How Does Your Light Shine?

I have been listening to News sources all morning, and reading on the Internet. I find it humorous in their major themes. The 300 Point rise in the Dow is attributed to Traders believing that Congress will act and pass the Bailout package of Paulson. I think it is far more likely that Traders lose about $8 billion per Day per Percentage Point of underutilization in their Capital assets. Possession of no-Interest Treasuries reminds of getting Drunk on $12/glass Beer. There are much better ways to blow your Money (at least pick a Slot machine which pays of at 30%, rather than 20%). I believe Wall Street has already blown about $80 billion in the run-up to yesterday, simply to present the Markets in crisis; in hopes of getting fast Cash out of Congress which they would not have to return. Yesterday cost them an estimated $24 billion in lost revenue, simply to try and scare reluctant Congressional legislators. And here they thought the Cash would be freebie!

I wax sardonic at the examples used to highlight the Credit crunch, listing Auto dealers in the fore. The fact of the matter states that these dealers would not have gotten the Credit lines, even if the Bailout had been passed; the Car dealers being overcapitalized and overextended, with lack of Sales and overpaid Labor based upon Auto Companies standardized Wage scales. These Dealers will only survive if they receive aid from their parent Car companies. The rest of the Screams come from ‘Mom and Pop’ Stores which have not made a Profit in the majority of Quarters they have spent in business. These slow Capital drains would have to be closed anyway.

I opt out for complete Congressional inaction. Every Day spent without a Bailout package leads to another $40 billion of the at-Risk $2 trillion Credit being reduced. I heartily disagree with the current Fed activity, which has pumped too much liquidity into the Markets already, especially when Commercial banks will not engage in sloppy Credit practices again. The confidence to get Commercial banks again trading Cash with each other comes in two forms: force Commercial banks to stay out of Investment banking, and allow the inter-bank rates to float freely. Either one of the Two would double the flow of Cash between banks, and both would eliminate any need for Bailout at all. Just my Thoughts! lgl

The New Child of Treasury

Here is the best access I have found to the Bailout details. The Treasury Secretary is granted the Right to blow $250 billion as quickly as he can, then get another $100 billion granted to him by the President, with another $350 billion in the Winds of Congress; if they like the Payoffs made through the first $350 billion. There has been mention of saving Homeowners, yet more attention is paid in the bill to inciting new bad Mortgages with a $7500 tax credit for subscription of new Mortgages between April 2008-July2009; few likely to express regret for Those already with a Mortgage at this Point. Paulson seems bound to help current Mortgage-Holders, though he has been given little Instruction of how, or even when, he is to do so; I think, according to the language, he could even demand higher Interest rates on the Mortgages. The Rumor, unchecked, that any Profits derived for the Treasury is supposed to be a hidden tax on Home-owning, with all Profits going to pay down the National Debt. It is obvious that Paulson is looking for a good Job in the finance industry, once his Treasury Days are over!

I see nowhere any Time Limit on the operation of this bill. I might be wrong on this, but imagine that the Treasury can buy bad debt for Generations, without need for further legislative authorship; at least, I have not heard of any Sunset provision in the Act to come. The Oversight Board has had little Public discussion, and no one has voiced any restraints on Treasury action I can find. The new special Inspector General sounds like it will be a lush new Government Job, with a GS-15 Payscale, and $50 million to spend. The Oversight Committee is paid well. Paulson can do whatever he wants for the first 45 Days, then he must declare the Procedures he will be using. We know that the Civil Servants will fare well, even if the rest of the Country goes broke.

It would be nice Sometime to study a document before a group of untrustworthy Individuals set it as law above Us. I do know that there is nothing in this thing which would compel any Change in Lending practice, and provides Incentives to new Homeowners to over-finance their Homes, or to refinance existing Housing, all under the same old lack of Regulation which brought Us to this Point. The Treasury Secretary will undoubtedly be buying Bad Debt for a long time. We can only hope that the conservative Republicans will hold to their Convictions. lgl

CDOs

Gretchen Morgenson presents a good Review of the troubles of AIG, but does not fully explore the role of CDOs. They were a mix of low and high Risk Debt which were supposed to make a Profit, no matter if there was some failures in the high risk elements; the entire Context of the CDOs was the expectation that all would pay something towards the overall Debt. They collapsed because the high Risk debt paid nothing when in failure, and low Risk debt had troubles of prompt payment failure under stressed economic conditions. Most of the Debt would still be paid off, but the Insurers had to advance funds to cover expected losses, destroying intermediate term Profitability. The CDOs, like most complicated things, showed (still show) long-term Profitability, though the Costs of doing business in the intermediate term was far higher than estimated. No one existed to cover the Intermediate Costs, as all Insurers operate on planned Investment schedules, where hurried Capital raising from such Products is impossible, except through Sale of the Securities. There was no Market for such Securities, because no Purchaser could handle the Intermediate Costs of the CDOs. This was followed by the inability to split the CDOs, once they had been sold to Investors.

There is much debate about the Moral Hazard of Government bailing out the Investment Banking elements, suggesting the limitation on Risk-Taking will be nullified. It amuses Me, knowing the one factor no one else seems to foresee. Global Slowdown is a Reality, and the U.S. Government is assuming a huge liability, though it should pay off in the Long-Run. I await the Treasury Crisis, where Treasuries find a lack of Purchase. It might not happen this Crisis, because of the long-run Profitability still expected, but there is both a lack of Cash and the question of higher Risk for foreign investors. We have become a World awaiting the dropping of the other Shoe, and the ground is seeming to fall away.

There comes a Time of Complexity, where Insurance becomes an obvious fraudulent attempt to get Investors to cover for the Issuer’s business failures. This forces a decline and avoidance of Credit Swaps. The musical chairs are limited, and the Risk must stop somewhere. It reminds of Roulette, except where the ball stops, stands as the Creature of Loss. It is why CDOs and derivatives of all types are so attractive, because it draws in so many more Players, while the Loss of such Play will descend upon one group of Players. A Fool will insure a Fool, who will insure a Fool, and so on; the Fool becomes a Crook, who doesn’t even understand how he became a Criminal. lgl

Bailout Revisions

The things that Readers should know about, but won’t get from Me: here, here, and here.

I contemplated yesterday on the flight of Cash from Banks, and Jim Kramer put a more cogent expression on his program: the real Need to increase the limit on FDIC Insurance on Deposits. The simple routing of Purchase Transfers through the Banking Demand Deposits necessitates a higher Protection umbrella, as Checks are cut for all Stock transfers, Commodity purchases, and Employment payrolls. Bank Reserves are being denuded simply because no One wants to keep uninsured funds in any Bank today, beyond an absolute Necessity Point. One does not desire to buy Movie Tickets, while the Fire Dept. is working to put out the Theater Fire. Something about a high risk premium demanded, without any Reward advanced against that Risk. Banks are strapped for Cash because the FDIC will not join the new Century (I think We a up to $2 million per Depositor, considering the increased funds, and the declining number of distributive banks.)

The second item I would outline must be that Government must join the Markets, not dictate to them. The proposed Bailout is going to fail even if passed, if Treasury and Federal Reserve believe it is a basic process of absorbing bad Paper. Treasury must open Trading desks in the various Markets and online, where they Buy and Sell Securities. Transparency remains the most important Issue, but the manner of transparent discovery is equally as vital. Clarity must be expressed in Terms which Traders, Venders, and Equity holders can all understand; this entails an environment similar and familiar to normal Trading activity. Banking controls should be implemented by buying Long, or selling Short. The Treasury should both Buy and Sell, and do so within parameters previously set, but adjusted continually to meet current economic conditions. The only advantage the Treasury should use is their uniformity of Policy, and their large Credit line.

The third proposal I would like to advance is that the bad Paper should be tied to the Equity securities. I have messed around with the Numbers, but it is hard to come up with an exact set because of the lack of a Market, and an absence of Econometrics. I suggest a 18:1 ratio of Bad Paper/Bank Stock. This ties the Paper to the Stock (evaluated at current Market pricing). A rise in Stock pricing would inhibit the Sale of Bad Paper, and contretemps effect on Stock pricing. Banks would be eager to sell Bad Paper if Stock price was low, but less desirous if Stock prices were higher; the Whole workable only if it required Treasury or Fed acceptance of Bank Stock issuances and Management Compensation. The Treasury must be equally willing to sell Bad Paper and Equity Stock as buying it, and allowed to separate the Two in Sale transactions. The one satisfying element to such a Program would be the much smaller requirement of Government funding, and the chance to make a Profit on the Transactions. lgl

Progress of the Bailout

The Great Deal has turned into the Great Debate, and is digressing into a Comic opera where Paulson kneels to Pelosi, and TV Commentators rant at each other. Washington Mutual burns out, and JP Morgan seems posed to be the next disaster. They, at least, are buying what Others have found toxic, and at least absorb $31 billion in losses from WaMu. Legislators revolt in the trenches, though, must be the major Story, and the Bailout will not occur under desired Conditions.

Wall Street is almost universally desirous of the Bailout, but there are Signs that it is doing better at Recovery measures than any Government agency could produce. They want the Cash, but there is no indication that it would make any difference. One TV Commentator admitted that there already has been about $1.5 trillion of bad Debt flushed out of the system, and Another suggested that another $700 billion will make no difference (Outside predictions that a total of $4 trillion is at risk). I personally side with the outlaw Legislators, and deem it necessary that the Markets cure themselves.

There has been much suggestion that the Bailout has become politicized; I would suggest that a Price Tag of $700 billion has always been political. The whole Situation revolves around whether the American people are willing to fork over for what is basically Investor Welfare. Most Americans, I imagine, would be adverse to such Suggestion, even if they had to absorb some of the loss on their own part. What is known states that the Global Slowdown is real, and will impact the American economy, no matter how much the Government spends trying to save unstable Banking practice. One cannot forever fund bad practice. lgl

Responce to the President

The Bush/Paulson/Bernanke Recovery Plan has always been too massive and invasive, reminding of the Clinton Medical Plan of 1993. They imagine to take over the financial markets, because there are actually Downside losses which have started to appear. They want to throw the Baby out with the Bathwater. They begin with the implication that Markets cannot regulate themselves, and create Problems impossible to moderate without gutting the entire Concept of free Markets. The Truth states that the Banks are already taking the requisite Steps to clear the Problem already, and the infusion of Government funds at this Point would defeat this Private Sector initiative by inciting over-evaluation of mortgaged assets. We actually need a Pause in the compulsive reactions of Paulson and Bernanke at Treasury and Fed.

I believe that the best Pause would be delay of any Congressional Plan until after the Inauguration of a new President. We can witness what progress has been accomplished in the interim by the financial sector itself; a not dangerous path, as I estimate that Commercial and Investment Banks together are likely to deny only about 3% of the Operating Cash to Business. The greatest majority of this Business will attain finance anyway, through the payment of premium Interest rates. The interim Period would also result in an estimated renegotiation of a probable 50% of the at-Risk Mortgages, with only about 20% of these Mortgages entering foreclosure; remembering about 90% of These would enter foreclosure even with federal intervention. The rest will find method to pay off the Mortgage, or will have Sold the Property for resolution with Bank approval. There is no need to alter Market performance, or set unsavory Precedent, by precipitate Government activity which is bound to cause as much damage as it averts.

Americans may feel they are compelled to witness the obnoxious spectacle of watching Congress waste vast Taxpayer resource, just to present a Congressional image that they are actually worth the exorbitant Salaries we grant them. The fact remains it is a Time for Americans to raise Roadblocks to the proposed actions, as the greater Period before Intervention by the Government is the most desirable. I would exhort Citizens to protest any activity by the Government before the general Congressional and Presidential elections; utilizing the Proposition that Americans would like to choose Who they would have implement any Plan. I would utilize the idea that since the Bush administration proposed the Intervention, it should be left to the incoming Administration to administrate; simply to remove any connotation of Self-Interest in the motivation of the development. The later effort would leave Congressional supervision in place, not a bad Plan when contemplating such a devolvement of Cash to what are Private Equity factors. I hate the Thought that this is intended as a corrupt Cash Cow for the departing Bush administration. lgl

Stance on Bailout

Some people have asked me for an actual Stance on the question of the Bailout. I reply that there is a place for Government intervention, but it has limitation, and that has been passed. The Fed action taken in response to Bear Stern, Fannie and Freddie, Lehman Bros., and AIG finished desired Government intervention. There is a Point where the Private Sector must once again assume their Risk and Responsibility. This means that Private money must extend the Cash to get through this Crisis; it is much easier and quicker if no one insists that Government assumes the responibility for the aggregation of the funds, whether by Taxes or Debt. In either Case, the Cash will have to come from the Private Sector. I believe it is far preferable with higher speed to force the Credit industry to offer the premiums to get that Cash, while the high Interest rates will more generally sponsor good Credit practice to greater degree than any Government regulation. I would like to explain to Mortgage holders that their current Contracts present a better deal for them, than any Mortgages established upon future viable economic conditions. At Risk Mortgage holders simply desire retention of contracted Property which their Incomes have proved too expensive, and is a Welfare desire to retain more equity than deserved by Government subsidy.

Government protection of Mortgage holders will simply worsen the Credit management of this Country, and lead to greater Crises in the future. Continuance of old practices which brought the current Crisis will only cause multiple disaster in the future. Billions of Dollars have been lost, and billions more will be lost; but forcing the Credit markets to reform will save Trillions in the long-run. Congress needs to deny a Bailout, or any further Government Cash in any way; this means Treasury and Fed must cease their Firehouse duties. Make the Private Sector raise its own Cash, and allow the Foreclosures to work. Housing prices will decline to their natural level, and the Realtor and Construction industry will face their own decline, at least until they amend to Renovation practices to return equity to the lost Housing. Investment Banks and Investors will have to assume their natural losses coming from their assumption of heavy Risk. The high Interest from Private Sector raised funds will refund more moderate Investors for their more sensible Investment practices, and force Business to adopt more effective Investment schedules.

The whole genus of the Markets today want to return to the vast Profits of past years, but there was never enough Equity to support those Profits, then or Now. Government bailout Cash would only further inflate the Equity price of those assets, without increasing the actual value of that Equity, compounding an already-bad Situation. Real Terms dictate that We squeeze unearned Profits from the Markets, not worsen the current conditions. We need more Liquidity, but it must be a liquidity coming from Blue-Sky Operators losing their Investments in trash in the Past. lgl

Boring, Boring, Boring!!

I bring you this article to highlight familiarity with all the Indexes in the World, as it touches almost everything. I caught the mention of 11 or 12 Indexes, and listed numerous futures and Commodities which are down. It is a wondrous exhibition of information which might distract from certain underlying themes: European and Asian markets do not think that the $700 billion Bailout will work; they expect the Dollar to depreciate; they believe that the Recession will come, and spread from the United States; that European and Asian financial stocks are even weaker than American financials; and emerging markets are already showing distress. My own Evaluation is that economic conditions are not currently that bad, liquidity will not be helped by the Bailout, and the Recession which is coming will be best served with a shortage of Cash; a Statement that I relatively oppose any federal action, especially of the magnitude desired by Treasury, Fed, and President.

The Equation would be different, if I had a belief that a Recession could be avoided. I still don’t define Bankers as willing to absorb greater Risk; they are looking to shed past Risk, not take on a further load which they know will not be covered again. American Consumers face an economy shedding Jobs, with a high Debt load, and rising Consumer Costs; they have to switch to Necessities Consumption–which will not maintain an expanding economy. The prime Cash Flow of the Entertainment industries is already beginning to suffer, and high Credit Card charges are beginning to curtail reversion to Instant Access Credit. Another Round of medical Costs increase will bring a massive increase in the number of Uninsured. The worst aspect of the Bailout sets a Precedent, and fuels Inflation. Other Groups are already in line for bailouts at escalating Costs due to Inflation. I think it would be better to allow the Bankers to endure the losses of their own Making.

I am so tired of Posting on the financials bailout, having hoped one Post would serve to emphasis my views, and then I could turn to more relevant economic issues. No one can seem to suppress the Issue, though, and on We go. Here is an article by Edmund Andrews which should be read, because it outlines both how little effect will be exhibited by the Bailout for Mortgage Holders, and how little it will help the Bankers, simply because of the magnitude of bad Risk securities that were issued. I am going to rebel soon, and start writing Poetry on this blog; friend Andy’s exhortations aside that I should never attempt such invasion of artistic effort. lgl

The Debacle

Americans who may believe We are alone in suffering from the idiocy of Bankers, should consider the plight of Europe. There comes a Point when one has to ask if collapse of the banking sectors is not cheaper than Bailouts. Examine the $700 billion American Bailout plan: Does this Cost not seem greater than letting the Economy go into Recession? The only thing that the Bailout has going for it is a 1 in 6 Chance that We will make a Profit on the Money. The Downside, here, is the engagement of the Government as a Private Sector Participant, a factor which will turn into horror as We progress. I can only tell Europeans that the new Totalitarian State consists of Bankers who refuse to come out into the Light, and are determined to extract every last pitiful Euro from painfully built Savings.

Paul Krugman has an infuriating habit of explaining an economic circumstance in terms where the correct conclusion is lost to the Reader. He correctly points out that the Fed only has about $800 billion of assets compared to the $50 trillion Credit market. Translated: this means that the Fed is the proverbial Fly on the Elephant’s ass of Old, and relies only upon reputation to influence the Markets. The fall of T-Bills to near-zero interest rates is important, but relatively undetectable from Paul’s definition. Translated: Buyers consider T-Bills equivalent to Cash, with probable identical rates of Inflation as Cash (hard Read here, but Buyers expect T-Bills to lose value at the same rate as Cash, but with a delay drag of about 60 Days). The near-zero interest rates become an Expectation of result Inflation over the term Period. It is only the expression of Business belief that Inflation has slowed once again, after it’s rapid advance over the past year.

Paul Krugman suggests that the Fed is losing its power to effect Monetary policy, and it is. The Fed is exactly is like position with the European central banks, and culmination of the current Crisis will find the Fed sinking into a simple Regulatory agency, with fiscal and monetary policy left to Congress; an institution known to lack Moderation, or even Common Sense. I fear for a World led by the Lobbyists. lgl

The Race to the Bottom

I give you the Authority under which the Treasury hopes to capture the Mortgage loss for the American people. I just scan through this Act, and find the document wide open to devious practice. The Secretary can appoint financial institutions as financial agents without Review or Bond, can establish Contracts without relationship to previous Contract law, lack of defense by Private Parties in the conquest of Private Contracts with ability to alter the terms of said Contracts, obtain $700 billion in Taxpayer assets to purchase Mortgages (undefined in Act) irrespective of the desires of the Holders with ability to alter the terms of the Agreement in any way desired by the Treasury without any Private recourse to previous American law, and the Treasury can alter, amend, extend, or increase the liabilities of the Holder without recourse to law. The ability I find most threatening is the open power to confer subsequent Ownership upon any financial agent or institution at will, without resort to supervision by Congress or Court.

One can read the covering article and find many of the objections to the Act which will be presented by Congress. What I find most objectionable remains the ability of the Treasury to amend the Ownership rights of the Contracts without Court appeal. I would far prefer a limitation placed on the Treasury, where actual Control of the Contracts had to be farmed to Private agents by Bid; said Agents subject to both Mortgage Contract law, and where they were left to earn their own Profits from the deal. There remains a vast threat to Property rights when Governmental agents are allowed both the Right of Conquest, and the freedom to Control without Private appeal to the Courts. It is even more desirable that the Government agency not be allowed to draft Private Profits from the Process. The worst aspect must be that voiced by some Commentators, who have suggested it could be a form of alternate taxation. The later is burden placed upon Private Equity holders, and should be an imposition only upon specific law.

Here is an article which examines if the new Government interventions will work to restart the financial end of the economy. Alan Blinder mentions that the whole Crisis is the result of declining Home prices; a Concept I disagree with, the decay in financial institutions was bound to result in a Crisis even with increasing Housing prices. Another element resides in the increased degradation of unoccupied Housing, much higher than the rate for occupied Housing, especially under distress evacuation of Foreclosure when close-down procedures were not followed. Financial Groups have not been utilizing due care in the preservation of Housing. The Housing is not worth what it was, if it ever was! Financial Groups are additionally directing their losses overall to their Mortgage units, to unload all their liabilities, especially by the Mortgage sector purchase of inner-Agency liabilities from private holdings of Group officers. Nothing I can find suggests that this vast absorption of bad debt by Government will restart the liquidity of the economy; stymied by the poor performance of the rates of debt reduction. I don’t think that Credit will return to normal function, until about 7% of the existing Debt is reduced by repayment or default. lgl

How We Roll!!

One thing I am extremely tired of consists of discussion of the Financial Crisis. This article may give the idea of what happened to Interested Parties, and serve as a chronological meter of the Crisis. My only Comment would be a Statement to wit: People conclude that the new Instruments are too complex for Others to understand. I contend that this level of Complexity also precludes the ability to make a Profit. Stated in another way: These Instruments were looking for a Return in Places no one even noticed had to be paid. Debt has to be recognized, before there is any chance of successful Payment. The consequences of this Debt were as null, as the Profits from them. One cannot subscribe to the assumption of Debt, until One understands the Repayment system; unless, of course, One expects to leave the Operation before Repayment becomes an Issue.

Here is the part of the Puzzle where I have my greatest doubts. Everyone talks about Liquidity, which basically means inducements to get financial institutions to loan funds again to the Participants in the economy. The Plan is to buy the ‘Toxic Debt" from the financial institutions, which will incite them to risk their Money again. Here is the Problem: The federal Government may or may not make Money from the Deal–depending on whether they can get the Debtors to repay the Debt. Attempts to force this Repayment will evaporate liquidity in the economy, like the loss of Snow in the Spring Sun. Letting the Debt slide will mean another Trillion Dollars of National Debt, and dry up federal opportunity for future interventions in the economy. Bankers, being sensible people, will notice that their Money is again at Risk if they engage in Toxic lending activities again, and that the federal Government has about reached the end of their own resources. Bankers will examine the Situation, and will prohibit all except the most sound of loans; We being back at the Liquidity Issue.

My Assessment states that Liquidity cannot be found in the Financials themselves, and Business will have to turn to the Equity markets for Cash. The Mortgage Markets will stay dry and mainly without Outside aid, if only the Rain would fall! The federal Government wasted its resources in a Bailout which will effect no change, and magnified their own troubles. The humor for Me lies in the fact that the Economy is not in that bad a Shape, and would have recovered if the Recovery effort had not been launched. One wonders if the economy will sustain the Recovery effort, which imposed its own set of Stresses on the Markets. lgl

The Squeak

The S.E.C. goes out of its way to condemn Short-Sellers of financial stocks, though for years it encouraged Short-Selling through relaxing the Rules of registered responsibility, and allowing Financials to loan based upon Securities later sold short. The Bankers want the Money of fraudulent practice, but how dare Anyone use such practices against themselves? There are Those who say the Double Standard does not affect the Markets–but they do and will! We will never establish a hard floor in Financials until such Time as the Markets can reflect a real Price for those Financials. How do you do this, if Short Sellers don’t start to lose Money? Deviant practice is properly governed by the Market infliction of losses; regulations simply allow deviant Players to save their Money for something worse!

I must say that I agree with John McCain for the first time since this Campaign season began. The Fed attempts to insert itself in the heavy Player aspects of the Market can only lead to disaster. One can describe the Situation in technical terms by statement that We now have hundreds of billions of unsecured loans issued by an Investment bank (the Fed), which would be hard put to express the maintenance of any Capital reserves. People will begin to measure if the Fed or Treasury can pay off their structured liabilities if they must, and exactly what magnitude those liabilities possess. Let Me be the first to call for an outside Accounting firm evaluation of the equity of the Federal Reserve. Most think I am Joking, but the Fed and Treasury have embarked on a slippery slope, and Someone besides myself will ask about Ability to Pay!

At what Point do Markets lose their ability to assess relevant equity? The Market movements of yesterday indicate this evaluation process was lost in the Day’s trading. One Analyst said that total variance of change yesterday equaled some 1200 points in the Dow over the trading session. The yo-yo movement at speed indicated a stampede mentality among the Ranks, with no serious Thought given to actual value. I await what the Markets will do today, but estimate effective Business decisions must ignore Market valuations for the near future. lgl

Distribution Systems

I am sincerely tired of the discussions of the Financial Crisis. Money, the Flow of Money, and Central Bank action to stimulate that Flow is all One hears. The only other Story is the Drops in the markets due to the impediment in the flow of Money. Somewhere out in Left Field, a Few bemoan the increase in Prices year over year, but no One thinks that Inflation will be called up from the Bull Pen to the Mound. It would be humorous if not so destructive, because Home Sales, Mortgages, and the financing of Such does not drive the economy, nor does the Cost of Operating Capital for Business. What does matter is Jobs and Consumption, but no one examines these, except to bemoan the Job losses for the poor millionaires in the Financial markets.

I am bored with Central Bank policy to maintain liquidity, believing that Business will obtain Credit when there are Profits to be derived by the old expedient of paying more for the Cash. Cheap Money is not a goal in itself, and lots of Cash out there actually restricts Consumption, because liquidity first appears as higher Prices in Consumption. I would much rather develop a Stimulus bonus, or a draconian fiscal restraint policy. Idea: Give all Businesses a full Tax Credit if they give all Employees a $1/hour Raise; the Thought being that it would be Stimulus taxable on the level of Personal Income, and could have the Tax Credit removed after 3 years. Somehow, that seems to me to be revenue neutral.

I decided to provide you with some serious Thought, and came up with Post from Cactus. Central bankers would not be so concerned if the current Crisis did not evolve their professional friends. Maybe I vilify, and Central bankers simply understand liquidity than other aspects of the economy, but could I take my Share of that $900 billion in Cash; I have some bills to Pay. It is like all forms of Welfare, though, in that no one will give the aid directly to Those in Need; they always Hire and Pay some Welfare Worker an exorbitant Pay to distribute meager dispersions to Whoever needs help. lgl

Our Truly Courageous

David Leonhardt attempt to present the attitudes of the major Players behind the AIG bailout. He does a fair job on one level, and a totally distortionary View on the other. The Players all knew that all these Companies–Merrill Lynch, Bear Sterns, Lehman Brothers, AIG, Fannie and Freddie would need a Cash source since last March; a Time frame from when they were first allowed to review the Books of these Companies. They started to curse in private back then, as they realized that at minimum, these Companies needed about as much Cash as Taxpayers pay in IRS taxation per year. The Decision was made quite early to save the major Players, the Ones who could forcefully create great difficulties for Politicians trying to obtain elected Office. They ran through the Options, and chose a Game Plan which protected both themselves, the heavy Players, and the Politicians; it becoming a strategy to play your average Americans.

Merrill Lynch had to go without supply of Cash, because this Organization only needed Time to work out its liabilities; the Scenario did not need an Example of efficient Management returning their Government loans. Bear Sterns held Investors who were heavy political Players, who could bring major political clout to the Mix; their at-Risk Investments had to be covered. The Above had to be done without heavy federal funds advanced, because what was to come later would bring major Shock to the American Polity. They now turned to the rest of the Problem, which is interconnected; the knowledge of systemic failures in one Company meant failures in the rest of the financial markets.

The next Problems managed was Fannie and Freddie, the true organic destruction of the Fed policymaker positions. Fannie and Freddie should have blown the Whistle several years before, but did not, all basically because of political pressures to ensure that adequate supervision to unsound investiture would not be exercised. The leadership of Fannie and Freddie could not be vilified, without their blowing the Whistle on the Politicians. Everyone had to escape with a whole Skin, or Everyone was going to lose some Hide. Fed policymakers took the brave stance of letting Everyone slide without Comment.

Lehman Brothers was left to the Wolves, because their Investors were not major political Players; Lehman being the plebeian Investment vehicle for Those without clout. Fed policymakers estimated they could attain a reputation for great policy acumen without serious danger by letting the Company fail; also aware that the brokerage side of Lehman would remain strong. AIG was long known to be the mahogany in the Woodpile. It is so huge and expensive with Risk equal to multiples of total Federal Government revenues, and it had to be covered, else Everyone in the financial markets would be looking for a new Job. It will not be swallowed without a lot of Pain. Others may laud the efforts of the Policymakers, but where were they some 2-3 years ago? Just set it down to the fact I am a vengeful person! lgl

The New Image

The failure in Confidence yesterday in the Financials might serve as an Example elsewhere, if only Politicians had the Presence to integrate the information. This Post from Don Boudreaux hints at the future Problem. His contention that Americans pay $22,100 in taxes per Household coming from David Broder may need a little Work (it would be hard put to suggest that Business and Corporation represent American Households, especially in the realm of taxation). It is true that American Households are as opposed to heavy taxation as are Business and Corporation, but the manner of the taxation varies greatly; Households having almost no control over such Government finance, yet Corporate entities fund a huge Lobby system which buys the tax rates desired. What We do need is a revised Tax system within which Politicians cannot ‘farm sale’ for their own personal gain, and a sensible Control system to limit Government spending. Establishment of such systems might allow American Households a Voice in American Politics.

I agree most of the time with Dean Baker, though that is a little hard to do most of the time. This Time I must disagree. A lower Dollar is not a panacea for Trade. Dean resides with the traditional Economists in thinking a lower Dollar will lead to more American products being sold to foreigners. I find that overrated. Foreigners are looking to reduce Stock of American dollars in their purchase of American Product, rather more than looking for Bargain pricing. A lower Dollar actually places more dollars in foreign holdings as Americans pay more for Imports which they must have, and the Trade Deficit will only grow with a lower Dollar. A higher Dollar actually makes American Investments more attractive, and reduces American Dollars held by foreigners.

Doesn’t Everyone wish that this article by Michael Lewitt was the Reality providing an umbrella covering AIG, because the failure of the credit default swap markets seems like the death of Us all. The Problem I find with it consists of the sustained Creditability of the United States Treasury, the Federal Reserve, and the Federal Government as a Whole. Nothing in this Country or the World can deal successfully with Trillions of Dollars of Resource cover; they only place their own viability as Risk. Remember that AIG held Prestige, before it followed the Judas Goats into the derivative markets, and later into the over-capitalized Shelf. Now, Everyone trembles because there is no creditability left in their assurances. Will Federal indifference save the reputation of the federal agencies?–Doubtful! Congress has spent too much through the Years, and Treasury debt also seem flakey in context. So the Paper Walls fall around Us, as the Economy churns successfully on. lgl

The Wind and the Lion

I always worry about a Paper which has a disclaimer that it should not be cited without prior permission; it being a flag that the authors doubt their own Words, and are reluctant to face quotation for the rest of their existence. The only flaw in the Paper, as in derivatives, is the proposition that One can sell and buy Risk. You have to delve into the quality of Risk to understand that there is a complication with such a Theory. Risk used to be discussed in terms of Spread; a Concept to which We must return again. Risk cannot be bought, sold, or devolved as long as there are singular Choke-points where the Whole can fail because of the position power of One participant. The Mortgage will fail, as Case in Point, throughout all its parts if the Mortgage-Holder ceases to meet his Contract obligations. It is at this exact Point where the derivatives are supposed to function, but actually expresses its real failure. Why? If the Mortgage-Holder meets his obligations, then none of the Contracts owe anything; if the Mortgage fails, then all Contracts owe the entirety of the Contract. One debt has bloomed into multi-debts all equal in size; the Mood of the retraction bad, as the Debtors face complete loss of all Profits made from the derivatives markets at rates greater than the original Profits. This means that they have to repay the entire sum of the Mortgage, without any Gain as in their original activities; i.e., the Repayment process costs them personally the total Cost of all Profiteering originally taken, and they don’t really like it much.

Rdan at Angry Bear quotes Donald Luskin, who wants Everyone to know that the American economy is not that bad. I agree with Luskin on the technicals, but will assert that such discussion does not venture into the real area of economic injury in the United State and World. The Financials are where Everyone stored their Profits through the last Two Booms, be it by Mortgage-financed Property acquisition, or by Investment in Financials through the Equity markets. Financials had provided observable Investment potential within an environment showing only Investment in Small Business with massive Management supervision, or super-sized Investments requiring huge equity to be obtained only by Financials. The Profits from successful Economic Rewards ran to the Financials. The trouble arrived when the real Economy refused to pay Financials similar Profits as it did to actual Production capacity, and Financials reverted to a Shell Game to draft more Profits–called Derivatives. Financials suddenly was making more Money than ordinary Production by a continuous re-lending to itself simply to claim a growing source of Capital and high Profitability. The Crisis came when the Economy still would not pay more to Financials from ordinary Production operations. lgl

Will the Real Victim Please Stand Up?

It rode slow out of the eastern Sun like the Bank Robbers of Old, but it is now up to $42 billion and carries the moniker of ‘Write Down’. I may have missed something over the past years, of course; it is just when did Banks get Debts which exceed national GDPs, you know, those things which should not be confused with Operating Revenues. Barack Obama thinks that there should be a Private Solution to the Lehman Crisis. I ask why Anyone thinks that these Financials are in any way Private anymore. One cannot claim non-Public status anytime they can inflict greater damage than the IRS on millions of American Households.

The Country is going Nuts again over the Price of Gasoline. Only two Drilling platforms and 20% of the national Refineries are shut down, and the Refineries should be back up in 10 Days; the loss of two platforms should be minimal multi-Millions, if the Rigs are recoverable. Refinery capacity elsewhere in the Country is not Over-extended, and should be able to take up the slack with minimal Cost increases for Gas. The Gas Price run-ups were only an aberration, and prices should return to normal relatively soon. Besides, I filled my tank before the Storm hit Galveston.
And People asked Me why I advised Friends to fill their Propane and Heating Oil needs in late August.

I present this Post from Arnold Kling for Those who feel a commitment to a diligent Reading of the Financial Crisis; if One studies the Links provided, One can understand that Fannie and Freddie were no populated by Economists and Banking personnel, but by Politicians dedicated to continuance of 'Fill of their own Food trough'. The role of Fannie and Freddie was to provide continuity to Mortgage lending, basically by maintaining stability of Pricing in that Lending. Fannie and Freddie should have announced that subprime financing was dangerous and Stupid, when Private Venders first established the practice; they were under a Mandate structure which functionally dictated, if not deliberately stated, what their course of action should be. Instead, Fannie and Freddie entered into the deviancy themselves, and took action to underwrite this bad Banking so that it could expand and regenerate. lgl

Nuanced Language

Arnold Kling has a wonderful Mind, but sometimes lets his Principles interfere with his Common Sense. Economics is all about Averaging around a Norm, and trying to define that Norm. His major conflict with Models lay in the prevalence amidst those Models of a Work-Life range extending about 40 years, where there has been about 3 Recessions and 5 Booms, as while as several anomalies. Out of the mess, One can draw several important factors: We are consuming Resources at too rapid pace; attempts to transfer Wealth forwards unto heirs is as inimical to Macroeconomics, as it is fundamental to Microeconomics; Heating or Cooling of the Planet is vitally important, but suffered by humanity with an impotence to alter the function; Short-term decisions to Consume destroy long-term decisions to Invest; and We are all going to die, no matter what Medicine achieves. These are all implacable Economic models which cannot be altered, and here resides Arnold’s resentment of models: the real valid models cannot be changed by viable human action. The periphery of action in Economic is small, and minor in effect. Arnold would throw out the Horse, because it cannot pull the Beer Wagon.

John Quiggin asks a Question of How real U.S. GDP per person doubled, while average Household Income went up only about 30%. The Question is not as tricky as it looks. He should examine the Capital/Debt ratio, the growth of Credit Consumption, and the current American attitude of Buy Now, and Pay for It when Possible; an attitude which holds a lot of ‘when’. One needs only to observe the degree of Debt Repayment, as contretemps to Debt Rollover. Most Americans my Age have a Mortgage payment today, which their Parents did not have when they were the same Age; and that Mortgage payment and Mortgage is much higher than when they started paying Mortgage payments 30 years ago. Our Parents would have been horrified to face Retirement with a Mortgage still to Pay, but it is an everyday event for my Generation. One has to ask what will happen when the Now Generation dies still in Debt?

Bet’cha? Paul Krugman says that We are threatened by deflation, now that Commodity prices have come down. Big Doubt on that One! Commodity prices are only coming down because We face a severe World recessionary environment. This means that if the World economy goes back to Work, Commodity prices will again start to rise. One should also consult with one of my previous Posts, which gives a factorial relationship between Wholesale and Retail prices. Wholesale pricing suffers far less volatility than Retail, as Wholesale price declines reduce Business Profit margins. Free Markets would equalize Wholesale and Retail pricing, except for Capitalization Costs and Time lags due to Investment decisions. I had to explain to David this morning what a Poke was, but We are buying Pigs here! lgl

The Path

The point where I was discouraged by the information was the drop of 0.7% in Retail, stripping out Auto sales. Wholesale Prices are exhibiting the Joint relationship it enjoys with Retail Pricing: Wholesale pricing pressing up Retail almost 1:1 when advancing, but showing a 5:2 Price reduction capacity. This means that Retail pricing will not retreat without sustained Wholesale price reduction over Time, and rarely without a Period of Retail Sales; something all Retail is reluctant to engage before the Christmas season. (Those Numbers used are not precise, but are used only for indication purposes; most Numbers given in One in relationship to a decimal fraction of One.)

Politicians make the worst of Economists, especially if they are Senators. The real Problem to Financials, which I have reported before, is their hesitation to Write Down their Losses and get rid of the Financial Crisis with decisive acceptance. Now, the Senators are calling upon the Federal Government to delay the Write Down even longer, obviously with the Intent to cost the Taxpayers even more, but gaining Politicians support in the coming Election. Students should realize that All that glitters, is a sickly yellow Paint.

I agree with Paul Krugman on this One, and it makes me worry. Should a compulsory Tax medium be allowed to artificially floor what is basically Private investment decisions? I don’t think so, and find regulation of those Underwriting decisions to only worsen the Conditions. We are starting to imitate the economic conditions of the Third Reich in the 1930s, where business failure was forestalled by Government mandate, with adoption of a unity of Private Sector revenues and Government taxes. It might not seem bad, as the Third Reich economy did well in the 1930s until the invasion of the Sudetenland. The Problem arose, though, that decisions reverted to a central authority, which had a very poor agenda. Such a political agenda is not expected in the United States (though when are We going to get out of Iraq?), but it is likely that We are going to invest another Trillion in bad mortgages. lgl

A Trade Tax

Americans have long exhibited a list of economic theories which are totally impractical: Tax Cuts will pay for themselves; business expansion must be accompanied by expansion of business debt; somehow, future Salaries will pay for the Consumer debt which current Income will not pay; and We can get rid of the Trade deficit by growth in Sale of American Products. People wonder how We had reached the economic instability We enjoy today. The Answer is simple: We adopt the posture of an Ostrich every time We face economic troubles; if We cannot find Solution to the Danger, simply stick your Head into the ground. The Trade deficit of $62.2 billion in July must be answered; failure to do so will simply turn the Trade deficit into printed Dollars as well as the old traditional Printing Presses. My Reply would be the introduction of necessary, but temporary, Trade Permits for each and every foreign Trade of $1 per transaction; the direction (Import or Export) being immaterial. It would be a Tax applicable on All, and flow from Each, starting at the initial Importer or Exporter, and extend down to the Check-Out Counter (at least, in the domestic economy). Actual study indicates that it would cost the Average Consumer no more than about $8/Week, and Business about $80/Week on average. The collection of Taxes on Foreign Trade, though, would basically eliminate the inflationary impact of Trade.

Mark Perry has a good Post suggesting that the simple Volume of increased Trade is good for the economy, and that the Trade increase depends on the weaker Dollar. The traditional Answer would be that he is right, but I believe Exports depend far more on the level of American Imports, than they depend on the weakness of the Dollar. Foreign economies utilize American Exports to absorb excess American dollars more than they expect cheap Product from the United States. It is hard to understand the motivation behind Consumption patterns, but my designated Tax would strengthen the Dollar, and clarify the Trade relationship.

The primary rationale for the Trade Tax would be to raise revenues to pay for increased Government Expenditures; I have long discounted the ‘revenue-neutrality’ necessity claimed by Marginal Tax Economists. The counteraction of Inflation holds far more immediate Need, lessens the cyclical aspects of both Markets and the Economy, and reduces Expenditures on Product which has little impact of domestic economic performance in the Short-term; while possessing almost no impact in the Intermediate or Long-term performance. No one expects any Taxation outside Income or Capital Gains will impact economic growth, except and until such Taxation becomes especially large in amount. On the other hand, such Taxation is perhaps the best instrument to release Inflationary pressures without weakening the Currency. lgl

Market Flows

OPEC went with the Extremists, and decided to cut Oil production. Is this a Disaster?–No! Will it actually impact the price of Oil?–Basically, it will introduce a 2-Day lag in the Markets for Oil to reach its equilibrium Price, with the Oil Capture spread slightly over 0.21 up to a 2 million barrel per day drop in Oil. What it will not do is maintain the Price of Oil, the hope of some members of a oligarchy. OPEC should realize that there must be a Cut of over 4 million barrels per Day to actually produce genuine support to Oil prices, a Production level which would cut Consumption far faster than Price; OPEC nations themselves suffering from a major Recession due to their loss of Oil revenues. Political discontent also increases some 34% faster when Average Incomes are either close to Poverty levels, or 18% and Greater than the Norm Average Income in Advanced Industrialized Nations. Recessions enjoin instability, and Violence increases functionally with the loss of democratic involvement in the political process. The Extremists in OPEC should realize that they have the most to lose under recessionary de-stabilization.

The Malls are suffering because they cannot find Venders, especially the larger Chains. There is no statistical evidence to be found as yet, but the larger Chain Retails are building Stand-Alone Units, rather than Mall investiture where Space Vacancies are a great Risk. I believe that the long-term Tendency will be to introduce interior Small Business Rentals to allied businesses by the larger Chains. A great Part of these decisions come with the Understanding that their clientele is Need-driven, and Mall access leads to Purchase fund diffusion by Customers traveling through the traditional Strip-Mall environment. This later Impact is far more important under Recessionary conditions than under an economic growth environment. Stand Alone Units provide the larger Chains with accessory Purchase capture denied in Mall setups.

The article about Apple expresses the real Problems for larger Retail; there being insufficient differentiation of Product, and Apple Share price fell 4%. A shrinking Consumption dollar demands greater distinction of Product to acquire Consumer dollars. Apple’s new line failed to generate enthusiastic compulsion to Buy, and Apple Stock absorbed the greater degree of that loss of Product loyalty. Recessionary conditions are starting to apply, whether We are actually even subject to a Recession, and Retail must realize that Customers want improved Performance and Style, to gain their commitment to Cash outlays. It is not as simple as the traditional Cash Flow format of Growth. lgl

Devotion to the Real Issues

There are Those who imagine that We can still establish a rational federal budget, and discuss how the Takeover of Fannie and Freddie will impact the budget. A Word of Explanation to my Readers: No fiscal stability can be attained, if the federal government continues to expand its commitments; Tax revenues are shrinking, not expanding. We have a dying Hog here, and One which cannot even pay for its own feed. There will be continued expansion of the deficit, as long as there is no reorganization of the tax laws. One can Spend, but One cannot Spend with balanced budget unless there are generated Tax revenues; the Economy will not raise those revenues simply by expansion–an estimated 14 years of expansion at current Growth rates to cover current Expenditures, and We literally cannot borrow at these Rates for 14 years. The fiscal debacle will have to be resolved within the next Presidential term, or We will have to adopt the Third World option of reneging on Our debt.

There are also Those who worry about the Presidential Debates, and the Questions asked during these Debates. I believe that Candidates accept only those Questions they desire, in the context they find acceptable, and will not debate if there is deviance from their chosen format. I think there should be a Internet site established called ‘Debate Questions’ where Questions could be advanced by the general Public, and voted upon: those Questions getting the 50 highest rankings in the Voting being mandatory for the Candidates to answer. The difficulty comes in the Candidate ability to deny these Questions. That is a State of Being which is unacceptable, and should be rejected by both Democrats and Republicans, because their lack of answer leads to Voter ignorance about the important issues.

Here may be the real Problem affecting the next Presidential administration, and the one which will cost the Economy the Most. The continuance of such Hiring practices will not only reduce Tax revenues, require major Unemployment and Welfare benefits, but worsen the Mortgage Crisis substantially. The trouble, though, may be endemic and hard to eradicate. The next Recession may induce permanent alterations in Spending patterns, and result in major long-term reductions in Payrolls. The Government will be needed to soften any such impact, requiring alteration of Government Expenditure patterns to accomplish the new Goals. We should ensure that the Presidential Candidates discuss the necessary issues, not nonexistent realities which will not come. lgl

The Takeover

Chris Dillow always makes One question his basic premises, and this Post more than most. The first thing which must be said states that markets are often wrong in judging economic policy. The judgement of the markets as to the felicity of the Government taking over Fannie and Freddie misses the essential Point: operations at these institutions were so bad, that Private retention would have led to a basic bankruptcy of the institutions; it was not expression that Public finance of Mortgages is the perfect medium. It commits American Taxpayers to a debt which has already depleted the funds of Private Stockholders, and rendered the U.S. Government liable at least for the debt held by foreign central banks. The likely Outcome will be that American Taxpayers will lose three times as much as Stockholders will. Real Truth states markets become as helpless as Governments, when they try to flee to Communism.

Paul Krugman asserts that the Government takeover of Fannie and Freddie was necessary, but it reminds greatly of the Japanese Crisis of the late 1980s. Paul claims that he and Bernanke worked out a strategy if a like Crisis developed in the United States. His commentary states that Bernanke followed the basic format of the Plan, which was interest-rate Cuts plus fiscal stimulus, but that the Plan did not accomplish the easing of Credit planned. I personally have real doubts about fiscal stimulus in the face of increased Income inequality, leaving the Poor only with a chance to maintain themselves for a longer Period before resorting to Private and Public Welfare, and higher Incomes are left with a large Tip which will not incite a Consumption splurge. Interest-rate Cuts are actually Inflationary, and encourage debt burdens, by enticing inefficient business operations to refinance and remain in competition for Resources with efficient businesses, so that Resource pricing is artificially driven up while Employment is only marginally improved. The ideal fiscal stimulus would be to set a maximum Income, then pay Mortgage payments below that Income level by reverse taxation, if and only if said payments make up over 40% of said Income. It should be known by All that efficient Operators would not be influenced by either Interest-rate Cuts or fiscal stimulus in the absence of favorable economic trends, and promotion of Idiots to Player status is itself stupid!

Everyone today is writing on the Government takeover of Fannie and Freddie; check the NYTimes and the Internet. I have read many Authors who stated that it was necessary, and, ah hell, I agree. I still have not heard any roaring enthusiasm for the Plan. I believe it is the policy of ‘Save the Banks, and screw the Stockholders’ in the Plan which leads to the less-than-wholesome endorsements. I do know in my bones that it will cost the Taxpayers at least as much as it did the Stockholders, and will only increase Mortgage extension with increase of Mortgage defaults, especially in a land of increasing Unemployment. lgl

The Tax Code

Greg Mankiw holds his own views on the Tax Code, but presents a good evaluation of the effects of the Code. Dividend Income before 2003 was not actually taxed as ordinary Income as Greg professes, having long been preferred by special Tax rates. I will simply digress by stating that the Double Taxation argument is fallacious, as Corporation and Stockholder are separate financial entities; I am quite sure Corporations would love the argument that they did not have to pay Taxes, because Resource Miners had already paid Taxes on their materials. Income Tax, if existent, should apply equally to all sources of Income. The question of Incentives equally lacks merit, because it does not actually impact Investment decisions. Income finds Investment or Consumption, as there is little else to do with it; the only Question becoming who will be the initial Investor–the initial Income Earner, or the Retail Profiteer. Actual distortion of the Investment decisions can be attributed to be less than 3%, and the Retail Profiteer actually expresses greater Investment acumen. The Arguments for preferred Tax treatment of Dividend Income lacks some reality.

The probable best Income Tax Code would be to tax all Income equally, then utilize Tax remissions to improve fairness. It can also be shown that Tax remissions of set size will produce the greatest fairness, with the least Income maldistribution. I could accept a Tax Credit of up to $10,000 for Investment, then demand that Income Earners pay their taxes; a position I would suggest that most Investors would oppose, as it would be leaving their already preferred Tax position. My only Counterpoint to their anguish states that the Government should not be in the practice of Investment Underwriting, where Income is given advantage simply because their Income is in excess of normal Consumption. Am I a Communist? I think not, but do believe that Business generation will still occur under full taxation, as long as Tax rates are not so high as to make Government a Profits-sharing partner. People like to proclaim the great Growth of the American economy since the Kennedy Tax Cuts; I like to point out the vast growth of the American economy between 1939-1963, a Time of extremely sharp Tax bites.

The last commentary I would like to discuss is the Question of Retained Earnings. Corporations do like to retain previous Profits, but the secondary taxation of Dividend Income is only an Excuse for a practice which Corporate management desires. The later would retain the Earnings even if Dividend Income taxation was removed–the Greed of Corporate leadership is great, probably the highest of Any in the modern World. There should be a Tax applied to undistributed Earnings, both to protect the Property Rights of Stockholders, and to propel outside finance of Growth projects; with an exterior Review of the Projects to ensure they fall within the same Profits criteria for which the Corporation was originally founded. The Goal should be profitable Growth, not Empire-building to fulfil the personal desires of Corporate management. lgl

Ghosts of the New Age

The Federal Reserve has come up with a Plan, so says this article. One wonders at the intelligence of the proposed effort when one considers the loss of Investor confidence which will be entailed. The Government is planning to cheat the Stockholders with a generated nominal price for their Stock. Both companies are supposed to be placed in foreign hands, who are expected to loosen a loan extension policy which has already lost billions of dollars, and the company leadership is expected to raise the Money for said expansion from Private investors. It is all going to work out well–as We live in Never-Never Land. Predicted End-Result: No Money from Private sources, great expansion of Mortgage numbers (both quantity and level), great Cost to Government (read Taxpayers), and a huge increase in Mortgage default.

The very next Story in the NYTimes discusses the increase in Unemployment to over 6%. What is not said is the impact which Unemployment will have on the first article. No one will be making their Mortgage payments on Time, if they have lost their primary source of Income. Economists oftentimes overwork their models, basically by imagining a consistency in those models when the structural economics are under Stress. Consumption has an intrinsic alteration of pattern in the face of Income shortage, not simply a decline in that Consumption. People make the most Time-Sensitive Payments on the most essential Products and Services, with other Payments delayed no matter what it does to individual Credit ratings. It becomes a matter of Priorities.

The Europeans are leading in both the Recession and the decline in Consumption. The Volume is down, and not expected to increase, while the Euros spent for that Consumption has gone up. The decline in the Euro against the Dollar has reflected this higher Inflation. The Economist’s suggestion in the article that the decline would be relatively temporary may be more optimistic than realistic. The EU is facing an increasing Population with a higher per person Cost of Living, less Capitalization per person, and constrained by Transportation Capitalization and Costs. Then one has to ask how far Anyone in the World is off the European Standard–whether in the United States, China, India, or anywhere else. lgl

How to Roll in the Modern Economy

One needs to read an article like this every once in a while. OPEC wants the Oil Prices of yestermonth, but not the Oil surplus of yesteryear. Oil prices have already broken the World economies, in that they have channeled what Investment has still continued. Mining operations have risen in Cost by my estimate of 30%, and Construction Costs by over 20%. Oil prices brought major disturbance to Household Incomes, bringing the shortage of Cash which incited the Mortgage Crisis; lighting a Match in the Powder Room. Tourism must be considered to have declined by an equal Percentage, all due to the Energy prices. All Commodities reflect Oil price increases through a 14-month infection Period; but express about 3 times the Price reduction resistence as Oil, when it comes Time to cut Prices (What goes up like a Rocket, can come down like poured Concrete). Producers of any Product exhibit continuous concentration in maintenance of Pricing for the Product at the highest level the Market will bear, while total Market Demand barely observes Pricing for the Product, until and when such Pricing affects their Production schedules.

I have always enjoyed the Word ‘dithering’, as it does encompass so much human behavior; most notably the Fed’s recent reactions. The Fed behavior first initiated a Rate Cut which was excessive, frightened the Market, and highlighted their lack of real impact on the economy in the first place. Now, when the economy is still expressing the highest inflationary pressures in a long time, the Fed talks about keeping the fed fund rate low to propel economic growth; a function it will never generate. I do not know when such knowledgeable people will recognize Investment is not a function of monetary volume, but of Investment opportunity. No one will engage major debt until they believe they can produce a Product line which will be economically competitive with the World market for the Product. Attempting to entice Production based on bad Numbers is not valuable.

Bryan Caplan may be Right on this one (which is not to say that he is wrong very often). Teaser rates only inform the Customer: What is coming has Price Shock, but We will get you addicted to the Product first. There is that rare Individual who has both opportunity, Time and Insight to play off the Teasers on each other, going back and forth between Providers, as they grant the best deal. The Problem, though, lay in it always being a spiral upward, never a retreat from inhumane Pricing. The Consumer can assume the attitude I express, and develop amplified Dread of unknown Costs, and naturally deny the extension of the Teaser. lgl

Energy Policy

Yea, Nay, or What? People ask how far apart Obama and McCain are on Energy policy, what is important about those differences, and which would costs the most. McCain’s policy would cost the Most, but Obama has unrealistic Energy goals. McCain, though, will be confronted by dedicated obstruction to his planned drilling and nuclear plants. Obama will face increasing Rents for his policies of Energy production and Conservation. In the great tradition of my not caring what people think of me, I decided to create my own Energy policy. It has many Initiatives I know have not been previously discussed, and both Energy Producer and Conservationist will be agitated like a powered Washing machine.

My favorite Energy Policy (my Own):

1) Crude Oil Producers will face a law (federal for universality) which will instruct that Producers cannot shut down any Oil Well or Oil Field themselves. Oil Producers must list said Wells or Fields with the Energy Dept., who will be instructed to investigate the physical capacity of the Well or Field, and will operate the Well or Field for the Dept. of Energy if the Well or Field is found capable of successful operation. The Oil Producers will be paid the lowest per barrel price for the Oil during the Period that Energy Dept. Manages the Well or Field. The Oil Producers can repurchase the Wells or Fields from the Energy Dept., if they pay the full Cost of Energy Dept. Operation of the facility during the interim period of that Operation.

2) The Law will detail the Energy Dept. to upgrade or build new Refining capacity sufficient to replace 30% of current Refining capacity, who will when the facility is built, be instructed to rent such facilities at Rates to influence Refined Product Prices at Rates approved by Congress.

3) The will establish a Federal Gasoline Tax dedicated by the law to pay for all Expenses incurred by the Energy Dept. in conduct of the Above operations.

4) The law will inform all major Users of Electricity that they will pay a 5% Surtax on all Taxes which they pay (federal, State, and Local) if they do not finance Wind generation (on-site for personal maintenance, or by rental of Wind Generator placement within their own, or connected local electrical grids) consistent with 30% of the Power generation for their own use.

5) the concept of Carbon Credits will be killed forever, stating the Government desires Compliance, not Confusion and Marketing. Business will be taxed if they will not become involved in Energy Conservation.

The only thing that still needs to be related must be designation of adequate Sniper blinds in my area of operation, for Those adamantly opposed to my Policy. I cannot comply with edification of such locations (Catholicism injunction against Suicide), but search for qualified Personnel. lgl

The Business Flow

This article says it all, if you read between the lines. The ISM numbers indicate a Contraction. Their Inflation index is down solely because Businesses have already raised their Prices, and still is so high as to indicate further Inflation in Our future. The important number for Construction is the year over year decline in Construction Spending of 4.7%. The rise in Public Construction of 1.4% only clouds the real loss in Private Construction Spending. Reality Investment Spending for non-Home speculation purchase of Housing did not seriously diminish the glut in unsold Homes. One must realize that ISM readings presage next Quarter earnings more than current position, so they indicate We have much more trouble coming in the months ahead.

Oil is still on a downward trend, but no one expects Business prices to quickly follow the Oil. One of the irritating elements of the current environment is the disconnect which is starting to appear between Crude and Refined Oil products, which are beginning to slow their decline in Price. Part of the Problem lay in the increased Operating Costs to Refiners caused by the hurricanes, with their reorganization Costs. The withdrawal of Investment funds from the Commodities markets is another real cause of the disconnect between Retail Prices from Crude. Students should realize this is a major indication of Inflation, where internal Business operational conditions counteract the lowering of Input Costs.

One has to have a sound business environment, if One desires to induce Investment. Beefing up Creditor rights is mandatory to achievement of such efforts to stabilize internal markets. One cannot expect major Investment in a Wild West atmosphere. The Paper cited simply does not understand Business risk aversion practices are at fault in the first place. This means a Justice system which is not influenced or controlled by internal Business Interests. Times will not improve until International standards are introduced into the domestic Courts. Investors must be able to understand the Risks, before the funds will flow. lgl

Resort to Idiocy

I read this morning that Fannie and Freddie should be combined. I think they should use the Name ‘Frantic’ instead of ‘Frannie’ if they do so. You take an immense structure with a huge amount of Bad Paper, and join it with another outsize structure with terrible amounts of Bad Paper; in the process, absorbing a gigantic amount of Bad Stock in order to issue a greater amount of Bad Stock to cover the Bad Paper of both units. Sounds a little weird to me, and I must ask who is going to buy the newly-issued Bad Stock? I have a little Comment for a Big Problem: The Suggestion that their combination would, in itself, forestall Failure; does Anyone remember the collapse of the Soviet Union? The later was much larger with more Resources than even Fannie and Freddie coupled, and it’s Downfall was very rapid, even faster than Expectations, because of loss of Confidence. Size only guarantees a heavier thud!

There is still some Sanity, but no Vote, at the Federal Reserve. Thomas Hoenig states institutions must fail when they screw up Operations, and also wants to fight Inflation; correctly ignoring the ‘Rome is Burning’ scenario. Rome is always burning, and no one ever worries except when major Investors are threatened. Small Business suffers failures every Business day, Mutual and Hedge Funds lose Investor funds daily, and Mortgage losses are nothing new, even in the last so-called Boom. There is Crisis, though, when Investment losses threaten to greater degree than the Internal Revenue Service. Fearful Investors should take heart that it could not be worse than the Tax rates of the 1970s, except for extremist fringe Investors. Close Examination suggests the debacle will not affect Investors worse than the Gas Prices have impacted the lower half of Income Earners. Investors may lose a couple years of Investment Profits, still a better Position than they held in 1992.

Here is a very important reason that I do not fly! I need not be a Captive audience listening to a Sales Pitch for a Product I will never purchase. There are People who find such solicitation entertaining, I simply have yet to meet them. It amazed me all my life that total Strangers felt compelled to invade my Space. Unusual Product does indeed need unusual Venue, but I do not need the occupation of my Time. Most Business practice effects some degree of etiquette, though Someone always feels no compunction about violating the Rules. lgl

The Modern Income Connundrum

We return now to the Question of Who exactly is Poor? The Question actually was Who is Rich? The Answer to that is probably Nobody, except the Warren Buffet types. I will retard the Argument, like the Post, to ability to Spend. One is not Free of Poverty until an Incident, or Series of Incidents, cannot whisk your financial resources away. Individual or familial illness can still evaporate One’s fortunes unless there is say $20 million to draw from, without waving Goodbye to the family Home. Wealth, in American society, is probably the Most Endangered Species that exists today. The best analysis may be to study the Triggers of Bankruptcy.

I have already listed the Number 2 ranked Reason for Loss of Personal Wealth–medical Recovery procedures. Some innocent Child will immediately ask what is Number 1; well, that Answer is simple: Loss of Personal Employment. 1.2 out of every 2 Households will suffer some financially catastrophic medical illness per 30 years of Work-life. A probable 1.8 out of Two Workers will lose their best-Paying Job somewhere within that 30-year Work-life, where they cannot find Employment equal in Pay again. Then We go to 1 in 4 Workers who will have a Income Flow problem within that 30-year Work-life: Mortgage boondoggle, Credit Card debt, or the growing Problem of loss of Underwriting Agent (the later must be explained: half the Businesses in the Country suffer from the Bank Buyouts, which universally bring a new list of compliance rules). The whole list insists on a necessitated increase of Income from their financial network, which is already strained by the competitive markets in which that Income generation operates; functionally put, Households and Individuals cannot easily transfer increasing Costs forward onto the Consumers.

The real likelihood states One is not going to be working the Best-Paying Job that they ever had, within a decade of having obtained it. They are also likely not to be working at the Job they enjoyed Most, after that decade. The Professionals have some security from these factors, but they are squeezed Operating Costs and high Wages for their Support staff. Few Income-Earners today can aggregate Wealth through simple Employment, but must turn to Investment strategies which too often fail to generate Profit. Globalization also removed much of the basic Safety from the Job markets, while destroying the negotiate power of unionized labor. It is sad to be Alone in the Crowd. lgl