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

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

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

Timing

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

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

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

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

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

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

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

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

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

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

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

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

'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

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

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

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

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