York, according to London-based Markit Group Ltd., the index administrator. An increase in the index suggests improvement in the perception of credit quality; a decrease signals the opposite.

More home owners are struggling to make house payments

Dawn and Scott Hentschel came within a sliver of losing their home after Scott, a construction worker, was laid off two months earlier than usual last fall.

The couple saw a legal notice in the newspaper and then a note in the mail that said their bank planned to foreclose on the two-bedroom, ranch-style house they bought two years ago.

Foreclosures still raging in Chicago area

Chicago-area foreclosures, which set a record last year, are projected to reach full-blown crisis levels in 2007.

Cook County is on pace to record at least 30,000 and as many as 36,000 foreclosure filings this year, according to Cook County Circuit Court Judge Dorothy Kinnaird, who presides over the Chancery Division, which handles foreclosures. That would mean a 35% to 62% increase from 2006, when 22,248 filings were easily the highest in county history after having risen 36% from the previous year. (The court combines both commercial and home foreclosures, but residential mortgages comprise the vast majority of its cases.)

Subprime loan crisis is hitting Vallejo hard

Vallejo is the Bay Area's version of ground zero for the subprime loan crisis.

A significant number of residents of the largely blue-collar city of 120,000 have taken out subprime loans -- expensive mortgages issued to people with poor credit.

Venezuela Local Debt Tumbles as Protests Extend to Fifth Day

Venezuelan government debt tumbled in local markets as people took to the streets for a fifth day to protest President Hugo Chavez's decision to pull the country's most-watched television network off the air.

Concern that protests will turn violent again led investors to sell dollar- and bolivar-denominated bonds in the local market and move money out of the country, traders said. Police have detained 182 people since May 27, the day that Chavez let the concession granted to Radio Caracas Television expire, Interior Minister Pedro Carreno said last night.

U.S: Subprime Fallout - How Significant is it for Credit Markets?

In a recent speech, Fed Chairman Bernanke made the point that the impact of subprime lending on the credit markets was not significant. This is a welcome note in contrast to many commentators that portray the world in black and white. Subprime lending is having an impact but not the disaster some commentators assert.

Subprime: Correction or Calamity?
How may we gauge the significance of the subprime correction? First, the ABX bond index (top graph) dropped precipitously from 93 in early January to 63 in late February but recently has moved back up to the 76 level. This suggests that the value of these subprime instruments has declined but that the decline is limited and not building momentum towards a total collapse.

Debt, Deficits, Derivatives & Delusions - 05/21/07

Yen on record low against euro

The yen hit a record low against the euro on Monday, with sellers of the low-yielding currency encouraged by regional stock markets' calm reaction to China's surprise move to widen the yuan's trading band and raise interest rates.

Group of Eight finance ministers avoided discussing the yen's weakness at a weekend meeting, which market players also took as a green light to push up high-yielding currencies.

S.Korea's trade deficit with Japan rises to 10 bln USD in first four months this year

South Korea's trade deficit with Japan rises to 10.06 billion U.S. dollars in the first four months of this year, compared with 8.35 billion U.S. dollars during the same period of 2006, said a report of the Korea International Trade Association (KITA) on Monday.

The housing bubble's silver lining

THE ONCE-buoyant housing market is clearly in trouble. Last year, housing prices around the country fell for the first year since the Depression. In Southern California, one of the epicenters of the housing and housing-credit bubble, the pain has been acute. Local subprime lenders such as Ownit Mortgage Solutions in Agoura Hills and New Century Financial in Irvine have filed for bankruptcy protection. MortgageDaily.com estimated that 12,000 mortgage jobs have been cut in California since January 2006. Foreclosure rates are rising.

Saudi Arabia's gold demand up 7 per cent

Gold demand in Saudi Arabia was up by 7 per cent in the first quarter (Q1) of 2007 as against the same period last year and further increase is expected due to customs tariff reduction, according to the report issued by the regional office of the World Gold Council (WGC) on gold demand in the Middle East, the Gulf region and worldwide.

The Trade Deficit and Foreign Confidence in the U.S. Economy

If foreigners lose confidence in the U.S. economy and are less willing to hold dollar denominated assets, the supply of dollars in the global banking system will exceed demand and the exchange value of the dollar will fall...

Debt, Deficit, Derivatives & Delusions - 05/04/07(Update 1)

Derivatives hint at weak April job growth

Investors believe the U.S. economy generated around 88,900 new jobs in April, according to the results of a derivatives auction.

Such a rise was smaller than that generally expected by Wall Street forecasters, who are looking for a somewhat larger 100,000 increase.

Paulson repeats China must let currency value rise

US Treasury Secretary Henry Paulson said on Thursday that China should quickly let its currency rise in value and let market forces play a greater role in recognition of its own economic might.

"It is quite important that their currency appreciate more rapidly," Paulson told several hundred students at Harvard University as he continued a series of discussions about the importance of keeping US-Chinese relations on an even keel.

India's trade deficit widens despite upward revision of export figures

India's trade deficit widened 40.5 per cent in the fiscal year ended March 31, this year to $56.74 billion despite an upward revision in export data for the April-February 2006-07 period.

While announcing the March 2007 foreign trade data, the commerce ministry has announced an upward revision of export data for April-February 2006-07 by about $3 billion.

Dick Cheney's Banker Grantham Sees World Bubble: William Pesek

You'd expect someone whom the famously dour Dick Cheney entrusts with millions of his dollars might have a gloomy view of the world. Jeremy Grantham does indeed.

``From Indian antiquities to modern Chinese art; from land in Panama to Mayfair; from forestry, infrastructure and the junkiest bonds to mundane blue chips -- it's bubble time,'' he writes in Grantham, Mayo, Van Otterloo & Co.'s latest quarterly letter titled ``The First Truly Global Bubble.''

U.S. Dollar Declining, Global Community Rising

Martin Weiss, Ph.D. examines the declining value of the dollar and how it directly affects the U.S. economy as well as the global community. In this issue of Money and Markets, Dr. Weiss discusses the plunge in the dollar verses the rising values of foreign currencies as well as the affects the dollar is having on the U.S. Housing industry.

According to Weiss, the U.S. dollar is sinking. No one is able to come to the rescue. Investors who fail to take protective action could get hurt badly. And those that act promptly stand to make some of the greatest fortunes in recent memory.

THE WORLD’S GREATEST UNREPORTED HYPERINFLATION

Zimbabwe has entered the hell of hyperinflation. Indeed, inflation in March rose by well over the 50% monthly threshold for qualifying as hyperinflation. The reporting of Zimbabwe’s travails invariably includes the standard reference to Weimar Germany’s 1922-23 hyperinflation, in which the monthly inflation rate peaked at 32,400%. The choice of this Weimar reference is somewhat curious. After all, the world’s greatest monthly hyperinflation rate was recorded in Hungary in July 1946, and it was 12 orders of magnitude greater than that of the peak month of the Weimar hyperinflation. As is the case with much economic and financial data, the Hungarian record has simply tumbled down what George Orwell called a “memory hole.”

Indian trade deficit nears US$57b as oil imports soar

India's trade deficit widened to nearly US$57 billion in the year ended March as a surge in the cost of imports led by oil offset a record year for exports, government data showed Tuesday.

Exports rose 23.9 percent to a record US$124.6 billion, in line with a target of US$125 billion for the year, while imports jumped 29.3 percent to US$181.4 billion led by oil, the government said.

Asia Draws on $2.7 Trillion of Reserves to Safeguard Currencies

Asian finance ministers will this week probably agree to pool part of the region's $2.7 trillion in foreign-exchange holdings to prevent a repeat of the crisis that depleted reserves ten years ago.

Loan derivatives poised for explosive growth

The market for derivatives of the risky corporate loans that are generally used to fund private equity buy-out deals is beginning to enjoy improving trading volumes and many are predicting that the next 12 months will see explosive growth.

Canadian Mint Introduces Wheel-Sized Pure Gold Coin

The Royal Canadian Mint today unveiled a gold coin that's as big as a car wheel and as thick as a hardcover novel, in a bid to help win business lost to global competitors.

The 100-kilogram (220-pound) coin, which is 99.999 percent pure gold, the largest and purest piece ever made, was shown to reporters for the first time today at the mint in Ottawa. While each coin has a face value of C$1 million ($900,000), the purity and quantity of the bullion gold they're made of makes them worth more than twice as much, based on current prices.