Friday, October 31, 2008

Judge for Yourself!

Never have I disagreed with an article more, or believed it more necessary for my Readers. The core of this conundrum lay in his exacting description of all the disastrous elements currently in the American economy (i.e., exactly those things I am afraid of), but often opines that the economy will jump in the opposite direction to what I believe. Nouriel Roubini has often done this to me, as he places different weight to economic factors than myself, and swerves left as I dodge right, and vice versa. I could encapsulate the Roubini Argument in a way which he would disagree with, but might straighten it out for my Readers:

Consumer Demand is in decline, and lowered Commodity Pricing may or may not be a curative for that decline. The Trouble resides in the fact that current Consumer Demand could be filled with 2002 Production Schedules, and the World economy could be facing an Unemployment level increasing by 125 million rather easily under some models; an Expectation which would be disastrous for Consumer Demand values down the Road. The World economy will really tank if it goes this Route, because We are talking Great Depression effects if it maintains this Production Curve.

I will attempt to counter the Roubini Argument on a Point by Point basis, and Nouriel will state I have done nothing of the kind if he reads this Counter-argument. First, he states that the massive inflow of liquidity is not Inflationary, and that central banks will mop up excess liquidity; central banks cannot do this if the Economy has interim raised Manufacturing Processing Costs, which they are already doing. Second, he asserts this liquidity will not be Inflationary if not monetized, a ridiculous assessment if the Money flows into the Economy; neither Market or Main Street can tell the difference between Dollar and Treasury bill. Third, the genie is already out of the Box, and Inflation cannot be controlled by the Fed with regulation of bank rates in a declining Economy. Fourth, the repricing of Debt when it becomes an increasing segment of fiscal accounting, is itself Inflationary. I would add that the viability of Treasuries are tied to the Import of foreign Goods, and the rating of American Treasuries is already suffering from numerous years of excessive borrowing on the World markets.

We are not starting into a period of Deflation, but are entering into a period of Stagflation; one which central banks are trying hard to maximize. lgl

Thursday, October 30, 2008

Another Idea in a Shrinking World

You can find the Tally here, and it is not good! The GDP decline of 0.3% is minimal, considering the total uproar of the financial crisis. You could get a decline that serious if the Dog simply got Sick. The Dog died with the 8.7% decline in disposable personal income, a Death Nell in an era of Bank and Credit Card restrictions of Credit flow. The real Problem for the future came in a 2.9% rise in core prices, after a 2.2% rise in the Second Quarter. I don’t like the Thought of a Second Stimulus Package, but the Inventory buildup of $89.1 billion over two Quarters makes me think of a Drink at 8 am; especially after the personal consumption index rising 5.4% year over year. We need the flowing Credit simply to maintain Our current position, and both Treasury and Fed know that Banks are jockeying for position with Buyouts and Dividend payments, not extension of Credit.

I am thinking hard about what economic ploy can be utilized in replacement to a Second Stimulus Package, where it will disappear like Water on dry Sand with as much effect; it would only add further weight to the pressure downward. I am toying with the very Socialist idea of a system of borrowing against back Paid Taxes, where the IRS would become the lender of last resort. The scheme of the Package being that Taxpayers could apply for such a loan up to 20% of the taxes paid over the last 5 years, where the IRS can determine that the loan is a viable Risk, and the Interest on the loan would be 4.2%. Repayment of the loan would be made in additional Payroll or Quarterly Withholdings to match Repayment and Interest. Some Economists will notice this is a sneaky way to actually increase Taxation, but Who said I didn’t have a devious and diabolical Mind?

I suppose, at this time, I should present my Reasoning for the Plan; this is where it will be dismissed on Points. The loan value dependent on past Tax payments would give some assurance that the loans will be as viable as the individuals and firms taking out the loans. More successful Income-Earners will receive higher Credit status than ordinary performers, thus providing incentive to quality performance. We already possess the loan extension and collection entity to capture all elements of necessary program use in the IRS. Banks and Credit agencies will be sidestepped in a one-time extension (repayment will have to completed before further funds extension), while the Interest on the loans will be an excellent tax revenue supplement. I will have to mull over the idea in greater detail, but Readers should remember that it is hard to devise economic policy in the face of all the garbage Politicians have thrown on the garbage pile. lgl

Wednesday, October 29, 2008

Intellectual Dishonesty in varied forms

Could there be industrial sabotage? Melamine is not that easy to get into the Food chain. It must be deliberately added to any Product, or else come already mixed in Feed while unlabeled. Its presence in Eggs means it must come in the Feed, especially when the Records of the Egg Producers show no violations. People will say I am paranoid, but Feed Producers are well aware of the hazards of Melamine since the baby formula scandal. Its reintroduction into other Feed lines would not come from any Producer whose livelihood is dependent upon his Feed sales; and who knows that the Food chain will eventually be traced. Somewhere some Competitor is attempting to boost his own Sales by ruination of the Chinese agricultural reputation. Chinese Feed lines need to check their Employees as well as their industrial mixes. Treason can be bought cheaply!

All Investors should read this article, even though I go along with Warren Buffet and John Bogle. I too believe in the P/E ratios in Investment, and anything at less than 12/1 is a basic Buy at any time, if the basic format of Corporate operation is not shook up. This gives One approximately a 80% chance that the P/E will be 16/1 within 3 years; a sound Investment policy if consistently used. The Codicil, here, is that the losers have to be kept until Corporate management improves, or the loss must be taken. A Statement should also be made that Investment advise do not have the innate association with your Money which you possess, and their error will not mean as much to themselves, as it will to you.

I include this article because Economic Thought has a Shotgun pattern, as Tim Harford does express cogently, without many sour grapes. Purists acclaim that there should not be a Nobel Prize in Economics. A probable majority of Nobel Prize Winners would disagree with the Prize Commission in the Selection of about half of the Winners; that is, if God told them that they had to tell the Truth. A probable Fifth of the Winners still wonder at the Timing of the Award, thinking they were a Dark Horse choice to avoid economic discord in the Profession; thinking honestly that the impact of their contribution had long been over. The most humorous aspect of the Award system is the reality that the Award is never given to any Economist who perchance needed the Money, or actually use it to further Research into Economics. lgl

Tuesday, October 28, 2008


The yen has gained against the Dollar by 24%, seen as a likely disaster for Japanese trade products, and virtually eliminating the yen carry trade. Recognize that We are talking about the second largest economy in the World behind the U.S. alone, and this not only ended yen provision of cheap financing to emerging markets, but virtually all Japanese products face impossibly effective competition from cheaper alternate sources. The Population density of the Islands nation insist that they must hold their Export volume to fund necessary Imports. The economic resource pressures driving the pre-WWII Japanese economy are again coming to the fore, with Japan possessing limited options. Japanese militarism has been seemingly dead since the crushing defeat in the mentioned Conflict; yet, Japan has an immense Population combined with a great Ship-Building capacity. What happens if the Japanese economy falls into 5th or 6th place among World economies; a level easily envisioned under the new economic pressures of Crisis?

Japan is not alone in the economic Crisis, as this article will express. Iceland raised its Interest rate to 18% to get emergency aid from the IMF, after the Iceland crown stopped trading on October 22nd. Several nations are looking for outside assistance in the financial crisis, the article naming the Ukraine, Hungary, Pakistan, S. Korea, and Brazil. Russia is borrowing from China, an unheard of element, considering the traditional cultural competitiveness of the two nations. Most of the World is looking for finance from the rest of the World, and will not likely find it in the volume necessary to avoid major economic distress.

The essential Questions becomes what comes next? Economic incentives are not such that We can expect a quick return to the optimism We felt less than a year ago. Is it even time for a comprehensive economic policy? Can a correct Monetary policy affect the real economic factors which exist? The Private Sector has apparently assumed that a reorganization through mergers is the Solution to current economic problems; seemingly good, except this Crisis assures that Private Sector entities can grow so large as to be immune to the forces of the Market. There is even some suspicion on my part that small, easily replaceable component part businesses are the Solution; the unenviable Result of management complexity destroying Survival capability. An Example would be to have 30 Car companies, instead of 3 or less. Thirty car companies would leave 5 still Profitable because their Car models of Consumer taste determined the Profitability of the company. The management decentralization works across the entire economic spectrum, and rewards Profits in their proper proportion (the system of quick Bankruptcies, quick Sell-off of industrial assets, and more of an Investment gamble). lgl

Monday, October 27, 2008

Oh, that Primrose Path!

The Bush administration ushered in bad economic performance at the time, and looks to leave in another economic horror. My partners in the Crime of economic journalism opine that it is important to stipulate that the Conditions promoting Recession were already in place before Bush’s entry, and that the economic conditions of Today are not due to any fallacy introduced by Bush economic policy. This assertion is highly debatable, but I do not wish to explore that avenue here. I wish to assert that George W. Bush has economically been without luck, whether it is a Case of Shooting himself in the Foot, or not.

You can adopt the position of a recent Nobel Prize Winner, or you can accept the contrarian position of myself, and proclaim that the Bush administration first flooded the Markets with Cash. The deluge of Cash was, in itself, the Problem. It presented an immediate impulse to Inflation, which could only be suppressed by destruction of old-style Wage Increase Incentives, working to stagnate all Wages except in the arena of Financial Credit and creation of new Technologies. The only Way ahead was to create some new thing, and encourage its adoption. It was immaterial whether the new thing was economically viable, or a Lemon from the word ‘Go’. Into the matrix came the counter-cyclical economic pressure for sustainable Profits from the level of Money invested, and the entire system was found wanting.

Now We are still maintaining the pretense that the huge inflow of Cash was an honest investiture, and that the Money was not drained off by the Charlatans who created the fancy new financial instruments to steal the Cash. The federal government has already spent over a Trillion dollars attempting to proclaim that the flood of Cash provided honest Investment, rather than Heartache. It disappeared like Water on dry Sand, and further inventive Steps are continually advised, no one actually suggesting that any Cure for the Mess has been achieved. I think I need to define a Concept of an economic Blackhole; all created by a group of individuals wanting immense wealth for little or no productive input, a tremendous influx of Cash not earned (think Government Spending without Taxation), totally erratic Expectations (think of Cellphones estimated to make a Trillion dollars, when a new version of a Cellphone comes out about every two months) of survivable Growth, and immense Marketing of Stock and other financial instruments. The basic underlying causation states that in order to meet all Profit Expectations out there, We need about $4 trillion more Profit per year than the economy will actually produce. That is the actual financial Crisis! lgl

Sunday, October 26, 2008

Ins and Outs of the Job Structure

What is wrong with this article in terms of economics? It discusses 3 high-end Layoffs, 2 of which were professional Mechanics, while the Last was an experienced Specialist. The focus was actually on a mid-level Management, who was being qualified for extended upper Management after sustained low-level Store management. All Three had dedication to specialized Work Skills in Industries where there had been a definite Downturn in Sales. All came from Industries requiring extensive Job skills, further demanding a high-end Cost to hire qualified Applicants as Re-Hires. The Jobs generate high Training Costs for Employees, and in Industries employing Personnel likely to find other Work with subsequent loss of specialized Experience in the Tasks involved. It shows that Business is getting badly Spooked, and are adopting Measures which will incur huge Re-tool Costs to get back to normal operations.

Mike Shedlock places his own Take upon the article, along with provision of a table which gives the relative shape to the real Unemployment. He uses Pictures to describe the difference between Now and the 1930s. One great difference lay in the level of Employment generated by State and Local Government itself; an amount is excess of 16 million Jobs. This, combined with the federal Employment, makes Government an important industry in economic stability; the Problem being excessively high Wage scales, the high level of Underemployment in governmental Jobs, the early Retirements, and the excessive Retirement packages offered by Government. Government activity becomes a major part of the Problem because of these characteristics, creating a new Class of preferential Welfare. I am just sketching here, but I imagine that this Underemployment raises overall Underemployment by 30%.

Everyone has to read this Post from Greg Mankiw. He is one of the finest Economists in the Country, and I just love it when he turns to individual issues; always an expression of debatable constraints which can be humorous. His analysis works out that the Marginal Dollar he earns Today will net him $4.81 after 35 years under the McCain Tax plan, or $1.85 after 35 years under the Obama Tax plan. I am not doubting any element of what he defined. Certain qualifications should be mentioned about the analysis: the Marginal Dollar Greg assumes has no permanent relationship to his statistical Income, that Income based as it is on tenure and personal investment decisions on his part; all of which would alter little with removal of the Marginal Dollar. Greg could imagine the component elements to attain that Marginal Dollar requires his, and his only, great Expertise; but economically, there is the Thought there are alternate Subscribers of that Marginal Dollar, who may or may not have equivalent Expertise, and would find that Marginal Dollar of greater Need and Desirability. The interesting element here states that as the Need and Desirability grows for the Seekers, there is a manifestation of lower Tax rates so that the Employment to attain that Marginal Dollar will attain higher value–both in immediacy and in the long-term. I would advise Greg to play with his kids more! lgl

Saturday, October 25, 2008

The Great Similarity--Not!!

One can ask how much damage the Great Depression of 1929 can do. There has been so many analogies relating the current Crisis with the Period economy, while the actual similarity between Then and Now is hard to maintain. Banks failed in the 1930s because local Businesses could not sustain the loss of Consumer Demand in their Localities, and subsequently could not pay for the Operating Credit they had arranged with local Banks prior to the Consumption dropoff. Banks, already overextended by Speculation in the Markets before the Crash and having lost their Reserve liquidity, could not withstand the Depositor draft from their Accounts. The relevant Points are: massive loss of Consumer Demand; Bank over-Speculation of Liquidity funds; Business operational inability to continue Production operations under the old financial arrangements; and no ability to restore liquidity to Banks or Business in the system.

Current circumstance is much different. Consumer Demand has not faded, it has only contracted by a minor Percentage degree due to the availability of extended Consumer Credit. The Bank over-Speculation had been near identical, yet Authorities have thought to purchase this bad Paper for the American Taxpayer. Consumption decline has been so shallow that Business operations can be sustained, if they had been successful before the Contraction. The Fed and Treasury threaten to drown the Economy in excess Cash. It remains to be seen how divergent the two Sets of circumstances will finally be, but the two Situations may be exactly opposite.

What no one discusses about either of the two Recessions consists of the slow erosion of economic function during the subsequent years. Employment contracted in great Sweeps after 1929, but was not that genetically different from previous practice; somewhat similar to Today what with Downsizing and Business reorganizations. The Telling Cost for Employment, Then and Now, was/is the ability of the Economy to create replacement Jobs. The Economy of the 1930s continued to decline until Job Creation again became a force in the Economy. It is undoubted that any effort in this Crisis will attain lasting economic performance, until We fix the Job Creation engine. lgl

Friday, October 24, 2008

Swing Time

Tyler Cowen would have Us consider Credit as an Option, stipulating that simple loss of this Option leads to a Credit crunch. He also has a link to Felix Salmon, who makes the assessment that lines of credit will be utilized to maintain Cash flow during Recessionary conditions, especially as Credit spreads widen (this One is tricky, lines of credit gaining a real Interest increase, but also a Optional value increase as banks seek to limit liquidity). I am on Alex Tabarrok’s side, and believe a Chicken is a Chicken, whether you pull Cash out of your wallet or a Credit Card. A Recession is a Recession because Consumer Demand lessens; it does not matter whether the Consumers have an intricate Credit system or not! But who actually knows for sure!

I agree with Chris Dillow and Robert Hall that Job Destruction rates do not increase significantly under Recessions; Job Creations rates simply do not match the Job Destruction rates under lowered economic performance. I don’t agree that Recessions occur when there is less than one standard deviation of 0.96 (average GDP growth per Quarter being 0.6% averaged since 1955; do believe these are UK rates of growth, not American). I could try unsuccessfully to model GDP growth trends rates, so will skip that; I will state internal endurance factors would require about 3 standard deviations to get business managers to alter their Production schedules, the temporary Shelving Cost increase of storage of Product of about 8% being cheaper than would be a twice-altered Production schedule to meet temporary flux in Consumer Demand.

What is a poor Nebraska farm hand to think, when the Federal Reserve Bank of Cleveland will not call a Recession, not even for their own area. Personal Income, Employment, Industrial Production, and Wholesale Sales are all in negative territory, but maybe there has been an increase in Credit purchasing–Not! Could it simply be a Shot over the Bow to inform Commentators like me to potentially revise their glowing accounts on economic performance. I would go and have a Drink, but it isn’t even Noon yet! lgl

Thursday, October 23, 2008

How to Explain the Mess?

One should read this Thing, if desiring a chronology of the financial crisis, though it presents a standardized view of the Crisis. I suppose I should present an activist, Opposition view to the entire Situation, both to confirm why the Crisis occurred, and to provide ammunition to my Critics; who feel deprived of Talking Points to prove I am full of it (a substance I am precluded from description). I requires a basic Overview of the Situation.

We came out of the Tech Bubble feeling like We were short of Cash. The Federal Reserve adopted a policy of Easy Money with extremely low Interbank rates. Everyone still felt that they were short of Cash, believing it would take a increased flow of Money in order to regain Boom conditions. Some bright young Bankers and Analysts thought about it, and came up with a critical Idea: find a Way to alter Debt in a manner where is could be considered Securities, not Debt. The joy behind the Idea was that Reserve requirements could be avoided by declaration that purchase of such Securities was not purchase of Debt per se, but Investment! Suddenly, Debt was not sustained Risk with quantified Reward features for its assumption, and became an Investment vehicle with a Sale value and Profits potential. Transference to Securities freed Debt from Reserve requirements, and required only Imagination to view it as actual Investment.

An ugly facet protruded into the entire Specter from the Start, though it was hidden from the euphoria of the Time; no one noticing until far too late. It concerned Monetary Policy, and revolved around the Concept of fractional reserve Banking. The writing of derivatives with subsequent Sale of the instruments created a false reevaluation of Debt; i.e., created Money, and did so without the requirement to maintain some relationship to Monetary Reserves. There was no Problem as long as such funds remained in the Investment cycle, but serious hazard entered when Investors thought to consider these Instruments like other Securities, which they could sell out and spend the funds in the general economy. It was at this exact Point where the new Credit instruments were found to lack real value, and attempts to spend the new Cash caused an Inflationary spiral in the Money Supply.

We had a group of Investors who assumed the Money creation power of fractional reserve banking without any controls, which slowly inflated the Price base throughout the Economy, without providing any greater security to Debt Risk or actual Investment expansion in the Economy. It was basically a creation of a new Middleman, who demanded a high rate of Return for a basic Paper mechanism, which did not instill any increased Value into the Investment. It was basically a Private Sector assumption of the Money Printing capacity of the Public Sector without Controls, and no organization for the assumption of real value to the Paper. lgl

Wednesday, October 22, 2008

The Expensive Scam

I ran across this Post on Productivity Capacity, which carries a short and concise definition of the difference between this term and GDP. What I found lacking is the expression that no Economy operates on the Productivity Capacity boundary. There are a number of reasons for this, mostly dealing with management deficiencies. Unemployment is a relevant factor, but Underemployment is an even greater magnitude factor, with Overstaffing creating a major third factor; especially in the realm of delayed Project Starts. One can discuss the delays of financial forwarding in this Age of Credit Crisis, which hinders the acquisition of Project resources. GDP shows great success if it can actually absorb 70% of the Productivity Capacity.

Mark Perry has a good Post on Unemployment. It clearly expresses that a great majority of States have less Unemployment than what was considered Full Employment some short decades ago. The interesting fact resides in the exact placement of the Unemployment. The States suffering the greatest levels are all States which were fully developed under older technologies, where old Capital has to be bought out and replaced before a revised Business format can be introduced. Many Economists fail to concentrate on the degree of degraded infrastructure, and its impact upon Recessionary conditions. Such degraded Technologies are the first to close down under Recessionary conditions, and the slowest to develop alternate Employment because of the need to eliminate old Plant, before introduction of new Capacity.

Readers really need to read this Post by Alex Tabarrok; be sure to check out all the links. Bank credit has not really changed through the progress of this Crisis; there being Cause to claim that the Fed and Treasury measures are better suited to save the Big Bankers who wrote all the bad debt, rather than the small Unit Business. The real Slowdown is coming from lack of Demand, not lack of Credit extension. The average Reader should understand that policies are set by Politicians to please major Contributors, not necessarily because there is any Need for Change. lgl

Tuesday, October 21, 2008

Oh Crappy Day!

Sorry for the inconvenience of the late Post; Words cannot define the Day, simply that I lost my Cable network yesterday, and most of this Day was spent in its retrieval. It did not help that a friend had to travel great distance to meet the requirements of a health Insurer; I being stuck with Babysitting the family dog. All’s Well that Ends Well–but it all ended on a Sour Note. At least the Whole did not threaten to extend into the Morrow, so maybe I should be called Happy.

Ben Bernanke truly does amaze me, to the point that he has abandoned any impulse to control Inflation. He has already taken numerous Options making it difficult to avoid double-digit Inflation; now, he is attempting to make it a Surety. What bothers Me is the fact that no Stimulus or fiscal policy will reverse the Downturn, and neither Democrat or Republican suggests anything which would not worsen the Situation. I will not argue the necessity of a Recession–it is coming anyway! I am saying that current American business practice must alter to meet those economic conditions, and that both Stimulus and Tax Cuts proposed will only hinder in that alteration.

The worst debate I have heard came from CNBC, where the limitation on Executive salaries was the Topic. The general Thought was the Bailout limited these Salaries, and that such Executives would find Employment elsewhere in the World. My first Thought was that it might be best if We could unload these overpaid Losers on Someone else. The second Thought I had was the fact that Executives are paid more in the United States than anywhere else, and Good Luck to any of them looking for a better-paying Job. My third Thought became why should We worry about 4000 thousand individuals who have almost 200,000 qualified replacements. Their only claim to fame being some experience, the later of which showed more incompetence than swift appraisal of profitable opportunities. lgl

Monday, October 20, 2008

Irrational Behavior

This is a Company I would hate to work for, as it contracts huge In-Store Operating Costs, based on expensive Inventory products and light Consumer traffic even in the best of Times. Closure of 150 Stores would allow switch of Inventory to the remaining Stores, but Job Cuts will lessen the desire to Shop in a industry dependent on a slick Sales pitch. I have previously been somewhat critical of Circuit City’s business format, and this advance pronouncement of business decisions does not help Employee Morale, or instill Confidence among Consumers dependent upon highly specialized Aid in both Purchasing and Installation of Product.

Here is another example of Irrational Stress placed upon the Market by amplification of fears. OPEC should not announce its decision to Cut Oil Production, if it does. OPEC member nations are committed to their Construction schedules, and will find it hard to sell less than they can produce in the first place. Such announced decision would in no way impact the Market favorably for Themselves, and could only harm the Demand levels for Oil. Idle Threats will only destabilize the Markets further, disturbing business confidence. It is noteworthy that the two OPEC nations least capable of sustaining a Production Cut, Iran and Venezuela, are the most vocal in calling for those Cuts.

Employees of financial firms continue to show great immunity to Market forces, as this Guardian article defines. Bonuses and Pay packages continue to mount, even though the relationship between Bonus and Profit continues to expand. I wonder if the industry can maintain its Pay schedule through any Bankruptcy proceedings in the future. Golden Parachutes may be the last thing to go, where Employees may lose their desk, chair, and computer consuls before their Paychecks. One must actually ask why such Stories do not appear in American Papers. lgl

Sunday, October 19, 2008

The New Risk

Tyler Cowen may have an explanation to the financial crisis, though his off-Paper forecast may add more scope to the analysis. Tim Harford talks about the off-record side deals, which did not follow the Rules of sensible Risk, and brought down the Whole when they became too massive. I believe there were two basic Reasons for the Crisis: Business personnel were overcharging for their own contribution to the Economy, and they insisted on a like rate of Return for their Investments. There was also a commitment to an ideal which I have never found existent: The claim that an Organization can get too big to fail. A combination of usurious greed and over-optimistic beliefs brought down the entire process. We are now down to Governments being too Big to Fail, a Concept resident in the Foolhardy.

John Quiggin would blame the rating agencies, which I cannot really criticize as it is so true; yet, We deflect from the primary agents–those who created the bad debt in the first place. The basic problem with critique of the rating agencies lay in their intrinsic lack of knowledge in their forecasting procedures. There is continual pressure to present good Ratings coming from the Seekers of those Ratings, without any support from Those relying upon the ratings for Investment decisions. Seekers utilize the lack of failure as pressure to increase the Ratings, and proclaim any downgrade to be a betrayal. Those who relied on faulty assessments for Investment do not blame the Sellers of bad debt, as much as they blame the Raters of that Debt. Investors get less from Rating agencies than they desire, but have paid almost nothing up-front, trusting to the moral integrity of Raters, who are basically paid by the Seekers of good Ratings.

Every Crisis brings out Explanations of how previous Great Economic Thinkers had already noted the quality and context of the Crisis. This is one of those Referrals which is better than Most. Keynes did have much criticism of unregulated markets. The real Problem in the current Crisis was not runaway markets, or the dastardly Asset bubbles inside a stable Price format. It was the static suppression of ordinary Wages, coupled with the rapid acceleration of Innovative Wage scales. New Wealth rose rapidly, Investments rose rapidly, and Prices rose steadily, all while average Wages stagnated. Consumer markets left ordinary Debt aggregation, and entered extraordinary Debt aggregation, as average Wage earners tried to maintain the increased Price pacing. The New Wealth of the Innovative Wage-Earners insisted on the same accelerated Gain in Investments, as they received in Wages. They pursued Risk because it paid more. Then the Bottom fell out, as Returns could not be generated, and Equity existed only on Paper. lgl

Saturday, October 18, 2008

Very Lame Duck

I can’t say that I can totally agree with this economic analysis, though I think all good Students should read it, and obtain their own impression. The N.J.T.C. may have actually helped the low-income laborer, while I imagine it did far more for the development of Temporary labor services. I think it could be a greater advantage to give a $400 Tax Credit for every laborer kept longer than the current Tax Year. This Tax Credit would underwrite Business desire to more fully exploit Market potentials, while concurrently paying industry for both Past and Present Employment. Business would hire exploitive Labor, and pay for the increased Payrolls by a Savings on all Labor Costs.

Mike Shedlock can gives you a fairly good assessment of the economic state. The Markets are still in disruption, and economic decay has yet to seriously impact the Traders; all of them focused on the Banks. Lower economic data can only further twist Investor confidence, and a stable economic structure will not be found quickly, no matter what level of Price. We can certainly expect a decrease in GDP within the next Year. The lack of Consumer Interest relatively negates the overwhelming need to end the Credit Crisis, as Business will not be borrowing in the near future, and Homeowners will still be unable to avoid their mortgages. It is doubtful whether Bush, McCain, or Obama can come up with any economic policy which will help.

Andrew Lahde took the Money and ran, and even did it when it was still kosher to do so. I would not have insulted either Investors or Contemporaries, as One might have to reenter the Markets again in the future; no Retirement Plan has real lasting value in this Age of Population Pressure. Still, his advisory should be retained, to provide an alternative evaluation of the Origins of the Credit Crisis. I hope Andrew enjoys his Vacation, at least until Inflation catches up with him. I wish I was as sanguine about where my new Paycheck was coming from (Hint: I rely on the Government). lgl

Friday, October 17, 2008


I basically like this article, because it shows the hallow nature off all Bailouts; they only being as good as the belief in them. A little back-of-the-Envelope exercise will lead One to conclude that Bailouts are only as stable as are the Economies involved. This means that the wastage of Capital through the Bailouts should only slow the Recovery to insignificant degree, and We are on Schedule towards normal as soon as Bankers realize they are not making a Profit this way! One should adopt the attitude of Gamblers: No One is going to come along, and pay you back for the Bets which you lost. Go back to normal operations! Your Deal!

Housing builds at the slowest rate since 1991. Dah!! We have a backlog of Houses with Banks unwilling to extend Mortgages to purchase them. Some Economists might even consider it to be a Situation where there is an Oversupply of Housing, with Construction companies building only at minimal levels to maintain business operations. Somewhere in economic analysis you can find an absorption process entailing ‘Creative Destruction’ where bad Mortgages will have to be foreclosed, losses taken, and new Mortgages issued; the only alternative being an accelerated rate of Housing decay, which means letting the unoccupied Housing fall into ruin. The Former is preferable to the Later, but the Later is being utilized because Bankers are unwilling to accept the Former; this means that Bankers are actually part of the Problem, not the Solution.

The above is not the only Way that Banks impede the Recovery efforts. This article explains the Problem. Bankers have now lost more than they ever gained in Profits during the Boom years, something like $1.06 losses per $1 of previous Profit. Bankers are adverse to lending out the Money they obtain from the Government, out of fear that Someone will complain about the lack of Return of the estimated $0.22 per Dollar of previous Profits taken for their own personal Reward in their mismanagement during the false Boom. My Statement will be automatically contested, if Bankers are so foolish as to mention their Wealth acquisition before Stockholders. On the other hand, Bankers are intensely concerned with Appearance on current balance sheets so will not lend, and resistant to outline of the methodology of their own form of 3-Card Monte. lgl

Thursday, October 16, 2008

Where's the Beef (Theory?)???

I watched the Debate last year, and thought that both Candidates were relatively effective; but I had a Problem with it. John McCain has years of involvement in the process of Congress, yet with all his innate knowledge, seemed like he was reciting from a Script from which he could not appear to deviate; Americans like a President who can think on his feet. Obama expressed a demeanor of articulate, informed character, but listening carefully, One notes his previous efforts show little input in previous major issues. The Debate itself, somewhat because of the Moderator, hung closely to generalities without real discussion of specifics. Those who listened to the Debate could almost imagine that the economic difficulties did not exist.

Paul Krugman explains his new Trade Theory, and Some will easily understand it, while Others may have a little difficulty with it. His basic thesis suggests it is only the concentration of Wealth and Skills which determine the entrance of geographic locations into the international Trade pattern. There are many delay factors which determine Trade entrance, many of which are independent of individual business format. The intro to those Problems remain Transport, Transport facilities, Speed of Transport, and degree of Safety of that Transport. There is still the Question of Resource availability–itself highly dependent upon the above Transport. I have always doubted the Concept of Capital Intensity as limitation of multiple duplication of industry; it was once said that the United States would remain the paramount Producers of automobiles because of the industrial Costs of Capitalization. Paul is not wrong, but he is a little less than right as well.

"Get rid of Joe the plumber, the Old Man is coming Home, Home, Home." Greg Mankiw cites Robert Nozick. What Republicans ignore is the right of American Voters, or their elected officials, enjoy the ability to exercise their own resident power in the decisions to distribute Wealth and Resource. Taken backwards, as I always work (no Commentary!), the small businessmen affected would be about 2% of the Total by the Obama Tax Plan, and cost them no more than about $5000 apiece. These small businessmen affected actually employ no more than about 100,000 employees, of which less than about 7000 employees might lose employment. It does not sound loud in an economy which has already lost a million employees this year, especially when stopping a Tax Plan to cut Taxes for multi-millions of Taxpayers. "How Does Your Light Shine, in the halls of Whatever!" lgl

Wednesday, October 15, 2008

Round Them Up--Rawhide!

The Republicans state that they will give us Bush, Bernanke, and Paulson, and Raise with McCain. The Democrats say they will accept Bernanke and Paulson, but reject the worst of Bush; all the while Spending as much in Deficits on idiot Cabbages and Kings. No One suggests that the federal government spends less Money. No One proposes that the Tax Code be reorganized and simplified. No One presents any type of Sunset law for other federal laws. No One produces a Fraud Initiative law which would place a legislative constraint on the provisional context of Derivatives and other financial contracts, especially Description of potential Surrenders upon filings for Bankruptcy, and authorship definition to identify Those responsible. No One sets a limit for squandering Investor assets to preserve a bad business format; none to be robbed of over 80% of their initial Purchase price, without a mandatory Bankruptcy filing. Everyone talks about Reform to stop previous practices which brought Us to the Bailout Crisis, but No One calls for any definite Change.

I know that there will be little Notice made, But the latest Paulson Bailout is not what Congress did Vote upon and Approve, costs some 3 times as much, and meets neither Congressional Expectations or Banking desires. It is actually not even a good fit as a conjunction with European designs. One cannot define exactly what it is at this early Stage, though it has some smell of an alternative form of Taxation to replace lost revenues from the Tax Code, all at the Cost of payment through higher Interest rates paid by Borrowers. This program has not be approved by Congress, and the Present and Future administrations will probably allege that challenging this policy will be violating Treaty obligations never stipulated in the actual Treaties. The upshot will be that Taxes will be paid by Those who need to borrow, to allow Escape from Taxation for Those who make Money off of running the system.

Meanwhile, the Economy continues to tank as Everyone maintains focus on the Stock Markets. Remember the good ole Days when Presidents and Congress assured that giving Households up to $1200 would cure all economic ills? Nowadays, We have great Deals to protect–Who?–Why? No one quite knows Who is being protected from What; it reminds of Rustlers complaining that the stolen herds have incidence of ‘Mad Cow’ disease. Sorry about That, I come from Farm and Ranch country. Is it going to get better?–Doubtful when Those who need the Cash are expected to pay for the Bill out of repayments of their debt. lgl

Tuesday, October 14, 2008

If I Had a Hammer

Every time that you think it could not get worse, then the Government does something else. I could say it is a lot simpler and easier to simply print that amount of Currency, but it equates to the same thing. One of the basic elements of the Credit freeze is the fact that the Borrowers are not there. The basic Rendition is: I don’t want to pay Interest, especially high Interest, on Money I don’t need and cannot employ! Operating Revenues to cover Monthly Wages does not even equate to the $250 billion to be spent as of Today, let alone that near Trillion that the Fed has already pumped into the Economy, and the $700 billion that Paulson plans to blow. I will use the Word Inflation, though no one will listen as yet.

The McCain Plan is beautiful, my Estimate suggests that if it is implemented, the expected Inflation over the next 36 months will rise to an estimated 30%, rather than the pidley 20% Inflation expected from the current infusion of idiotic liquidity. McCain wants to allow the Baby Boomers a freebie cut in their Withdrawals taxation from their Retirement plans, in exactly those Years when they are expected to make the greatest draft on those Reserves. He also wants to fund those Plungers in the Markets by cutting their taxation by half; the restriction to Equities held at least one Year will disappear in Conference Committee, and McCain will sign the bill anyway. He simply wants to insert the lack of Value pressed from the Markets recently back into the Markets, automatically ensuring more Crisis ahead.

The real trouble comes in the fact that the position of Fixed Incomes will be seriously disabled by a conjunction of these Plans. Leadership thinks this is creditable, but forgets about the Entitlements, which will insist on alternate funding for these Groups. Some of the more Stupid among Our leadership cadres believe that the Entitlements programs can be dismantled, not understanding that you can make Americans suffer only so much. Attempts to alter the Standard of Living of Americans will only produce a Change in leadership. Even the Emperors of Rome did not think to cancel the Bread and Circuses. It takes the destruction of the entire Economy, by Conquest or loss of foundation Resources, to stop the demands of the Public. lgl

Monday, October 13, 2008

How to Become a Millionaire

How to become a Millionaire without really trying? I would say that I was happy for Paul Krugman, but would face charges of hypocrisy. He makes a hell of a good Model, and–well, might write a little better than I. Still, I possess the belief there will be some error found in his Trade models as Time passes, but when did that ever slow the Nobel Award process? He might even have had to Sell Out, and promise never to criticize the Nobel Award system again in his Commentaries. I will be a good Soldier, though, and congratulate him on a Award for which he put in real Time, Thought, and Invention.

The Markets are appearing to claw their way back at mid-day. I don’t believe that Oil will reach $100/barrel this Year, because OPEC needs the volume of revenues and won’t cut Production, and any greater increase will create a Wobble in other Weak markets; which cannot hold Gains in the presence of higher Oil Costs. The pressures are far worse in Europe and emerging economies than in the American economy, where Profit ratios can be wiped out with a 12% rise in Oil price. The Political process presents greater insecurity, with most Markets elements fearful that their favored Candidate will lose Big. The incumbent Threat is altered Tax Schedules, where Accounting practice must be changed, which might entail a different methodology to garner Profits. The Markets hate Changes in the Rules, even if they are found to be beneficial.

One has to ask if Bankers have yet learned their Lesson about Risk Management. Europeans appear too willing to follow Americans down the Primrose Path. Most People do not understand that One cannot quantify Risk, not in the terms at least that they would utilize that quantity. Reference should be made to Benjamin Franklin’s Statement of Hanging Together. Anytime more than 2% of the Total Volume of Credit fails–the Entirety fails. One cannot withstand major losses in any Sector without all Sectors finding a drain of Cash. Devotion on nothing but Growth hides the real danger of Risk, and too many Children burn their fingers on the fancy Toys. I have great Respect for maintaining Reserves, both in Banks and in Investment portfolios. An intelligent Child increases his Reserves in safe vestibule as his Portfolio grows, risking only about 70% of his Wealth on Risk Growth. lgl

Sunday, October 12, 2008

The New Conservative Edict

God Save Us from Bailouts! First they fail to pass something Stupid, then they pass something even worse, and now no one knows what they should do first. Everyone has all sorts of Plans, but no one has come up with Step One as yet. It is a Sarah Pelin type Soccer Mom Situation, where She cannot decide exactly what Color shade for the Drapes. There is going to be a long Decision process, before We get a One-Size Fits All multiple investment type, which with Our Luck is inherently bound to fail in catastrophic proportions. Our greatest Worry, Now, is that the kids will wake up, and enter the Bedroom right in the middle of it!

They search for Solutions, while Others pursue the Question of how We arrived at the current debacle in the first place. A thousand elements can be discussed, without a single Cause being cited as accurate. I will attempt a simple Rationale as Others try to wade through the minutiae: Republicans learned their Lesson from Reagan, and his legacy as Witnessed; if you want to Profit from running the Government, take your ill-gotten Gains before you are thrown out of Office. They searched for a Work model, and found the Carnival people–typically called Carnys. They adopted the elemental philosophy of the Carnival, headed by the Blue Sky pilot from Texas. The Play was basically a Replay of Teapot Dome or Poinzi, orchestrated by the leadership of the Country as a Whole. It was a fantastic Game of Three-Card Monte; at least, until it was learned that none of the Bets were actually covered.

The Bailout was actually an attempt to attain Coverage for the Mess, not actually return the great losses involved, but Saving of the Reputations of Those involved. The furor over the Bailout, though, ensured that the Reputations could not be saved anyway! Then White House and Republicans in general realized an terrible fact: McCain was behind in the Polls, and so far behind in fact, that imaginative Vote-Counting could not hide the fact of the Loss. They reexamined the Bailout, suddenly realizing that they had given their Political Opponents a huge Cash Cow, if they did not get the Bailout funds spent before Bush left Office. The purported Plan as espoused would not get the funds where Republican desired–the hands of the Special Interests which supported them, and would provide themselves with Jobs after Office. It was the Time for arch NeoConservatives to consider Nationalization of the Banks, To and For the enrichment of the Special Interests. lgl

Saturday, October 11, 2008

Banker Friendly

Some of those crippled Individuals who are forced to listen to my pedantic meanderings are aware that I am deeply disappointed about the Mindset of both Treasury and Fed. There is a lamentable devotion to the protection of their own Peers, rather than any Concern about the fate of Anyone else. The Goal of the Bailout has become the protection of the Banking community from the financial crisis, rather than a protection of the Economy from the Banking crisis. Actions taken have devolved into defending Bankers from potential Risks, much more than protection of the Economy from Credit loss. The elimination of Risk for Banks may seem like fundamental underpinning for the Economy, but it is not; and actually, only allows for Banking profitability under Recessionary conditions.

Bernanke at the Fed suggested recently that the Fed should start paying Interest on Reserves Banks currently are mandated to maintain in order to lend. Does this sound like a good Deal on the surface? It will produce a Monetarist goal of additional deficit spending on the part of a Government entity, but there may be various avenues far better suited to arrange such deficit spending–like Welfare to Someone other than rich Bankers. A couple of Economists could possibly agree with Me that such a Practice could lead Bankers to park more funds with the Fed as Reserves, and actually lend less to an Economy needing the Cash. I will grant Equal Time to Alternate Opinion (my own) and suggest that there be a 0.1% per month federal tax upon Total Deposits held by every Bank, working out to a 1.2% tax on Total Deposit holdings per year. This would incite Bankers to actually keep their Lending potential fully subscripted by carefully examined loan extension, as they would need careful supervision of their total funds dispersal to generate adequate Profits to satisfy Investors, and thereby, to keep their Jobs.

Other interesting Contemplations could be insistence that every Author of a Credit Derivative or CDO must place their Name and Position on the Instruments, just in case We want to sling Mud someday; declaring them unmarketable without such Labeling. Bankers could join the rest of Us in fear of independent Audits, and be forced to undergo a regular Independent Audit system by an outside Accounting firm. Such a Publication of personal failures could lead Investors in financial institutions to suggest an alternate search for Work for Some. An element could be mandated Statements listing Percentage success of completed loans under each Bank Officer supervision, in the yearly distributed Stockholder Prospectus. Accountability is a Concept which few Bankers have yet adjusted, but is One whose Day may have come. lgl

Friday, October 10, 2008

A Depressing Recession

And this Guy explains the intricate points of Economics for the Beginning Student? Actually, sorry Greg; you hazard a definition close to that of almost every Economist. There is a difference between a Recession and a Depression. Almost Everyone has an intrinsic conceptualism of the difference, but no one has ever seriously vocalized it. It has, of course, become a hurdle which I must leap; amid the laughter of experienced personnel. A Recession differs not one wit from a Depression in the Entry; a Recession can potentially have a higher Price slide in the Markets than does a Depression. A Depression actually opens with a relatively abrupt loss like Recessions, but a quick Recovery is blocked effectively, unlike the Recession.

Some Economists reflect that almost every first attempt at Recovery is blocked in either Recession or Depression, with a basic Return to the bottom Price. The first attempt is always basically blocked because all Participants think that it is only a Return to Business as usual. This is undoubted ignorance, as the Stock Prices would not have tanked in the first place, if Business as Usual could recover the momentum. Recessions quickly recover eventually because the Loss was the Result of bad Paper practices: bad Credit extension, bad loan levels, bad Equity evaluations, bad Sector cohesion, or bad Investment strategies. The common rationale behind such a Recovery is a redistribution of Equity between Parties, which will support to Boom mode.

A Depression, on the other hand, have intrinsic Problems within the Production/Distribution network under which the Economy labors. The Great Depression had Manufacturers refusing Layoffs until their Warehouses were overstocked with a basically stocked Consumer market, no development of Consumer Credit, and Banks invested in the Markets without any Regulation. No Recovery could be accomplished until the Warehouses were emptied. How does this fit in examination of the current Crisis? Well, it will be basically a Recessional Recovery from a Downturn caused by a $9 trillion Claim of Equity which did not actually exist. Literally put, Production Profits simply could pay for the excess Equity. We have been washing out Equity in the Markets for about a month, and We are practically back where the Profits spread with carry the estimated Equity. Recovery is coming. lgl

Thursday, October 09, 2008

Fed and Treasury

We find Alan Greenspan being pillared Today, because of his support of derivatives, and his maintenance of low Interest rates for too long a Period. Get Real! Greenspan was facing Opposition to any Change in that policy throughout his reign, all of it coming from the same Individuals criticizing him now. An ingredient in the Turmoil lies in the manner in which the Federal Reserve Board is managed, currently it consists of a form of oligarchy where dissent is never released to the Public. Congress should mandate every decision of the Fed be accompanied by a dissenting Opinion published along with the Majority decision, and listing the strength of the Dissent. It would solve many Issues of Conflict within the business world itself, bring to the fore potential alternatives to the current program, and list the contradictory forces potentially suppressing current Policy.

Does this appear to be sending Money down a Rat Hole? The Fed had to pony up another $40 billion to AIG because the original bridge loan was disappearing like water on desert sand; something like $61 billion was gone in a twinkling of an Eye, replaced with an even longer list of threatened Securities. There is really something to be said about letting Businesses fail naturally, and picking up the Pieces after; an element which possesses favorable Recovery capacities. The only truly significant indication states that the Fed is actually a poorer Investment strategist than your average Wall Street plunger!

Paulson’s choice to head the Recovery team highlights Business trepidation of the mix of Government and business. I actually have greater faith in Neel Kashkari than I do in Hank Paulson, but his only financial Record is writing the very loans which went to hell. It is the old proverbial setting a Crook to catch a Crook; this somewhat amended, setting a Crook to detect the Crime itself. The Whole makes me wonder why I have ever supported an Organization run by Politicians and Bureaucrats. lgl

Wednesday, October 08, 2008

Sell Regulation Short Because of the Losses

Market Exchange floors carry more gossip than the Back Fence. It is why a ban on Short-selling, and even the Up-Tick Rule, will always prove to be a disaster. The Gossip is vital to the Markets, and the elements which they center around also need expression to All. Every Short-Sell is quickly spread across the back fence of the Exchange floor, with the Position taken known with Carry prices, even though it might be months before it can be determined Who made the exact play. The total volume of Short Sales, and the Prices paid for them, will travel through the entire Market floor (even when Electronic) within the Market Day. Guess What: everyone on the Exchange floor concerned knows the current Price, know the amount of bet decline, and start making a determination if the Short made Sense.

Readers would think this was the Final Step, but it has only began to effect the Market. This following is all called the Institutional Buying, though established Stockholders also play an important part in the resultant action. Institutional Managers consider the level of Shorts volume, and ask themselves whether there is Cause to support the Stock price by Stock purchase, to forestall loss of Stock Equity to themselves. In other Words, the Short-Selling generates its own cadre of Stock Buyers, or equally, the decision not to support the current Stock price. Either Option functionally sets a floor upon each Stock sold Short. It is a quite sophisticated Floor as well, based on Stock Expectations, volume of Stock sold Short, and the dedicated Stock price of the Short. It is a simple, though complex network which establishes maximum and minimum Value for Stocks in the Market.

The Up-Tick Rule is equally stupid, because Institutional Buyers and ordinary Traders cannot fix an Expected floor for the Stock. Soon experienced Traders are asking what are the new Rules, and where can the Value of Stock be pinned. Uninhibited Short-Selling is actually more important to Market structure than is Long positions. Long purchasing is always an Unknown, and incredibly Confusing without an established floor for the Stock; nobody able to determine the degree of Loss they might endure. The truly Good Buys in the Marketplace today with wonderful P/E ratios, comes simply because the Stock Exchanges prohibited the mechanism which set a dependable floor for the various Stocks in question. I hope Regulators quickly realize their Stupidity, and forestall further action to restrict Market reactions. lgl

Tuesday, October 07, 2008

Delay of Game

There comes a Time when all Good Men must take a Side. Where do you stand on the Issue? Be sure to read the three Open Letters linked in the article. I once wrote, maybe back in April, that the greatest determinant of the Crisis would fall on the willingness of the Banking structure to Write Down losses. Investors could endure losses, but the Markets and Investment could not withstand non-disclosure. Management, though, would not adopt honesty in their failure because of the Risk to their own positions. The Credit markets have now frozen to great degree, and the Question now revolves on How to Restart them. We basically have Three positions: the fundamentalists, the so-called Realists, and the Bankers. None of the positions possess a naturally consistent, pro-Active position of definite value. I am basically a fundamentalist, believing that economic policy will only cloud the Issue and delay the Write Down of losses; an effect which must be accomplished before there is progress to loosen up the Credit.

It is indicative of the real Problem behind the Bailout that there is great Doubt that it is sufficiently funded. The Concept of Government Underwriting inevitably and immediately brings to the fore every Claimant who could possibly gain some amount of the largesse. Any Threat to solid Credit will be entertained equally because of the fear of Public Denouncement, and 80% of the Credit losses could be handled by the Private Sector adaption far better than any Government control. Normative measures to discount Risk will be abandoned for the pursuit of Government Cash. The expansion of the declared Crisis to obtain Government backing will frighten Banker, Borrower, Investor, and Depositor. The Panic of the Herd will start to stampede.

The drop in the Dow since the Signature of the Bailout is almost Self-Explanatory: It brought immediate discussion of how much each Participant could bring forward to obtain the Government welfare; Stock Analysts and Stock Holders were listening in the Wings, suddenly, an initial Threat of a Year’s loss of Profits on the Company books turned into a life-threatening Scenario which doomed Stock values. The entire Market systems are now Gun-shy, after losing major segments of their equity. No one is calm, and decisions made are only worsening the Situation. It does not help that the entrusted officials of the Bailout have no idea what should be done, never having charted these shoals before. lgl

Monday, October 06, 2008

The Nonrefundable Mortgage Crisis

Students of the Financial Crisis need to read this article by Barry Ritholtz. What is not said is the basic Policy which led to the Crisis, which was the decision throughout the financial world to join Wall Street. Leadership decided to leave Banking behind, and design a new system which could be Bought and Sold just like Stock. Normal Rules of Lending were abrogated, and a uniform component of Profits-taking was introduced, where Instrument creators were granted an average 8% of the total funds up-front for having written the Instrument. They grabbed, pressured, or bribed their way into a good Credit rating for the Instruments, then went to Town in selling them; a practice where they were distributed prior to any Foresight measurement determining the intrinsic Recovery value of the Instruments.

The entire program relied on low Interest rates, so that the up-front Profits-Taking could be hidden from both Borrower and Investor. Instrument Creators carefully crafted the Instruments so that they were shielded from liability after the Period where their Profits-Taking was accomplished. The low Interest rates were necessary so that Mortgages could be refinanced under difficulty, with the doubtful Mortgage could be Paid and replaced with another doubtful Mortgage at greater cost, and less Advantage to the Borrower. The two most important factors in the refinance which Borrowers did not follow: 1) that they would pay off the previous Mortgage with the refinanced Mortgage; and 2) that they had paid off a significant amount of the first Mortgage, so that the refinanced Mortgage could be extended for a standardized Period, and the Instrument Profits-Taking could be absorbed by the new Mortgage. Low Interest rates were absolutely mandatory for the second provision to work out; the rates determining the rate of repayment of the debt.

These Mortgages had many Strikes against them from the Beginning. The first factor working against successful operation was the enhanced Construction Costs incurred with the Property itself. Realtors were inflating normal Construction Costs by economic profits, normally about 10% in the rising Real Estate market. Bankers were lowering the Credit ratings necessary for Borrowers to attain a Mortgage, truly ensuring that the later had too great an amount of their Incomes devoted to Mortgage repayment. Instrument Authors insisted on up-front Profits, and the limitation of liability to the Period of completion of Sale, isolating both Borrower and Investor from the renegotiation capacities of Mortgages; Some might have doubt as to the later, but the intervening Second Party has been freed from liability, freeing them from the economic necessity of Contact with either First, or Third Parties. The interruption led to Severance of Contact. The Instruments were written in form almost demanding refinance (obvious benefit to Profits-drafting Creators of financial instruments), but eliminating any Referral process with the elimination of Second Party liability. The real amazement was that the resiliency of the American economy sustained such Mortgage practice, until it threatens to bring down the entire system. lgl

Sunday, October 05, 2008

'My Momma Done Told Me'

David Mudd tries to blame the other Guy, and it does not come off well. The trouble with the Analysis comes in the fact that the Signs of disaster had been appearing for years, he had multiple opportunities to inform Congress of the coming Storm in the financial world, and he chose to join the Consensus losers, rather than be a Whistle-Blower. The Investment pattern by Fannie Mae showed clear expression of fraying and breakage, but he simply collected some $10 million in bonuses in his first four years at Fannie. A direct connection can be made between the reward magnitude, and the level of Risks entertained by Fannie; no one pays such Prices for actually competent performance, when it is performed in the normal course of business activity; not even in the Wildcatting of Wall Street of these years. The assumption of unsanitary Risk was the sole criteria for such level of bonuses.

Here is an article declaring that the good ole Days of huge Gains is over for Wall Street. It amuses Me, since it has been a common rendition ever since the days of the gay 1890s. Obvious wealth has always been the billboard of Wall Street, and will remain as long as they are allowed to shift other Peoples’ money. It is the nature of the industry. The only thing which will change comes in the form of Property values, which will fall until a new Wave of heavy Dealers will arrive at the Street. The real Winners are those Traders who pack away a couple million every year, and Retire to a village in Florida, where they will always speak of their rectitude in the den of vipers. They don’t visit the Bars and Restaurants–Brown-bagging their lunch, and live somewhere in Queens. They watch the High-Rollers come and go, and rub shoulders with them on the Exchange floor; shaking their heads, while wondering what deal will bring the kingpins down. It also is the nature of the business!

Robert Franks claims it is Steroids, or as he puts it, the ability to participate in the Markets utilizing other peoples’ money. He says that this must be limited, but a limitation would be the end of the Markets. The fact of the matter resides in most people being too lazy or too ignorant to invest their own excess Cash. They simply do not know how to put it to Work, anytime it extends beyond their own little sphere of competence. I personally have a Sister, who was raised in the same Household under the same Schooling conditions, who was rabid for the $700 Bailout; her rationale being it would save her Mutual Fund and Hedge Fund investments. A reasoned argument could not shake that belief, and her Equity will suffer nevertheless. One can only listen to the Grateful Dead in ‘We will Survive’. lgl

Saturday, October 04, 2008

Practical Hazard

Tim Harford may not comprehend the Moral Hazard in its full context. The Government Policy of saving all Entrepreneurial Risk if it goes bad will be destructive, even the implication of such before the Risk is taken. Risk-Taking under such circumstances will become a fictional farce. One cannot have a vibrant economy when all Risk is protected by a Cover, at least until the Risk is so great that no Insurance of any kind could be found. This leads to another Question which I fear We will have to Answer: Where is the Point where the magnitude of Risk exceeds the efforts of any Economy to reduce it?

All Markets were withholding Sell orders yesterday until Bush had signed the Bailout bill. The Markets then tanked because economic fundamentals preclude any Boom generated by the excess Cash, there being entirely too much Money to lose in the Markets. All economic indicators are going South in a big way, with major distortions appearing in intra-Sector transferences. Incentives are disappearing in the Moonlight, and not to be seen in the light of Day. All Traders are attempting simply to close their Accounts without losses, a Practice which is the exact opposite of Risk-Taking, or Progressive Growth. The Bailout Package will never be Stimulus, only replacement of losses for bad Managers.

The entire Scenario cannot possibly alter the economic state; the only effectual effort now must be efforts to stimulate Consumer Consumption. Said Stimulus will not come with Consumers expected to pay higher Consumer Product prices without aid. Consumers actually need what Business refuses to countenance: Wage increases. Mortgage Payments, Utilities, Food, and Intermediate Goods are all increasing in Price, but Business is in full-bore Wage suppression. Everyone gets a break except Households. The Land of the Business Tax Credits above All else will learn the effect of denuding the Consumer, I am afraid. lgl

Friday, October 03, 2008

The price of Oil has reduced, based on fundamentals which state that there is a lot of pumping Wells now, and People buying a lot less because of the downturn in the Economy. The Proclamation that this is a great help to American Consumers, though, reminds of Wiley Coyote being handed a coil of Rope falling off the cliff. The weight of the coil simply added to the impact force of landing, unless the end of the Rope was tied to something. The American Consumer faces a situation where their Spending pattern too often is loosely tied a shaky Job. One cannot develop a sustainable Consumption unless purchasing with Cash. The Problem finds in the reality that the Short-Term looks better than the Intermediate-Term, while the Long-Term will require a larger Capital Aggregation–doesn’t that sound like fancy Bull?–too bad it is true!

The Fed persists in claiming Influence in the Credit markets, after fronting the $600+ billions to those Markets. This Thought that anything would change by lowering the fed funds rate stands as another example that the Fed pursues an Economic policy which is obsolete. The first thing which needs to be said states that the Commercial banks have sufficient Cash reserves to lend. They won’t Lend because of the insecurity involved in that Lending at this Point, where they cannot adequately evaluate Business performance. Most Sales in normal Business models could easily vary by 30% under recessionary conditions, and Bankers hate to provide Cash to businesses whose Profits can vary by plus or minus 300%.

The States are beginning to undergo the effects of the economic downturn. I do not know of any State which does not support its Road construction from the Bond market, and many States utilize the Credit markets for ordinary operations like paying State Employee salaries. It is the humor that progressive States will be the most deeply impacted by the Credit Crunch, while the regressive States will likely only have to suspend Project constructions. I believe that this Recession will establish a Theory for the acceptable levels of Welfare, there being some prominent theory both defining the Cause of the Recession, and the Respondent necessary action to counteract the causation. It matters little that most of these theories later prove to be erroneous, and equally productive of adverse economic crises down the Road. lgl

Thursday, October 02, 2008

Show Trials

Why is it that I feel that the Senate failed Us? One-Third of the Senate is standing for Election, and 25 Senators voted against the Bailout Package last night. The rest of the 100 Senators must of figured that there would be alternate adverse News before they had to risk reelection. By the way, the remaining Senators up for Election came from States most involved in the Markets, with the Senators knowing they would get much internal support. Louis Uchitelle find businesses being solicited for loans by Banks, and businesses taking loans at a 30% rate (which used to be usurious). I find such behavior indicative that good business practice has no trouble obtaining Cash, though threatened by corruptive Lending practice, while poor business practice is still being underwritten, though without the proper banking supervision (the Lenders are utilizing their own good Credit rating, to make usurious Profit off of fly-by-night operations?). We obviously need another $700 billion of liquidity, so that unsound Lending practice can continue!

The European Central Bank decided that fighting Inflation was more important than Liquidity, even if Corporate friendly Ireland had fallen into Recession. Does this mean that the EU decided that foreign Corporations making mass Deposits in Ireland was not worth Underwriting, because not even the reduced Deposits have a history of being spent in the EU? The defense of the Euro may make more Sense than pouring $700 billion more into a presently Sound currency like the American Dollar, all to subscribe loans equivalent to the above listed. Someone in years past, like Me, suggested that Globalization implied absorption of the hazards of foreign economies, without the significant magnitude of foreign Sales making the Risk-Taking worthwhile. I am wondering if it is worth a Month’s research to write an Exposition on the assumed hazard of Globalization (you won’t see Me expend such effort for People to read the first and last paragraphs).

Tyler Cowen is such a help in trying to catalogue the various Plans out there to resolve a financial crisis which might not exist (Some, er, Me, have suggested that it is only anxiety normal under a reduction of Consumption Demand). Consumers find themselves in a place where it is better to pay off Bills, rather than blow their next Paychecks. Waving to the Dow as it goes down may be a better formula, than is injecting $700 billion of Inflation into the Money Supply (remember that the Fed has already fed the Money Supply about $600 billion, without a ripple except in Consumer prices). I was always a Fan of the Stalin Show Trials of the 1930s. Maybe We should put the Investment bankers in a Court Docket, and start ranting at them; a much cheaper practice, with release for the Soul. lgl

Wednesday, October 01, 2008

The Decay of Rent-Seeking

I enjoy a good propaganda Piece as much as Anyone, especially one where even the Author fails to understand the Advertising implications. The inevitability of the desired Goal is first asserted, followed by the huge horror which can be picked out of History and proclaimed by any failure of the desired Goal. The partisan self-interest is not denied, simply covered with the patina of Experience. The desired Goal leaves the cusp of Rent-Seeking, and blooms into the beautiful flower of necessary Tool rather than expensive Toy. Banker and Wall Street wish to attain the Welfare graft always sought!

The Reality may not be presented by the beauty of the Writing. Anyone with Experience will inform they must get the Money before the Election, or the Crisis will disappear at the current rate of Risk reduction. Delay will cause the need for the Bailout to disappear before they can get their hands on the Cash; reminding of the Stimulus Package, where the full effects of the Downturn had been undergone, altering Consumption patterns anyway. Rent-Seekers hate the slow pace of Congress, which never provides the Money before the Markets have moved past the Issue in question. Worse, it becomes apparent to the educated Mind that the Rent-Seeking has lost all effectiveness except for an Inflationary pressure. What is a bunch of Scoundrels to do, when their paid Assets in Congress cannot get their work done on Time!

I enjoyed, and agreed with, the Comment mentioned on TV yesterday from a Small Town businessman, who asserted that any Business which depended on steady Credit for meet its Payroll was inefficiently run. The implication was such a business should be out of business in the first place. Anyone operating with such close Margins should think of alternate methods of employing their Capital. I remember a Friend who sold a profitable business, simply because it did not enjoy the rate of Growth which he thought necessary; he did not have trouble with meeting his Payroll at any time, though. I know Another who financed a Coffee House totally from Credit Cards, and achieved total Credit independence within four years. An economic downturn will of course change any business matrix, but business enterprise which cannot maintain a Payroll free of Credit after 5 years of operation, truly needs to fail anyway. Any belief in Creative Destruction must call for Congress to leave the Markets alone! lgl