The U.S. financial crisis should be on everyone’s mind. It’s a serious situation. A private investor simply can’t hold money market paper right now. So added to the mortgage mess is a liquidity crisis that’s never happened since the run on banks in the Depression. So you can’t do nothing. The liquidity situation has to be dealt with.
We’re getting an object lesson over the next few days on making decisions under uncertainty. And the uncertainties faced by Chris Dodd and the other congressmen are of the type that are characteristic of real decisions. No one’s going to be able to put “error bars” around anything other than in a wild-eyed guess sort of way.
While we got intimate details on the politics and theatre of the “deal”, explanations of exactly how one gets from A to B are less available, or for that matter, what A and B are. We all know that there’s a problem. We know that there are a million non-performing mortgages and that no one wants to hold money market paper right now. I don’t really understand how the dots connect; I’m prepared to believe that they do, but it would be a good idea for someone to stand up and show how they connect. I know that the bailout plan is priced at $700 billion, but after watching CNN almost all day yesterday, I don’t know what the plan actually is. I know that nerves are frayed, but surely there are some people that can start explaining what the plan is and why Main St should support it. If it’s a good plan, I’m sure that Main St will, but explanations of the concepts and why it’s a good idea should be out there so that public opinion can be mobilized.
If I were in the room charged with making a decision, if I had my druthers, I think that I’d seek out the opinions of Warren Buffett, George Soros and Boone Pickens – three very different and highly successful people knowledgeable about markets, but not directly involved in the fiasco. And someone from a Wall St firm who’s steered clear of most of the mess. I guess J.P. Morgan Chase seems to have done better than most. Wouldn’t it be nice to see some of these guys on CNN saying what they think? [Note – again, I’m not saying that these guys are angels, I’m just saying that I’d like to know what people who haven’t been in the mess, think of the solutions.]
[Note: here’s an interesting take on the situation earlier this week by Conrad Black from his jail cell. Regardless of past hubris, Black is also a very smart guy, knowledgeable about markets and history and well worth listening to. I agree 1000% with his point about China. Also, to keep the $700 billion bill in perspective, Black says that the annual US current account deficit is $800 billion.]
The first people that the committee has to listen to are Paulson and Bernanke, but it would be awfully worrying having to rely on anyone who’s been directly involved in the supervision of the failed institutions.
At the end of the day, the people in the room, regardless of their past histories, have to make decisions and it must be very hard for Chris Dodd and people charged with making the decision to figure out who to trust. [I mention Dodd here, because, after watching hours of this on CNN yesterday, he struck me as the person in the game that seemed both willing and able and I’d personally go along with whatever he decided. [Note: many people have observed that Dodd is part of the problem and he may well be/probably is. Having said that, until someone else is running the committee, that’s who’s there. And if a decision has to be made, the incumbents have to make it. Only one decision is going to be made, even if it’s a decision to do nothing or to hoist the thing until the next administration. This comment doesn’t mean that I think that he is free of responsibility in this mess or that I “endorse” him or that he has the “solution”. I have no idea on the matter; indeed, I don’t know for sure that there is a solution or even exactly what the problem is, other than serious people say that there is one. People have observed below that Freddie Mac and Fannie Mae have been huge lobbyists and contributors in Washington and that may well be part of the problem. But we’ve been told by politicians in both parties that it is a crisis. And the collapses of AIG, Washington Mutual, Bear Stearns and Lehman Bros are sure evidence of a crisis. And this is in an economy with GM and Ford on deathwatch. I don’t know whether there’s a solution or even, as I note below, exactly what the problem is. If I was in the room, I’d want to understand the problem better than I do right now. But at the end of the day, somebody has to make a decision, even if the decision is to do nothing. Doing nothing might be a rational decision, but it’s a decision that should be made intentionally. And while the people in the room may have created the mess, until new people are there, they’re still the people that have to make a decision. So any decision that’s made right now – even a decision to do nothing – is by definition going to be made by people who presided over the mess.]
Climate Audit 
1024 Comments
Steve:
I’m writing an essay on unpredictability for family and friends. In it I refer to Taleb and William Briggs. For people who believe in persistence and extrapolation and other reliances on auto-correlated processes, I plan to show Taleb’s “Turkey Well-Being Graph.” I’m not adept enough at sending things to CA but apropos of this theme, you might show it to readers.
Regards,
Bill
This thread is sure to get very partisan, but this response isn’t meant to be. I would point out for a start that Chris Dodd, Senator from Connecticut, was a prime player in the causes of this debacle when he helped to pass legislation that promoted making loans to high-risk borrowers. Banks were under legal jeopardy if they didn’t make enough of these loans in the interest of “affordable housing.” As for Buffett, Soros, and Pickens, they all have reputations for personally profiting from the mistakes of others. Paulson and Bernanke seem to have been pretty ineffective up to now in managing the economy and predecessor Alan Greenspan mishandled interest rates on his watch. Wall Street did what Wall Street is supposed to do – maximize profits – but the cozy relationship between government and business sent the profits to investors and the risk to taxpayers. So relying on these guys to fix the mess seems a lot like relying on climate scientists to police their own business. Maybe they’re ultimately the ones to do it, but I sure don’t have confidence in them. Remember, all of them participate in a very large “peer-reviewed” enterprise. And how so such things usually work out?
Re: Gary (#2),
And he was also the recipient of the most money from Fannie Mae and Freddie Mack of any member of congress. This creates a conflict of interest, not unlike to sort of thing we see with the “team” doing peer review of each other and of people like Steve M.
Re: Gary (#2), I agree with Gary and, per my reading, others that are most vocal and culpable now can be added to the list, eg Charlie Rangel and Chuck Schumer. I’ve also read that McCain sponsored legislation in 2006 for more regulatory control of Fannie MAE and Freddie MAC and it was defeated in committee by the Democrats by a partyline vote. Go figure!
Re: Robert (#13),
If we’re adding names to a list of who currently in a position of power not to trust, I nominate Barney Frank. He still wants to keep Fannie and Freddie, not only in business but to expand their portfolios.
Re: Robert (#13),
In 2003, the Bush administration pushed for regulatory reform of Fannie and Freddie and it was rejected by the democrats. In 2005, McCain again proposed changes to Fannie and Freddie and again it was rejected by the democrats.
None of this should be a surprise. Over the past few weeks, i’ve read articles from as far back as 1999 predicting the very things that are happening now.
Re: JamesG (#11),
That’s exactly right. Everything is supposed to be free-market until the wrong person’s axe is gored. Then, it’s all about stepping in and doing something to “Save” something or other.
The free market can be a cruel beast. It rewards and punishes the right and wrong moves all on its own. When governments start stepping in to “assist”, they start to remove the markets natural risk/reward system, artificially creating winners and losers and changing the dynamics of a system that works very well to serve the needs of hundreds of millions of people in the US without the commisars making decisions on the movements of goods and services and trying to direct the decision making of all those people.
Re: Robert (#13),
Regading McCain it’s important to remember that he was criticized by the senate ethics committee for his part in a previous financial meltdown, the Savings and Loan debacle, he was one of the Keating 5. That would be a case of the ‘fox guarding the henhouse’!
“The Ethics Committee ruled that the involvement of McCain in the scheme was also minimal, and he too was cleared of all charges against him.[37][36] McCain was criticized by the Committee for exercising “poor judgment” when he met with the federal regulators on Keating’s behalf.[7] The report also said that McCain’s “actions were not improper nor attended with gross negligence and did not reach the level of requiring institutional action against him….Senator McCain has violated no law of the United States or specific Rule of the United States Senate.”[39] On his Keating Five experience, McCain has said: “The appearance of it was wrong. It’s a wrong appearance when a group of senators appear in a meeting with a group of regulators, because it conveys the impression of undue and improper influence. And it was the wrong thing to do.”[7]
Regardless of the level of their involvement, both senators were greatly affected by it. McCain would write in 2002 that attending the two April 1987 meetings was “the worst mistake of my life”.[40] Glenn has described the Senate Ethics Committee investigation as the low point of his life.[8]
Not everyone was satisfied with the Senate Ethics Committee conclusions. Fred Wertheimer, president of Common Cause, which had initially demanded the investigation, thought the treatment of the senators far too lenient, and said, “The U.S. Senate remains on the auction block to the Charles Keatings of the world.”[41] Joan Claybrook, president of Public Citizen, called it a “whitewash”.[41] Jonathan Alter of Newsweek said it was a classic case of the government trying to investigate itself, labelling the Senate Ethics Committee “shameless” for having “let four of the infamous Keating Five off with a wrist tap.”[42] Margaret Carlson of Time suspected the committee had timed its first report to coincide with the run-up to the Gulf War, minimizing its news impact.[41] One of the San Francisco bank regulators felt that McCain had gotten off too lightly, saying that Keating’s business involvement with Cindy McCain was an obvious conflict of interest.[43]”
Steve: once again, if you were in the room trying to make a decision, that’s yesterday’s skeleton. What should people do today?
McKitrick?
Relying on Chris Dodd, Barney Frank, and the rest of the Congressional buffoons who greatly contributed to this mess, as well as the very Wall Street denizens who also greatly contributed to this mess, are not what I would call “people you can trust”. They are more like the fox guarding the hen house.
Maybe we should be talking to CEO’s of successful banks which aren’t experiencing these kinds of issues. They seemed to have been able to steer around the problem by making good decisions. And just because an individual investor has been successful doesn’t mean he knows anything about the situation. Warren Buffet might, Pickens made his money in oil, and George Soros made his money by betting against currencies, often harming the financial status of the countries whose currency he bet against. Doesn’t sound like the kind of person I want around.
There are are number of alternatives to taking 3/4 of a trillion dollars from the taxpayers to bail out these institutions, many of which are much better than what’s been presented so far from Paulson and Bernake. They can start by suspending the accounting rules which force companies to evaluate their investments as if the company were being sold today. If the company doesn’t have to write the investment down to zero because there’s no immediate buyer, that will help their debt/asset ratio.
From the Dodd proposal
Assuming that the assets are even sold for a profit, why would we be using taxpayer money to fund democratic slush funds for political purposes.
So no, I wouldn’t support anything that Chris Dodd wants to do. If something has to be done, then it should be the absolute minimum to help out. Perhaps in the form of loans, or like House Republicans want to do, forcing the banks to purchase insurance from the government for their CDO’s, so that if the value does fall, then the government can provide the insurance money on an as needed basis.
Steve:
Agreed.
No, it doesn’t. if you were in the room up against a deadline, I’d like to know what people of that sort of personal success thought, as well as what the government people thought. Particularly if you were suspicious of the advice that you were being given.
Re: Jonathan Schafer (#4),
Fox Barney Frank guarding the chicken house, indeed! Your comment continues to be apt.
Today’s Wall Street Journal carries a front-page article revealing Frank’s funneling funds (12$million) to a bank in his state, contra TARP policy.
(http://online.wsj.com/article/SB123258284337504295.html)
Re: NeedleFactory (#1016),
Yes, I saw that. The game never changes in DC, just the players.
Boones, Picket, Chris Dodd and Soros.
Ask the bankrobbers how to rob the bank and then put the money back in the bank. Scratch my head.
The whole problem was caused by Fannie and Freddie and the Dems.
Sugarcoat all you want but it is political correct racial preference politics that caused this.
Dodd was also part of “waitress sandwich” incident with Kennedy. Aside from that, I’ve watched him handle other situations over the years, and I’m not quite so confident in his sharpness.
Gary (2) has it right …. Chris Dodd is part of the group responsible for this mess, which started with the “Community Reinvestment Act of 1977”, which required banks to lend to those with no down paymant and bad credit. If the banks did not have enough of these loans, they were threatened by the government and “Community Organizers” for “discriminating” against poor people. Dodd and other from his party then encouraged Fannie Mae and Freddie Mac to buy these loans to keep the gravy train going, and in turn the managers of Fannie and Freddie made tens of millions of dollars and pass large sums back to the politician’s political coffers.
From today’e NPR Morning Edition:
For those that say the weather forecast is “always wrong” my response has been “it is better than economic forecasts”.
It’s somewhat hypocritical that modern economists have for years been blathering on about non-interventionism, free-markets, private better than public, blah blah, blah then when it’s time for assets to correct back to their true value all this delusional “invisible hand” theory is utterly abandoned in favour of interventionism, regulation and government take-overs. The truth is that nobody knows dick-all about what methods work best until they are tested. Anyone coming forward now as a saviour is operating on ignorance and will likely do more harm than good. Save the savers but don’t bail-out the risk-takers I say. It only encourages them to do it all over again. Why save investment companies that lost trillions through incompetence anyway? Do they produce anything useful, or have any hidden value, or any skills? Obviously not!
Without a sound energy policy any financial band aid will do nothing to halt the flow of capital out of the U.S.. Rich folk don’t notice the cost of energy the rest of us do on a daily basis. So far I have not heard anyone mention how to get the individual reconnected with his obligation, only how to get the financial institutions out of theirs. Thank you for this thread, in my mind it highlights the difficulties at not looking at the costs of actions.
I would mildly dispute your assertion of three fairly neutral mavens. The one is trying to take other people’s air, water, and land and use it to enhance the value of his natural gas holdings, and being cynical. Another has committed half a trillion dollars to modify public policy and his support continues to pervert the dialogue. Hasn’t another just placed a Five Billion Dollar bet on this perturbed and derived housing market?
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PIMCO’s Bill Gross and Mohamed El-Erian should be put in charge.
Climate Audit thinking Dodd is the solution now makes me wonder if Mann, Hansen et al aren’t right after all.
I’ve heard Wells Fargo has been pretty much unscathed by this. JPMorgan Chase, Bank of America, Citigroup, HSBC, Banco Santander, Toronto-Dominion. Can’t they just all buy the bad ones? Eh.
As to those that should be ‘put in charge’ of ‘fixing’ this, you’re not looking for a perfect answer, just one that’s better than the alternatives. Picking the best of a bunch of bad choices as it were.
But it’s all rather up in the air as if the bailout is even alive any more.
http://news.yahoo.com/s/ap/20080926/ap_on_bi_ge/financial_meltdown
Re: Sam Urbinto (#19),
I’m sure there are far more banks than this that practiced sound economic principles. Most of them would be small banks, sure. But all the failing banks/Wall St. execs., and real estate handlers should be allowed to fail. They cannot be saved. The government throwing money at the problem won’t help. Example : the government has been throwing money at the US educational system and it has done nothing to help. US education continues to fall further and further down the ladder.
So let these big entities fall. There are many smaller banks, real estate brokerages, etc., who will be more than happy to pick up the pieces of that fall since it will mean a very large chunk of new business for them (business that they didn’t have to spend advertizing dollars to gain) and they will apply their sane and sound economics to these new customers just as they have been doing all along with their current customers.
Sure, there will be a hiccup in the economy while the transition is taking place. Maybe up to 3 years (my estimate). And the process will move slower than most people will want it to. But doing this sounds much better than giving 700 BILLION DOLLARS to those that have been failing. I can only see them failing with this enormous amount of money. That failure would hurt far worse than any hiccup that would happen in the economy during a transition. I also would feel much better having this business in the hands of people that are already successful in their work rather than remaining in the hands of those who have run their businesses into the ground–and I think the average person would feel better about that too(again, my estimation). This would make the transition period bearable, even hopeful–hope that there is a positive end to all this. I have faith in the American people. I think they are more than able to solve this problem if put in the power of their own hands. I don’t have faith in poltiticiancs and failing bankers/Wall St. execs. I don’t have faith in leaving these problems in their already failing hands. I don’t have faith in giving them 3/4 of a trillion dollars. The truth is I have a sick feeling about this “bail out”.
Let the free market fix this. The sky will not fall.
#17, A cruel beast indeed. And those pointing to the current debacle as a failure of free markets need to understand that what we’re seeing is not a failure of a free market. This market hasn’t been free, in the economic sense, since the moment congress placed mandates on it to assume high-risk credit lending.
I’m in the group that says I may not have a degree in economics, but I have no faith in the ability of Congress to solve this problem.
Events like these at times like this bring out the worst of an already corrupted system of governance.
Jim
Steve were you not aware of the influence Dodd, Frank and the others listed above had on the sub-prime mess nor the campaign contributions they were getting? Fox guarding the henhouse indeed.
The government guarantees are also part of the problem, because the allow risky behavior. Remember the S&L crisis? Deregulation allowed risk taking without the risk since there was insurance. Same went with the mortgages, Freddie and Fannie will buy them or we can sell them off in blocks so no one realizes how bad the actual loans are.
My vote for president could easily be swayed by the first candidate who promises to have the CEOs and boards of these banks sued for fraud and malfeasance.
Steve: I didn;t realize how pervasive Fannie Mae and Freddie Mac lobbying was. Good point.
Re: BarryW (#21),
It would of course be the height of hypocrisy for McCain to do so given his earlier involvement in the S&L crisis!
It’s quite a scary situation, and from Portugal all I can say is good luck and good choice.
But, it’s quite a catch in terms of GW models comparison. To understand that economic models and climate models share the same concerns over Mandelbrot and chaos does raise my skeptical eyebrows even further.
The problem is that there is little chance (and I surely DON’T want that!) that the climate makes a turbulent ride as an analogy to the economic crash, only to make the forecasters look even dumber than big W, if that’s even possible (sorry for the few in here offended by the true remark). Without that possibility at hand, we’ll have to wait a few decades until we can truly discern what’s real in the models from what’s reificated(?).
An interesting interview here. Here’s an interview with a prominent professor attending a conference on this who doesn’t know what the plan is either. Ross McKitrick observes that the professor, as a producer of a housing index, doesn;t make forecasts. Something that GISS and CRU might think about.
Folks, please don’t interpret any of this as endorsing anyone’s handling of the situation or their past history in it. Everyone that’s touched this sucker shares responsibility. Dodd included. He just made a less bad impression on me than the other guys. I realize that impressions can vary and that this is just an impression from CNN.
Having said that, it’s an interesting illustration of a real-life decision problem. Whoever was responsible for the mess, you still have to decide things today. Maybe tomorrow, you can go back and deal with the problems, but you have to make some decisions. Doing nothing is one possible decision.
Lots of competent people say that something needs to be done. By and large, my premise is that a reasonable person has to go along with the recommendations of qualified people. .
I don’t disagree with comments that energy needs to be sorted out. Actually I think that the U.S. trade situation with China is also probably a “root cause” in some sense. I don’t see how the U.S. can continue to import so much stuff by issuing IOUs to the Chinese, while hollowing out the manufacturing sector.
If the current bailout deal is expected to work, why don’t the Democrats just pass it? They have the votes. The idea that they want the House Republicans on board indicates they have a severe lack of confidence it will be successful.
Some sort of low interest loan or insurance package for those institutions in dire need wouldn’t leave the taxpayers holding the bag for so much.
In any case there shouldn’t be anything extraneous added into the bill other than the absolute minimum to get the job done. No pork style amendments and if any profit eventually emerges that should be entirely rebated to the taxpayers or used to pay down the national debt.
These bailouts are becoming bigger and bigger and remind me of someone playing a martingale system at the crap table. Do it often enough and all is lost.
Re: Bob Koss (#24),
My thoughts indeed. It indicates one of two things. Either the House doesn’t have the votes to pass as enough Democrats will vote against it along with most of the Republicans, or, they are looking for political cover. After all, if you’ve been a so-called “Defender of the little guy”, how can you be seen providing 700 billion dollars to Wall Street out of the little guy’s pocket without dragging the other party with you. At this point, I’m not sure which is the realization. Other scenarios may be in play as well, but those two readily come to mind.
Christopher Dodd? What a cruel joke!
In 2005 Greenspan warned Congress that if Fannie Mae and Freddie Mac continued to grow, “the total financial system of the future [will be placed at] substantial risk.”
Christopher Dodd received over $165,000 from Fannie & Freddie Mac, more than any other Senator, and was one of those who killed a Senate Banking Committee bill in 2005 that would have reined in Fannie & Freddie.
Why trust now the foresight of one who resisted a cure three years ago?
Steve,
“Lots of competent people …) goes both ways, as lots say to leave this alone as well. And given the biases and affiliations that we aren’t even privvy to, I tend to agree with them.
There are several intersting articles that say the bulk of the US Banking system is made up of local and regional banks, and that they aren’t having any trouble as they never participated in this lunacy. In other words, your local savings bank and credit union are still issuing car loans and mortgages, just like they always have, to people who(m?) 😉 they believe can pay them back.
In fact?…just yesterday I used a debit card to buy a book, and a credit card to buy a shirt?…and they both worked perfectly.
I guess my point is that given a)”If it bleeds, it leads” and b) It’s an election year, and in fact, some 45 days way…very mucy of what the media is reporting can be filed right alongside of the reports regarding the 20ft sea level rise that is imminent :
#20,
I won’t debate with you on this, although I couldn’t have the most different opinion.
Instead, I’ll link you to the most recent William Briggs, here. It is a wonderful read on the subjectiveness of statistics, but this part is the one you should read the most (bold is mine):
With this in mind, I’d say that I reach a completely different conclusion from you :p.
For what it is worth, President Bush has been warning about the dangers from Fannie Mae and Freddie Mac since 2001. He even tried witholding appointments in an effort to force Congressional action.
Also, for what it is worth, Obama’s top economic advisor, Austan Goolsbee, was telling us, as late as 2007 not to worry about these lenders.
Re: Jim Miller (#29),
Since dems only had congress since 2006, I wonder what have the reps been doing to solve this problem in those five years.
The only thing reps done was “dereg” all, since 2000. And we know what 2000 bring us. *cough* Enron! *Cough* *Cough*.
I mean, it’s nice to have ideologies, but quite frankly, you should not build a wall of concrete blinding you from the rest of the reality based solely on purist ideologies. Look at what that drove GW into!
Re: Luis Dias (#38), Can you point to a single instance of de-regulation in the last two years? In the last ten? It seems to me the push for the last decade or so has not been de-regulation, but rather massive re-regulation like the Sarbanes-Oxley bill.
This is how I feel right now, unfortunately.
Steve: again, can we stay away from backbiting on this. Tomorrow’s available.
CNN is not exactly a reliable political or economic information resource. It is widely recognized, at least in this country, to be the cable channel that is most in the tank for the Democratic Party and that it has been for years.
#19. You mention the Toronto-Dominion Bank and other banks as being unscathed. If one were making a decision on this, you’d absolutely want to know the views of the unscathed banks. They probably have the most valuable input.
The Chairman of the Toronto-Dominion Bank, Ed Clark, is a classmate of mine from university and a very smart and socially conscious guy. I’d follow his advice on this in a heartbeat.
I realize that a thread like this would be charged. However, for the sake of argument, can we put ourselves in the shoes of someone trying to make a decision. Or put yourself in Obama’s shoes or McCain’s shoes. It’s not relevant to today’s decision whether Barney Frank got money from Freddy Mac or Fannie Mae. There will be time to exhume the skeletons tomorrow. So if you were McCain or Obama and a staffer wanted to talk about yesterday’s contributions, you’d tell him to get lost. So please stick to things that shed light on the plans. Skeletons on another day.
Re: Steve McIntyre (#32), Well, actually it IS quite relevant who was paid by whom to influence the system. Just like it’s relevant who provided the tree-ring proxy to whom in paleo-climate reconstructions. Were they qualified, reliable, and unbiased when they produced the series or are they a pal who has “adjusted” the data and/or pre-processed it in a peculiar way. To fix the financial problem I’d get a list of experienced people with reasonable credentials in finance and do Wegman’s connectivity analysis to see who is too closely linked to whom. No need to load up the committee with replicates (ie, multiple versions of the same proxy). Then I’d make everyone submitting a plan also do “an engineering-quality” analysis of the situation before I’d weight their contribution too highly. In the end, the clearest exposition of the problem and a rational roadmap to a solution that minimizes the error bars (ie, the risks explained in a rational way) would be my guide.
Re: Gary (#39),
You know the saying, the perfect is the enemy of the good. By the time such a process was ending, the world had already collapsed. Three times.
Re: Luis Dias (#40), Of course. I’m just putting it in the context of what much of CA has been arguing about climate science. The principles still hold, though. At least attempt to do the right thing and shortcut where you have to because of time urgencies (which are no excuse ever to do the wrong thing).
Steve
I am going to use this phrase from that brilliant fellow:
1) I don’t believe it’s as bad as they are desperately trying to convince me it is.
2) There are parts of this proposal that make no sense to me, and are clearly “pork”. Such as %20 to ACORN from sale of properties, instead of going to retire debt. Limiting compensation packages (how does this attract the best/brightest people to take these jobs?)
These are some of the reasons I would vote no.
Jim
Here’s an interesting take on the situation earlier this week by Conrad Black from his jail cell. Regardless of past hubris, Black is also a very smart guy, knowledgeable about markets and history and well worth listening to. I agree 1000% with his point about China. Also, to keep the $700 billion bill in perspective, Black says that the annual US current account deficit is $800 billion.
In terms of where this is all going, I think that the following observations by Black are on point:
I agree with what Black says in the big picture.
Yes a decision needs to be made, and that definitely includes a “do nothing” option.
But this highlights common themes, lack of oversight, lack of clear, shared and deemed objective information.
Business requiress a faith in the future so that you can place a value on somethng today…and that value may be zero or it may be more than zero. However, markets require information, information they trust, hence the need for auditors, regulators, standards and legal system to resolve conflict and punish wrongdoers. In the absence of that all risk is infinite and things collapse to zero if it doesnt have a value greater than one today, hence the move to tangible assets like gold.
Steve is correct, you can assign blame later, you can reform later but this is decision making in real time with real consequences with real uncertainty.
Definitely gathering information is one of those high priority items. I am not convinced that the problem is crystal clear, I think it is but I am not sure, seems to be a liquidity trap based on questions of asset valuation and faith in organizations, instruments etc as on going concerns.
The scariest thing is that the “bank run” has happened early. It isnt consumers seeking redemptions, yet, but that instiitutions are seeking to avoid being the ones that cant redeem, so they are hoarding cash and not lending it to each other. Who would loan acash when the only asset you’ll accept is cash? It gets worse if all they would accept is a hard asset like gold, the adjustment period will be brutal.
Lack of proper, trusted valuations, valuation methods and proper understanding of risks (the A to B thing Steve refers to) are the root of this. There are always proper questions to ask, especially when the risks are big.
To tie this back to climate, this makes ensuring your information and methods are clear, open and unimpeachable are just as important if not more so in the climate debate. If the stakes are as high as the AGW proponents would have us believe then being open is more of an imperative since the risks are bigger and the need for consensus on action is higher. What you see in this crisis is that when there is confusion on basic facts you can’t acheive the agreement required for action and “Do Nothing” becomes the default.
Here’s IBD take on the fiasco:
http://www.ibdeditorials.com/IBDArticles.aspx?id=306632135350949&kw=Uncommon,Knowledge
Dodd’s face on TV is a farcical joke.
Rich
I am not an economist, but shouldn’t any decision with regards to this situation be focused on trying to avoid the worst case? My understanding is the worst possible outcome is the complete devaluation of the dollar (please correct me if I am wrong). So, since the Fed’s are simply doing the tried-and-true “lets throw greenbacks at it to make the problem go away”, wouldn’t that be the worst thing to do since simply printing more money is the fastest way to devalue the currency that a lot of the world relies on?
Re: Jeremy (#41),
The probability of another Weimar meltdown is little. Given said that, you should be aware that the lack of liquidity on the market is a beast of deflation, not inflation. To print cash is the fastest route to prevent the deflation nightmare.
The big problem of it is that it means pork. Big pork. Giant pork. Big chance of corruption. Big fat chance that you will relieve the worst scumbags of their responsability to this problem. And it means a lot of cash flow from the medium class money to the CEO’s parachute lottery. What I mean is that most of the money would be better spent if burnt.
Re: Jeremy (#41), focusing on the worst case scenario is not necessarily sensible. If we all do that, we should all become agoraphobics.
The problem here is the fact that nothing about past experience tells us anything about the current situation in terms of being able to attach probabilities to the consequences of various actions. The situation is compounded by the fact that this is very close to the election, and that rationally creates expectations that the government must and will do something.
The opportunity for rationally choosing to do nothing was back during the Bear Stearns episode. That is where the Fed and the treasury re-enforced the expectation that they would step in to “help”. Coupled with lower interest rates, those actions just delayed the inevitable while prolonging the actual and potential agony by creating a commodities (mainly oil) bubble. Sometimes letting small fires burn themselves out can avoid a bigger forest fire later.
We are now in the middle of the big forest fire. If anyone took me seriously, I would recommend letting whatever is going to burn to burn.
There are over-valued assets. The only way clarity will reign is for the values of those assets in markets over the next year. In my humble opinion, trial and error in markets is better than trial and error by the Treasury and the Fed. While my heart longs for an interest rate hike, it would also make sense to commit to keeping interest rates unchanged for the next year to remove one source of uncertainty. This will take time. There will be real pain and suffering. However, it is not like the alternative is going to be a sudden alleviation of pain and suffering through government action. In fact, such action has the real potential of prolonging the pain.
This path, of course, will not be chosen. This is an election year. Politicians never choose doing nothing over doing something and this is doubly true in an election year. We will be asked to believe that somehow Paulson and the successor will have an uncanny ability to figure out correct asset prices when the markets could not. I believe Hayek had something to say about this. No one listened to him either although he did eventually get the Nobel prize:
Final note: I believe the problem with most economists of today is that they are far too removed from the actual economy. Grad schools select Ph.D. students mostly on the basis of mathematical ability (I am the last one to ignore the value of mathematical models). A lot of economists I meet have never considered reading the classics, studying economic history and history of economic thought. That makes them capable technocrats (especially in the macro policy area), but ill-equipped to deal with certainty.
In that regard, I share in Dr. Taleb’s disdain for my profession and admire his courage and success.
— Sinan
Re: Sinan Unur (#64),
I think what’s most amazing about that quote, and yours as well Sinan, is that you can replace “economists” with so many other professions and it would be just as true. In fact, I get the sense that I’m going to be witness to a lot of crow eating in the next few years.
OK, here’s something from the IBD report above:
Steve, have you accepted Mann’s statement that his new paper verifies his previous work? Would you accept it from one of his co-authors from other papers? Maybe because you know that if he didn’t do it right the last time there is no reason to believe that it will be right now.
Why would you think that Dodd et al, should be the ones leading the fix to this mess when they were culpable in it’s creation? Let the ones who were the the critics be the ones to fix the mess not the culprits! It’s not a question of exhuming skeletons it’s determining who is competent and who doesn’t have a personal motives in messing with the fix. The ones you are suggesting may be the former, but they are also certainly the latter.
Be careful when you talk about “Money Market Paper.” A money market account is a different beast than a money market fund. MMAs are backed by FDIC. This means that if there is ever a run on the banks, you will get your money back in hyper-inflated valueless dollars. 🙂
#41.
I think that that is probably exactly right. I hope that that is what the decision-makers have in mind. You can’t hope for too much in such a mess.
Widespread banking failures would probably be worse, but it’s a horrendous beauty contest.
My sense of the world right now is that the dollar is over-valued relative to China and India right now. Is there a yuan-dollar exchange rate than can balance the China trade deficit? Dunno. I don’t see how the U.S. can keep running a current account deficit of $800 billion a year by printing securities for other countries. Maybe we’re seeing some of these chickens come home to roost.
The hollowing out of the manufacturing sector really worries me. What’s going to happen with the car companies? If they go, the situation becomes catastrophic for the U.S. It’s an awful lot easier to shut plants than to open them up. Does the shrunken manufacturing sector make sense? Not to me. We’ve got the identical problem in Ontario. Tool and die type jobs are being done in India and China at 10% of the cost. But you can’t outsource the public sector. So too much burden has been placed on blue collar workers/
Sorry, Mr. Steve et al, I have a hard time figuring out the US political system, but since the Congress in 2003 was dominated by Republicans, this sentence strikes me as history rewritten in a very Orwellian sense. Please explain to me this inconsistency. The dems who were in the minority in 2003 are to be blamed for something that the reps didn’t approve?
Steve: Dunno. You could be right. I was quoting an article; I haven’t verified it.
Re: Luis Dias (#48), Basically it was collusion between the Parties – the Republicans with not enough of a majority to push legislation through that they traditionally favored, instead discovered the joys of spending like drunken Democrats. It worked for a while with the War as a distraction. In this cozy system, they bicker with each other, but in the end both sides know how to bamboozle the public. Term limits is the logical answer, of course.
Re: Gary (#49),
Either way, it seems rewritten history in order to appeal to political prejudices. If what you say is the true story (and it’s a very believable one), then this guilt towards dems is bogus. Individual congress people should be pointed at and responsabilities should be clearer than waving the hand in the air and shouting “it was the Dems!!!”
It would also help to point out that the mess wasn’t initiated entirely by FM/FM. The meltdown started in the beggining of this year with Hedge Funds, etc.
In response to the mess, I’d go with McCain’s original intent at regulating more, not less.
Re: Luis Dias (#55), There’s more than enough guilt to go around. Like in climate science, US politicians are going along to get along. As for more regulation, I don’t think so. The problem is not the quantity; it’s the quality. The regulations required the risky lending, remember. The regulators need to be independent and have their rules written to minimize risk. Currently this is not the case.
Re: Luis Dias (#48),
In the Senate, even if you are in the minority party, you only need 40 members to filibuster any bill. The repubs may have had a majority in 2003, but there was no chance that any reform bill was going to pass with the spectre of a filibuster hanging over it. That’s just the way the US Senate works. Sometimes it’s good, sometimes, not so good.
Re: Jonathan Schafer (#54),
Good? Fillibuster? How can that be any good? That’s a ridiculous system. Pardon my french.
Re: Luis Dias (#57),
If I were an American, and some of those Dems on Steve’s climate panels sudddenly announced they were going to implement an immediate program to generate hald of America’s electricity from wind power, then I would be very glad if the Republicans had the ability to block it.
Unfortunately, I am English, and our system of Parliamentary tyranny means that a Prime Minister can do pretty much anything he likes, as long as he maintains his majority. Which is why we are in such trouble now.
I guess a filibuster is part of what our American friends call “checks and balances”. Seems pretty sensible to me.
Re: fFreddy (#96),
Quite right. And the real point of the check and balances is to prevent panic. This is why skeptics have a problem with the AGW scaremongers. They want to act now rather than get things right. The more they push it, the more we doubt their science.
Re: Luis Dias (#48),
Not dominated. Republicans were in the majority, but not by much. The President could not rely on them to follow the party line – there were always enough floating “maverick” types who were likely to vote with the Democrats. I imagine these floaters were fairly major taergets for the lobbyists, too.
Pinch of salt warning – I’m English, and I might be talking total tosh here …
Re: Luis Dias (#48),
One thing to remember is that there is a major schism that is readily apparent in the Republican party. The Republican party has sold itself as the party of limited government for some time now. There are many Republicans, Ron Paul being a noteworthy and powerless example, who actually believe in limited government [Paul has been forecasting this outcome for a long time and is opposed to a bailout]. Many other Republicans, George Bush, for instance, advertise small government but are only too happy to use as much [or more] government as liberal Democrats would – just for different purposes [McCain probably falls somewhere near this camp: He was FOR regulation before he was AGAINST it; now he’s FOR it, again.].
So we see George Bush engaging in the same world-policing and nation-building he criticized when opposing Al Gore. We saw a federal intrusion into education standards. We see a drastic increase in the internal security apparatus. We see an expensive drug program for seniors. And now we see a $700 billion bailout program. Many elected and unelected Republicans opposed these things [As did Democrats…]. Some of Bush’s initiatives received as much or more support from Democrats as from Republicans. There are individual politicians who wear white or black hats, but neither of the parties is completely innocent or guilty.
This is a big country, and there are regional differences among the parties, for sure. Western and Southern Republicans and Democrats often have different views than Northern and Eastern members of their parties. Southern Democrats may have more in common with Northern Republicans than they do with Northern Democrats when it comes to legislation – but party loyalty kicks in when the Presidency is at stake.
Many of the “small government” Republicans are found in the House of Representatives, whose members are closer to the people and are ALL up for reelection in November. [For Canadians and others in the audience, only one-third of the Senators are up for reelection – they have a longer time horizon] This is significant in the current negotiation over the bailout. Democrats have the votes to do whatever they want, and they want to use big government. The problem is Representatives from both parties are reporting 90-to-1 calls from constituents opposed to the bailout.
Many House Democrats support the policy implications of the bailout, but they hate the price, certain unworthy beneficiaries [e.g. – Wall Street CEOs], timeline, and political ramifications. The “small government” House Republicans are fundamentally opposed to the government intrusion on grounds of principle – they believe this problem was caused by government and they won’t vote for socialism. If the House Republicans don’t sign onto the bill, and it passes, every House Democrat has about a month before election day to explain why they shouldn’t be thrown out of office. Expected electoral gains in the House by Democrats may evaporate.
This is especially significant because the Presidential election is in a statistical dead heat and it looks very likely that we may have a tie in the electoral college. In that case, the Presidential election will be decided in the new House of Representatives. Democrats do not want to hang themselves with the President’s plan and lose the next 4 years in the White House as a result. This is probably why Speaker Pelosi, Barney Frank, et Al are so pissed right now.
Steve: Jim. it’s hard to moderate these sorts of discussion which is why I generally aoivd them, but this is too partisan for how I want to cover the story. It’s not that the race isn’t interesting and tactical,. but let’s not go there. BTW I disagree that it is “very likely” that there will be an electoral college tie. It’s possible but not “Very likely”. I like this sort of analysis but not here.
Re: Steve M.(#88),
Bad word choice on my part – note I combined “very likely” with “may” in one sentence. Rarely a good combination.
Political considerations are, unfortunately, as real for these decisionmakers as economic considerations. The punchline is, unless the President, Bernanke, Democrats, and “big government” Republicans agree to move to something approaching the alternative plan that House Republicans are calling for, there’s not going to be an agreement [at least before the election in November]. If they all recognize that, they should do it or tell everybody there’s not going to be a quick bailout of Wall Street.
Note – I’m sorry if comment #88 came off as partisan. I’m not a Republican, nor a Democrat. I was attempting to douse the flames of party partisanship, not fan them. Alas, the road to hell is paved with good intentions.
Re: jim edwards (#105),
As an observer of the US political scene, I can vouch that Jim Edwards is not a major party partisan. I am a small letter libertarian and that is how I would classify Jim – as he shows all the signs of that affliction and articulates that position well.
Steve M, I do get a charge from your suggestion that there might be “someone(s)” out there who could formulate a solution to the problem that has been in the making for years, or to whom we might seek counsel, and do it through political/politicized government action.
These things have a way of working out by the shear force of the economic realities involved and despite governments attempt to mitigate them.
The crisis machinations seem to be drawing a line in the sand that Armageddon will be upon us with no action yesterday and then the line becomes today and then the line becomes tomorrow and then next Monday. Maybe with congress and the administration fumbling all over themselves and with all the political posturing occurring, the crisis will be delayed sufficiently to take the edge off the crisis psychology – and provide us with something to be said favorably about incompetent politicians.
Also I would add that if one gets away from the partisan cheerleading, one has a better opportunity to see the root causes of the problem more clearly and judge better the potential remedies. Unfortunately that is not the typical approach even with our supposedly neutral media. I do think that the material presented in this thread is more informative than that that the NYT, WP and LAT will put together. They will tend to stick with the political drama unfolding and with filtered political comments.
If I were a betting man, I would wager that since many of the involved politicians are very sensitive to creating and maintaining an image of people of action, we will get a bill passed soon with finger pointing to follow shortly and with deniability for all to what the bill contains due the crisis situation allowing little time for detailed study of the bill by lawmakers before voting.
Re: Kenneth Fritsch (#129),
Thanks, Kenneth, and you’ve smoked me out. “Affliction” is an apt moniker as I believe most libertarians probably feel sick whenever they watch the news.
Luis,
Us political system is rather malleable, the same tight party discipline generally doesnt apply. So a minority of republicans may have joined a majority of democrats to prevent something from passing…but I await the facts, I am only speaking in general terms.
#43. Those are fair points. I hadn’t realized the degree to which Fannie Mae and Freddie Mac had infected Washington politics. My bad.
Having said that, someone has to make a decision, even if the decision is to do nothing. It would be pretty pathetic if the politicians from both parties said that this was a huge crisis and then simply adjourned without getting to a decision.
And maybe it isn’t a crisis. As I said above, I haven’t seen exactly how A connects to B and I’d like to hear a recommendation from someone not in the game. I mentioned Buffett, Soros, Pickens (and added Conrad Black and Ed Clark) precisely because, if I were in the room, I wouldn’t know who to trust. I think that that is the more salient point than having a less bad impression of Dodd than others.
The trouble right now is decisions have to be made by the people who are charged with making them. It’s all very well to say that they caused the problem, but until they’re out of office, they have to decide. And if a decision has to be made, they’re the ones that have to decide.
I agree with the points about Mann to a degree. However, as I’ve said on many occasions, if I were in a policy job, I would consider myself obliged to follow the advice of IPCC until official institutions changed their views. And if a decision on climate had to be made in the next 5 minutes, you’d have to take IPCC advice.
If you don’t have to make a decision in 5 minutes, you can try to improve the quality of disclosure and due diligence in the climate field – procedures that seem to have been forgotten in Freddie Mac and Fannie Mae world.
Re: Steve McIntyre (#51),
I’m concerned that given all of the people involved in the solution seem to have vested interest in protecting the investment banks, themselves and their cronies, including Paulson and Bernanke. I don’t know if this is actually necessary to protect the monetary system, but it stinks. These experts have gotten huge salaries, bonuses and golden parachutes (including, I believe, Paulson) and they’ve brought us to this state. Shoring up the system will not fix it. You’ve got to get rid of the cancer, which includes these malefactors.
Deregulation was a bad idea. Not because it its inherently bad, but because the government was still involved as a guarantor of the system through Freddie and Fannie, and through the Treasury. Same problem, I think, that exacerbated the S&L crisis. If you were gambling and had a “Sugar Daddy” saying they would pay off your markers if you lost, wouldn’t you be inclined to take big risks?
Re: Phil. (#56),
I’ve heard that McCain was kept in the investigation because, otherwise, it would have been only Democrats which would have been too embarrassing for the Democratic leadership.
Steve: I take your points, but again put yourself in the room trying to deal with today’s problem. You can’t throw up your hands because you don’t like the connections of the people. I wouldn’t either. You have to put yourself in a position to be properly advised on this. How would you go about it? You don’t want to hear from staffers about what a mess it is; you already know that.
Re: Steve McIntyre (#51),
Absolutely correct. The worst thing is to have the market stop working because everybody’s waiting for the decision to come down. If the decision is to do nothing, the market will act. Obviously, people will debate if it will act correctly or sufficiently. It won’t act at all, however, while everybody’s waiting to see if they should discount their assets or hold on until the buyout comes. The credit freeze will only get worse if the Feds hint at a bailout, then drag their feet on deciding.
As the saying goes, “Lead, follow, or get out of the way.”
Austrian economists saw this crisis coming years ago. You can’t have artificially low interest rates, easy credit and not expect malinvestment and a market bubble. Now the bubble is bursting and the same idiots who got us into this mess are prescribing more of the same to get us out of it. See any recent Ron Paul youtube interviews on Fox or CNN. Or see him hammer Bernanke here: http://www.youtube.com/watch?v=Bjpor8iBe58
Steve Again, the problem for a decision-maker in the room is what to do today, even if it is to do nothing. There’s obviously lots of blame to go round.
Well, they should hardly receive a compensation package if their decisions helped the institution fail.
Re: Jeff Alberts (#53),
I quite agree, the Dem package apparently includes provisions for that:
The principles the Democrats said had been agreed upon call for Congress to make $250 billion available immediately with $100 billion available, if needed, without requiring additional congressional approval, said two senior Democratic aides familiar with the negotiations. The second half of $350 billion would then become available by a special approval of Congress.
On executive compensation, the draft would require limits on compensation for executives of any company participating in the bailout. These caps would apply for as long as the company is in the program. This would include some language to limit excessive “golden parachutes.”
Treasury also will get an equity stake in the companies being helped by the bailout, though what type remains to be worked out.
In the Carter administration bailout of Chrysler, government guaranteed loans to the company in return for ‘warrants’ of Chrysler stock which meant that the treasury was able to sell stock in Chrysler once it returned to profitability and earned money for the taxpayer in return for the risk they were taking. Interestingly once Chrysler became profitable they tried to get the government to give back the warrants! A similar arrangement was used in the airline industry bailout
Re: Phil. (#112), I agree as well. And it appears the Republicans agree. Best I can tell the Rep’s will not stand for the ACORN thing and the Dem’s hate the insurance thing. Hopefully, both will be dropped and we get a bill. If the final bill is more that 100 pages look out for more of the same.
Doesn’t this line of argument lead to the conclusion that apparently ‘the best/brightest’ created this mess?
When Ron Paul enters the discussion, you know it’s time to put it to bed.
Well I didn’t read the whole thread but I will tell you this isn’t over even if they hand out the 700 billion. Things are gonna get a lot worse and 700 billion isn’t gonna correct the problem. The only fix is to stop the drop in real estate prices and that isn’t likely any time soon. 700 billion is a drop in the bucket in this problem and will only temporarily stop things.
On the bright side there will no longer be billions for stupidity like AGW research.
I wish Taleb was involved with the discussions in Washington on the same level as Mr. Dodd. Remember, if you think government is the answer there will always be a problem.
At 6:05 into this video Ron gives advice for what to do now:
George Soros gave Hansen 750,000 bucks to honor Hansen for his efforts to politicize climate science. I don’t think I’d want his advice on this problem. Early in the negotiations, the Democrats tried to include via the backdoor a new ban on the development of shale oil. I’m appalled at those seeking to use this as a way to force all kinds of unrelated and unpopular laws on the nation.
Steve: The Soros story about Hansen is untrue. You don’t have to like someone to be interested in what they think. Pickens is from a different end of the spectrum than Soros. I’m sure that the shale oil story is untrue as well.
But again please think about today’s problem not old gossip.
What to me is most evident about the recent financial crisis is the unintended consequences we see that allowed this mess to be precipitated by the establishments of Fannie Mae and Freddie Mac and the failure of the sponsoring government to admit the weaknesses and risks involved with the system as it evolved from incremental pressures and changes that were more political than technical in nature. Combine this effect with the crisis mentality involved in pushing for immediate government “mitigations” and I judge that we have an example of what I see as the biggest risk for AGW mitigation and the need as I see it to have some measure of the uncertainty involved.
It would take a major leap in faith, in my mind, for one to view the negotiations going on in the US government in reacting to this crisis as something well thought out, considered and technical in nature. I see almost all reactions being of a political nature to this point. Paulson has the support of Buffett in this matter and one could certainly understand the lack of confidence in Paulson given the successes of his stop gap efforts to date. Bernanke’s (and Paulson’s) actions have appeared to have intensified the crisis mentality by the very unprecedented nature of them.
I do not judge that a czarist approach with any individual, no matter their specialist reputation, will bring this mess to a quicker end. The government with all good intentions wanted more Americans to own their homes and in the process presented, in effect, an artificial subsidy that became more and more divorced from economic reality. Like the unfunded liabilities of government health care and retirement programs eventually the price has to be paid and that is what we are now paying in the case of home buying subsidies. The more fixes that are put in place to mitigate the problems the larger the problem will become and the longer it will take for the economic adjustments to occur.
However, given the short sighted view of this problem by most of the important players involved one could easily see why they would throw out all attempts to put uncertainty limits around future projections of the economy with no action and alternative attempts at mitigation and thus leave the rationalizations for actions that are very political in nature wide open. In other words, since we cannot perfectly or approximately predict the future and particularly the near future, ones political based choices are equivalent to perhaps more rational ones. Unfortunately, that would appear what we are currently facing.
Hopefully trade imbalances will not be addressed by protectionist tariffs as was implemented in the 1930 Smoot-Hawley act. Many economists blame Smoot-Hawley for the depths of the U.S. depression.
For an interesting proposed solution, with a realistic, black-swan-ish view of risk:
Pricing Mortgage Securities When Nobody Knows Anything
http://www.arthurdevany.com/?p=1239
The Greater Fool Theory of the Mortgage Crisis: Congress is Making the Taxpayer the Last Fool Standing
http://www.arthurdevany.com/?p=1245
Hi,
I think the private industry in this market should take care of it themselves. They should bare the burden of the cost as should those involved all the way down to the small investor. I’m a one who thinks if you make a bad decision then live with it. The government should only make sure things don’t crash and hurt everyone. Why do they suddenly know that exactly $700 billion will fix things? Somebody knew this a long time ago or they simply don’t have a clue and just threw out this number. Steve has is right, but you need people who can profit from this to fix it right. Do you want someone to try to fix it with no vested interest? I think not. My two cents.
I do not believe the Yuan and the dollar float freely, the yuan is fixed and undervalued. A sudden increase, watch Chinese goods suddenly become very uncompetitive.
However, the longer it takes to convince the Chinese out of this untenable situation the bigger the problem will be.
Re: Stephen (#73),
Absolutely right. The Conrad Black line about issuing IOUs to the Chinese to buy their goods is wrong; it has been the choice of the Chinese not to repatriate their dollars because, if they did, they would rapidly lose their cost advantage. Hence all the attempts to get the Chinese to open their markets to other US imports.
It’s not so different from the situation with the Japanese in the 80s, except that China has an awful lot less depth to its economy, and is, I suspect, heading for a fairly major crash of its own.
I”m new to posting here, but was my post removed?
Steve: sorry, I’m not going to allow links to political statements. This thread is already at the edge of what I allow, but circs are unusual.
Folks, it’s obvious to me in Canada that something is specifically wrong with U.S. regulation as this is a made-in-USA problem that is not originating in Canada, though bad times in the US will be bad for us. So something is clearly wrong with your housing finance structures and, without knowing much about it, it certainly seems like Freddy Mac and Fannie Mae are probably up to the armpits in it. But to some extent that’s tomorrow’s problem.
Jack Welch, former chairman of GE, and a hugely respectable and accomplished businessman on things. He’s volunteered to work for $1/year. That’s the sort of person that’s needed,
Re: Steve McIntyre (#76), Steve, when you asked “who,” Jack was the first person that popped into my mind.
Mark
Luis Dias: If you will read my comment carefully, you will see that I did not mention the parties. Nor did I mention the parties in either of my posts. (And I explictly credited a Clinton advisor in an update to the first linked post.)
My suggestion — I hesitate to call it an argument — is that we should pay more attention to those who warned us than those who pooh-poohed those warnings. For example, I would listen to Bush and those who advised him — and I would not pay very much attention to Senator Dodd. (Incidentally, one of those who advised Bush, Gregory Mankiw, has mixed feelings about the plan.)
(Since you brought up the question of parties, I’ll cover that briefly. Both Republican and Democratic members of Congress are to blame for this crisis. More Democrats than Republicans, but the blame is bipartisan.
But it is also true that most of those who warned us about this problem were Republicans.)
Steve: I take it that Paulson would count as someone who advised Bush. So surely he should count. Isn’t Dodd just selling Paulson’s plan? Or have I misunderstood something here?
Re: Steve M.(#78),
Yes, I think you’ve misunderstood, somewhat. Bush [through Paulson] came to the Senate Banking committee with an outrageous request for legislation that was an obvious non-starter for any member of Congress. Congressmen don’t like to be told they should cough up money and have no oversight, and not be able to attach any of their own pet projects because then the entire economy will fail and it will be their fault.
The President has laid this one in Congress’s lap, so now they have to do something – because the President can’t. Dodd and company have come up with a counteroffer, essentially, that has the same ultimate dollar figure as Paulson’s request but many terms added. It should be noted that, in our system, the President doesn’t officially submit legislation – he must ask one of 535 members of Congress to do it for him.
Bush [along with Paulson and Bernanke] doesn’t appear to be objecting with Dodd & co.’s counter proposal at the moment – but I don’t think that makes it Paulson’s plan. This appears to be a somewhat bi-partisan Senate Banking committee plan, with strong input from Barney Frank and Speaker Pelosi.
Re: jim edwards (#99),
There go the chickens. Are those feathers in Barney’s mouth?
Re: Steve M. (#78), I don’t think funding ACORN with 20% of any profit made from the bailout was part of Paulson’s plan. So Dodd and the Dem’s have an agenda. Paulson’s plan or really lack of a firm plan is intended to assign some value to paper considered by many as worthless. With some value assigned to the paper, banks have a chance at becoming more liquid. 700 billion if far too little to do any good unless the street gets involved. It could build confidence though.
Scary situation. One thing that Fannie and Freddie can be used for is shared risk financing for home owners that actually live in their homes. The shared risk loan is a debt free home equity loan only in this case that equity would be used for refinancing and would have to stay in the home. No home ATM allowed. The home owners would have to agree to stay in their home for a minimum number of years. Once sold fannie and the home owner split the profit/loss. Risky if short term but a solid investment for Fannie if the loans go to term or at least 5 to 7 years.
Paulson may be a very smart guy but he is a lousy salesman.
Blimey. Quick-moving thread …
Isn’t the interface of the truth with politics the whole point of this website?
Steve: It is a general rule of this blog that discussions of policy are prohibited. Today’s a bit of a one-off.
Put all the non-performing loans into a basket and auction them off. Give the proceeds back to the originating institutions.
That’s what was done during the S&L crisis.
Steve: Maybe that’s a good idea, maybe it isn’t. Is the situation the same today as then? Maybe something different is needed. Again put yourself in the shoes of someone in the room. Whatever the answer is going to be, you need to hear it in a formal way from someone who knows their way around. Someone authoritative needs to put it on the table. Otherwise, it’s tomorrow’s issue.
Auction off FNMA and FNMA.
In terms of who to turn to for advice, how about other countries that have been through similar turmoil: link
Steve: I hope and presume that Paulson and his staff have been doing that. If so, that’s the sort of thing that they should talk about.
Re: Tom C (#83),
From your article on Sweden :
The point here is that, unlike the Swedish taxpayer, the US taxpayer is already on the hook, via the federal guarantee on Fanny and Freddy, which has been there for decades.
Sorry – link didn’t work
Re: Tom C (#84), That’s a really good article. Some excerpts:
Clearly the whole crisis is linked to Total Solar Irradiance. If you just count the sunspots…
Unfortunately, at this point only the US government has the financial resources to put a floor under the value of the CDO’s, etc. But the floor needs to be low. BTW, this sort of thing on a smaller scale, buying distressed assets at fire sale prices, is one of the ways Buffett made a big chunk of his money. By being able to buy and hold these assets to maturity, the Treasury could make a profit in the trillions of dollars (10E12). OTOH, if the US Treasury buys them and sells them on the first uptick, it will only delay things. Mortgages need to be re-negotiated on a case-by-case basis, not by government fiat. Otherwise, when things do finally settle out, mortgage interest rates will be at the level of car purchase interest rates. But then, maybe they always should have been.
Oil and Real Estate.
My maternal grandmother ran one of the largest businesses in her state with my GF as a figurehead. In 1980, they sold the business for a lot of money and retired and put the money in an S&L and an Oil and Gas leases. In 1983, the S&L went under, leaving them with little cash, and then oil prices crashed, making the leases nearly worthless. Then the buyer of their business killed himself. The bank asked them to take over the business until they could figure out what to do. They made some money in helping the bank find an owner for their old firm that they built over 40 years and exited that with the firm intact and most people still working. That money sustained them until the RTC checks started to come in. They also testified in the criminal trial for the S&L managers and got some money for working for the lawyers. ( We were always worried that she would go kill the managers when they got out of prison. ) Thank God their house was paid for. She always made sound decisions over the years and the decision to put the money where she did ran counter to what my GF wanted which was to buy land. The latter was the soundest decision in retrospect, but was wrong in foresight.
When I asked her about those three years, she said it was just one crisis of many they got through over the years – lawsuits, cash flow issues, injuries, etc. She said you start with a fixed idea, then work from there. Start with the best idea and then make decisions. With a large workforce, and a business highly dependent on them, the hardest thing was uncertanty for the workers and she stressed that removing uncertainty was the most important thing.
The big problem is the crappy loans. What’s the best way to deal with them? How did we deal with crappy investments in the past? No need to reinvent the wheel. IMHO, most are probably going to cash-flow. Someone will snap them up. Package them and revalue them in an auction which will then reset the balance sheets. This will then give some firms cash while getting the crap off the balance sheets.
The RTC did a great job and then closed shop. Everyone liked them. Find someone who worked on the RTC and appoint them head. Or, another trusted figure. Robert Rubin is someone who comes to mind.
Then let the firms and market chew on the idea and see where people are at.
IMHO, the Chinese Crash that is coming is going to be much worse than the US problems. The liquidity crisis is going to spread around the globe in the next few months. Oil and Real Estate. Nothing changes.
#90 – fFreddy
Agreed. That is the real root of this problem. That is why it isn’t a “failure of capitalism”, etc. By guaranteeing Fanny and Freddy (a relative of yours?)the normal market restraints were eliminated.
The solution is firstly, to not lend money to people who have no chance or intention of repaying it. From the New York Times 1999:
So, the legislation that required and encouraged and allowed it should be repealed.
Re: MarkR (#98),
Once you provide an “entitlement” it is almost impossible to take it away, unfunded or not.
If I have understood correctly the big problem is the mortgages are split up and securitized. Then it is difficult to pick out the underperforming mortgages from the performing mortgages. Therefore nobody wants to buy any of the securitized mortgage packages. There was even a case in court of a man who stopped making payments and when the company holding the mortgage got to court they had no paper to prove they held the mortgage. The judge told them to come back when they had paper proving they held the mortgage. I know we moved into Houston a little over two years ago and the company that we closed with only held our mortgage one day. The second company took one payment then sold the mortgage again. This combined with the SEC rule to mark the securities to market instead of long term value has halted all trading in the instruments.
Re: #4:
“Maybe we should be talking to CEO’s of successful banks which aren’t experiencing these kinds of issues. They seemed to have been able to steer around the problem by making good decisions.”
Yes. See here for the view of just such a CEO, BB&T’s John Allison:
http://www.bloomberg.com/apps/news?pid=20601109&sid=afxCLBycUdbc&refer=home
Among other things, Allison says, “There is no panic on Main Street and in sound financial institutions. The problems are in high-risk financial institutions and on Wall Street.”
BarryW #21: I’d be surprised to find many people in Congress, especially those in the various finance-related committees and the like, that hadn’t had their hand someplace near or in the cookie jar.
Steve #23: So right, find the competent people, determine a course of action based upon the various input.
Bob #24, Jonathan #28: I would say that those pushing against this realize there may be unintended consequences, some of which would of course be political.
PhilH #30: I’d probably argue that CNN has become less politicized in the last few years, mostly to compete with the powerhouse of Fox. Which (watch the Sunday show on the broadcast network) is not quite as far-right as some would imagine. But that’s all moot; there needs to be a fusion of sources with various outlooks.
I would look to 4 sources of TV info on this; CNN, Fox, PBS, and C-Span Together they’d give a wide view to bounce each off against each other.
Steve #31: Who better to listen to (or at least gather the opinions of) than smart folks who haven’t gotten into or too far into it at all?
Steve #32 Skeletons later, exactly.
Luis #38: The problem with the viewpoint of trying to tag this on one party or another is that nobody in modern history has had the 2/3 in the House and 60% in the Senate needed to get over veto power. Another issue is that as the world economy has grown and situations changed since around the late 50s to late 70s, since (and during, perhaps) that time, most presidents, and perhaps both executive and legislative branchs and their programs, have more often been dictatated by circumstances (coupled with at least some dogma of course).
All in all, it was a blip with a bare majority of one party from 1994 to 2006, with half under a president of the other party. Especially if you take into consideration that it takes time to ramp up after taking over Congress for the first time since 1952 And you have to take into consideration a mix of various policies of presidents; since WWII, you have D, D, R, D, D, R, R, D, R, R, D, R
Quite a mess, not so simple.
Luis #48: The 107th Congress, 2001&2002, started with a tied Senate and a 9 vote majority in the House for the Republicans. Hardly “domination”. Also in 2001, a senator became independent and caucused with the Democrats, so they controlled the Senate for a while. The 108th, 2003&2004, had a 51 to 49 Senate and the House was a 20-24 vote margin for the Republicans; at the largest, the margin was 52% (229-205; a tie is 217) So calling any party dominating is hardly correct. Although of course, the committee and panels are operated by the party that has the majority (or in the case of right now with the Democrats, the plurality, with Sanders and Lieberman being independent, it’s really a tie).
The bottom line is, for those of us familiar with the machinations of the federal government of the USA, it works how it works, right or wrong. And how it works is that without 66.6% in the House and 60% in the Senate, without a president of your own party, and without 20 years or more of like-minded peers to implement a consistent long-range far-reaching plan, you get what we have. Which is a basic stalemate with plenty of in-fighting.
Stan #62: No, a Soros foundation did legal and PR work on the behalf of Hansen. Considering how much the foundation spends, it was pocket change. And Hansen was hardly special out of the thousands they deal with.
All: Nobody’s going to be able to do much with the various aspects of this totally out of the control of everyone; pessimisim in the markets, the world economy aspects of it all, the urbanization and industrialization of China and India et al, the price of oil, the political makeup of countries with oil, the use of fossil fuels as the main economic and energy source for the planet, and so on.
The issue is fixing the problem, not arguing about who did what why when or trying to figure out the dynamics of world history since 1850.
Heh, captdallas2, I’d say that being an expert at finance or what have you, precludes being a good salesman! 😀
But as far as the solutions; do what you best can, under the existing circumstances, using the available resources. Wondering about why, or how it could be, or that it isn’t how you would like it to be, or that you had other people or mechanisms rather than the ones you have is not very productive.
How can you tell a train of thought is not helpful? Right, it starts with “I wish that…” or “If only…”
🙂
from a “get our of debt” guru in the US
That’s Brian Wesbury – an “optimistic economist” – is that an oxymoron?
http://en.wikipedia.org/wiki/Brian_Wesbury
http://www.daveramsey.com/etc/fed_bailout/economic_cleanup_10887.htmlc
Re: GTFrank (#108), say just on sub-primes for this period of time you can change that rule — a temporary change
More economic Calvin Ball 🙂
From media reports, one would believe that there is a “consensus” that a bailout is needed and any dissent / delay is irresponsible. Sound familiar? In reality, there is no consensus except in the minds of Wall Street, prominent politicians and the media. The fact is that no-one really understands the magnitude of the problem and whether a bail-out will rescue the economy from imminent collapse or create a prolonged recession through the old double threat of the law of unintended consequences and moral hazard. Many reputable economists, including at least three Nobel prize winners, have openly spoken against the bailout.
Steve’s original question “who do you trust?” is very appropriate. His answer (Warren Buffett, George Soros and Boone Pickens), less so. Buffet has spoken openly about not understanding the implications of derivatives (see the Gen RE FP debacle), Boone Pickens is an old-style corporate raider who has not indicated any great breadth of understanding of modern financial markets, and Soros – well let’s just say one may prefer an advisor with a better reputation for integrity.
The other suggestion of listening to banks who have avoided major dislocation is also unsatisfying. Just because a CEO showed sound decision making in one area (avoiding subprime mortgages) does not automatically make that person an expert in a significantly different and more complicated question. In addition, it is important to recognize the conflict of interests that exist.
So who should the decision makers listen to? Well, in my view, they have to hear all voices and balance them. This includes Steve’s suggestion, the CEO’s of troubled companies, those with related experience in other countries (Sweden in particular), the Fed and the economists that make their living studying financial markets. The decision unfortunately will be made with very imperfect knowledge and has a good chance of being counterproductive. We really are in unchartered territory here – Paulson and Bernanke have clearly misread the financial position more than once already. Maybe they are right this time, but that is far from certain. Anyone who isn’t confused, doesn’t know what’s going on.
Roy Blunt turned up on CNN speaking for the House Republicans and did a good job. Whatever the outcome, it seems vital to me that it be bipartisan. People have provided lots of reasons not to trust Dodd; so it’s important that someone like Blunt signs off. If he does, then I think that there’s not much point backbiting about the decisions made today.
But everyone will sure be entitled to be mad about being placed in such a situation.
From media reports, one would believe that there is a “consensus” that a bailout is needed and any dissent / delay is irresponsible. Sound familiar? In reality, there is no consensus except in the minds of Wall Street, prominent politicians and the media. The fact is that no-one really understands the magnitude of the problem and whether a bail-out will rescue the economy from imminent collapse or create a prolonged recession through the old double threat of the law of unintended consequences and moral hazard. Many reputable economists, including at least three Nobel prize winners, have openly spoken against the bailout.
Steve’s original question “who do you trust?” is very appropriate. His answer (Warren Buffett, George Soros and Boone Pickens), less so. Buffet has spoken openly about not understanding the implications of derivatives (see the Gen RE FP debacle), Boone Pickens is an old-style corporate raider who has not indicated any great breadth of understanding of modern financial markets, and Soros – well let’s just say one may prefer an advisor with a better reputation for integrity.
The other suggestion of listening to banks who have avoided major dislocation is also unsatisfying. Just because a CEO showed sound decision making in one area (avoiding subprime mortgages) does not automatically make that person an expert in a significantly different and more complicated question. In addition, it is important to recognize the conflict of interests that exist.
So who should the decision makers listen to? Well, in my view, they have to hear all voices and balance them. This includes Steve’s suggestion, the CEO’s of troubled companies, those with related experience in other countries (Sweden in particular), the Fed and the economists that make their living studying financial markets. The decision unfortunately will be made with very imperfect knowledge and has a good chance of being counterproductive. We really are in unchartered territory here – Paulson and Bernanke have clearly misread the financial position more than once already. Maybe they are right this time, but that is far from certain.
Anyone who isn’t confused, doesn’t know what’s going on.
#109. I don’t pretend to be anything other than confused. IT’s frustrating not to have a really clear explanation of the problem. When it comes to announcing their plan, I hope that someone can explain exactly why it’s needed with details and not generalities – a clear explanation of how A leads to B. All too often people try to fob off the public with generalities and I hope that this is not such an occasion.
As to someone like Soros, look, I’m not vouching for him or trusting him. It’s just that I would value the opinion of smart people who know markets. I’d almost add – especially one who knows tricky practice. If I was worried about getting tricked by Wall St, I’d be a lot more comfortable if I had some help from someone who knew the tricks. Wasn’t it Joe Kennedy who helped set up the SEC?
As to doing nothing, it might very well be an option. I have no personal idea as to whether it would be a good idea or not. The three economists might be right, but, speaking personally and this is personal, I’d place more value on advice from more practical people. I can understand why reasonable people may differ on this. That’s why bipartisan is important here.
Re: Steve McIntyre (#114),
You would value his honest opinion, certainly. But how would you know you’re getting it ?
Re: Steve McIntyre (#114),
I am afraid you will not get that. You will get a first step, reverse auctions for some of the bad paper, oversight, no golden parachutes and probably warrants. Paulson, really needs flexibility to respond to varying situations with out showing his hand ahead of time. As the value of the paper starts to be revealed the Fed can and should be able to adjust to conditions. They are making a risky move, but one that has to be made. FDIC has to cover banks deposits or it is game over. The big D. So the bailout has to be able to adjust to the pitch fork and torch crowd. With 40 something trillion in US real estate value (that value is a big question mark), the 700 billion will be between 30/1 to 50/1 leverage. That is the problem, what is the real estate worth? Expect something similar to the Japanese housing bubble end game possibly a little better.
Steve: I don’t see U.S. real estate going to zero. It’s not expensive relative to Europe. At a certain point, people will start buying. If I were younger and knew real estate, I’d be raising money in Canada to invest in distress U.S. properties. Today’s problem is liquidity. Everything else is tomorrow’s problem.
Re: Pat Keating (#117), 🙂
#116. The whole thing is so typical of real decisions – you’ve got to decide something, you don’t know who to trust. In a case like this, I think that you’d especially want the views of wily traders. You wouldn’t know whether they had an angle. But y’know, the situation is pretty dire and, in my opinion, most people are all trying to do the right thing and I think that Soros or Pickens, deliberately named from opposite spectra would as well. But it would just be one more piece advice.
I recieved this “tongue in cheek” email from a friend. It is in reference to the AIG bailout of $85BILLION which now seems like so much statistical white noise.
If only:
I’m against the $85,000,000,000.00 bailout of AIG.
Instead, I’m in favor of giving $85,000,000,000 to America in a We Deserve It Dividend.
To make the math simple, let’s assume there are 200,000,000 bonafide U.S. Citizens 18+.
Our population is about 301,000,000 +/- counting every man, woman and child. So 200,000,000 might be a fair stab at adults 18 and up..
So divide 200 million adults 18+ into $85 billion that equals $425,000.00.
My plan is to give $425,000 to every person 18+ as a We Deserve It Dividend.
Of course, it would NOT be tax free.
So let’s assume a tax rate of 30%.
Every individual 18+ has to pay $127,500.00 in taxes.
That sends $25,500,000,000 right back to Uncle Sam.
But it means that every adult 18+ has $297,500.00 in their pocket.
A husband and wife has $595,000.00.
What would you do with $297,500.00 to $595,000.00 in your family?
Pay off your mortgage – housing crisis solved.
Repay college loans – what a great boost to new grads
Put away money for college – it’ll be there
Save in a bank – create money to loan to entrepreneurs.
Buy a new car – create jobs
Invest in the market – capital drives growth
Pay for your parent’s medical insurance – health care improves
Enable Deadbeat Dads to come clean – or else
Remember this is for every adult U S Citizen 18+ including the folks who lost their jobs at Lehman Brothers and every other company that is cutting back. And of course, for those serving in our Armed Forces.
If we’re going to re-distribute wealth let’s really do it…instead of trickling out a puny $1000.00 ( “vote buy” ) economic incentive that is being proposed by one of our candidates for President.
If we’re going to do an $85 billion bailout, let’s bail out every adult U S Citizen 18+!
As for AIG – liquidate it.
Sell off its parts.
Let American General go back to being American General.
Sell off the real estate.
Let the private sector bargain hunters cut it up and clean it up.
Here’s my rationale. We deserve it and AIG doesn’t.
Sure it’s a crazy idea that can “never work.”
But can you imagine the Coast-To-Coast Block Party!
How do you spell Economic Boom?
I trust my fellow adult Americans to know how to use the $85 Billion
We Deserve It Dividend more than I do the geniuses at AIG or in Washington DC
And remember, The Birk plan only really costs $59.5 Billion because $25.5 Billion is returned instantly in taxes to Uncle Sam.
Ahhh…I feel so much better getting that off my chest.
Kindest personal regards,
Birk
T. J. Birkenmeier, A Creative Guy & Citizen of the Republic
The entire Freddie Mack, Fannie Mae mortgage market collapse was primarily (as in the biggest, not the only factor) a result of certain politicians creating a housing bubble through a system of social welfare (housing for people that could not afford to purchase), and rewarding their constituents; Franklin Raines, Jim Johnson, Jamie Gorlick to name a few. In other words what we have here is , I get votes through social welfare and campaign contributions, my buddies get rich, and the tax payers foot the bill.
Now let us see why this trillion dollar crisis we could take us down. The war in Iraq. Yes partially, but our economy was tanking before this financial collapse and not because of the war in Iraq. The cost of energy was sending us down. Again political actions in tandem with environmental activist have stopped virtually every effort to develop this nations natural resources.
Just think, about 200 million people are paying $75 to $100 more per month for gas then they did two or three years ago. That is about 15 billion each and every month!!! Add to this the cost of everything else, as all things are to some degree dependent on the cost of energy.
Boy was I off. I just goggled US gasoline use. 1.5 trillion gallons a year. That factor alone at $2.00 less per gallon would be 3 trillion dollars available to help face this crisis.
If we had a reasonable energy policy we would have very low inflation, high employment, the ability to survive this financial disaster, and be able to afford the development of clean energy and fossil fuel alternatives.
Oh, and who are the politicians that supported Fannie Mae and Freddie Mac, and also did all possible to prevent the development of US energy resources?? Find them if you wish to cast blame.
Steve (#118)
“most people are all trying to do the right thing and I think that Soros or Pickens, deliberately named from opposite spectra would as well.”
And here we differ greatly. I don’t believe any of them is trying to do “the right thing”.
Jim
The problem with the “Birk” plan is that the math is off by three decimal places…making it $425/pp.
“Other than that, Mrs. Lincoln, how’d you like the play?”
Jim
#122
Three zeroes, that’s nothing…
Yeah, Birk does seem sort of creative, doesn’t he? 😉
Mark
Steve, I would suggest you find an alternative to CNN. CNN is an extension of the Democratic party. The only time CNN will not shade the truth to help a Democrat is when they have an opportunity to help a Democratic farther to the left. You simply can not get accurate or meaningful information from CNN.
Also, beware of Soros. I would bet Soros has probably figured out how to go short in this whole mess and is one of many who are presently making a killing by helping destroy companies that are trapped between ‘mark-to-market’ accounting regulations and capitalization regulations. At this point, the good idea of ‘mark-to-market’ is being enforced as a suicide pact.
Finally, you should know that many of the people whom you are choosing not respect because they are trapped in this situation were forced into their present position by the actions of the U.S. Government. It is unwise to completely discount their opinion without understanding the context. There is often a wisdom brought on by pain and experience that one can benefit from if one is willing to listen.
Steve: I aw Roy Blunt on CNN. He’s not a Democrat. Soros might very well have figured out how to make money out of this. But I don’t understand why people wouldn’t want to hear what he said. He was one of 4-5 names that I mentioned, the others being people like Buffett, Pickens, Welch. And his advice might be no good. In a crisis like this, I’d want to know what smart experienced people thought and not be blinded by past animosity. And who am I not respecting here? And whose opinion am I discounting? It’s such a mess that you have to listen to everybody and even then you’re going to be guessing as to what to do.
Steve I am sorry, I am learning from you at the rate I can, but I would not trust George Soros for a second. As far as the US is concerned he is “not a friend”.
I like your idea of going to some sucessfull bankers that are doing fine through this and have a deep understanding of our finacial system. We have to capitalize the market, and right now banks do not trust each other.
There is no reason well educated and sucessful bankers making two or three hundred thousand dollars per year are not as capable as the guys making millions.
Primarily the must be deeply honest and trustworthy, as well as well educated.
Sorry I got so long winded at comment #120, but is this accurate…
I just goggled US gasoline use. 1.5 trillion gallons a year. That factor alone at $2.00 less per gallon would be 3 trillion dollars available to help face this crisis.
Re: David (#120),
The plan is to wave hands, scream the sky is falling unless you agree to a massive bailout with minimal debate, and turn over $700 billion.
And to evidence the lack of liquidity the Fed over the last week or so has decreased liquidity by means of its own power. I kid you not.
The rich get richer, the poor get poorer and everyone pats themselves on the back saying how they “saved” us all. Sigh… I can see it now, the same guys that caused this mess will all get bonuses, or more contributions to their campaign warchests, while telling us how noble they were.
Mark
Steve: I don’t see anyone patting themselves on the back right now. The people involved look to me like their nerves are on edge and that this is the last thing that they want to do. But again, can people try to avoid backbiting on this and talk about what should be done or how you would go about getting advice on how to deal with it.
Re: Mark T. (#131),
I hope there will be hell to pay for the same old same old crowd. There will be a return to common sense, old school personal investing. People that stuck to reasonable debt limits and savings will be fine. Insomniacs that want to get rich overnight with zero down flipping and borrowing 125% of the value of their assets for that “guaranteed return on investment” will get cleansed from the financial gene pool. School of Hard Knocks.
Sadly, this financial crisis hit me personally yesterday.
Our company needed a bank loan to pay our employees until the government contracts were finalized next year. Because of this financial crisis, we could not get the money.
Yesterday, our company shutdown and closed it’s doors. I just lost a $70,000 per year job, and do not have a clue what will happen next.
Yup, this has become personal!
Steve: Good luck. This is exactly the sort of thing that people in the room are worrying about. My impression is that many readers here are talking about fine principles, but it’s a mess and can easily spiral out of control.
Re: Steve Huntwork (#133),
Sorry to hear that. In 1989 I was promote to vice president of a small company. Just in time to withhold all payments to myself and the owner for two months, explain to the employees why pay checks would be late, dig into my own pocket to help a few employees make urgent payments and unfortunately lay some people off. It sucks.
Re: Steve Huntwork (#133),
Steve, good luck to you
Re: Steve Huntwork (#133),
But they had a guaranteed US Govt contract in the pipeline? Keep an open mind if they are telling you the crisp truth.
Anyway, the crisis is misunderstood. Yes, defaults are increasing a little with a declining economy. Yes, sub-prime loans are defaulting, but only a little faster than non-sub-prime loans. Reading the press and right wing pundits hinting blame on blacks one would think all these sub-prime loans are defaulting. Not true.
The major forcer of “crisis” here is the wholesale decline of housing real property prices at nearly all places in the USA, including the vast majority under no threat of default. Most of mortgages are bundled and packaged as mortgaged backed securities. The security of these securities, so to say, are the value of the homes bundled into them. Housing prices go down, so do the value of the related derivatives.
Hint: the government officials are very coy about what they are buying for the public. When Bush says words like “The taxpayer will eventually profit because we will sell these instruments in a few years when the market normalizes” what he is communicating is that the crisis has less to do with defaulted loans and much more about the value of the real property connected to the “toxic paper” he wants to taxpayers to buy. Officials are coy about this because they know it is “faith based economics.”
Prices unlikely will adequately return to salvage the toxic paper. The recent mortgages were overvalued even at the market current to their issuance, for crooked reasons and not. In the big picture, American housing prices inflated in response to the Bush income tax cuts. Housing demand is relatively inelastic, that infusion of money to homebuyers allowed homeowners to demand more. Same thing happened after the Reagan income tax cuts. There isn’t going to be another round of big income tax cuts.
jim (#134)
After awhile, you stop wretching even if you keep watching, hence the old standard “Comfortably Numb”.
One of the things that’s most distressing for people that I talk with regarding this and many other issues, is that the political system hasn’t kept up with technology.
Let’s say that %80 of the population was against this bailout.
So what? Is there anything you, as an individual, can do to stop it? No. You can write your political leaders, which has been shown to be completely ineffective, so it won’t accomplish anything.
The point is there is nothing that taxpayers in this country can do to prevent this, period.
We have the technology to “vote” on important issues, and vote on them outside of normal election dates, but we don’t, becase we can’t adapt? We can’t produce a perfect system?
It’s amazing. We can analyze, but we can’t do a thing about it.
Jim
Steve: Again, I wish people would limit their comments to things that would be useful if you were a staffer sitting in the 2nd row at the meeting and talking to McCain or Obama. If any staffer started talking about generalities, I’d fire him. In our own way, let’s stay constructive here and not talk generalities.
Steve asks: “I take it that Paulson would count as someone who advised Bush. So surely he should count. Isn’t Dodd just selling Paulson’s plan? Or have I misunderstood something here?”
Yes, Paulson is one of those advising Bush. But Bush was making these warnings long before Paulson joined the administration. (My first post in comment 29 links to a White House press release, listing the Bush warnings. The first came with Bush’s first budget, in 2001.
As for your second question, I have followed my own advice and not paid much attention to Senator Dodd, so I am afraid that I can’t tell you whether Dodd is just passing along Paulson’s advice.
Oh, and just for fun, you might want to look at the Andy Kessler piece in the Wall Street Journal. He claims that the US taxpayer will make piles of money from Paulson’s plan. (I don’t know enough about the problem loans to evaluate his arguments.)
One thing to remember; just because you seek out the advice of person A, F, M, and P on the situation as part of a gathering of opinions and reasoning on a certain issue doesn’t mean the same weight (or any weight) will be assigned to those opinionis, or that the reasoning will be accepted past a certain percent if at all.
In situations like this, you want a variety of viewpoints, and then in the synthesis, taking into account the biases, the other opinions and such of one person or another, you can make a rational determination using as much data and information as possible.
You can’t just go ask person Z or J alone just because they either match your own outlook or because they weren’t involved (as far as you know).
I totally agree with Steve on this one; you ask the experts, and then decide how much you trust them. Or don’t trust them. This isn’t time to pick and choose based upon either the past or because of ideology.
Its really simple for the von Mises Austrian school. Easy credit encouraged all sorts of bad investments. Investors with the mental discipline to resist easy credit survive. The solution is to writedown, and writeoff bad investments ASAP. Take your hits and move on (from painful experience).
Maybe you can apply the Mannomatic or RegEM to it, Sam, and get a “global solution” to the crisis? Badumpbump!
Mark
reminders: Taking Steve M’s note to heart: why isnt anyone talking about particulars of the bill. The only aspect of the bill that anyone has mentioned is the insistance to earmark 2 billion? dollars to a community group called acorn. Apparently these earmarks are one cause of what caused the delay in approval, but no one really knows. why all the secrecy about the bill?
if there is a financial system crisis, why dont the lawmakers just tell people about financial fixes which have been put forward?
in terms of liquidity world wide: there are over 7 trillion dollars in cash and “securities” floating around in sovereign wealth funds and hedge funds in the middle east and europe, and untold hundreds of billions in South east asia. these funds can purchase the entire float of the Nasdaq and vst portions of the US economy. And who knows what derivatives this money is tied to. I think stopping the further devaluing US assets is part of what is going on
Re: dsantis (#144),
Very, Very good question! and why all the rush? And why giving it to Paulsen, a man new to the public awareness? Why exactly 700 billion? why hasn’t there been a audit done on such an enormous amount to see if that is the amount really needed? where’s the common sense in this entire process? and why can they say disasters will happen if we don’t do this, but then at the same time say they don’t know if it will work? There is no sense, no consistency in that. How can they know disasters will happen but then not know if the amount will help? How can they know one thing but not the other?
What worries me (and others) is whether it’s gone from bad mortgages into a run on banks. I agree that hits are better taken sooner than later. Bnt the risk here is spread to valid institutions.
Re: Steve McIntyre (#145),
Well, we do have the FDIC*. That should prevent consumers from losing faith in their deposits. Although I just heard a story on NPR**, saying that the reason ~9% of Washington Mutual’s deposits were withdrawn in the last few weeks is that younger customers may not understand that deposits up to $100,000 are insured by the Federal Government.
Perhaps a swift advertising campaign is in order to keep people from running on the banks.
* Federal Deposit Insurance Corporation
** National Public Radio
The FDIC is the one really good response FDR had to the Great Depression. Banks were denied the ability to establish free market arrangements to prepare for bank runs, because “evil” trusts had to be put down at all costs. The Federal Reserve was given monopoly power to respond to crises in the banking system. When the bank runs started, the Fed sat by and watched – even though they had all the necessary resources and authority to prevent banks from going under. The Fed allowed one-third of the US money supply to disappear. FDR declared a banking holiday until banks could be triaged and deposits insured. One could certainly imagine better free market stability schemes than the FDIC, but it has done its job at a cost well below $700 billion. There’s no reason to believe it can’t continue to do that job – as long as depositors know it exists.
Re: jim edwards (#151),
The FDIC would soon run out of funds if a major default of US banks occurred. The idea is, of course, that by having this insurance that runs on banks are inhibited. Unfortunately if a major crisis did occur either the US taxpayer would have to anti-up big time or the confidence of the depositors in our banking system would go to zero and not for a short period of time. People have come to depend on the FDIC factor and plan their finances around it.
FDIC is not that different than other government activities such as Fannie Mae and Freddie Mac. They all look good until a sufficiently large down turn in the economy shows all their warts.
Re: Kenneth Fritsch (#157),
Agreed. The FDIC is like having air marshalls on some of the planes. The air marshalls don’t exist to keep us safe. They exist to make us feel safe enough to keep flying, and to deter crazies from trying to hijack a plane. If the banks are sound, we don’t need the FDIC [as long as depositors believe in FDIC…]; if the banks are unsound, it’s impossible for FDIC or any other scheme to patch the hole.
The same is true of police forces during a major disaster or riot, or any other government scheme to protect the public – it can’t work when the s*** really hits the fan.
Re: Kenneth Fritsch (#158),
The FDIC does not have the money to cover all insured deposits. Money will be printed to pay FDIC commitments. Inflation will occur from this new printed money. This is not good.
The solutions to this problem are basic–stop spending money, stop making new debt, pay off all debt you do have. No new debt–this is why I don’t want a bail out in any form!
There is no pretty way out, no “convenience” anywhere in sight for an American people who are in a convenience homeostasis. The next few years are going to be ugly for some people. They will be crashing down to earth. The deeper they went in to debt over the years (which includes the Federal Gov.) the harder their crash will be. There will be many tears for some. America is now required to live within it’s means. No more going in to debt to have more conveniences and big screen tv’s. Starbucks and Jomba Juice will be sacrificed (They probably shouldn’t have existed in the first place). Americans are spoiled brats (btw, I’m an American, I’m not standing on the outside criticizing what I see). We’re all going to have to grow up now.
Also, I’d say there should be a Constitutional amendment that requires the government to have a balanced budget.
America has run headlong in to debt for years now, many years. The piper has come calling.
Re: GeneII (#198),
No insurer has the money to pay off all claims. In the business world, that is why reinsurance companies exist. They spread the risk amongst a number of insurers so that no one insurer will fail and take down a bunch of businesses with it. With FDIC, there’s not possibly enough money to cover a major bank insolvency, let alone all banks. And, the risk is solely borne by the government, aka the taxpayers.
As to whether there should be a bailout, my gust instinct is no, but it depends on the terms. This article is a good review of how a combination of the Paulson and Cantor plans could be a win-win for the taxpayers. And I agree with the points he makes about how if the Fed makes money via the payoff of the loans and/or selling the debt later if the value goes up, then the profits can be used to pay down the national debt.
There’s still a long way to go on the bill though. So far, the democrats have refused to remove the 20% of the profit going to ACORN provision.
There are no runs on the banks in the US. The deposits are safe and insured
Major US companies like GE (with AAA rating) or Caterpillar finance their day-to-day business like paying salary and rent with borrwing for 2 or 3 months. I’m sure they will meet difficulties finding funds in commercial papers and have to look for different means of funding.
IN the meantime the US is pumping another 25 Billion in the heavy lossing US automotive industry, what a waste of money.
There are no runs on the banks in the US. The deposits are safe and insured.
Indeed the conservative Republican proposal is the for the US government to insure all mortgages. This isn’t directly on point to a deposit tun but it shows the depth that is possible in the insurance.
But if an institution is ‘valid’ only in the context of a credit-based bubble, then its also a bad investment. WAMU was a bank and a valid institution, but they would lend money to anybody. If you look at businesses through the filter that Warren Buffet does say, you look at dividend yield, etc, real profits, a lot of these institutions are not ‘valid’ in an economy not based on expanding credit (AmEx say).
The credit markets are frozen because of bad debt; something similar but not identical to what happened with the S&L crisis in the 80’s. There are many elegant and sophisitcated ways of dealing with bad debt, but when markets are frozen and a catastrophe possibly looms the only prudent course is the direct one; remove the bad debt, make a market for it and slowly sell it off as was done with the S&Ls. The free market will do it itself eventually but the pain will probably be exquisite.
On Dodd, it doesn’t bother me as much that he was wrong or even bullheaded on easy money and lax credit standards as that he accepted a sweetheart loan from the largest mortgage company in the US and still apparently sees no conflict in it.
A Senator can’t accept a pair of tin cufflinks from a lobbyist for Florsheim shoes, but he can take out $580,000 worth of loans at a special rate from the leading company in the industry he is supposed to be writing laws about?
Steve: That doesn’t make sense to me either. But that’s tomorrow’s problem.
Regarding history of this crisis – see the series that Investors Business Daily (currently at part four) at
http://www.ibdeditorials.com/series11.aspx
For a blog that examines the global warming agenda and how the AGW folks have pushed it using mostly just fear and some science. But it’s still just fear. Trading on fear has made millionaires out of folks like Al Gore.
Consider the largest ever bank failure happened just this Thursday. JP Morgan bought Wash.Mut. and they stated they’ll write down about 30 billion out of 307 billion in assets. Unless the bailout passes then they’ll just sell the deflated assets to the Treasury and keep the 30 billion. A ten percent hit is “hurtful” but not a catastrophe except to the shareholders.
One should be very, very cautious of people that are dealing out fear.
After all, Paulson came from Goldman Sachs, as did Bush’s chief of staff Bolten, and a Goldman Sachs employee who’s a fundraiser for Obama did pass Obama the House Republican’s concerns and alternatives prior to yesterdays meeting. I’ll put on a liberal hat and float the conspiracy theory that it could be the former Goldman Sachs employees are fearful Goldman Sachs might be next up for sale.
Last point is be very concerned when Congress enacts anything to fix a crisis.
If I were president, it would seem to me that the American people could be your most valuable asset in solving this situation. Americans need help paying down their debt, so give it to them. Make any reduction in personal debt over this tax year and the next a straight deduction from taxes owed. It would be painful to the Federal budget, but jesus they overspend anyway, and I can’t imagine it being any worse than printing more T-bills to manufacture quick liquidity. Any thoughts on this idea?
Steve: Tomorrow’s problem. Nothing to do with what to do today.
Here’s an article that makes some sense to me. Roubini’s actually looked at economic crises in other countries – he finds that huge current account deficits financed abroad are a common cause. Makes sense to me. The huge trade deficits and hollowing out of the economy are surely a “root cause”. Same sort of diagnosis as Conrad Black.manufacturing enterprise work and so And one that I’ve worried about simply because it’s so hard to make an enterprise work.
Re: Steve McIntyre (#154),
I think Steve M that you are looking at the wrong metric here in searching for a root cause for the current US financial problem. I do not see how you would link the Fannie Mae and Freddie Mac problem to balance of payments.
The US consumers buy products/services from other nations and some of those nations buy significantly less from the US and therefore those nations must hold dollars that are not used to purchase US products/services. They can hold those dollars in their banks as reserves and not earn returns on them or invest them in US dollar based assets. These assets are varied but often they chose to purchase US debt that is either directly or indirectly (like Fannie Mae and Freddie Mac) backed by the US government. Those nations are very much as committed to our economy as we are to their purchasing our debt – it is not a one way street. Most of those nations have decided (probably erroneously) that their economies success is based on running a surplus balance of payments and take proactive government actions to keep their payments in surplus. In some cases the real losers in these situations have been those other nations’ consumers who have, in effect, subsidized the products bought by the US consumer.
Our nation’s economy has done better when we have had negative balance of payments and restricting free trade has always had negative repercussions.
#64, I am in violent agreement. Though, allow me to offer an even crisper quote from John Stuart Mill.
I believe that by far the best fix is to let those things that will crash, crash. The harsh judgment of the market is needed far more than the nagging and bailout of the regulator.
I believe Bush’s assertion that the tax payers will make money (btw I am Bush-defending neo-conservative in defense policy) is utter garbage on its face. The free market is VERY GOOD at finding money makers, and these toxic mortgages are NOT IT.
Steve: I love your site, thanks for the work you do.
Some good youtubes: Roubini, Kevin Phillips
I really hope the US economical Crisis can be solve as soon as possible because it will give the implications for the whole world economic situation. Some people say, the inflation may raise again.
Even these mortgage packages are money-makers, at the right price, if you can wait a few years. It’s the ability to wait (i.e., liquidity) that is the current problem.
The current US financial crisis is in fact closely related to one of the primary concerns of CA, namely due diligence.
For several years, it has been well known that many of the subprime mortgages that were bought up by the firms that are now in trouble classify as NINJA: No Income, No Job, no Assets. These mortgages were bundled by the GSE charter duopoly Fannie Mae and Freddy Mac, and by investment banks, into “Collateralized Mortgage Obligation” (CMOs) and resold to pension funds, and other financial institutions. Had the packagers or the investing institutions done the minimal “due diligence” that Steve reminds us is expected in the wildcat world of mining stocks, and which is woefully lacking in the “scientific” world of climate science, they would have at least spot-checked the underlying mortgages to see that the required paystubs and appraisals were all in order. And double-checked a few of those to make sure no fraud was involved.
Instead, they bought and resold them with no regard for their validity. The big mistake in the current crisis was not to close down Fannie and Freddie last July. Since their assets are almost (but not quite) as large as their liabilities, this would have required marking down their down by only a few percent, say to 90 cents on the dollar. Foreign central banks like China’s that were snookered by Treasury officials into buying this debt would take a hit, but ironically, a modicum of fiscal restraint on the part of the US would probably help their portfolios in the long run, by restoring the foreign exchange value of the dollar.
It’s asking too much of Steve to start a new blog, Mortgage Audit, but seriously, a little mortgage auditing up front would have prevented this whole mess in the first place.
Burning Down The House: What Caused Our Economic Crisis?
The root cause of this crisis is the intervention of Congress into the mortgage and credit markets. For a decade Congress and the Executive created a situation in which lenders could be legally exposed to criminal litigation if it could be proven that they “discriminated” against minorities. For a decade lenders lowered credit and up front cash standards needed to buy a home. When Greenspan lowered short term interest rates to 1% in 2003 he set up the perfect storm for the growth of a huge real estate bubble. Fannie Mae and Wall St used the high risk mortgage securities tools and derivitives to not only finance sub prime mortgages, but used these tools to leverage credit.
The problem was that the mortgage securities gained incrediable value and were used to borrow on a massive scale. From 2004-2006 over $3 trillion of consumption were financed by derivitives and high risk mortgage securities. This consumption is still unpaid. Most of the loses due to this consumption still hasn’t been tallied. The $700 billion doesn’t even come close to cover these loses. The only way the ledgers can be “cleansed” of these loses is for a large market correction (maybe as high as 25%). This is what Paulson is attempting to avoid. Whether he can pull this rabbit from his hat is highly doubtfull.
There is also the constitutional question. Can Congress delegate to the Executive the powers to nationalize our banking system? And why should we trust Barney Frank and Christopher Dodd (two of the biggest cheerleaders of Fannie and Freddie) with $700 billion of taxpayers money. It has only been 2 days and auditors already found that earmarks were slipped into Bail-out bill.
Besides the problems cited above, foreign capital will flee US capital markets until Congress can reform not only the capital markets, but also elminate the Beltway-Wall St cronyism that got us into this problem to begin with. Based only just last months problems with Fannie/Freddie it is surprising that Congress hasn’t announced the closing of these 2 GESs and the selling of thier assets. Barney Frank just 2 weeks ago declared there is no way this is going to happen. These two entities currently hold $5 trillion of mortgages – over $1 trillion are high risk. Foreign investors will flee to safer havens such as the Euro, oil, gold, and commodities.
One idea I’ve had WRT executive compensation would be to alter the rules for stock and options grants such that they can’t be converted for some significant time. Make the CEO look five or ten years down the road rather than to the end of the quarter or the fiscal year. Some form of this would still offer the possibility of massive reward to attract the sorts of people these companies want but lessen the desire for temporary soaring figures based on fake numbers.
Steve M, I think you will not hear any answers here to the current crisis as most posting here are probably honest enough to admit that do not have any answers or that their answers would not pass political muster in Washigton – so they can only offer generalities. The staffers of the Washington policticians are probably being tasked with finding political cover for their bosses.
You seem to be making the proposition that if the politicians simply could hear all the “good” arguments that a rational choice would follow. Most politicians have made up their minds what they want in the bill and their main problems are how they can market it to their constituencies.
What might be an interesting and educational thread would be a detailed audit of the finished bill.
If $700 billion is needed for the bailout, where is that missing $700 billion sitting now? Surely, the organisations needing the bailout do not have it stashed away in Swiss banks. By my distant thoughts, it’s probably distributed among numerous citizens who made housing transactions, and so there is an element of logic in using taxes to balance the books again. I don’t see this as interference in a free market so much as causing the market to go back a step or two and then following a more desirable path.
Housing sales have increased 2 months running in San Diego.
http://rereport.com/sdc/ar_mo_ncc.html
You can usually trust congress to start doing something at the point
when the market has already turned.
#164. In penny stocks, promoter stock is escrowed and is only released over time contingently. Too bad the Wall St bonuses weren’t escrowed the same way.
In tonight’s debate, McCain made the mistake of blaming the SEC and its current chairman for the current financial mess. In fact, a large part of the problem has been that Fannie Mae and Freddie Mac, being “Government Sponsored Enteprises”, have been exempt from SEC oversight. As a result, they have been able to get away with accounting irregularities — like being years behind on issuing a balance sheet — that would have put them behind bars, had they been SEC regulated.
If SEC oversight is an unreasonable burden, then all firms should be exempted from it. But if it is a necessary evil, then there was no excuse for exempting these two mortgage intermediaries from it.
Re: Hu McCulloch (#171),
But Fannie and Freddie have their own regulator: The Office of Federal Housing Enterprise Oversight. These are not “unregulated” entities, and they are certainly not entities created by a free market.
Re: Hu McCulloch (#171), Accounting irregularity was legislated into Fannie and Freddie. They were required to issue bad loans, pretty irregular accounting in my opinion. Helping the poor buy housing is a great idea if it doesn’t break the bank or help create a housing bubble. The community reinvestment act created sub prime loans.
Here is a quote for wiki:”Part of the increase in home loans was due to increased efficiency and the genesis of lenders, like Countrywide, that do not mitigate loan risk with savings deposits as do traditional banks using the new subprime authorization”
Re: captdallas2 (#188),
Huh. Mitigating loan risk means reducing the risk that the loan will go bad.
I assume that this quote is saying that Countrywide would lend against a mortgage, then immediately sell the loan on to Freddy or Fanny or whoever, rather than raise its own funds fromn depositors and hold the loan on its own books. This does not mitigate any loan risk: the loan can still go bad. More to the point, in a panic, people can withdraw their deposits.
(The mechanism by which bank runs happen is that banks borrow money short-term and lend it long-term. Once a panic starts, for whatever reason, the banks cannot continue with their short-term borrowing, but cannot call in their long term lending.)
#163 and others. From my reading into this, I’m dubious that the “root cause” of a crisis of this magnitude is any single thing. Maybe I’ll think differently in the morning – but the most persuasive analyses for me have been Roubini and Conrad Black. Some posters said that the U.S. needs to listen to the experience of other countries; that’s what Roubini’s been studying. I’m persuaded that the elephant in the room is the current account deficit, leading to under-investment in manufacturing and over-investment in housing. All kinds of poor policies over a more than one generation are probably too blame. And it’s going to take a long time to reverse.
The poor disclosure policies and propping up of the FMs have papered over the problem, but not any more. One point here that reminds me of Enron and nearly 100% of people misunderstand the Enron failure. I don’t think that the limited partnership frauds at Enron had very much to do with the failure IMO the failure resulted from lousy investments, not the LP frauds. The LP frauds served to cover up the failure after it should have been discovered and delay the reporting of it (and cause good money to be thrown after bad.) I’m not saying that the analogy transposes exactly, but I really suspect that the “root” problems go beyond the FMs to current account, but the FMs have exacerbated the mess, that’s for sure.
Roubini seems to be in favor of a bailout as a band-aid. All in all, he seems to make as much sense as anyone.But maybe it will seem different tomorrow. I hope that the folks in Washington get a good night’s sleep. They’ll need it.
Re: Steve McIntyre (#172),
Steve M, while I must admire your unemotional approach to finding a persuasive analyzer of the US finance problem, I hope you realize that US politicians might not be likely persuaded to quote an analyzer who is spending time in prison for financial related fraud – at least not for this problem.
I would guess the next question must be why select these two analyzers of the situation when I would estimate there are hundreds of different ones available.
Steve: Well, I am pretty unemotional about these things. Black’s a pretty unique person. How many businessmen who manage small empires write history books of merit in their spare time. Not just vanity books, but books of insight and substance. In this case, he’s expressing views which tend to agree with my own but which I haven’t expressed, but which attract me and make sense to me when I see them in print.
As to who to trust – that was the question at the start of the thread. Place yourself in a politician’s shoes and try to figure out who to trust for advice. Not very easy, that’s for sure. Once people are in this sort of predicament, it’s really hard to make good decisions; all you can hope for is that they don’t make the worst possible choices. But the most likely choices are likely to be highly “inefficient” in the sense that avoiding the worst possible situation may well waste what in normal times is a lot of money.
Luis Dias, #45, writes,
Not clear — even “new Keynesians” agree that interest rate targetting can stabilize the price level only if the Fed raises rates more than 1 for 1 with inflation. CPI-U inflation over the past 12 months is now running 5.3%, yet the Bernanke FOMC has held the Federal Funds rate at 2% for half a year now, so that the real Fed Funds rate is below -3%. The “Taylor Rule” (with a 1.5:1 feedback) would call for a funds rate of almost 9%.
Unless the Bernanke Fed has the fortitude to pull off a Volcker-style credit crunch now, there is no reason to rule out a Weimar-style hyperinflation, with inflation accelerating and real rates going ever more negative.
Another way of looking at it is that the “monetary Laffer curve” (see my 1982 book Money and Inflation) puts an upper bound on the amount of seigniorage that can be raised by inflationary finance. If the Fed tries to buy up all the bad mortgages corrupt loan officers and incompetent investment bankers can generate, this limit will surely be exceeded.
#171 Sounds like the Austrian school. Investment in the means of production, manufacturing, is only real indication of economic health. Too much investment in non-productive investment by poorly regulated banking systems plagued by excessive borrowing and reckless lending. I must read more of your stuff Hu!
Re #160,
Make that “… marking down their debt …”
There’s a reason there wasn’t a panic from 1936 until this year, and it was Glass-Steagall. Instead of killing it, it should have been strengthened and expanded to the non-bank banks.
This is a manufactured crisis, created by free market ideologues who (possibly) believe what they say but do not understand what they do.
Up to 1929, there was a panic every 6 to 20 years; then no panics, and now a panic again. Even if correlation is not causation, some things are suspicious, like finding a trout in the milk.
I am not sure that any corrective measures taken now will work. The New Deal answer — the one response we know from history can work — is lender-of-last resort. FDR didn’t bail out any investment banks.
As far as I can see, nobody is proposing a lender-of-last resort solution, just various permutations of a bailout.
Read Kindelberger, ‘Manias, Panics and Crashes’ to see how we got here.
Fannie Mac and Freddie Mae are distractions. The cause is not them, and not falling house prices. The cause is unrestricted financial markets.
Re: Harry Eagar (#176),
Harry, your socialist ideology is showing. See http://www.capmag.com/article.asp?ID=5274 and http://www.capmag.com/article.asp?ID=5275 for starters.
Re: Harry Eagar (#176),
The “New Deal” didn’t work. In 1939, after 7 years of “New Deal”, the unemployment rate in the U.S. still stood at 20%, stock prices and business profits were still 60% below the levels they had been in 1929 and economic output was still down over 50%.
Real economic recovery did not begin until after Roosevelt’s death, when Republicans regained control of the Congress and repealed most of the “New Deal”. For the facts about how government caused — and then tragically prolonged — the Great Depression, see the four part series by Richard Salsman in the June, July, August 2004 and January 2005 issues of “The Intellectual Activist”.
“Unrestricted” financial markets? The only thing that is unrestricted has been government’s efforts to regulate those markets. As Harry Binswanger pointed out, the whole system in place now was crafted based on that failed “New Deal”-era philosophy (with continual noose-tightening since) precisely to avoid what has now happened!
The Federal Reserve was created in 1913 to protect us from panics and prevent recessions and depressions — and has failed to do so. The Federal Depositors Insurance Corporation was created so that we wouldn’t have to worry about bank failures — but here we are worried sick about bank failures. The Securities and Exchange Commission was created to protect us from shady or fraudulent investments — but here we are with billions of dollars of investments turning out to be very shady indeed. Freddie Mac and Fannie Mae were created to protect us from greedy bankers that wouldn’t give us loans simply because some of us didn’t deserve them — and yet here we are facing a credit crunch of enormous magnitude.
What you are seeing is a failure of the regulated market. The best short description came from Yaron Brook:
“The unfree market has failed. It’s time for a truly free market”.
Steve: I am profoundly uninterested in hosting a debate on the generalized merits of “truly free” versus regulation. No more of this here please on either side.
When a house of cards begins to collapse there is almost nothing that can be saved. What needs to happen is a realistic line needs to be drawn: these here are the bureaucracies that are worth saving. Hopefully there is some realism in the room to temper the fantasies of the defenders of the corporate nanny state. Individual people should be the primary concern, not bureaucracies. The public should not be led to play the “last fool standing”. To the defenders of the corporate nanny state this probably sounds like “do nothing”. But the greedy, the malicious, the incompetent, and the corrupt need to be held accountable for their sins. That would be doing something alright.
This whole bailout business seems to me, is the last frontier in the destruction of personal responsibility. For decades smokers have been suing tobacco companies for all the health damages that the smokers have inflicted on themselves, for a while it looked like fat people where going to start suing fast food and junk food companies. And now the wealthiest men (and women) in the world, are getting the government to bail out their companies, when their own greed, incompetence or failure of due diligence, landed their investments in bankruptcy. As much as they enjoyed the rewards during the good times, those captains of industry should also suffer the consequences of failure in bad times.
If the government is going to own all these bad loans, will the government then be foreclosing on its own people? or should this be a bail out of main street, instead of wall street… and all the mortgages reset to fair terms? That may help the economy recover quicker – stop the flow of houses into foreclosure, and stabilize the real estate market.
RE Michael Smith, #182,
Yes, they have their own regulator, but as often happens, one that is “captive” to the interests of the regulatees. My point was that McCain shouldn’t blame the SEC for what is largely due to FHEO’s shortcomings. SEC, unlike FHEO, insists on annoying paperwork like annual financial statements that help protect investors against Ponzi funds. If this is unreasonable, all firms should be exempted from SEC oversight. If not, there was no excuse for Congress exempting F&F.
Even if it’s too late to protect the taxpayers from liability for F&F’s existing debt, it is not too late to lock the barn door before all the horses escape, by making it clear that only existing F&F debt has this protection, and that lenders are on their own with any future F&F bonds.
Future growth in the mortgage industry will then have to come from private firms. F&F, unlike the S&L’s that failed in droves during the 80’s, at least did not attempt to finance 30-year fixed rate mortgages with 0-maturity savings accounts, but instead were able to match their asset and liability maturities by selecting the maturity of their bonds. There is no reason private finance companies could not do the same thing, though of course they would have to have a higher capital/asset ratio than F&F did, in order to protect investors from losses and make their bonds attractive.
I assume that you can’t imbed images in the comments, so I will just point to this cartoon which seems pretty appropriate. Democrats and Republicans both have their roles in this, but this is first and foremost a Wall St.-induced crisis.
http://www.cagle.com/news/WallStreetCollapse/images/davies.gif
Steve,
I think it’s correct to analyze various facts/opinions regarding “root cause”, as without that, you can’t possibly hope to have a solution. In that light, this reference is not meant as a “bashing” of anyone..
snip
Jim
Steve: This thread is already over the edge of blog policy. I’ve decided that I don’t want to link to anything that tries to give an edge in this thing to Obama or McCain or else it will overwhelm the blog. Personally, I think that either one of them are going to do the best they can in the present circumstances, regardless of anything that they might or might not done or said in the past. So we’re not going to get into that sort of thing, OK. My own view is increasingly that, like 9-11, there’s enough blame to go around for both parties. It’s a big problem that’s built up over a generation and it will need a bipartisan solution, not just in the crisis, whatever it is but in determining where to go from here.
In terms of truth in lending legislation, it seems tremendously dishonest to have called these things “investment banks”, when they were neither.
Roubini, for example, consistently calls them “broker-dealers”, which is a term formerly used in Canada for penny stock bucket shops. The names were all blue chip as well. A simple question – did they call themselves “investment banks” in their own literature or is that a term that others applied to them.
In the aftermath of this thing, I presume that people will be parsing through their 10Ks for misrepresentations. That’s what I’d be doing. For anyone who wants or expects some sort of redress from the bonus-baby executives, that’s where it will be found, if anywhere. It’s actually a sort of project that I’d probably be pretty good at, since you need a bit of an eye to wade through the voluminous documents to see if they’ve moved a pea under a thimble anywhere.
Opponents may start to understand my approach to climate articles a bit better. I take representations in journal articles at face value, not as mere puffs – think verification r2, robustness to presence/absence of all dendro proxies. So while I’m criticized in some quarters for being too “legalistic” in my reading of scientific documents, I think that that sort of approach may seem a bit more valid in the wake of the present meltdown.
Re: Steve McIntyre (#186),
Steve, this is terminology left over from the Glass-Steagal Act of the early 1930s, which established the idea of commercial banks and investment banks.
Pontificate on …
In the go-go years of the 1920s, America pretty much followed the European model of global banks, i.e., banks that could go into any area of financial business that they chose to, including stock underwriting.
When the crash came, banks that had been underwriting issuance of stocks and shares were left with large amounts of unsold inventory which was plummeting in value, along with depositors in a panic and withdrawing their money. So a lot of major banks went bust, leading to contagion with smaller banks, and so on.
The Glass-Steagal Act required that a bank should be either a commercial bank or an investment bank.
A commercial bank was allowed to take deposits, and was expected to make loans, and was not allowed to underwrite securities.
An investment bank was allowed to underwrite securities, but was not allowed to take deposits.
Commercial banking was all about getting deposits and making loans, and would tend to be relatively boring and stable. Investment banking would be more exciting: more profitable in boom times, and prone to make huge losses in busts. In essence, the difference between debt and equity.
Incidentally, you mention broker-dealers: I guess you are referring to firms that only deal in the secondary markets, and which can be quite small companies. The key point for Glass-Steagal purposes is primary markets, i.e., underwriting a major new issue of shares or bonds, which requires a significant capital base.
It’s also worth noting that, throughout the 20th century, bond markets grew at the expense of loan markets. Bonds still count as securities, so commercial banks could not underwrite them, so they were continually losing a large part of their natural debt business to the investment banks.
Of course, whenever there was a boom, all the big commercial banks would get annoyed that the investment banks were making so much money. (They would tend to conveniently ignore what happened in busts.) So for a long time (probably since the 1940s, I’d guess) the commercial banks were frantically lobbying for the repeal of Glass-Steagal, so they could get back into underwriting securities. They eventually succeeded in the mid-90s.
Even prior to this point, the term investment banking tended to be more glamorous, and lots of commercial bankers would like to call themselves investment bankers, at least in an informal context.
Pontificate off…
So, in answer to your question, “investment bank” is a term which had a specific meaning in law until quite recently, but I think no longer has any specific meaning. Nonetheless, companies which have been investment banks for generations will probably still refer to themselves as such.
To call a company like Lehman or Morgan Stanley a “broker-dealer” is also unfair: they are/were a lot more than that.
Re: fFreddy (#213),
Am I being pollyanna to assert that they should have strictest of controls anyway, though they are annoyed at not being in that game, maybe even as far as making it a Constitutional Amendment that they must remain, as you put it
so that when peple put their money there it stays only in “A commercial bank was allowed to take deposits, and was expected to make loans, and was not allowed to underwrite securities”?
Steve (#186),
“For anyone who wants or expects some sort of redress from the bonus-baby executives, that’s where it will be found, if anywhere.”
There will be no redress, at least not from those you mention.
And to be perfectly clear, I really don’t care if WaMu put forth a deal for their new CEO that allowed him to walk out the door with $20mil for a total of 17 days work, UNLESS MY TAXES are used to bail the company out. Companies are and should be free to compensate their employees in what ever way they see fit. I believe this is another reason that so many people are against this.
Jim
Steve: If I were a shareholder in Lehman Bros who watched my shares go from $60 to $0, I’d sure be wondering why the Chief Executive got $20 million last year. Since you were not a shareholder, maybe you don’t care, but there will be people who do, quite aside from the crisis.
John and Michael, if there were any restraints on lenders recently, I’d like to know what they were. Please advise.
This mess is a failure of unrestrained financial markets. Nothing more and not only predictable but predicted.
The idea that the New Deal caused the Greatness of the Depression is counterfactual.
It ain’t easy to reflate. We are not (yet) in a position to need reflation, so your objections are beside the point.
Re: Harry Eagar (#189),
That depends on what you mean by “unrestrained”. If you mean “unregulated”, then no, the lenders weren’t “unregulated”. The biggest players in this mess — Freddie and Fannie — were under the regulation of the Office of Federal Housing Enterprise Oversight. (Not the SEC, as Hu correctly pointed out, but regulated nonetheless.)
However, these lenders were “unrestrained” in the sense that as “government sponsored entities”, they were largely perceived to have the full backing of the Federal Reserve, that they were “too big to fail”, hence they able to attract huge amounts of investment. So for a number of years, at least, they were certainly “unrestrained” relative to purely private enterprises that do, indeed, face the possibility of bankruptcy if they make a sufficient number of bad loans.
And that’s the fundamental “restraint” that operates on lenders in a free market: the prospect of bankruptcy if too many bad loans are made. But with fiat money and an agency — the Federal Reserve — with the power to create credit and money out of thin air, government thinks it doesn’t have to face that constraint. It created Fannie and Freddie, and passed the Community Reinvestment Act, to induce lenders to make RISKIER LOANS than they otherwise would have made. And they got what they wanted, in spades.
Thus we can see that the root cause of “unrestrained finances” is government-controlled fiat money managed by those who think they can command “better” economic results than the free market. They have failed time and time again.
But even the government can’t get something for nothing. The losses from these bad loans are real. The transactions took place, and the money changed hands, money that will never come back to the lenders. This whole demand for a bailout is a demand for one more transaction: from the taxpayer’s pockets to those lenders.
As far as the Great Depression is concerned, I gave you the economic data after 7 years of “New Deal”. You can’t simply dismiss it by claiming it to be “counterfactual”.
Just out of interest, can someone give me a brief explanation of how a bank can have “funding problems” at all? For example, Britain’s HBOS had around £270b in deposits (customer deposits) but had lent out over £450b, leaving it with a “funding gap” of over £180b. It seemed to me when I read this, that HBOS must have borrowed the £180b from the money markets in order to lend it to its customers, but why then should it need to raise more cash at all?
If I borrow from A and lend to B, I collect payments from B and pay back A, keeping the difference between the interest rates. The only thing I can think of is if A demands a higher interest rate than I can legally charge B, which would leave me with something of a problem. To say that HBOS is adrift by £180b is just wrong though, surely?
Re: Robinson (#190),
A lot of that £180bn will be in short-term CPs or CDs, which generally have a maturity of up to 3 months or so. If not enough investors are willing to roll it over – i.e., reinvest – when it falls due, then a gap develops. Also, if enough depositors get antsy, then significant parts of the £270b indeposits could start to be withdrawn very quickly.
Incidentally, if you are quoting what you read in a newspaper or saw on BBC, the odds are that the journalist didn’t really know what he was talking about, which is often a source of further confusion…
Re: Robinson (#190),
The problem is the $270B in customer deposits. If they can be readily withdrawn and the $450B is tied up for a year or more, then a run on the bank by the depositors can reduce that $270B quickly and the gap is a lot more than $180B.
(#186) Steve,
Then those people made a very poor investment decision, and likely didn’t do Due Dilig prior to making their investment in Lehman.
Jim
Steve: That’s were disclosure obligations come in. Did Lehman Bros properly disclose their risks? 10Ks are there to protect investors. If there is a misrepresentation or non-disclosure in the 10K, then the buyer has a legal claim. Lehman Bros probably have fine print that is not particularly clear but which would afford them some sort of legal protection. If you browse through the Lehman 10K (I have), you’d be hard-pressed to come away with a clear understanding that this firm was up to their necks in crappy mortgage paper. So I don’t think that the disclosure was adequate in the sense that an investor could be make a properly informed decision. I’m not saying that the investors are innocent. But full, true and plain disclosure is very important, just as due diligence is.
Plus there are forms of due diligence that an investor can reasonably expect regulatory agencies to carry out. Investors can expect regulators to enforce regulations.
Unless the real estate market corrects the $700 billion will only delay the problem.(at least till the elections over) Like Conrad Black says, the basic problems in the economy will remain.
If the houses are not being built all the builders, Real Estate agents, lawyers, etc. are not working, not paying taxes and not buying. Then the autoworkers, boat builders(and other makers of toys) are not working. This is already starting to ripple through the economy. Next you are going to run into the problem of where is the government going to get the money to pay the huge government workforce as the tax receipts fry up? And as house prices fall the municipalities collect less tax revenue. Michigan has lead the way on this and the Michigan answer of raising taxes has been a disaster which made the problem worse.
This is justice? The government was quite draconian forcing the banks to make the bad loans. This is what happened to banks that did not follow the rules.
“Department of Justice
CHICAGO BANK CHARGED WITH DISCRIMINATORY
“REDLINING” LENDING
WASHINGTON, D.C. – The Justice Department today announced the filing and resolution of a lawsuit against a Chicago lender. First American intentionally avoided serving the credit needs of residents and small businesses located in minority neighborhoods, a practice commonly referred to as redlining. First American has agreed to invest $5.7 million and open new branches in these minority neighborhoods to settle the lawsuit.
“All Americans should be able to access the financial markets without regard to their race,” said R. Alexander Acosta, Assistant Attorney General for Civil Rights. “We will continue to oppose vigorously any discrimination in credit and lending services.”
The Justice Department’s complaint, filed in federal court in Chicago, alleges that First American intentionally failed to market and provide lending products and services to predominantly minority neighborhoods because of race. The complaint notes that not one of First American’s 34 branch offices is located in a minority area. The complaint alleges that statements by First American officials indicate that the Bank’s business practices were racially and ethnically motivated.
The Justice Department also filed today in federal district an enforceable settlement agreement resolving the complaint. Under the agreement, which remains subject to court approval, First American is enjoined from discriminating on the basis of race, color, or national origin in any aspect of a residential real estate-related or credit transaction. In the settlement, First American agrees that over the next five years it will:
open four new full-service branch offices in areas affected by its allegedly discriminatory conduct;
invest $5 million in a special financing program under which it will offer residents and small businesses in predominantly minority neighborhoods, residential real estate-related, consumer, and small business loans at subsidized interest rates – at least one-half of a percentage point below that which the Bank would normally charge;
spend at least $400,000 to advertise its products in media and direct mailings targeted to generate loan applications from neighborhoods allegedly discriminated against;
provide a minimum of $300,000 to develop and implement a comprehensive consumer education program in credit counseling, financial literacy, and business planning for residents and small businesses in predominantly minority areas.
“Home ownership is the American dream, and the ability to gain credit is crucial to the realization of that dream and to the development of all communities,” said Patrick J. Fitzgerald, United States Attorney for the Northern District of Illinois. “Redlining robs residents of minority communities of their equal right to a better life. As this case shows, it will not be tolerated.”
Continued
http://www.usdoj.gov/opa/pr/2004/July/04_crt_478.htm
Steve: That’s the same lawyer that prosecuted Conrad Black. But look, this is small beer in the scheme of things. This is an incident, but it’s not why the trouble exists.
Re: Steve M.(#194),
Re: Whether a judgment of $10 million, or so, against a bank that doesn’t make enough subprime loans can cause a $1 trillion, or so, meltdown.
I take no position on whether First American Bank was guilty of bigotry or simply attempting to limit the number of risky, sub-prime loans it funded [contrary to the mandate of the Community Reinvestment Act].
Assuming the latter, however, a few “incidents” like this could be the cause of the trouble. The whole point of lawsuits like these is to get the rest of the businesses to conform with public policy desires. They work. Businesses tend to change their practices when they see other businesses being sued.
snip
Likewise, it wouldn’t take too many prosecutions of banks that refused to make “their fair share” of risky loans to get the rest of the financial community to create as much bad debt as Fannie would buy.
Re: jim edwards (#238),
My patience paid off in delaying an answer to “small beer” as I think the reply that you articulated here makes an important and otherwise potentially overlooked point.
Re: Kenneth Fritsch (#239),
Thanks, I hope Steve read it before he snipped it.
Re: jim edwards (#238),
After the CRA was revised circa 95, the Janet Reno led AG’s office filed 13 major lawsuits against banks for violating the CRA. The revisions to the CRA “addressed criticisms that the regulations, and the agencies’ implementation of them through the examination process, were too process-oriented, burdensome, and not sufficiently focused on actual results. The agencies also changed the CRA examination process to incorporate these revisions.”
Essentially, they made them performance based rather than regulation based. So, regardless if you were following the rules, if your “performance” wasn’t up to snuff, then you were guilty of violating the CRA.
This is not to say that the CRA is responsible for the current mess. It is just one piece of the puzzle.
I think this sort of stuff is what opened the floodgates.(this is not the only bank taken to court) Once you started handing out loans with no background check and with Fanny and Freddie there to cover the risk, greed took over and the whole thing snowballed. The government forced the risky loans into the market.
This is from the year 2,000.
Many people realized what was happening long ago.
Nobody would take on the issue since they would be destroyed by the press as a ‘racist’.
“The Trillion-Dollar Bank Shakedown That Bodes Ill for Cities
Howard Husock
The Clinton administration has turned the Community Reinvestment Act, a once-obscure and lightly enforced banking regulation law, into one of the most powerful mandates shaping American cities—and, as Senate Banking Committee chairman Phil Gramm memorably put it, a vast extortion scheme against the nation’s banks. Under its provisions, U.S. banks have committed nearly $1 trillion for inner-city and low-income mortgages and real estate development projects, most of it funneled through a nationwide network of left-wing community groups, intent, in some cases, on teaching their low-income clients that the financial system is their enemy and, implicitly, that government, rather than their own striving, is the key to their well-being.”
http://www.city-journal.org/html/10_1_the_trillion_dollar.html
Fitzgerald also prosecuted Scooter Libby.
Steve: Like 9-11, there seems to be plenty of blame to go around for both parties. My impression is that, in quantitative terms, the defaults are more prevalent in the Sun Belt than the inner cities, but that’s not based on study of the data and I would be open to any quantitative observations.
Re: Shawn Whelan (#195),
“Steve: Like 9-11, there seems to be plenty of blame to go around for both parties. My impression is that, in quantitative terms, the defaults are more prevalent in the Sun Belt than the inner cities, but that’s not based on study of the data and I would be open to any quantitative observations.”
Wherever the real estate bubble bursts and the price drops you are going to see the defaults. The trigger for the easy money and the subprime loans was Fannie and Freddie as manipulated by the government who controlled them. Once they started taking the subprime unsecured loans and forcing the banks to make the loans it was pretty hard to close the floodgates they had opened.(and they never made any attempt to close the gates)
Thomas Sowell
“Why then is there such a mess in the financial markets? Much of that mess is due to the very people we are now turning to for solutions– members of Congress.
Past Congresses created the hybrid financial institutions known as Fannie Mae and Freddie Mac, private institutions with government backing and political influence. About half of the mortgages in this country are backed by these two institutions.
Such institutions– exempt from laws that apply to other financial institutions and backed by the implicit promise of government support with the taxpayers’ money– are an open invitation to risky behavior. When these risks blew up in their faces, Fannie Mae and Freddie Mac were taken over by the government, costing the taxpayers billions of dollars.
For years the Wall Street Journal has been warning that Fannie Mae and Freddie Mac were taking reckless chances but liberal Democrats especially have pooh-poohed the dangers.
Back in 2002, the Wall Street Journal said: “The time for the political system to focus on Fannie and Fred isn’t when we have a housing crisis; by then it will be too late.” The hybrid public-and-private nature of these financial giants amounts to “privatizing profit and socializing risk,” since taxpayers get stuck with the tab when high-risk finances don’t work out.”
http://townhall.com/columnists/ThomasSowell/2008/09/23/a_political_solution
The ability of the American government to deal with this financial crisis, and the IPCCs ability to guide us toward responsible policy share a common problem – data mining and creative adjustment to proxies.
One of the problems we Americans have in reaching political solutions (or preventing poor legislation from being enacted) is our lack of electoral power over our “representatives” and the partisan polarization this situation has created.
Steve: snip. Sorry. we’re not going to discuss electoral redistribution in the US.
snip – there are enough issues that need to be faced right now without moralizing about government,
Re: BarryW (#199),
Would that this wasn’t about politics!
They say that the two things you shouldn’t watch being made are sausage and legislation.
The word is that it’s rather ugly in the conference room with a lot of attempted add-ons to the bill and a somewhat lopsided number of attendees (9 Democrats, 2 Republicans, and Paulson) (Don’t know why it’s so lopsided). They seem to be optomistic as of right now.
The Republicans are proposing a
which may be an option added to the bill.
They also seem to be checking which way the wind will blow:
Wonder if it’s anyone you’ve proposed Steve.
I’m still concerned about what is going to be hidden in the fine print.
snip – sorry. NO religious references even if incidental. It’s a red letter rule.
Re: GeneII (#201),
the quote was from the wisest man to ever live. it wasnt a religious quote.
if i had quoted from Jack Welsh it would still be in the thread? it was a basic principle not proselitizing
Steve: I know what you meant, but it’s a red letter rule.
Re: GeneII (#208),
Misunderstandings, my fault, my apologies
Somewhere in this thread, Steve asked for specifics for addressing this problem. Here is my list:
1) Repeal the capital gains tax, the dividends tax and the tax on interest income — take all three to zero! This will allow capital to flow much more easily to the most successful firms. Every time we’ve lowered the capital gains tax from 50% to the present 15% there has been a surge in the economy right after the cut. Repealing the dividends tax and interest income tax will provide an additional incentive for capital to flow into the financial system.
We need to remove all government impediments to the flow of capital into the financial sector.
2) Suspend all anti-trust laws in banking and financial services. This will allow the strongest, best-managed firms to buy out or otherwise merge with the shakier firms at discounted prices, put whatever good assets they have under better management and allow the write-down of bad debt.
3) Repeal Sarbanes-Oxley. This noxious legislation has chased a great deal of capital away from our system. Repealing it would be a huge shot in the arm for the economy, which would relieve pressure on marginal banks and other financial institutions.
4) Repeal the Community Reinvestment Act to remove the pressure that still exists to make bad loans!
5) Suspend the recent “mark to market” requirement for asset values. Allow businesses to value assets at cost (or on any other reasonable basis) as long as they clearly disclose what they are doing.
6) Announce an immediate freeze on all Federal Spending — every bit of it, NO exceptions. There is a huge amount of waste in the Federal Government and there is no better way to squeeze it out than to announce that all budgets are frozen. This step will reduce the pressure on the Fed who must continuously finance a monstrous federal deficit.
7) Since one of the root economic problems here is the value of housing, anything that can be done to stimulate demand will help. Make all expenses associated with buying a house — including down payments — tax deductible. This will help stimulate the purchase of houses and reduce the current glut of supply.
8) Fire the entire staff of The Office of Federal Housing Enterprise Oversight and allow Fannie and Freddie to fail. Let it go through standard bankruptcy proceedings.
There are a vast number of other regulations I’d like to see repealed, but there is little hope of winning agreement on them at present. The ones above are doable — and would help a great deal — if we can get Congress to exercise a little common sense.
Re: Michael Smith (#202),
Wow, what a wish list! Good points!
Re: Michael Smith (#202),
This would be ideal, although I must take exception when you said,
The OFHEA can only operate if given the ability to do the audit and oversight tasks assigned to them. As Senator McCain stated on the Senate Floor back in 2006,
snip
Steve: If I see the words Obama or McCain in any post, it will be deleted.
snip – c’mon. I’ve asked people to tread lightly on specific politics.
Re: GeneII (#203),
really wasn’t about politics, just an observation. Im an american, frustrated with the politicians. Didn’t seem like my comment about the was political. Politicians are part of the reason we’re here. Changing those politicians is part of the solution. I feel some of the Wall Street execs should be put in jail over this.also. both politicians and wall street are realted i this
had nothing to do with plitics
#200. That is a really excellent article and I urge readers to consult it.
Kudlow says:
His description of the outstanding issues makes sense. The description of the plan on the table was non-existent and I, for one, didn’t realize/couldn’t imagine that people would insert funding earmarks in something like this. Ugh. Anyway, as Kudlow describes it, Paulson’s plan seems to have sense to it. If the opportunity to purchase mortgages on decent properties at a deep discount arose, it’s something that careful people who knew the properties could prudently invest in. The U.S. is not going out of business.
There’s a lesson for climate here as well: the public can’t be treated like fools. People want to do the right thing, but things have to be explained clearly to them.
#202. My own sense of a post-crisis road map for the U.S. and I’m just brainstorming here like everyone else goes back to the current account problems and the energy problems.
I think that the housing market is going to be saturated for a while. But it’s not as though there aren’t important investments to be made.
Boone Pickens seemed to talk sensibly about strategies for the U.S. to reduce dependence on foreign oil. This will require a lot of work and it might as well get started when housing demand is weak.
Also the need to ensure the survival of the auto industry (which is integrated with Canada) is essential. People are going to have to support the “home team” a little in their car purchases. It’s so hard to build up an infrastructure and the implosion in these sectors has to be halted somehow.
this sums it all up. it doesnt matter what your politics are.
its just a collection of facts
please ignore the last few minutes of the video
Very detailed and predicted back in August.
http://www.prudentbear.com/index.php/commentary/guestcommentary?art_id=10098
Gosh, the paper does have value if written down, but should the Govt be buying it?
JP Morgan just bought a heap with WAMU. Thats as it should be. The bubble
created a lot of opportunity for people to get a house, invest in RE
but now the strong hands take over the problem areas. The Govt
just creates more bad investments.
There may be fears of widespread bank runs (it’s been a while since the last ones in the US) and a lot of talk about the need to reform (again) the financial system. But still I don’t see anything extraordinary about this crisis. It’s a textbook example of the trough of the business cycle: massive overinvestment (this time primarily in the housing market) fuelled by the banking system and central bank policies, and demand finally being unable to meet supply: house prices fall and drag a good part of the economy with them.
The solution? If the goal is the short term, what I know of Bush’s plan simply tries to avert a panic and prevent a sharp economic downturn. But it’s not guaranteed to succeed at all; if successful, comes at the cost of slowing down the economy in the future via increased deficit and public debt; does nothing to prevent future crises and actually rewards financial malpractice.
I’d rather think of the long-term and try to prevent similar crises in the future. Which unfortunately means letting the market purge the malinvestments itself and, definitely, reforming the banking system. You can’t have people investing in foolish bubbles cyclically. I’m just a simple graduate in economics but the best way I know of to prevent this would be forcing a 1:1 ratio between deposits and real reserves for all lending institutions (IOW, having all investments backed by some form of previous real savings) and freeing the currency market by putting an end to the central banks monopoly, as many “Austrians” propose.
I don’t expect to see any of that, though. So the cycles will continue and the regulators may not even be able to prevent the coming big recession they’re only concerned about.
And there may be a lot to be concerned about:
From 3 to 102 pages and growing!
Something about this thing isn’t adding up. The motto “Buy low, sell high” should be making people happy now. Some are saying this “bail out” will be great for the future of America, i.e., when these houses go up in value the profits will be returned to the American people for them having paid for the bail out. Odd that. Since there is a feeling of optimism about a profit coming in the future then there is no problem in letting all these failing entities fall. Since there is a hope of profit coming it only stands to reason that there will be banks and real estate brokerages just waiting in line to “buy low” now so they can “sell high” later. After all, as an example, Bank of America bought out Merrill Lynch. They bought low and they know in the future what they bought will go up in value and they will make money. They aren’t dumb. They didn’t buy something that will continue to fail and then drag them down to failure themselves. The share of economic problems that Merrill Lynch was causing has already been put on track to a correction. And B of A will make money from it in the process.
We keep hearing about : (paraphrase) “if we don’t bail out these places ramifications will be felt throughout the entire economy”. But it is already being felt throughout the entire economy now–I live in America and I can see everyone feeling it for months now. Will it feel worse in coming months? Could be. But even if it does the sky isn’t going to fall. The sun will come up some day on a better tomorrow and someone (or someone’s) somewhere will make money from this situation.
So what doesn’t add up is why these places aren’t let to fail, like happens in the free market to poorly run companies, and let others in the free market vacuum up the mess, like happens in the free market.
Maybe it’s because some in the government would rather be the ones to make the money on these houses when the real estate market begins to make it’s correction from this low back to rising prices again. It been buzzed that there will be a return of 100% of the profits of this price rise correction to the American people for the bail out they are doing now, so making this an “investment” and not a “bail out”.
But do I believe the government will actually do this 100% distribution of the profits back to the people? Nope.
Re: GeneII (#223),
That claim doesn’t make sense to me either. The losses suffered by these firms have already occurred. The money has already been transferred out of their accounts and into the pockets of other entities. A bankruptcy doesn’t cause additional losses; it simply acknowledges the losses to date and stops more losses from occurring. The claim that if we stop these losses now, by allowing these firms to go bankrupt, then the losses will have some sort of additional “ripple effect” throughout the economy sounds like a version of the “broken window” fallacy.
And where is the evidence of a “credit crunch”? I hear ads on the radio from mortgage lenders soliciting business every day. Home sales have fallen, but this was inevitable given the bubble created by luring in so many additional (unqualified) buyers. Once that pool of additional (if marginal) buyers was exhausted, demand had to fall back to the normal level. Plus, there are probably some buyers waiting to see if home prices fall even further. But a “credit crunch”? Where is the evidence for that?
The banks do not trust each other. End of story. If they do not trust that inter-bank loans will be solvent, the flow of money, and the economy stops. Some in Congress, as usual, are trying to take political advantage of this primariy need, and demanding billions go into other programs (20% of the 700 billion) that are extensions of the original programs (mae & ,mac)
Now sadly an additional warning…The shorter term debt of the credit card markets may be the next shoe to drop. Gentlemen, hold on tight.
We need to stop the contagion caused by illiquidity. The danger is that short-term borrowing in the commercial paper market will completely dry up, as well as short-term bank loans for working capital. If the federal government is going to play hedge fund, as Paulson and Bernanke propose, I would rather have them offer to insure high-quality commercial paper (possibly for a fee of a few basis points) for the next six months or so. This would likely cost the government budget nothing but would prevent the downward spiral of dis-intermediation that could lead to a severe recession or depression. It also would avoid the problems of moral hazard and unfair redistribution, by not bailing out speculative investments in crappy real estate. The Paulson-Bernanke plan is both indirect and uncertain in its effect on contagion and dangerous in its long-term implications.
Steve Mc, you missed a great opportunity. A key factor in getting from point A to point B was a lack of transparancy. These instruments were sold off with the buyers not having a clue as to the underlying data, what was actually in each of these bundled securities; how many and which houses, condos, strip malls and etc. All they knew was that they were triple A rated. Even today, they can’t judge the value of the individual securities because they have no clue as to what they contain.
So I ask you, why should they give you the information? They have 25 trillion invested in this mess and all anyone might want to do is try to find something wrong with it.
Here is a link to a short, but wonderfully informative article about the housing bubble:
Please be sure to click on the “Real Estate Roller Coaster” button at the bottom of the article.
Part of the fallout of a deep US recession would be a smaller appetite, and funding, for AGW mitigation. That may happen elsewhere, too, if the recession spreads beyond the US.
A recession combined with the apparent current pause in global warming would be a difficult one-two punch for the AGW activists. It may also buy time for climate science to mature and improve and for additional evidence, one way or the other, to accumulate. Interesting times, these.
Re: David Smith (#229),
Another part of the fallout from a deep US recession, and particularly if it had global repercussions (which it no doubt could), would be the sudden drop in GHG emissions. If the recession were severe enough and long enough some of the ignored Kyoto emission reductions goals/quotas would come back into play.
Of course, some of us have thought all along that recessions might well be part of the mitigation strategies – even if as an unintended consequence. Maybe the US will be leading the way into an AGW mitigation that not even the politicians will not be able to screw-up – with prolonged and recurrent recessions.
Re: Kenneth Fritsch (#230), Then again maybe Uncle Sam will back Detroit with 35 Billion to build electric vars?
Re: captdallas2 (#231),
Let us see how this will work: Congress subsidizes Detroit to build electric cars, but thanks to the FM/FM fiasco the banks will not provide credits to buy those cars. No problem congress will set up an FM that provides easy credit to the car buyers, and especially the electric ones, with the good name and credit of the US government. We could be well on our way to an auto bubble. Of course, we will need Bernanke to listen to Conrad Black to inflate the money supply to help the bubble along.
that should be 25 billion and electric cars (got the glasses now).
Every 20 years or so there is a bank crisis, at least in the US. This is IMHO determined by the non-normally distributed random nature of the inputs to the profit equation for banks. Some banks understand this, but to survive they must reduce leverage, which prevents them from getting to be big banks. They are thus unimportant when a crisis hits.
A bank crisis evokes fear among the banks and bank substitutes, and they lend less. Without this lending, effective demand for houses, cars, education and other things that need to be financed declines. Recession, layoffs, personal troubles ensue. While few of us care whether the sign on the bank down the street says Bank of America or Bank of Montreal, we should all care if that bank and the others won’t make any loans.
There is some benefit to trying to unblock the lending logjam if it allows us a chance to avoid the recession, layoffs and personal troubles.
IMHO when they rethink banking regulation nothing short of greatly reduced leverage at banks (and thus higher lending rates) will do much to delay the next bank crisis.
The investment banks and AIG were brought down by their compensation systems, paying traders each year on that year’s profits. This encouraged individuals to pursue risky strategies that produced potentially big profits and enormous losses. Profits could be used to buy the summer house. Losses go to the stockholder, bondholder and every so often to the taxpayer.
The legislators have so far acted responsibly during this crisis, taking the advise of their experts and doing the best they could with a bad situation. That they and their predecessors created the situation, or at least the framework that meant the situation would arise, is irrelevant this week.
Re: Joe E (#234),
Hmm, one generation. Could it be that it takes new blood to figure out a new risky scam, or is it just that the new blood hasn’t been burned yet?
Re: captdallas2 (#233),
And the winner of the things said in jest award…link
You missed a perfect prognostication by 10 billion.
from Yahoo news :
Bailout Plan Gains Key Support article makes it sound like a done deal, but let’s wait and see. From the article :
Shows taxpayers will not make a profit as was hoped by some. It says repaid, i.e. 700 billion (possible) in, 700 billion out later on. In reality the tax payer will lose a bit in the exchange when inflation is taken in to account.
Nouriel Roubini has this, and quite a bit more, in an article from Sep 26, 2008 on his web site :
Roubini also has this at his web site from Sep 28, 2008 :
Dave Ramsey has this to say.
It’s disquieting that Roubini’s read on the plan is so antagonistic.
I thought that the concept of buying mortgages at a deep discount made sense (e.g. the Ramsey column) and, under the circumstances, was a pretty good concept. If the beneficial owners of the debt or the fund holding the debt was outside the U.S., they’d be the ones taking the haircut rather than anyone in the U.S.
But Roubini obviously sees something else going on.
Re: Steve McIntyre (#235),
What the bailout is attempting to do us not save shareholders but to save the credit market. We’ve seen an example on this blog in which a compnay has failed because it could not get credit to bridge it untule some government contracts came through. Likewise companies are finding it very difficult to get short term gredit and when they do their credit lines are being restricted. Wihtout a bail out or some other solution, even sound companies are not going to be able to get credit to meet their payrolls. What can happen after that can be seen in the history of the 1930s.
Re: Steve McIntyre (#235),
I have yet to read anyone who is really for the plan. Many have said some action is required, to keep the credit markets from totally seizing up, but even then, it’s totally nebulous. All the regional banks seem to be doing just fine. They aren’t having a liquidity crisis of any sort.
Roubini is right, in that this bailout benefits the shareholders and Wall Street players at the expense of the taxpayers. At least they removed the ACORN slushfund, or it never actually made it into the bill’s language. But that’s small recompense. The bill as it stands now is better, but doesn’t really address the taxpayer concerns and continues recent trends of socializing losses in the free-market.
Re: Steve McIntyre (#235),
maybe he sees this found at the end of this at his web site :
I normally wouldn’t give this kind of talk the time of day. But now since Roubini’s predictions from 2 years ago are now happening just as he said them this “Dr. Doom” is making me give this prediction some serious thought.
Re: GeneII (#244),
There were plenty of other people making the same predictions two years ago.
I still wouldn’t pay any attention to this chap. To say that America’s current account is funded by the kindness of strangers is nonsense.
Re: fFreddy (#252),
I think he’s talking about loans from foreign nations
Re: GeneII (#253),
When you interpret the term “funded by the kindness of strangers” to mean “I think he’s talking about loans from foreign nations” I think you make the situation sound different then it is and the point, I think, fFreddy was addressing.
Foreign nations with a trade surpluses with the US must either hold those dollars as reserves at no earnings or invest them in US assets which can include private and public debt. I have heard lately the expression that China is loaning us money which is strictly true when they buy bonds in dollars. The spin I have seen on that loaning term, however, has implied something unrelated to foreign exchanges (which has been there forever) and more on the level with loans made with the Marshall plan or the WW II lend lease programs.
Nations with a trade surplus have to invest those foreign assets or trade them for another currency and then that buyer has to invest or hold them. But a number of those nations with trade surpluses encourage the surplus as a matter of government policy and those dollars or other currencies taken in have to disposed of in a manner to earn optimum return. That is hardly a matter “kindness”.
Re: fFreddy (#252),
I wasn’t aware of all these people. Could you tell me who they were? I’d like to verify this for myself, see what they had to say.
Two good reads both on credit markets and their uniqueness are Steven Pearlstein in the WashPost
http://www.washingtonpost.com/wp-dyn/content/article/2008/09/25/AR2008092504311_pf.html
and Bruce Bartlett, an economist with the Reagan and Bush (H. W..) administrations (and former Fed Chairman Alan Greenspan and Paul Volcker and former treasury, state and labor secretary George Schultz have endorsed its intent):
http://www.nypost.com/seven/09272008/postopinion/opedcolumnists/why_the_bailout__130927.htm?page=0
entitled “Why The Bailout: The Case Bush Hasn’t Made”
From my perspective (many years in real estate), the financial system rescuse is really monetarism: how the deflate an asset bubble that emerged since Fannie Mae and Freddie Mac got into pushing NINJA (No Income, No Job or Assets) loans in 2003-4? This created a $1.2 trillion asset bubble, now making up the majority of homes in foreclosure (and the rate has multiplied in recent months). The $700 is 60% of this asset class-a rough guess of how many loans making up the “toxic” swamp will eventually fail.
There will still be much pain ahead. Remarkably enough, it is the opacity of the problem that has shut down the credit markets, which was planned to have a trading market open in December and which could have alleviated much of the problem. Compounded by mark-to-market accounting rules adopted with Sarbannes-Oxley after the Enron bust, this has put mighty pressure on banking and insurance firms holding mortgages and securitized debt.
There is blame enough to go around. Many parties and institutions have failed (although thru FRE and FNM, more by Dems partisan wishes). The goal is to get credit markets functioning again. It could be next year before we are sure that this least bad option succeeds (in some sense).
It is a global event indeed. Scary to be sure. But this could well speed an adjustment in asset valuation, and the US economy could well still lead the world economy out of the pain sooner than later.
On the crisis
Here’s Ron Paul from 5 years ago: http://www.lewrockwell.com/paul/paul128.html
Here’s Peter Schiff from 2006: http://www.youtube.com/watch?v=EoB4BS7CGAw
It’s time to listen to the Austrians who saw this crisis coming long ago.
Re: nanny_govt_sucks (#243),
Indeed. There is absolutely nothing new in this “crises” that hasn’t been seen and predicted by Austrian economists many times before.
Consider, for instance, this passage from one Austrian economist’s book:
Those words are from Henry Hazllitt’s book, “Economics in One Lesson”, page 47. It was written in 1946.
Unfortunately for us, the great majority of today’s economists — and virutally all of our leaders and politicians — have ignored the Austrians and are still fooled by the Keynesian notion that “consumer spending” is what drives economic activity, and that government can keep the economy growing by perpetually stimulating said spending through an endless expansion of credit and the money supply.
In reality, of course, this “easy money and expanding credit” policy simply puts us on a roller coaster of “bubbles”, “booms” and “busts” because the credit expansion cannot go on indefinitely.
In housing, for instance, there are only so many additional home buyers that can be lured into the market with “easy loans” — and while those newcomers are swelling demand and causing housing prices to skyrocket, things look rosy. Indeed, even existing homeowners are induced to take on more debt as they see their equity rocket upward. But when the supply of new borrowers is exhausted, demand must inevitably fall back to the pre-boom level, and prices must plummet as well. This fall in prices, accompanied by the inevitable fact that the default rate on the new “easy loans” will be substantially higher than normal, leads to the “bust” we are now facing — with all of the participants now scrambling to push their losses off to the taxpayers.
Here’s a few videos from Wharton School of the University of Pennsylvania
Richard Herring on What’s Next for Investment Banks,
Joseph Gyourko on Fannie, Freddie, and the Housing Bust,
Wall Streets Day of Reckoning: Turmoil in the Global Market
“Some posters said that the U.S. needs to listen to the experience of other countries; that’s what Roubini’s been studying. I’m persuaded that the elephant in the room is the current account deficit, leading to under-investment in manufacturing and over-investment in housing. All kinds of poor policies over a more than one generation are probably too blame. And it’s going to take a long time to reverse.”
Steve,
When Greenspan lowered the short term interest rates (the rate at which investment houses and banks borrow from the Fed) at 1%, he was only asking trouble. Niether the Central Banks, nor Congress can stipulate how these firms in turn lend thier money. They usually chase the most profitable investments. In 2003, it was mortgage securities. The Tech Boom went bust in 2000-2001 and no one was willing to again pour thier money into the NASDAQ. The biggest profits were in the mortgage debt market. The high risk mortgage securities became a hot item, and thier prices began to go through the roof.
None of this is rational. Yes, there was plenty of good investments to make in US manufacturing and municiple infrastructure projects (through munis), but the spread at which the Central banks were charging (1%) and what the lenders themselves could charge customers was big (anywhere from 6% to 30% (for credit cards)). Greenspan’s easy money policy directed Wall St’s efforts into the mortgage debt and derivitives markets. Greed too over from there.
I’m not sure about the US, but the paradox is that in Europe and elsewhere this financial crisis keeps being portrayed day and night as a perfect example of the failure of capitalism / free market. Of course, Bush’s plan to send free markets “on vacation” for a while by rescuing the biggest losers with taxpayers’ money does a lot to help spread this idea. It’s all quite sad. And could have perverse effects for economic freedom in many parts of the world that have always been reluctant to adopt or expand it.
Steve’s correct; plenty of blame to go around. But it looks like this is basically on autopilot.
I don’t know what’s bad about an idea to buy assets at pennies on the dollar (especially physical assets) and then hold them until they’re worth more. As well as at the same time increasing liquidity and boosting confidence.
As far as those saying thing A or B might/will happen, a lot of those predictions seem to be based upon how the world worked 5 or 10 or 20 or 50 years ago. Things are different now.
All in all though, it appears there are a lot of people with a lot of ideas and a lot of knowledge gaps all running around battling. How will it turn out? Hmmm. Well, trying to make sense of this isn’t an easy short-term thing.
Interesting timing for this though, don’t you think?
Re: Sam Urbinto (#251),
Well, first off, I think both Democrats and Republicans have criticized the fact that the Treasury is not bound to pay any particular amount for assets under the proposals. The Treasury gets to decide whether to pay “pennies” or full paper value [the “dollar” that was originally financed to buy an overvalued home], or even more. The whole point of these plans was to pay MORE for the assets than they are valued in the marketplace – in order to prop up the financial system. Is it OK for the taxpayers to pay 99 “pennies” for assets that are worth 40 “pennies” ? The 59 extra “pennies” would have been a straight subsidy to a wealthy and politically-connected business community.
Secondly, don’t forget the unknowable opportunity cost of removing so much consumer and investment capital from the marketplace [either from increased taxation, higher interest rates due to increased federal borrowing, and / or deflated currency / inflated prices].
Thirdly, how long do they have to be held ? If you hold almost anything long enough in un-indexed dollars it will show a profit. Should any bailout scheme be approved, eventually, look for the final results to be reported in un-indexed dollars, so that the future politicians can pat themselves on the back and tell the public how well they’ve been served. Don’t expect these assets to be sold when they’ve almost broken even, either. The politicians won’t have the spine to part with them before there is profit to show – lest they be subject to a political hit. If the assets need to be held only 2 months, that’s one thing, but if they must be held for six years, that’s another.
Re: jim edwards (#258),
First. As far as what The Treasury is bound to or not, I was speaking in generalities. Rather moot, but imagine you had cash in 1932 and liked the way General Electric or US Rubber Co or Best Foods looked. Just sayin’
But to be specific, if something is worth 40 cents, then pennies on the dollar means I get 2.5 of them for something like a dime or a quarter, not 1 for ninety-nine cents! 🙂 Although of course that does meet the strict definition; even 8 million pennies a dollar is pennies on the dollar.
Second. What is the ‘unknowable opportunity cost’ of the participants in the world finanical markets losing another half of their confidence, or of the mortgage insurance sections of AIG bringing the rest of the company down, or of the repurcussions of WaMu or Wachovia having to write off billions in bad loans, or of thousands being foreclosed upon?
Third. The specifics of how long anything has to be held is not very important at solving the issues right now.
All that said, government and business together made this mess. What I’m unsure of is if it’s better to let it all fall apart and let things take care of themselves or what is needed. The painfully obvious is that bad things happen when things are left alone. In the long run, is that better? Who knows.
One thing is clear from the headlines; this is not some theoretical exercise in macro or micro economics, or some localized minor issue.
Stunning Defeat for Bailout Plan Torpedoes Stocks; Dow Plunges 600
Investors Swarm T-bills as House Rejects Bailout
Oil Plunges $10 as U.S. Bailout Plan Voted Down
Crisis of Confidence Hits Regional Bank Shares
Latin America Stocks Plunge as US Bailout Rejected
European banks bailed out as crisis spreads
Re: Sam Urbinto (#262),
Of course, I share your definition of “pennies on the dollar”. The problem is, politicians tend to use language in strange ways, so that, as a result of the 16th Amendment, for example, congressmen believe the government owns all of our income. A Senator who proposes to allow us to keep more of our money is expected to explain how he is going to “pay” for the tax cut. A very bizarre use of the word pay; a very common usage of the word in our Nation’s Capitol.
It’s a non-sequitur to talk about the common usage of the phrase “pennies on the dollar”, because ALL of the proposals vis-a-vis the bailout have been about paying considerably more than fair market value. That’s not “pennies on the dollar” as we use it in common parlance.
This is true, but the cure can’t be pursued if it’s worse than the temporary affliction. There are many who would describe this crisis as being analogous to the ill effects of early stage withdrawal from drug addiction. [The drug being cheap credit and artificial subsidies.] Should we buckle down and detox, or should we enter the alley and inject some heroin [the bailout]. A shot of heroin will “solve the issues right now”, but it will do nothing good in the long run. It will only delay the inevitable. The money spent on heroin disappears, and the kids go without food, clothing, or shelter.
So the comparison between short-term and long-term costs, while irrelevant to solving today’s problems, is critical in evaluating public policy. Should we spend $10 trillion today so that future millionaires in Bangladesh don’t have to erect a seawall near their beach estates ? It’s a form of the same question.
I don’t know, but these costs are being talked about by the President and Members of Congress. The costs I mentioned are not. We have another one-sided equation analogous to those presented by AGW alarmists with limited information: What’s the cost of not acting ? The cost of acting is once, again, ignored.
Re: jim edwards (#268),
When sound companies begin to fail because they cannot get an adequate line of credit and this translates into mass unemployment and loss of pensions, is this a short or a long term cost. When a company fails, it fails. The jobs and wealth are gone both now and forever.
Postive feedback is at work in the economy now.
Re: Stan Palmer (#269),
Read the article linked to by Michael Smith in #266, above. The author makes a logical argument that the unintended consequence of recent Federal Reserve policy has been to keep banks from lending to each other. These policies are quickly reversible. So far, we’ve seen a number of not-so-sound companies getting bailouts. Is this diversion of resources wise ? What happens if and when sound companies do have trouble; will there be anything left to help them with ?
The leaders who happily drove us over this precipice now tell us Armageddon has come. Others who pointed out the cliff and tried to get us to change course are still being ignored if they say Armageddon has not come. As I stated above [#93], if the government endlessly pursues a bailout without success, the attendant positive feedbacks really will freeze up the markets.
Well, yes and no. When most people lose a job, they try to get another one. So, true, the job at company A may be “lost forever”, but they may go on to be employed at companies B, C, D , and E.
Businessman X may lose his shirt on the capital equipment he bought when a firm fails. Businessman Y can start a new business with the capital he buys for “pennies on the dollar” from the bankruptcy trustee. Wealth is more often transferred than truly lost.
It’s not so clear whether the economic crisis will have truly long-term or merely short-term effects. Don’t underestimate the profit motive as a driver of new economic growth.
Re: jim edwards (#271),
I was involved in the fiber optic/Internet bubble. I know of telecommunication companies that were not involved in anyway with fiber but got caught up in the frenzy. I know of good engineers with 25 years service who were marched to the door by security guards. I know of many new engineering graduates who never gained a job interviewI wonder if these engineers became employed by companies B, C, D and E.
Re: Stan Palmer (#276),
Why don’t you call up ten of them and ask them if they were able to find a job in the last eight years, then you wouldn’t have to wonder anymore.
Is it a bad thing that an industry that didn’t create any profit stopped employing highly skilled people, forcing them to shift their skills and labor into industries that created actual wealth. Should we be happy if a false economic bubble draws highly talented people out of productive pursuits ?
Re: jim edwards (#280),
The question was rhetorical. The reality is that the older engineers are unemployable. The cannot find jobs in engineering despite every effort. They are essentially forgotten.
Re: jim edwards (#271),
The government can create money with the stroke of a pen. Inflation is not the problem now. Deflation is. Money is being destroyed and with it the economy is being deprived of the means to create wealth. I do not want to re-visit teh workd that existed the last time deflation was the problem.
Re: Stan Palmer (#277) [and 279] ,
You make it sound very easy. Just print more money !
This is not free, of course, else we could have a $100 trillion bailout – why stop at $700 billion ? Watering down the currency is a tax on every senior with a savings account, and every parent who has put away money for their kids’ education. How about members of labor unions who are locked into multi-year agreements at a pre-currency inflation wage rate ?
You’re right in identifying the terror of government-induced deflation, as we saw during the 1930s. As I stated in #152, the solution to this is advertising to the public that their deposits are guaranteed by the FDIC. It was the bank failures that were caused by unnecessary runs [and a failure of the Federal Reserve to stop them] that caused the contraction of the money supply from 1929-1933. It’s quite a leap to assume that sound banks are going to crash now, just because some auction houses in New York have liquidity problems. Now, if the government spends too much bailing out unsound entities, I could imagine depositors might believe the government can’t back up its FDIC obligations. Then we just might have runs on banks. Wouldn’t that be a bizarre consequence ?
Re: jim edwards (#281),
You mean that the government check writing machine will run out of zeros? US dollars are created out of faith nothing more.
Re: Stan Palmer (#269),
Even though these large institutions, both private and govt (Lehman vs fanny etc..) are going down because of bad loans and the housing bubble bursting etc…even with all of this bad paper out there what about the other banks and financial institutions outside of the fanny/freddy loop, that didn’t give out the bad loans? How are they doing? I’ve heard the likes of Wells Fargo, Bank of America etc..are doing ok…aren’t they still loaning money today? How contagious is this is the question I have.
Re: tom s (#273),
Tom: if you deposit something that belongs to you in any kind of company or institution under the agreement that they will return it to you immediately if you ask them to, they are forced by ordinary property law to keep it safe and not lend it to others. Unless said company/institution is a bank. Then they can legally lend it to other people and actually multiply their deposits by a stroke of a pen (in very simple terms) and lend most of it away. So, unfortunately, at this point it doesn’t matter much whether a bank has followed sound or not so sound practices. They all enjoy the above exception to the common property rules. So if bank runs spread, it’s just impossible for the banking system to return all of their deposits and they’ll all be equally in trouble.
Ditto. Rather than an extended set of regulations, banks and financial institutions could simply be subject to the same rules as the rest of businesses. In fact the exception they enjoy began long before capitalism existed (except for a few and short examples, such as the Bank of Amsterdam in the 15th century).
Re: Mikel Mariñelarena (#283),
Correct. One thing we forget is that in the 19th cent., paper money used to be banknotes, issued by individual private banks. The banknotes of shaky or unknown banks were worth less than those of conservative, well-known banks. No banknotes were worth as much as similarly-denominated gold or silver coins. The free market was able to discount paper money to account for risk. Common people understood banks could fail, and they treated banknotes accordingly. What are banknotes, after all, but promises to pay – they’re no different than the mortgages [‘housenotes’] that Fannie Mae traded in. Instead of being backed by real property, they’re backed by the assets held by the bank that issued them.
Today the Federal Reserve has a legal monopoly on paper banknotes. We still allow banks to create money, but now the government allows this money to magically become fungible with Federal Reserve banknotes. The Congress has made this bank-created money “legal tender for all debts, public and private.” This is a pretty nice bonus for banks, which get to sell their somewhat risky, bank-created money at full price. The free market would require them to discount it, if Congress would allow the banks to be subject to “the same rules as other businesses”, as you say. Corporations can sell bonds or other securities, but they have to pay interest in order to get someone to purchase them; only banks get to print their own money. That’s not free market capitalism.
Re: jim edwards (#287),
Err, sorry ? What do you think you mean by this ?
Re: fFreddy (#292),
Are you asking what I mean or what I think I mean ? The latter is a little rude.
I expect you know that $1000 in government-authorized money can be deposited, lent out, redeposited, re-lent out, etc. $1000 in coins or government-printed banknotes can turn into several thousand dollars in bank deposits [not necessarily in the same bank]. This is freshman-level macroeconomics. How does $1000 turn into $5000 in simultaneous deposits ? Where does the other $4000 come from ? The bank(s) created it, of course.
As you illustrate, above [#293], a bank’s debits and credits will balance when the bank is liquidated. That doesn’t change the fact that the bank is creating lots of money. You can make as many credits as you want, as long as you make sufficient debits to counteract them.
200 years ago, a bank might lend out discounted Bank of Hartford notes, today a bank lends Federal Reserve notes – worth their face value. I didn’t say that the change was responsible for the credit crisis, just that it could be reversed and is an interference with the market.
Re: jim edwards (#297),
Please accept my apologies.
Perhaps we have a difference of terminology. The banks in your example are creating deposits. They are not creating money – only the central bank can do that.
Re: fFreddy (#303),
No offense was taken. And if my imprecise terminology caused unecessary confusion, I regret that. I believe those deposits created are part of the “M2” indicator of money supply. They’re not physical money, but they’re money, nonetheless. The Fed establishes an upper bound for this portion of the money supply by adjusting the reserve ratio, right ?
Re: jim edwards (#308),
Please see my answer to Mikel above. In short, no, they are not money in any useful sense of the word.
I do realise that I am probably at odds with most of the world’s economists here, but that doesn’t greatly worry me.
I’m not sure if these views mean that I’m a monetarist, or an Austrian, or something. I still don’t care – it’s what I see in the world around me.
You mentioned freshman economics; I went to a few lectures out of curiosity, but left in disgust at the slapdash way they chucked partial differentials around. With the greatest of respect to our friend Ross, I am not a great fan of the majority of theoretical economics.
And don’t get me started on the MBA-droids …
Re: fFreddy (#317),
As a thought experiment, imagine there is only one private bank with a monopoly position in consumer and business accounts.
Now the central bank releases some finite amount of currency into society [say $1M]. This is money both of us recognize.
Through the mechanism of repeatedly re-lending deposits, this $1M gets multiplied to become $20M on the accounts.
You’re correct. The bank can’t provide more than $1M in currency at any one time, because that’s all that’s been printed. So there’s $1M in “real” currency and $19M in “phantom” currency. If a disaster wipes out all of the bank’s investments and it fails, depositors will only receive ~5% of their deposits.
But in the more likely condition that the bank is not in a state of failure, if you were to ask the citizens and businessmen how much money they had, they’d say $20M, in aggregate. These depositors can utilize their funds indirectly, as collateral for agreements. They can all make cash withdrawals on these accounts, but not at the same time. What is money but a medium of exchange with some agreed-upon value ? The real question is: can ALL of the depositors directly access ALL $20M of their funds at the SAME TIME, which would seem to me to be a reasonable test for whether $20M in money actually exists.
The answer is yes.
Assuming an adequate computer system exists, everybody can make $20M worth of purchases with their ATM cards at precisely the same moment. No actual printed currency is required for this group of transactions. As there is only one bank, it simply moves values around on a spreadsheet. If all of it is simultaneously accessible, it appears “real” to me.
If you have four banks, instead of one, the same mechanism applies – with the exception that some banks see their total deposits go up $50k at the end of the day, and some see them go down $13k at the end of the day. Banks A, B, C, and D simply need to make minor payments to each other to balance their accounts – or they could treat the imbalances as short-term loans, paying a small amount of interest until the next day’s transactions reversed the imbalance.
Re: jim edwards (#324),
Most of the “wealth” that exists is on paper (stocks, bonds, electronic funds) and has no physical reality. Even cash is just a promise. So it’s all really pretty much phantom money. Sort of like putting a lump of gold underground in your back yard. Rather has no meaning while it’s in shares of stock XYZ.
No, I’m not suggesting we go back to trading chickens for gold for furniture for seed. 🙂
As an aside, how would you feel if you’d bought into IBM with 10,000 shares in 1987 at $40, sold it at $10 because it looked like it was going down lower in 1993, and then missed out on the ramp up to over $100 since 1999? Probably a lot better than if you’d bought 10,000 shares of Google at $633 in 2007 and watched it now at under $400. Well, hopefully you didn’t put your life savings into Unisys in 1980 or 1987 or 1999.
Re: GeneII (#325),
Miron is right on. That is to say, I pretty much agree with his points, his tone, and his reasoning.
Pressman’s not too happy with blaming the CRA for anything. http://www.businessweek.com/investing/insights/blog/archives/2008/09/community_reinv.html
Norberg and others have a different take. http://www.theaustralian.news.com.au/story/0,25197,24421918-20261,00.html
DiLorenzo chimes in. http://mises.org/story/2963
And of course, the in-depth version, quite the fight fest! http://en.wikipedia.org/wiki/Community_Reinvestment_Act
More so the talk page…. http://en.wikipedia.org/wiki/Talk:Community_Reinvestment_Act
Re: Sam Urbinto (#326),
Don’t single out money. Our entire society operates on trust. Does the government exist ? Do laws exist ? They do if enough of us believe in them. If not, there is “no confidence” and the government can fall. It’s amazing how quickly even a state like East Germany could melt away – once the population decided it didn’t exist […and they wouldn’t be crushed by Soviet tanks, like the Hungarians had been in 1956.]. A “statist bubble” ?
If you want to see a good movie, look for “The Lives of Others.” It’s about a Stasi agent monitoring an East German playwright near the end of the regime.
I’m not quite old enough to have been buying IBM shares in 1987. I prefer not to stress out about it, so I stick with the S&P 500 indexed fund.
Re: jim edwards (#328),
Yes, trust; you trust other drivers not to drive your direction, that they’ll stop at red lights, and that the vehicles around you won’t ram into you. Just like you trust that when you walk into a fast food place, the clerk won’t stab or shoot you, or yank all your money out of your wallet.
I’d add emotion to that trust though. Optimism and pessimism also. Cover the bottom with oil priced in dollars. Toss in some currency trading and trade deficeits. Throw in a dash of greed, risk/reward, fear and the like. Cover well with complex interactions with technology and other world governments and geopolitical ramifications. Mix. Bake in a pressure cooker for 30 minutes.
Voila!
Re: Sam Urbinto (#330),
Don’t forget the grand assumption about human & institutional behavior – that withdrawals and defaults etc. are asynchronous (i.i.d. white noise). Once synchronized, withdrawals etc. destabilize the system. So why are there no automatic mechanisms in place to anticipate synchronized herding, when we KNOW that herd behavior, like landsliding, is a Hurst process?
Re: bender (#331),
Oh, forgetting the herd mentality is not something I would do. Positivity leads to more of the same, as does the opposite. Finanical or otherwise. Much like polling reveals those being polled basically know nothing and just go along with the pollster, their friend’s opinions, or the nightly network news.
How many people are still convinced the new millenium started in the last year of the old one? How many people are still convinced the Dec 18, 2000 and Dec 27, 2000 deadlines for electoral votes weren’t hard and fast rules, or cite the Dec 9 5-4 stay, rather than the Dec 12 7-2 ruling that the recount had to be ended because it violated the 14th Amendment? How many people still say the expected 1998 US District Court findings of fact against Microsoft had nothing to do with the dot-com bubble bursting and that the economic issues afterwards were all the fault of the new president 2 years later?
Nothing is ever just about economics or politics or the masses reactions to things.
But some things are clear to those that think of these things; the computer Y2K problem being a non issue (after some amount of reasonable and needed preparation), the tech bubble popping as the herd ran the other way, the effects of calling polls closed and elections called while the polls were still open in that state and a number of others, or what happens when greedy companies make a bunch of bad loans?
Look! It must be {insert reason here} that this happened at the start of 2000!
Re: bender (#331),
A very good point, Bender. The system needs to be set up so that herd events (which are all too common) are handled in a more effective way than currently. That may require a trade-off against the more common asynchronous operation of the system, but the stakes are too high not to adjust it in that direction.
Re: Pat Keating (#365),
To be fair, mosher said it first. The smart money knows where the “stupid money” is flowing. If herding follows a Hurst distribution then the size of individual bets against the herd should also follow a Hurst distribution. There are financial institutions that know this, and others that do not. I would listen to the big fish that is well-positioned to eat all the little fish. The “predatory lenders” are about to find out what real predation feels like.
Re: bender (#331), Bender, I just had this vision of you addressing a joint session of congress discussing the Hurst process pounding your shoe on a table.:)
Re: jim edwards (#324),
Your thought experiment is too imprecise, and I don’t understand key steps.
Please restate with the minimum necessary number of components and a precise list of steps.
I suspect you will find I’m right, but I’m open to being persuaded.
Re: fFreddy (#327),
1. California leaves the union. A new central bank is formed, the Bank of California, which is put in charge of regulating the money supply. The Bank of California prints 1 million poppies [the new, official currency].
2. California passes a law, granting a monopoly to a private bank [owned by the Governor’s brother] called the Bank of Sacramento. Only the Bank of Sacramento will be allowed to make loans to, or accept deposits from, persons and businesses residing in California.
3. Another law eliminates the flow of money in or out of the State, or the use of competing currencies. [In other words, we’re making a new economic island with 1 currency, 1 central bank, and 1 private bank]
4. The state distributes 1 million poppies through purchases, payroll, etc.
5. All 1 million poppies are deposited in various accounts with the Bank of Sacramento. [for simplicity’s sake, nobody’s losing poppies in the sofa cushions or putting them under the mattress.]
6. The Bank of Sacramento lends 950,000 poppies out to certain persons and businesses. [The Bank of California requires the Bank of Sacramento maintain a 5% reserve] Some of the money is distributed in cash; most is distributed in the form of cashier’s checks. All of the recipients spend the money to purchase real property, goods, or services. All of the persons providing the real property, goods, or services subsequently deposit the money they receive into the Bank of Sacramento.
Total Bank of Sac deposits = 1,950,000 poppies. Total outstanding loans = 950,000 poppies.
7. The Bank of Sacramento lends 902,500 poppies out to certain persons and businesses. [remember the 5% reserve] Once again, the 902,500 poppies find themselves redeposited into the Bank of Sacramento. We could go on, but I’ll stop here.
Total Bank of Sac deposits = 2,852,500 poppies. Total outstanding loans = 1,852,500 poppies.
8. The “money” deposited in accounts at the Bank of Sacramento is now roughly triple what the Bank of California printed. Debt has increased, but we’re going to ignore that. It’s crucial for accounting purposes at the bank, but doesn’t come into Joe Citizen’s conception of available money. If Joe borrows money, he recognizes he has long-term debt, but he also has money he can and will use right now.
9. If everybody shows up to withdraw their cash, the Bank of Sacramento will be able to supply about one-third of that in the various accounts. Depositors won’t be happy. It looks like there won’t be 2,852,500 poppies, after all. Only 1 million poppies worth of cash purchases can be made at a time. [In your example, above [#315], a depositor takes out his 10K to buy a boat] No more cash purchases can be made until the vendors redeposit the cash into their accounts, making the cash available for additional withdrawals and purchases.
10. But what if the purchases aren’t made in cash ? What if the purchases are made with ATM cards or cashier’s checks ? All 2,852,500 poppies can be used AT THE SAME TIME. In other words, the amount of simultaneous buying power in California is now almost triple what the Bank of California has authorized. Money is a medium of exchange with an agreed-upon value. Triple the buying power = triple the money.
11. You could argue that the Bank of California is authorizing the money, because they’re setting the reserve rate. The central bank is only setting an upper limit, however. It’s the Bank of Sacramento that’s determining whether to grant loans or not. Therefore, it’s the consumer bank, not the central bank, that’s creating the extra money.
12. What happens if several of the loans end up being written off ? The balance sheet might look like this:
Total Bank of Sac deposits = 2,852,500 poppies. Total outstanding loans = 852,500 poppies.
This bank is insolvent, but it’ll only be a problem if business expenses exceed interest revenue for an extended period or if the bank gets called on it. If people continue to pay using ATM cards, then the bank need only keep adjusting the account balances on its master spreadsheet.
Re: Mikel Mariñelarena (#283),
That was meant to be 17th century.
Re: Mikel Mariñelarena (#283),
This is nonsense. If you deposit $10 in the bank, then it can lend $10 to someone. It can’t lend any more until it finds someone else to deposit some more (or sells shares, or bonds, or funds itself in some other way.)
This is nothing to do with magic multiplying deposits. It’s because most bank deposits are relatively short-term, and most bank loans are relatively long-term. A bank can’t call in its loan assets anything like as fast as you can clear out your current account/ refuse to roll over your CDs.
Re: fFreddy (#291),
No, unfortunately, it isn’t nonsense. And, ironically, you explain yourself how banks create money ex-nihilo, by lending (log-term) funds that were deposited under the depositor’s believe that they would be kept liquid, thanks to the fraction-reserve rule banks operate with.
Let’s assume that ordinary citizen X deposits $10,000 in a bank Y. X believes that this amount of money will be kept at his permanent disposal. So for him it’s clear that he has $10,000 in liquid money (which is confirmed by checking the balance bank Y keeps for his account). But bank Y lends this money out to citizen Z. Citizen Z thus receives a deposit of $10,000 that he can freely dispose of. Z now also believes that he has a liquid balance of $10,000 with bank Y. Bank Y has thus created money with the stroke of a pen by lending out funds that were actually meant to be kept liquid (as opposed to funds that bank Y could have borrowed from citizens wanting to save them).
Banks are only obliged by law to keep a small fraction of their liquid deposits as reserves. The difference between both quantities is the amount of money they create, inflating the money supply.
Re: Mikel Mariñelarena (#304),
Mikel, perhaps you can explain something to me that I’ve never been able to understand regarding the frational reserve banking debate.
In your example, even though the original $10,000 deposited by X is now on the books as $20,000 in deposits, this does not mean that $20,000 will now be spent on goods and services in the economy, does it? Fractional reserve banking only works because depositors like X only spend a fraction of their account balances over any particular period of time — and it is that fraction that the bank must have as reserves. So how is it inflationary?
Re: Michael Smith (#311),
Re: fFreddy (#315),
Michael,
To see how the system is inflationary, consider what happens with the money that Z, recipient of the loan, receives from bank Y. He spends or invests it and someone else gets the money. One way or another it will end up as a new bank deposit (or several of them). The bank that receives this deposit will behave exactly like bank Y. It will use it to give loans to other people and so on. From X’s initial $10.000 deposit, the fractional reserve banking system creates several times that amount in new deposits with only a small fraction of reserves to back them.
fFreddy: Please read the above. And let’s stop pontificating about “nonsense” and “silly statements”, shall we?
Re: Mikel Mariñelarena (#346),
This explains the Phrase “fractional reserve banking” does it not.
How is this limited then?
Re: Mikel Mariñelarena (#346),
Mikel, thanks for the explanation. I can see how new deposits, when loaned out, can create additional deposits. However, wouldn’t the exact opposite have to occur when deposits are withdrawn? If so, I don’t see how we can label fractional reserve banking inherently inflationary. It seems to me it’s just inherently highly leveraged and will serve to magnify whatever inflation/deflation is occuring. I’d appreciate any additional thoughts you have on the matter.
Re: Mikel Mariñelarena (#304),
No, I snipping well don’t.
Not quite. He has to give it back at some point in the future, according to the terms of the loan agreement. This matches X’s ability to withdraw his funds, except, most probably, in terms of timing.
So X has taken $10k of real money out of the real world and put it into the banking system. Z has taken $10k out of the banking system, and done something in the real world, maybe bought a boat. There is only one $10k of real money.
You refer to the fractional reserve system as inflating the money supply. I disagree. In fact, it is a gamble on people maintaining high confidence in the banking system over the long term.
You say that “X believes that this amount of money will be kept at his permanent disposal.”
Say Mr X decides he would like a boat too. In normal circumstances, he would go into the bank, get his $10k, and get on with it. His belief was correct.
But if he tried to do this when people have lost confidence in the system, and there had been a run on the bank, then he would not get his $10k. His belief was not correct.
And if the bank goes bust, then Z has the $10K, and X doesn’t – and there is still only one $10k in the world.
The ONLY way new money gets created is if the central bank steps in, and prints a load of new money to reimburse X, without getting the same amount back from Z.
I prefer to think of fractional reserve systems in terms of the amount of slack in the system. For example, consider an electrical supply system. When it is state run, or heavily regulated, it tends to have plenty of slack, and can handle an outage of, say, 10% of capacity. When it comes under a regime of profit-maximisation, the amount of slack tends to get reduced, and a relatively small outage will cause the whole system to fall over, and widespread blackouts.
(Is this what happened in California in recent years ? Dunno – but it is going to be happening soon in the UK.)
Incidentally, if you Google “fractional reserve” you will find blog posts from people saying “so fractional reserve means a bank takes $10 in deposit then lends out $120, right ?”
This seems a natural misunderstanding (which I am sure Mikel does not share) of the statement that “fractional reserves inflate the money supply”, and further adds to my feeling that we should stop repeating this silly statement.
Re: Sam Urbinto (#251),
As far as I know, the only physical assets involved here are houses. I’ve looked at dozens of these foreclosed (or facing foreclosure) houses around the Atlanta area and most of them are, to be blunt, absolute dumps. What condition will they be in after they sit unoccupied — and therefore unmaintaned — for another 3, 4 or 5 years?
What’s more, looking at the following graph, it looks like house prices — even houses that are occupied and well maintained — are destined to fall a great deal. What will a run-down house be worth when the prices of even well-maintainted homes are falling?
Re: Michael Smith (#261),
A very good point. Perhaps the banks having to eat the subprime and derivitive stuff is better than the government having to do so. Maybe it’s better to just foreclose on everyone and auction it all off to those entities that (and least for now) have the cash or credit to do so.
On the other hand, these properties do sit on land, right? Maybe it’s time for a bit of government sponsored urban redevelopment, like some of the programs from the Great Depression or the New Deal. Assuming we don’t end up back there before action can be taken, that is.
The problem is the many elements that exist now that didn’t exist for most of the first hundred years of the industrial revolution (say, 1850-1950 or so). A world economy. Fossil fuels as a if not the major player in the economic dynamics. The level of technology and communication that exists. Deficit spending and trade levels. Stuff like that all, overlapping and interlocked.
Oh, and 7 billion people.
Enough about the Austrians. They are ideologues, and just like any ideologue, they only see in blacks and whites, in extremes, in simplistic forms. I’d argue that economy is way more complex right now, and I’ll argue that perhaps no one knows exactly what is going on. People have clues. Some of those clues are based on something spot on. Some others are just lucky coincidences. For instance, if you are a doomster crackpot prophetizing collapse for enough time, then maybe you eventually get it right. It doesn’t follow that you have a clue of what you’re talking about.
To give another example, take Warren Buffet. Hardly an “Austrian Economist”. He clearly predicted this mess of derivatives and mortgages as a time bomb several years ago.
Re: Luis Dias (#255),
Can you give me an example, please, of where the Austrians are wrong?
Steve” Ive asked people not to discuss generalities, including this.
Re: Luis Dias (#255),
OK. But not only the Austrians predicted this crash (and the 1929 one, as well). They also have a theory of the business cycle. What is yours? What alternative is there outside of the Austrian framework to avert the recurrence of these destructive cycles?
The Nays have it? This is pretty high drama. The FDIC brokered a wachovia takeover/merger by citi. Interesting times indeed.
Lucian Bebchuk , (his CV), has this to say (an abbreviated version).
An important difference between now and the Depression is that in the Depression the vast majority of people were involved in agriculture and you had a collapse in agricultural commodity prices. The proportion of the world economy accounted for by the US has declined a lot over the past 30 years and this crisis is right now entirely American. What impact will have it on India? MAybe not as much as people might think.
Re: Steve McIntyre (#265),
In the Deepression, farmers were ht hard as everyone else was. They did have an advnatage in that they could, at least, grow some of their own food. For urban dwellers, this was not so. Farmers could not sell their crops because people had no money to buy them. So crops were dumped while people starved in cities.
The recent Russell Crowe movie “Cinderella Man” told teh story of teh boxer James Braddock. it depicted him and his wife burning their furniture for heat and feeding their children wallpaper for the paste.
I certainly hope that their is a difference between the near future and the 1930s.
Re: Steve McIntyre (#265),
Steve: two things stood out with the Agrarian economy of the time. Crops and animals were destroyed, deliberately, to increase prices through scarcity. Unthinkable but true.
The emerging drought, dustbowl, forced millions onto the road and into cities.
On topic is this article in SCIAM about Quant software.
http://www.sciam.com/article.cfm?id=after-the-crash&sc=DD_20081121
regards
Sam, here is an illuminating article: Link
Re: Michael Smith (#266),
I should mention I never did comment upon what I thought should happen. Since A) We have no control over what happens and B) What should happen will. And has been.
To the article: Exactly. Clearly, we can trace a lot of this mess back to Greenspan and Bernanke. I don’t let Paulson off the hook either. Nor do I trust economists (especially those in what are at least semi-political situations) yelling and screaming as if it’s the end of the world. But there’s more, from “subtle” pushes for looser lending from both the Executive and Legislative branches in the U.S. from both parties, although it appears certain problems stem more from the actions of one party on the issue of offering too much credit to too risky borrowers.
One thing is clear; the timing of this is interesting, to say the least; a short election cycle and then this basically pushing it out of the news.
Re: jim edwards (#268),
Politic-speak takes a fine ear to parse, indeed. My point was that if assets worth .30 were bought at .05 that might make sense. Not that it was actually true in the case of this “bailout” (government funding of private debts, or whatever you want to call it.) But did anyone think this was going to go anywhere? First, the party with the votes to pass anything on their own pretty much cries for bi-partisanship. Then when the vote comes on Monday, the other party sees all of them voting no! So seeing the not-very-well-hidden ambush, indeed goes along with them, voting no also. Ha, what a surprise. I would bet that was the plan all along. But then again, nothing surprises me when it comes to the repubocrats.
Certainly, a loss of 1.2 trillion in capital in one day (well, on paper at least, of course) then followed by a bounce back to the cost of the supposed plan puts us about even; but still with the problem. What problem? Badly run financial institutions get bought out or fail? So what?
Sorry, I’m not a climate scientist; I’ll not forecast the future. 🙂 My opinion? It’s always been pretty much just like the article Michael linked to; let the market sort itself out, shake out the winners from the losers and let the strong survive. Like happened with the railroads, automobiles, telegraph, telephone, Internet and so on. Nothing new. It’s just “the markets” now.
Re: jae (#284),
Yep. That’s pretty much it.
Re: sameera (#294),
The geo-political world-economy land power control situation, running on food and fuel, almost all revolves around stabilizing a region of the world by a country and helpful allies? Dude, please.
Re: nanny_govt_sucks (#296),
Did anyone really expect otherwise? I mean, those paying attention rather than indulging in wishful thinking.
Various: And AIG stock (for example) was at around $70 for most of the last 5 years; now it’s at $3 — compared to losing 40% of the value of a property? Well, okay. Sure.
And about how much money there is; it’s to a large extent wrapped up in long-term government bonds I believe. A lot of it in foreign hands. But where do they dump it if things go south? This isn’t a national problem, it’s a world problem. We’ve just started.
Just remember the words of the great Roman statesman Quintus Sertorius:
“All the insight in the world, right or wrong, makes no difference if you don’t have the power to implement or the ability to impel others to do so.”
Okay, you’re right, I just made that up.
But seriously; why does this look so much like AGW? 😀
For those of you still confused, read through this topic and then think about why the current financial mess is so hard to get a consensus on.
🙂
We have a huge trade deficit. Not only from fuel but in manufacturing. The great depression saw agriculture in major difficulty as well as the manufacturing segment. So far our manufacturing has been exported to foreign countries leaving agriculture still intact in the U.S. We now have a failing service economy. Our troubles will migrate to those countries that manufacture goods for us. If we solve the current liquidity problem we had better look at solving a major source of the trade deficit, energy.
Is not the root cause the bad judgement of a large number of ordinary people spending money on housing when they could not afford it? Is it not therefore logical that these overextended people pay for their excesses by cutting down on lifestyle a little? Is it not also true that a major help would come from a shift in employment from sectors that merely redistribute the money of others (we have too many of these) to sectors that actually create new wealth and saleable hard products (in which I include Intellectual Property and energy)?
The next excesses to be cut are those causing Global Warming (we are told). The notion that a person, not his neighbour, will actually have to give up a great deal to meet GHG targets has not yet sunk into the community. Try asking people what THEY are going to give up for the Global Warming cause in which they believe and you are likely to get responses that will scarcely change emissions.
Re: Geoff Sherrington (#274),
How is the economic crisis going to be limited to “overextended people”. And how is a collapse of the credit system be limited to “cutting down on lifestyle a little”?
We are in a desperate situation and people are providing lectures on economic philosophy and quoting nostrums about limited government. From the house floor today:
I wonder how much food and shelter that “convictions” will buy for a family that has lost their source of income. Recall Damon Runyan’s observation that btoht eh rich man and the poor man are free to sleep under teh bridge.
Re: Geoff Sherrington (#274),
Actually Geoff it was not bad judgement for many ordinary people, but good judgement.
In a number of states (including many (most?) in the sunbelt) a lender only has recourse to the home itself, and not to other assets. Very different to what we are used to in Australia. Loans also came with honeymoon rates for the first year or two which meant you could actually pay the loan for a couple of years. There are then two outcomes: if property prices hold, you simply refinance for another honeymoon loan. If property prices tank, you hand the keys back to the bank and lose very little (you’d be paying rent during that period if you werent paying interest, so very little risk for a potentially large reward).
So for the ordinary person taking a sub-prime loan in those states, the manner in which banks were lending meant that they had very little risk.
Its the sunbelt states that are seeing prices tank (the combination of loose credit and poor regulations meant that investors also took the opportunity to buy where sunny), as well as areas like Detroit where a lot of people have been laid off.
Of course, there are people who did overextend themselves in states where limited recourse is not in effect, and they are suffering. But from the last figures i saw most of the house price pain was centred around the sunbelt and other slect cities like Detroit.
As for the solution to this problem; its very difficult. The main concern will be trying to prevent serious runs on banks that will destroy the financial system. I dont believe that the bailout is the right option as it sends the wrong message to the risk-takers. The FDIC also sends the wrong message; it introduces a moral hazard. If deposits are insured then risk-takers will feel more liberated to take excess risks, and drag their competitors with them.
If the bailout was focussed on underlying assets, perhaps it would be more effective? Not sure, there is a lot of complexity to think through.
One thing i dont understand is why the bailout was announced in a realtively certain fashion when it was far from certain that it would be voted through. Its introduced far more volatility, and a falling market puts added pressure on financial institutions.
Re: poid (#289),
That’s simply not true. Not that the details are entirely wrong. Yes, there were teaser rates, or interest only loans. Yes, people did get in over their head thinking that either in a year or two, they would make enough to cover the payments, or the value would go up sufficiently that they could sell for a profit.
But if you think a foreclosure on your credit record is no big deal and you’ll just walk away, you are mightily mistaken. It may not be quite as bad as a bankruptcy, but I can pretty much assure you the extreme difficulty you will experience in trying to obtain a future mortgage will a foreclosure is on your credit report. And it affects not only future mortgage availability, but also the amount of credit you can get in other areas (and the rates you pay as well), on credit cards, installment loans, vehicle loans, etc.
You might be able to walk away and escape the payment, but it will have a significant, long-term affect on your financial situation.
Re: Jonathan Schafer (#298), This is actually the core of the matter. Mark to market accounting understates risk in a rising market and over states risk in a falling market. So the subprimes seemed fine due to a flawed method of evaluation, now they seem worse for the same reason. Properties bought at the peak lost about 40% of their value. Older homes did not lose any real value unless the owners over extended their HELOC. It is a lovely mess to be sorted out.
Re: captdallas2 (#301),
A better approach would be to mark to cost initially, with a (say) 10-year moving average using market valuation. This would smooth out a lot of the over-valuation on the way up and under-valuation in a drop, and give banks some time to deal with sudden market-value drops to zero.
Re: Pat Keating (#306), I was considering a ten year moving, but I think a longer term 25 to 30 years is, better for conservative investing. Ten year cycles, give or take a couple years, are pretty common and would tend to skew things.
Re: Jonathan Schafer (#316) Thank you. I agree that it may not take very much to change things. One thing Fannie and Freddie needs to consider is backup funding for the poor paper they issue. I have no problem with lower income families having a chance at a home. I do have a problem with irresponsible lending.
Last Wenesday, Sep. 24th, 166 economists petitioned Congress to slow down.
The petition and signatories can be seen here.
Two columns about the petition here and here.
HBOS accepts a deposit from Alice of £10. HBOS lends this to Bob. Bob deposits teh money in his HBOS account. How much money does HBOS have on deposit? £100, £200 or amything that HBOS ants it to be?
Bob buys some goods from Carole for £50. What does Carole do with the money. She pays down ther line of credit from HBOS. How does this affect HBOS’ balance between deposits and loans?
Banks can create money with the nib of a pen.
Without regulation, the system is unstable and prone to crashes. Contra much of the rhetoric that is flowing around today, the free market is not the best system. it is not even complete system. To function, it needs an extensive set of regulations and intervention when the expeted crashes occur.
Re: Stan Palmer (#279),
Based on this data, HBOS has liabilities of £20 of deposits, and assets of £10 of cash and £10 of loan to Bob.
No, £20. See above.
On the liability side, it has no effect on their deposits.
On the asset side, it changes froma £50 loan to Carole to £50 in cash.
No, they can’t. Where are you getting this nonsense from ?
The same is true with regulation.
You have a better idea ? Pray tell.
Or, to paraphrase Chuchill on democracy, it’s the worst possible system, except for all the others that have been tried from time to time.
Re: fFreddy (#293),
No, they can’t. Where are you getting this nonsense from ?
The money that banks lent out is re-deposited with them. They are then free to lend this money out again. The money they lend out is backed by their deposits but it has been created by the stroke of a pen. As we saw yesterday, it can also be destroyed by the stroke of a pen.
The system works because the same money has been used repeatedly to create wealth. This wealth backs the loans as collateral. The money does not sit dead in strongbox.
To keep the system stable, the banks are regulated so that they do not lend out all of their deposits. This acts to dampen the system so that it is less prone to crashes.
The current plan to buy all the bundles loans containing the toxic sub prime debt seems good.
If the total of the bundled mortgage loans is $700 Billion, the toxic parts,(say 10%= $70 Billion) times the value recovered after foreclosure (say 50%=$35 Billion), after all the losses have worked their way through, the cost of financing= Interest Income received from loans say 5% * $700 Billion = $35 Billion per annum, less government cost of financing ($700 Billion times 2%=) $3.5 Billion. Surplus on fund would be $32.5 Billion times half avg length of loan (10years) =$325 Billion surplus, less $35 Billion Capital loss. $290 Billion final Surplus after 20 years.
The only unquantifiable is the effect on long term Treasury Bond rates, which will obviously be upwards.
PS. Big surplus, that’s why the Dems want a big chunk to go to their special interest groups. 10% of $290 Billion can buy a lot.
PPS. I will arrange this for my usual commission.
This has all been predicted by many for a LONG time–by “auditors” like Steve. It’s about time the bubble broke and forced reform and oversight. It’s a good thing for society, actually. Maybe some more people will understand basic economics.
I asked earlier in this thread why the amount is 700 billion. I wondered why that specific amount. I found out why and it certainly isn’t an answer I can be happy with.
This piece of information is found here –no, I didn’t make this up, you can’t make this stuff up!
You would think that when asking for 700 billion dollars (said by some to be the largest amount ever asked for from the US Congress) that there would have been painstaking caution put in to arriving at this number to justify asking for it. You would think there would be a list of clearly laid out reasons why it’s needed. But there isn’t. There’s only a rush to act now or, I reckon, the sky will fall (gee, haven’t we been hearing all about acting now on global warming too?). There’s uncertainty and fear, well, maybe I should say threats. Threats like this : we were told over the weekend that if this Bill wasn’t passed Americans wouldn’t be able to use their credit cards on Monday. But people used their credit cards today, Monday, the same as always. So since the case for 700 billion wasn’t laid out before our eyes in stark detail it makes me wonder still what really is going on? And how was it possible that it has come to this?
Martin Kenney thinks it’s “crony capitalism” in this column Mistaking Socialism for Crony Capitalism…
I think this economic crisis is solely due to the expensing of money for unnecessary wars in Iraq and Afghanistan.It is the mere factor but management pitfalls also play a role.It will be a difficult task for the Washington to overcome this problem and stand on their feet.
Re: sameera (#294),
Well, you are entitled to your opinion but the facts say otherwise. This situation had nothing whatsoever to do with wars in various places around the world.
Hooray! The stupid plan was defeated. It isn’t often that Congress stands up to government interference in the economy. And on Mises’ birthday no less.
Re: nanny_govt_sucks (#296),
And the world didn’t end yesterday either. Yes, it was a rough day on the Street. Yes, 401K’s and pensions are going down. At some point, the credit logjam has to be broken. But there are ways of doing it without putting one dime of taxpayer money on the line.
The first thing they should do, without even submitting major legislation, is suspend the mark to market rule. I said this a many comments ago on this thread. This sole regulation is the primary reason for the liquidity issues facing the investment banks. Suspend that rule and the capital crunch disappears. It doesn’t solve the long-term problem, but it solves the short-term problem and gives time to deal with the eventual clean-up of the mortgages. That can be done via the FDIC and insurance.
Re: Jonathan Schafer (#300), he first thing they should do, without even submitting major legislation, is suspend the mark to market rule.
Re: Jonathan Schafer (#300), We were typing at the same time. I am actually writing an article on Mark to market flaws and ways for homeowners to determine their true home debt to equity ratio. I am using 1950 to 1980 average home price trend extended through today to give them a ballpark estimate. There are a lot of loan options available if you know the real value and reasonable future value. Banks are making lots of deals.
What the heck I make squat for these articles so I’ll post it here for review:
America in Crisis: Home Owner Options
There is a lot of talk on the street about suspending mark to market accounting. Mark to market is assigning a value for a financial instrument on the current market conditions. This is fine for short term commodities but not for long term assets. Home loans are long term assets, at least the ones that we should be concerned about are long term.
Mark to market tends to over value long term assets in an up market and under value in a down market. In the down market we are in, mark to market tends to overly devalue the mortgage loans that are a large part of the current financial problem.
That is the reason that the bail out was considered in the first place. To assign some value to the long term commercial paper, the bundled mortgage loans that are driving our economy down.
These mortgage loans, bundled or not, have value. Determining their value is a complex process because each loan has circumstances that affect their value. Are payments in arrears? How much has the property depreciated? What is the outstanding loan amount versus the current estimated property value based on its true condition (some have been trashed). In general property values bubbled up almost 100% over norm, meaning a 40% to 50% correction is in order for homes purchased at the peak. Older homes have lost no real value unless the home owner over extended their Home Equity Line of Credit (HELOC) somewhere near the housing peak.
That is a crap load of money to lose, but that is a fact of life in investing. Don’t buy high or you will lose your butt. Still those ill advised mortgages have value.
Housing in America has plenty of humps and bumps in its history. How to smooth out these humps and bumps to determine real value requires a little math function called linear regression. Over the long term, 5% per year appreciation is a good estimate using a linear regression from 1950 to 1980. Using that estimate you and your lender can determine a reasonably accurate value for your home. Once you have a real estimate of value what do you do?
If owe less or near the estimated value, sit tight and enjoy your home. If you borrow against your home keep your total home debt in a manageable range.
If you owe more than the estimated value you have more decisions to make:
Can you make your payments? If you can, your home will make you money, it will just take longer than you thought.
What if you can’t make full payments? If you can’t make your payments, shame on you. File bankruptcy and take a seven years time out or you could talk to your lender. Depending on your and your loan lender’s situation you may be able to work out options due to the global financial situation. Rent to own options, shared equity options and don’t thrash the property options. Talk to your lender and keep the payments up or as close as you can while you negotiate. So many homes are being trashed before or after foreclosure that you would be amazed at what lenders will do if you communicate a real plan.
Rent to own option: This is closely tied to the, don’t trash the property option. A home that is lived in and properly maintained has more value than one empty and subject to be vandalized. Any income your lender can make is better than none at all. If or when your financial conditions improve, you can buy your home back.
Shared equity option: This is bit more complicated to negotiate, but is worth a shot. You sell your lender a portion of the home’s future value to reduce your payments to a manageable level. This is similar to a Debt Free Home Equity (DFHE) loan. No money changes hands. You would have to agree to stay in your home for five or more years keeping your payments current during that time. When the home is sold you and your lender share to profit or loss.
Don’t trash the property option: If you are so upside down on your loan that you can’t make payments large enough to pay off some of the principal(negative amortization), you just become a renter. As long as the property is making any money and maintained it has higher value and you have a roof over your head. While this doesn’t sound like a good option, it does buy you and your lender time to work trough the mess.
This is the decade of the deal. I have never seen so many short sales and financing options with banks looking to make anything, not just what they have on the books. Hang in there and remember, mark to market means crap with long term real estate investments. Look at the long term trends.
Re: captdallas2 (#307),
So people are to be blamed because they were idiot enough not to make linear regressions in the period 1950-1980? Really? Do you also believe that the people that took the bait didn’t acknowledge first if they could pay it or not? Really?
So if some illiterate but hard working folk could, in 2005, pay 1000$ per month for their house, but they can’t pay 1500$ or 2000$ nowadays, it was their fault, because they were unable to make linear regressions?
Mind Blowing, the pundits of this age.
Re: Luis Dias (#309),
You know, that isn’t even close to what he was saying. They were two completely separate thoughts. One was about mark to market, the other was what to do if you can’t make your payments. That you would purposefully construe it otherwise is to your discredit and shows you are pushing an agenda.
As to whether it was the home buyer’s fault that they could afford $1000 this year, but not $1500 next year. You bet your rear it was their fault. They signed the paperwork. Buying a house should be one of the biggest decisions in a person’s life. You absolutely have to know what you are doing. Anyone can look at a payment schedule and see what the payments are going to be. If they bought on a teaser rate or interest only mortgage, those facts were disclosed to them during the process. If they were unable to understand what that commitment meant, or all of the other obligations that go with owning a house, such as homeowners insurance, maintenance, etc., then I have one word for them…Rent.
Re: Jonathan Schafer (#313),
No it’s not. You’re the one misreading.
So it was JoeSixpack’s fault that Greenspan made rates of 1% and then it was also his fault that he didn’t predict that it would increase to 3/4% in two years? I guess we should all put to prison all these guys that aren’t paying close attention to C-Span and don’t buy the Economist.
In this case, I’m with you. 60%. But these cases are the minority. Most people were simply surprised to see their monthly bills go through the roof because the whole Ponzi system was starting to collapse.
Now, explaining the 40%. Imagine the following. You have an idiot and a lender. The idiot’s an idiot. But the lender is a banker. He ought to know what he’s doing, BUT he lends the money anyway and considers the idiot as an “AAA” class mortgage client. To put the blame in the idiot would require people to reconsider what the roles of specialists are there for. I mean, I don’t blame Joe Sixpack if he believes unskeptically at Global Warming. He just takes the word of specialists for granted. Likewise, if he goes to the bank and the lender just says something like “Okay, don’t mind the little words, I’ll lend you the money”, general rule, he’ll take it.
To blame Joe is scapegoating the system. THAT is an agenda.
Re: Luis Dias (#314),
If you finance your home with an ARM, it is clearly spelled out that your APR can rise a certain amount over the lifetime of the mortgage as well as a certain percentage per year. That is generally 2%/yr 6% lifetime of loan. This information is provided to the borrower. Again, if they don’t understand, don’t sign the paperwork. If it is explained in a fraudulent way, then that may be an actionable lawsuit. Either way, yes, the bottom line is it falls on the purchaser to understand what they are doing. And you know what, people have been doing it for a long time. People of all shapes, sizes, colors, intelligence, job type, etc. That somehow, now, people are too stupid to understand is just utter non-sense.
No, it’s called personal responsibility. The blame everyone but me is an agenda; it’s a downard spiral where ultimately, no one is responsible for their own actions and look to the government to bail them out.
Re: Jonathan Schafer (#318),
I am fortunate, as for one, I don’t even have a mortgage, and for two, I don’t live in the states. So you can clearly see the absence of my agenda there.
This is where I’m with you. But again, there was no paper referring to the rise of the FED’s rates. The fact that it rose substantially made a bad dent to all mortgages, APR’s et al included. I understand the point made about fiscal responsability. But, again, if the banks eased so much the money it was because they had market pressure to do so, and they ought to know better. They knew, or at least ought to know, that they were lending money to people that couldn’t possibly afford it. That people accepted it may be at fault, but the 99% burden should be in the banks.
It should be straightforward. Imagine that there is a bar. Then comes folk that instead of paying the drinks, they promise to pay later. They begin to understand that the barman is a very “easy man”, and so even him knowing that they won’t pay, he nevertheless accepts their promises. Sooner rather than later, you’ll have your bar full of drunk irresponsible and broke people asking for a drink. Of Course! It couldn’t happen any other way. It’s the barman’s responsability to ensure seriousness in the business, and not allow “promise payments” unless he’s pretty sure he gets it later on.
Re: Luis Dias (#309), No, people are responsible for debt they assume. Unfortunately, lenders made it easy for people to make mistakes. Partially due to mark to market accounting painting too rosy a picture and because of federal law and policy.
One of the most valuable assets of any American is a high credit score. You don’t maintain one by making poor financial decisions. The purpose of the article is to illustrate a simple tool I feel can help people make better financial decisions. The article posted is a rough draft so I will consider changing the tone, but personal financial responsibility is a part of life in American.
Re: captdallas2 (#308),
Captain, I think you show how one could proceed given that the legal system would allow all this flexibility – I think perhaps that it does not.
Re: Luis Dias (#310),
Methinks that we never have a problem that lacks from finding and identifying victims, but for this one we seem to be working overtime.
Re: Kenneth Fritsch (#312), The options I listed are legal and happening. The shared risk option is limited, but with mark to market rumored to be changed as I type, I predict you will see more of it.
Re: captdallas2 (#307),
That’s a good article. It certainly makes sense to me and I’m no financial expert, just do a lot of reading. Mark to Market is really driving the value of the mbs’ down right now causing liquidity issues as banks try to raise and conserve capital to maintain the established debt/equity ratios. This is why banks are hoarding cash and not lending to other institutions. This is the credit logjam they have been talking about. Well, suspending Mark to Market would reduce or eliminate the logjam, at least on a temporary basis. Banks would not have to raise capital/conserve cash to maintain the proper ratios.
As you state, these assets have some value. The question is how much. Well, it partially depends on the individual mbs. Since they bundled high-risk and low-risk mortgages together, it’s probably pretty hard to have a good value. Add in the drop in equity value of the backing real-estate and no one really knows what they might be worth. In a sense, nothing, due to the uncertainty and the fact that no one is stepping up to buy them. OTOH, they certainly do have value, from the backing real-estate and cash flow. To me, this is why using the FDIC and insurance to mitigate some of the risk makes sense to me. It is also why the government (read taxpayers) buying up to 700 billion (in long-term national debt) in potentially toxic loans while the banks that did all the bad business are just able to go on as if they made no bad judgements is just plain wrong. Socializing losses is absolutely unacceptable just as socializing gains would be/is.
Do the absolute minimum to break the credit logjam and let the rest of the chips fall where they may. It may be painful in the short run but long term, we’ll be much better off than just masking the problem with a bunch of cash.
BTW, I heard today that part of the bailout bill that would have approved up to 700b would have also increased the ceiling on the national debt by 1.5 trillion in a single day. Yet no one has explained that either.
Also, apparently, it’s no longer being called a “bailout”. Now, it’s a “rescue plan”.
I was not able to post the relevant link/graph so below I have listed the US GDP as a percentage of the world GDP over the past 29 years to the nearest 0.5%. I think when we consider the US financial problems, and for that matter, the balance of payments we should be at least aware of the relative size of the US economy vis a vis the world economy and its changing percentage of the total over time. The graph shows a bimodal distribution with peaks at 1985 and 2001/2002.
1980 = 23.5%; 1981 = 26%; 1982 = 27.5%; 1983 = 29%; 1984 = 31%; 1985 = 33%; 1986 = 29%; 1987 = 27%; 1988 = 26%; 1989 = 26.5%; 1990 = 25.5%; 1991 = 25%; 1992 = 26%; 1993 = 27%; 1994 = 26.5%; 1995 = 25%; 1996 = 26%; 1997 = 27.5%; 1998 = 29%; 1999 = 30%; 2000 = 31%; 2001 = 32%; 2002 = 32%; 2003 = 29.5%; 2004 = 28%; 2005 = 28%; 2006 = 27%; 2007 = 26% and 2008 = 25%.
Jeffrey Miron, Harvard professor (click for CV in this page), and one of the 166 economists who signed the letter sent to Congress, has said this
in his commentary Bankruptcy, Not Bailout, is the Right Answer
I’ll make my first and last comment on this thread. I’m surprised that Steve started it, except I suppose he thought there are so many brilliant people here that we could sort it all out :-). Or maybe he’s trying to get some good ideas on what to do with his shares :-).
My serious point is this. You anti-bailout majority/consensus are IMHO burying your heads in the sand. If you bail out for $700B, you may be going to pay for some or all of that as taxpayers, depending on how the economy does and exactly how it is sorted. ut if you don’t bail out, you risk a spectacular crash which will cost you a damn sight more. A guy upthread just said he lost his $70000 p.a. job. Were any of you listening? That’s you in 1 or 10 or 100 months time if you don’t get behind your leaders. Of course it may be wise to let some banks go to the wall “pour encourager les autres”, which is why a total bailout is worrisome. Then of course, some people, speculators and/or government have to decide who is going to be thrown out of the balloon, and no-one wants to give people that power. But they did so when they invested in a bubble market.
I’m in England; when America sneezes, the rest of the world catches a cold. When America catches a cold, the rest of the world catches bird flu. If I knew where the vaccine queue was, I’d be in it.
Rich.
Re: See – owe to Rich (#329),
You make a lot of good points; the uncertainty, the reality of a global marketplace dominated by petro-dollars, the reliance of quite a bit on the fortunes of an entity such as the US — one that has had a quarter to a third of the entire world GDP as Ken earlier pointed out.
This isn’t some esoteric high-school what-if simulation, this is an extremely complex, difficult, interlocked geo-political and economic type of behemoth that is like a quadrillion ton train moving at 9,000 MPH. So far, the efforts of those responsible or not (regardless of their powers, their intelligence, their methods, their reasoning or their motives ulterior or not) are like a bumblebee trying to stop the train with the air from its wings.
By the way, bumblebees fly because the wings act like reverse pitch semi rotary helicopter blades. They move around 200 bps, due to the insect’s thorax muscles vibrate, like guitar strings or rubber bands might. And the wings bend. This created vortices giving lift on both up and down strokes. So taking into account wing angle and deformation, inertial and aerodynamic forces and the like (body vector).
So, science can prove it can’t fly; if it makes the wrong guesses that is, such as no flow separation and insufficient oscillation amplitude. Considering only fixed wings and not including dynamic stall in your calculations….
It’s all about highly unsteady viscous flows and dynamic boundries!
Bees, AGW, financial matters.
🙂
Re: See – owe to Rich (#329),
In your opinion, that may be so. I disagree. In my opinion, a bailout is just putting a band-aid on the problem. It will only mask it temporarily, not resolve it.
The risk of a spectacular crash is not mitigated by the bailout. It may only be delayed. There’s no concensus that the bailout is required or that it is even good policy.
As to the person who lost a job, well, while I feel for him (and know what it’s like), people gain and lose jobs every single day due to finances and other issues. Should we try to stop every single thing that might happen which would cause someone to lose a job? We might as well just movie to a Soviet style economy where we are all employees of the state. As to whether its me or not in 1 month or 100, maybe it will be. I hope not, but if it is, I’ll survive as will everyone else unless they give up. That’s no reason to jump in and saddle ourselves and our children with another 700m in debt.
Letting the market sort itself out is the best course of action right now. If banks go under, someone will swoop in and buy the assets. Pain for one is opportunity for another. The only real thing of value lost in a bankruptcy is the shareholder value. The debt holders get some or all of their money back or gain ownership of the company and existing assets. And don’t forget, these companies have plenty of assets.
Re: See – owe to Rich (#329),
If we do not put liquidity into the markets we are indeed on the razor’s edge. Even if we do this or a similar plan, we have deep challenges, and there is no guarantee the contraction of the markets will not happen worldwide regardless.
The best plan (after an emergency funding of the capitol markets)is to develope nuclear energy, clean coal, as well as drilling for oil, building refineries, etc. How many people would this employ??
Some of this revenue could then be used to continue developing other non fossil fuel energy. would like to hear some thoughsts on this. What say you!
On a side note has anyone written (a Ross Mckitrick for instance) an expose on the cost of the current “non energy” energy policy?
In the US we refuse to drill, to build processing plants, to develope nuclear, etc; and similar inaction around the world has led to oil being at least $40 to $60 dollars per barrel more then it would be.
At around seven billion barrels to the US, this means a $280 to $420 billion drain per year. Our economy was beginning a nose dive before this financial collapse. Added to the oil cost is the rapid rise in natural gas, electric rates, as well as virtually everything else that makes up the GDP. Add carbon cap market costs. Add tax payer funded AGW research. Add the jobs lost because we have other (often unfriendly and unclean) markets develope our energy needs. What has the entire AGW scare cost?? I would love to see a real paper on this, and appreciate in advance any reference to one.
Under Hurst-like herding creditors need to keep a higher proportion of deposits in reserves.
What has the AGW scare cost the world economy in $s, jobs, political tension, and GDP? I want to know! Could the world not afford to deal with any negative consequences of climate change, whatever the cause, if we had a sound energy policy?
Some say WW II pulled us out of the great depression. Speaking for myself I wish to avoid a WW III.
So instead could we not have a war for energy independence? What say you????
Re: David (#339),
I don’t think “energy independence” is necessarily a good thing. I’m not particularly happy about the 15% or so of our oil that we import from Saudi Arabia, but we import much larger amounts from both Canada and Mexico.
Remember two things:
1)Capitalism works by allowing production of any particular goods or services to gravitate to the most efficient suppliers. Restricting the supply of any particular commodity to purely domestic sources is almost certain to result in a far less efficient utilization of capital and labor, which will cause economic harm, not produce economic benefits.
2) Every dollar spent on imports becomes a dollar that ultimately must be spent on our exports or otherwise invested in the American economy. There is simply nothing else for those who sell to us to do with the dollars we send them. They can trade those dollars for some other currency, but whoever overseas winds up with US dollars must eventually spend them here.
Some people are upset that many of those dollars are winding up invested in US government securities. I personally am opposed to the high levels of government spending that makes it necessary for our government to do so much borrowing, but, if our government must borrow, at least the availability of those dollars from overseas keeps our Federal government from drying up the domestic sources of capital.
Re: Michael Smith (#344),
I agree with some of what you say. And it would be ok for us to trade internationaly with most nations. My point is we must drive down the cost of energy to it real cost on a competitive market.
Now it is artificially inflated by the refusal to develope known resources and dependence on unstable (to say the least) nations.
This however I do not understand
So you are saying for instance that China can and does take our dollars and convert them to their dollars by selling them to whom?
Cannot a foreign nation just convert them to their books at the internationally recognized exchange rate, and then spend them in their own nation?
At any rate I am not against trade. As mentioned I just wish energy costs to not be artificially enhanced by fear of the unknown. And I know the climate senstivity to 2X CO2 is unknown.
Cheers,
David
Today there was talk about moving from mark to market to hold to maturity evaluation of MBS. Hold to maturity has problems in a down market. There is rumor that the SEC is planning a modification of hold to maturity accounting. This could be interesting.
Could we cut back on thought experiments and stick to things that are on the table.
Re: Steve McIntyre (#341), The question was “who would you turn to for advice?”. I wouldn’t trust anyone who couldn’t parse these useful thought experiments. I guess that ends my contribution. FWIW I found myself in agreement with the Dark Lord Black.
Re: bender (#342), That is a huge question. There is plenty of advice out there. Most of it questionable or wrong. I feel you have to listen to all but make your own decision. Paulson, Bush, Cox and Bernaki all have access to all kinds of advisors but, the decision has to be made based
on the circumstances.
Cox, finally is addressing outdated accounting practices. The FDIC is finally addressing outdated insurance limits. Bernaki is hopefully considering the dollar value and not the whining of Wall Street. Paulson, this is just my guess, is considering TARP, Temporary Asset Relief Policy, as more of a bluff than a policy to instill confidence. After today, I have to say that our economy is sound enough to deal with these events. Pretty damn remarkable, all things considered.
Re: Steve McIntyre (#341),
Steve; this is of course your blog. The expanded and even narrow version of your question is of course a (usually taboo here) policy question on what can be done to help the current finacial crisis.
The long term solution ( leaving aside for the moment any possible global AGW disaster) is a push for world wide energy indepenece. The entire world is paying $40 to $60 more then necessary for oil.
On a microcosmic scale the average couple with two jobs is paying $200 more per month just for gasoline, let alone home energy costs, energy driven inflation etc. And this long term solution is on the table. Senator McCain hinted at it when Bill Clinton invited him to his “global initiative” and again in the debate he referred to 700,000 US jobs for nuclear power.
Yet perhaps the audit on what the AGW scare had cost the world economy is food for another day. Yet it must be done and discussed, please. The discussion would be limited to What are the current costs of the AGW claim of catostrophic Global Warming? We do not need to get into policy, just a understanding of the costs.
Re: Steve McIntyre (#342),
What was on the table yesterday was the hue and cry from those pushing to get the bailout back on track that the US stock market index going down 7% or so caused a loss of 1 trillion dollars to US businesses which was then immediately claimed to be more than the 0.7 trillion dollar bailout.
Now if those people making that claim had done the thought experiment that goes something like: One trade was made on each stock in the index and on average the sold prices were 7% less than the opening prices. The index contains a portion the total equities publicly traded in the US. The total market capitalization of all publicly traded companies in the world was 50 trillion dollars (US) in August 2008 and at approximately 12 trillion dollars for the US. How much money was lost in those transactions?
By the same reasoning, US businesses gained nearly 0.5 trillion dollars two days after the bailout was voted down.
Could we, based on that thought experiment, eliminate those commentators making the loss claim as candidates for someone to consult in this crisis?
I am happy to see some support from economists in my position against a bailout:
http://www.bloomberg.com/apps/news?pid=20601103&sid=aNhbZSQz2Vws
— Sinan
It’s not “unknown”. It’s known, but with an unknown amount of uncertainty. Hence the need for audit on that calculation. Can we have a blog ruling on statements such as this, which are OT for this thread and venture off into the realm of junk.thermo.sci, against stated blog policy?
Re: bender (#349),
Bender you may be a great scientist, but you would of made a better attorney.
By the way my comment was on topic in the sense that the long term solution to the world wide equity crisis is to develope the earth’s resources far more effectively then is currently being done while investing in long term solutions to fossil fuel dependency and short term solutions to pollution, water shortage etc, that are “better known”
Re: bender (#349),
Really is this not like saying the answer is 3 C but I am not certain, and I am uncertain how much I am uncertain.
Re: bender (#349),
We have been mainly talking about “short term” solution to what is an economic crisis on the global market. One way or the other capitol has to enter the markets.
I felt like I made a cogent “long term” point in bringing up the possibilities that current energy policy due to AGW alarm has raised the cost of oil by $40 to $60 ppb above what a less restricted policy would be. In the US alone this is a $280 to $420 billion dollar drain on our economy!
One could say that the global economy is at a tipping point. It is possible that the drain caused by the current energy policy will push the world over that precipice, regardless of short term solutions.
In post 348 I said ”
Bender responded.
I explained the relevance above. Now as to Bender’s assertion that it is known, but with an unknown amount of uncertainty.
One could do a great deal of science on the physics of bowling, but if one forgets the goal of knocking down the pins, the numbers will mean little.
The goal of understanding the earth’s response to 2 X CO2 is to help determine what energy policy is wise. If the range of climate sensitivity is 1.2 to 4.5 C (this is my offhand recollection of what I have read) and we are uncertain about how uncertain this range is, then for practical purposes we do not know the answer to meet our goal of wise energy policy. Additionally I do not think we know how much of the warming (even if it is anthropogenic) is caused by CO2.
Also have we ascertained the benefitsl of increased CO2? For instance what is the world wide savings on increased food production and reduced water usage due to the increase in CO-2 ? Do the positive environmental and economic effects of CO2 increase in a linear fashion, while the warming from additional CO-2 decreases logarithmically? Are we not also scientifically certain that that even if Koyoto was followed the effect on temperature would be very small and of little consquence.
To summarise at this point we have the option to put millions to work, and from a base of prosperity, develop renewable energy and 4th generation nuclear technology; or we must go all out (much more then is currently done) and with fair certainty destroy the global economy, shut down fossil fuel production and invade China and India to get them on board, and even then we would have in Bender’s word
but known climate results.
Haven’t read through the whole thread so forgive me if this has already been said, but I think the title of the thread is a bit too exclusive.
This has been a worldwide crisis for some time and many Euro banks are more highly leveraged than US ones and were eager buyers of US MBSs and some countries experienced their own real estate bubbles as well. About the only difference I can see is Europe was a little behind the US in terms of economic slowdown and waited a little longer to address the problem. Asia will be next; Japan is already cratering and has been for some time.
I have read that the T-bill interest rate is now negative. The credit market is so bad that institutions are paying the US Treasury to store their money overnight. They could get 5 or 6% p/a for this from the banks but will not lend.
FAS 157 was only instituted in Nov 2007 so how outdated can they be?
They may be good or they may be bad but I’m not sure they’re outdated.
Steve: Maybe they’ve “moved” on.
Re: Barney Frank (#354), Honorable senator, where did FAS 157 address mark to market accounting?
Hmm, you sure about fixed rate mortgages? Mine wasn’t affected.
And I disagree about where the burden should lie. I’d say more like 80% borrower, 20% lender. If you know you can’t afford a 2% rise in ARM, much less 6%, then you shouldn’t have gotten the mortgage.
From Bloomberg News Service
So companies that sell commercial paper to finance payrolls etc are going to have a difficult time – or so I am told. These companies have no realtion to teh creidt crisis other than being its victims.
Re: Stan Palmer (#358),
The URL for this is:
http://www.bloomberg.com/apps/news?pid=20602007&sid=aAVnE01UExIc&refer=govt_bonds
http://www.time.com/time/business/article/0,8599,1845818,00.html?cnn=yes
From Time:
http://foxforum.blogs.foxnews.com/2008/09/26/opposingviews_0927/
re Steve’s opener:
US democracy allows the electorate to prevail. On any topic this politically charged politicians listen heavily to their constituents. That maybe the only reliable thing you can say about politicians. Lobbyist’s get thrown under the bus when media keep sticking cameras and microphones in politician’s faces.
By and large the electorate gets it right – and they will this time as well. A bailout bill – if desirable, will surface at the right time, with the right focus. The politician’s are not smarter then the electorate, they are just the best at getting elected – as it should be. It’s a 400,000 to 1 ratio; the DC politician’s can’t be smarter.
Media spotlight on Fannie’s and Freddie’s modus operandi, and the last 10 years of the financial sector’s and DC’s mismanagement of that, enables an educated electorate to demand the right decision out of DC.
Damn, I promoted Barney, he is just a congressman.
(#357)
I’ve seen mention of this sentiment repeatedly: “They knew, or at least ought to know, that they were lending money to people that couldn’t possibly afford it. That people accepted it may be at fault, but the 99% burden should be in the banks.”
Of course they knew. That’s the whole point, and the smoking gun. Institutions were TOLD to make the loans in these markets, and they were TOLD that Freddie/Fannie would back them, so there was no risk. Read up on Penny Pritzker, CRA, ACORN, etc. If you miss the government’s involvement with forcing institutions to make these loans, then you’re missing one major factor in why people don’t trust the government to handle this.
Jim
Re #363,
Captain, sir,
Below is a link to the basics on FAS 157. My apologies if you are an expert.
My understanding is, and this article seems to confirm it, that FAS 157 specifically forces mark to model accounting of level 3 assets to consider present market value in determining asset valuation; in essence it forces defacto if not dejure mark to market on the riskiest, most opaque assets.
If I’m wrong please set me straight. (little Barney pun there)
Link here
Re: Barney Frank (#368),
My appologies to Rep Frank. FAS 157 has a blurb “This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.” which I misinterpreted it applied to assets acquired from that date forward. Thank you for bringing that to my attention. The SEC brought FAS 157 provisions to the attention of wall street yesterday surprisingly.
Tax cuts added to the new bill in an attempt to lure some politicians to change their vote from nay to yea. Story seen here :
Senate to Vote on Rescue Plan With Added Tax Cut
But there is no spending cuts in the Bill.
How can a debt problem be solved without spending cuts? As it stands now Washington wants to continue violating common sense. How long can this continue?
Washington doesn’t want to listen to the doctor. There may come a day in the next year where Americans will be demanding they do.
Re: GeneII (#369),
Until the election is over.
Australia has in the past had its own financial problems. From our experience we have moved beyond bailing out companies that are collapsing to attempting to prevent the collapse in the first place. The mechanism that we use is the AUSTRALIAN PRUDENTIAL REGULATION AUTHORITY (APRA).
In a nutshell APRA sets and enforces rules designed to ensure that the institutions it oversees are able to meet their financial obligations – e.g. that banks maintain capital adequacy ratios. They collect detailed financial information from prudential companies and advise the government on what actions should be taken. APRA has power to take their own enforcement measures, such as disqualification from holding senior positions in the financial services industry (as at mid 2005 around 80 people had been disqualified from holding senior office by APRA). APRA is fully funded by the prudential companies that they oversee.
From the following you can see that APRA has been given fairly sweeping legislative authority.
Re: Don (#372),
Don, you beat me to it by seconds. The formula seems to have insulated Australia rather well. Our main worry now is the lemming rush to beat the USA to impose carbon emission trading. Kerchoo!
However, as a diehard free market person, I’d say that the really deep, real cause of trouble worldwide is Feds that set official national interest rates. The free market is only free when Joe Citizen can call for his bank manager to come to his office and hear, “I’d like a loan at X% p.a, please”. And ditto in any country he chooses.
The Feds have imperfect information. As economists, they are not immune from error envelopes around their pronouncements. Much the same as the doubling CO2 question, with the beautiful answer by bender in #349
bender’s 333 is spot on too.
I wish people would not rush to issue diagnoses about whether the US mortgage situation is due to unfettered lack of regulation or the opposite. I personally find such statements to be rather uninformative about the present situation, shedding light more on the politics of the writer than the situation.
There are many nuances to the current U.S. situation that resist simple categorization. In some aspects that IMO should have been regulated, there were no regulations or bad regulations; in other areas that IMO should have been unregulated, there were regulations and bad regulations. Government institutions like Freddy Mac and Fannie Mae are rather sui generis to the U.S. I’d rather understand their role in this a bit better before throwing around simple homilies.
Another aspect to the present situation that doesn’t fall simply into traditional categories is the role of state-sponsored investment agencies (China, Middle East) in holding U.S. securities, facilitating a huge current account deficit that might well be connected to the present situation.
My own sense is that a number of different factors contributed to it. As in the climate area, I think that this blog works better editorially if readers focused on smaller bites – trying to pin down interesting and relevant facts, rather than using it as a pulpit for doctrinaire opinions.
Re: Steve McIntyre (#375),
Steve,
I totally agree that having this thread develop into a clash between doctrines/theories would eventually lead nowhere. However, you asked from the beginning for solutions and insights into the current crisis. Well, there are at least 2 ways to address your request: 1) Focus simply on ad-hoc, short-term solutions for this particular event. 2) Put this event in perspective and offer explanations and courses of action that could prevent similar events from happening in the future. Inevitably, the latter focus requires a theoretical background that some people (including perhaps yourself) will reject a-priori. However it has the potential of offering a much sounder and practical advice. If you were inside that room charged with making the decision you should not want to dismiss this second kind of opinions.
Re: Steve McIntyre (#376),
I think a number of posters here have been attempting to explain the financial problems based on some consistent and basic views of the economy that flies very much in the face of the very pragmatic, emotional and temporary fixes that are being bandied about in Washington and among those willing to provide their favorite band aids to Washington. It is of great interest to me that most of those forming a consensus on the bailout were also part of the consensus who never saw the crisis coming.
The “fixes” being proposed as legislation and by the experts are nearly all self-proclaimed as something that one must hold one’s nose in favoring in the hopes that it will somehow change the psychology of the moment.
I think that an important benefit of these discussions (if you so choose to allow them going forward) is that one can gain a better understanding of how the systems involved in this crisis work. Discussing the individual issues involved would perhaps keep the debate on topic. To that end I would take your comment below as a challenge in explaining how the US balance of payments has contributed to the current crisis. I know some otherwise rather intelligent people in the US who seem to have a very populist and pedestrian view of the balance of payments and its consequences.
Re: Steve McIntyre (#376),
I say let it fail.
This situation is directly tied to excess regulation, that being government issuing mandates to lending institutions to give loans to those who would normally not qualify. The result is extreme overinflated housing values. Check the property values vs inflation for the last 50 years; it is obvious. Now that is a hockey stick!
Insuring failure only prolongs its ultimate destiny of total collapse. Everybody was happy until the bubble burst.
There was oversight, like the fox guarding the hen house. Where are the screams for investigations? This makes Enron look like a child stealing a candy bar from a 5 & Dime.
Politicians are like diapers. They should be changed often and for the same reason.
Sorry, but I just couldn’t resist.
There are 10^11 stars in the galaxy. That used to be a huge number. But it’s only a hundred billion. It’s less than the national deficit! We used to call them astronomical numbers. Now we should call them economical numbers.
— Richard Feynman
Amanda Ripley says to sell the plan:
Find a face: Human beings are not moved by numbers or by vague predictions of certain doom. They are moved by stories.
Rebrand the Bill: The phrase “bailout” is a deal-killer.
Shoot the Messenger: If you want people to support the radical idea of rescuing rich investment bankers, don’t send a rich, former investment banker to convince them.
Be Specific: People need to know what will happen if they do nothing – or if they do something.
——————
Re: Michael Smith (#344),
Actually, dollars are the de-facto currency in a lot of the world, including illegal and black-market financial matters. Think drugs. Also, oil is priced in dollars. There’s also the matter of holding debts of the US in another country being in dollars. So do all the bucks stop there in the US? Not really.
Re: bender (#349),
Sure the reaction of the climate to a doubling of carbon dioxide in the system is known. In terms of knowing how much a house is worth in some calculated range before it’s put on the market, all other factors holding steady, and assuming a willing buyer and seller in an open market. It’s known to be guessed at around 1.5 to 4.5 C, with a few degrees wiggle room after everything is taken into consideration in the system. We know the climate sensitivity quite well. It’s some number between negative and positive infinity. 😀
#366
I wasn’t talking about the lenders, I was talking about the borrowers. The individual needs to take responsibility for their own actions. If you know you can’t afford the loan, you don’t take it. The institutions certainly deserve blame, but I’d place it equally, 50/50 on borrower and lender.
This account deficit has not contributed to the sudden manifestation of the current credit crisis. If anything, it’s delayed it, by providing a reservoir of demand for US debt.
We’ve been running around, buying stuff and handing out IOUs. We could do that indefinitely, as long as our suppliers continue to accept the IOUs. The problem comes when they stop taking the IOUs [bad] or line up all at once to cash them in [worse].
A lot of dollars have been dropping into a black hole, more or less. Now those dollars may come back out of the black hole. There’s going to have to be an adjustment in the price of the dollar, of course.
The fact that this huge imbalance exists may have a significant effect in the future. The ball is in the Chinese court; what can they do ?
The Chinese could start spending some of this money, which would devalue the dollar and increase US employment in mining, manufacturing, or services.
They could come here and buy assets, which would devalue the dollar and inflate the value of some real estate [which could be a godsend to some owners and lenders.]. It would lock them into paying property taxes and also put investment capital in the hands of Americans.
They could come here and buy more stocks, securities, or other debts. This would deflate the dollar, prop up the markets, and put investment capital in the hands of Americans.
They could stop buying U.S. instruments, which would increase the interest rate the government has to pay to borrow.
They could sell some of the instruments they already own, which would further increase the interest rate the government has to pay.
They could stop accepting U.S. IOUs entirely, but not without shutting down their own economy.
They could dump all U.S. dollars and securities on the market at once at fire-sale prices, which would temporarily sap the dollar and securities of value, but eventually they’d rebound. This would undoubtedly create great havoc in our society. China [and others who participated in the sell-off] would lose their shirts on their current holdings. China’s export economy would be ruined. Some politicians might look at this as an act of war.
Anything the Chinese do will have some effects, positive and negative, for the economy. The problem for them is they are so wedded to us that they can’t do very much without hurting themselves – unless they reverse policies that prop up the current trade deficit. It seems certain the dollar will continue to weaken [which is bad for people with savings], but unlikely the Chinese will do anything so drastic as to critically impair the U.S. economy.
OF course, it’s delayed it, but it might also have made the day of reckoning that much worse by allowing matters to accumulate so much. My point was merely to forestall stale arguments about regulation-no regulation, markets non-markets in the sense that: is a Chinese state investing company subject to usual “market” behavior? In some ways, yes; in other ways, no. It’s sui generis and needs to be considered in that light. Same with the Middle Eastern holdings.
I’m trying to stop forestall hackneyed arguments rather trying to make a big argument in few sentences. There are a lot of things going on here.
Re: Steve McIntyre (#382),
Once again, this comes back to the existence of the Federal Reserve and U.S. monetary policy. We can’t blame the Chinese for buying our dollars and debt. We can blame our monetary policy, which allows trillions in currency to exist off the radar until inconvenient economic circumstances arise. If the money had been backed by something [gold, U.S. oil / timber / fishing rights, land in Nevada] then the Chinese likely wouldn’t have had this large amount of U.S. securities. The value of the dollar would have had to have adjusted as more and more got picked up by the Chinese and Saudis, and we responded by issuing more money [if we chose that course when money became scarce at home]. Foreign holders probably would have sold declining dollars for assets, rather than using them to buy into securities that paid returns in ever-declining dollars.
But we have the system we have, and there are too many dollars in it. What if the Chinese had stayed away from these mortgage-backed securities ? They would have bought something else, inflating the value of those investments. The people who sold their investments to the Chinese would have looked for something else to invest in. They very likely would have settled on the mortgage-backed securities, for the same reason so many others did. They listened to Greenspan say “there is no national housing market” [implication – downturns in one region have no effect elsewhere] and they believed the involvement of Freddie and Fannie meant their investment had some sort of federal backing.
Re: Steve McIntyre (#382), There are a lot of things going on here. I am somewhat curious why you don’t want regulation or lack there of included. That is a significant factor. Trade imbalance definitely is a problem but as long as intellectual property rights are protected it is not as much a problem. Oil prices are a huge problem both for trade imbalance and inflation. The low value of the dollar is a problem. Too low interest rates are a problem. Consumer confidence is a problem. Investor confidence is a huge problem. The loss of many of America’s blue collar workers is a gigantic problem.
If you want to reverse engineer a solution, put 50 million Americans to work making 20 plus buck an hour doing work that benefits the nation. Infrastructure repair, drilling, refining, manufacturing and construction. Restore the middle class.
Re: Steve McIntyre (#382),
Precisely the reason why people develop models. So that there can be no confusion about terms. No distortion of interactions. No ignoring the implications. Sort of like a GCM?
Re: David (#411),
For those puzzling over my 2xCO2 uncertainty proposition:
3C ± x, where x itself is not known with precision.
Does that help? My point: Waving your hands and saying something is “unknown” or wholly “uncertain” denies the fact that it is partially known.
Yes, this is OT. And who led us there? Not me.
Re: bender (#412),
bender, I’m not against “models” in the arm-waving way that too many people are. I am 100% against modelers being unwilling or unable to clearly articulate the components in an orderly A-to-B exposition so that the key parameters, relationships and assumptions are laid bare.
I’m also against faux precision. I don’t know how one would go about modeling the behavior of the Chinese state investment agency, for example. But it seems like any holder of billions of dollars of hot assets can hardly be ignored in understanding the present situation.
Re: bender (#413),
And my point was that it is not known well enough for the obvious purpose of creating wise energy policy. I never implied that there is no understanding.
The short term capitalizing of the market is necessary. Otherwise we may die a death of 1,000 cuts delivered very rapidly. If however we follow our current very restritive energy policy we may die the same death of 1,000 cuts delivered over a longer period of time, and that both of those methods of death (quickly through loss of confidence in our system, or more slowly through trillions wasted on restrictive energy policy) are virtually guaranteed to happen far more rapidly then the uncertain death of climate change. That was my point.
Dave Ramsey has this plan
The Common Sense Fix
vote to be taken 4 1/2 hours from now, reported that nays will have it again, but let’s wait and see
forgot to say : reason given that nays have it again is because the bail out still looks like rich people benefiting at the expense of the middle class
Re: GeneII (#387),
The reaction of the Dow and S&P500 would indicate that the Yeas have it.
Re: Stan Palmer (#389),
looks like it.
The reasons for this crisis are varied and complex. The crisis can be attributed to a number of factors pervasive in both the housing and credit markets, which developed over an extended period of time. Some of these include: the inability of homeowners to make their mortgage payments, poor judgment by the borrower and/or the lender, speculation and overbuilding during the boom period, risky mortgage products, high personal and corporate debt levels, financial innovation that distributed and perhaps concealed default risks, central bank policies, and regulation (or lack thereof).Overbuilding during the boom period eventually led to a surplus inventory of homes, causing home prices to decline beginning in the summer of 2006. Easy credit, combined with the assumption that housing prices would continue to appreciate, had encouraged many subprime borrowers to obtain adjustable-rate mortgages (ARMs) they could not afford after the initial incentive period. Once housing prices started depreciating moderately in many parts of the U.S., refinancing became more difficult. Some homeowners were unable to re-finance and began to default on loans as their loans reset to higher interest rates and payment amounts.
—————————————–
francis
Link Building
According to Ben Stein (article here), it’s not the primary sub-prime Mortgage Backed Securities that are the real problem, it’s the Credit Default Swaps. These are the equivalent of put options or short positions on the MBS’s (and other debt instruments as well) and the potential for profit on these in the current market is effectively unlimited and involve nearly the whole financial industry.
Re: DeWitt Payne (#390),
Yes, the basic mortgage packages don’t involve much leverage, but there is a great deal of leverage in the Credit Default Swaps. Big profits on the way up if you are long, but big losses on the way down. So now the taxpayer is to bail out the Wall St. gamblers who made a lot of money for a while but now are caught long.
Re: Pat Keating (#397),
Let’s just leave them caught, eh.
But the taxpayer still isn’t completely on the hook. The House of Representatives still has to vote. It is buzzed that it will not pass there and that even 2 yea votes from Monday are going to switch no nay. But who knows what to believe.
Re: Pat Keating (#397),
Actually, the long position doesn’t make that much money. You sell a CDS for x dollars, which is only a small fraction of the total value of the underlying security. Your bet is that the security never goes down in value and you get to keep the x dollars. That didn’t happen, the underlying securities may be nearly worthless and now you owe 10x or 100x dollars to the buyer. Worse, apparently a lot of these CDS’s were naked. There was no underlying security. It was pure speculation and the sellers didn’t hedge their bets at all. These were all private contracts and hence totally unregulated and incorrectly valued on the corporate balance sheets.
Michael, can you expand on this? “wouldn’t the exact opposite have to occur when deposits are withdrawn?” I fail to see how the withdrawal of deposits will “undo” the creation of new money that has taken place once bank Y lent out X’s liquid deposit. But I may be missing something.
The main business of a bank is lending out money to make profits with the interest rate. They don’t keep any liquid assets apart for the statutory and voluntary reserves. In a 100% reserve system banks would borrow money from savers and lend it out to people and businesses, making profits from the interest rate differential. No new money would be added to the system with this operation. The borrower would put the money received in circulation but the lender would had previously taken out that money from circulation and given it to the bank. All liquid deposits would be kept as reserves.
In the current system banks also lend out money that was deposited on condition of it being permanently at the disposal of the depositor. This creates new money in the manner sketched in my example and increases the money supply. Everybody with a new deposit created in this way can put their money in circulation. The larger money supply in the economy can hardly be anything but inflationary.
Hope this helps?
Re: Mikel Mariñelarena (#392),
The withdrawal won’t undo the new money at once, but I think it will over time. Let’s take the very simple case you described in comment 304, which I’ll paste below for clarity:
Now what happens if “ordinary citizen X” withdraws his $10,000 from bank Y? Assuming for the sake of simplicity that citizens X and Z are the only depositors at bank Y, it will have only one choice. It cannot simply take back the $10,000 it loaned to citizen Z. So Bank Y will have to borrow this $10,000 to give to citizen X.
(My understanding is that, in the real world, banks cover this situation by borrowing from other banks or from the Fed.)
And how, eventually, will Bank Y repay this loan? It will repay it when citizen Z repays the $10,000 he was loaned. And when this loan is repaid, both the original $10,000 and the inflationary $10,000 will be gone from Bank Y.
Of course, it’s clear from this example that the inflation that occurs from a new deposit happens much faster than the deflation that occurs when a deposit is withdrawn.
Granted, this is a drastically simplified case, but I don’t think the complexities of the real world alter the fundamentals — however, I could certainly be wrong!
p.s. I see from your profile that “Economics in One Lesson” is a favorite of yours. It is a favorite of mine as well. I wish I could get more people to read it!
Re: Michael Smith (#414),
Hi Michael,
Glad to know Hazlitt’s book is also a favorite of yours. I spent 5 years at university (and many more afterwards) reading economic texts but I don’t think I could recommend a better one to a layman intrigued by economic matters.
As for your question, a couple of thoughts come to mind:
1) My example only shows how banks do create new money from “real money” (assuming X’s deposit was “real money”). But in order to see how this creation of new money translates into inflation one needs to introduce more people in the model and think of what happens with Z’s loan. It ends up (in the most simple case) as a new deposit, which in turn, will serve as the funds for a new loan, which will also end up as a new deposit and so on. It’s easy to show how this process converges to the creation of a finite amount of new money that will however be several times the $10,000 initial deposit under the normal circumstances of a small fractional reserve rule. So, again, we’ll have a banking system operating with a large amount of new money.
2) Let’s stay for a moment with our simple model of only 2 people and 1 bank. In your example, when X withdraws money from bank Y after Z has already disposed of his loan, you’re in effect describing a bank panic. Once we introduce more people and more banks in the analysis, bank Y will be able to sort the problem out (that’s why fractional reserve seems to work) but remember the nature of a large amount of the deposits those other banks also operate with. They are new, inflationary money. X deposited real money but is now withdrawing (mostly) inflationary money. His withdrawal does not eliminate the excess supply of money in the system.
Hope this helps to clarify the idea.
Re: Mikel Mariñelarena (#424),
AAAAAAAAARRRRRGGHHH ! ! !
Sorry, Steve.
Re: fFreddy (#426),
fFreddy: if that was a sign of disagreement, you may want to try and articulate your thoughts in a more understandable way.
If, on the contrary, you were expressing the sudden realization of how wrong you were before, don’t worry too much. You were in the company of prominent economists like the late Galbraith, who also thought that each economic crisis was the result of some particular bad economic policy that had preceded it. He failed to see a systemic problem in the continuous recurrence of booms and crashes. However, he did say a very sensible thing: there is no economic or physical law that provokes the recurrence of these crises.
In any case, one thing is for sure: in a 100% reserve banking system with no central bank monopolizing the emission of legal money we would not be witnessing a crisis like this one. The continuous expansion of fiduciary money must end up in the creation of bubbles followed sooner or later by their implosions.
I’m not dogmatic though. If someone can express what other problems may arise in a system like the one described above, I’m ready to listen.
Re: Mikel Mariñelarena (#443),
To quote (from memory) a little better what Galbraith said: there is no economic or physical law that makes economic crises inevitable.
The Conrad Black article referred to by Steve above seems to make a lot of sense, also a lot of the comments from Peter Schiff leading up to this crisis proved to be be pretty accurate. I happened to see a interview with him a week before the main bank dramas:
http://news.sbs.com.au/dateline/america39s_housing_crisis_557175
It seems that from somewhere around the time of Reagan, the US decided to tone down manufacturing, and become a services economy, currently GDP by sector agriculture (0.9%), industry (20.6%), services (78.5%) according to wikipedia http://en.wikipedia.org/wiki/Economy_of_the_United_States.
Not sure they are very good at a services economy yet, the amount of services they export doesn’t seem to cover the goods they import: http://www.census.gov/indicator/www/ustrade.html
This imbalance explains some some of their huge debt, and downsizing of manufacturing must surely pressure some lower income families who once had members employed in manufacturing, and lost work as factories closed/outsourced. I wouldn’t be surprised if some of those families were attracted to the troubled subprime loans market.
– Ernie.
Companies that actually manufacture products are treated as 2nd class citizens in the U.S. We only recognize things of apparent size as important (Big debt,Big IPOs, Inflated service companies, Inflated government). Our B schools only turnout people that can appear to manage services and maybe an IPO or two. China and India far outstrip the U.S. in producing engineers (approaching 10 to 1). Without manufacturing and the required R and D the U.S. will continue to struggle. When asked to describe the architecture of a computer many of our computer science majors cannot conjure up the workings of a PC. No idea of synchronous or asynchronous. How can we compete when given the choice of buying some equipment with a ROI of 6 months the management structure cannot respond because of the nested relationship of the ownership of the business. The view point of a small technical manufacturing company.
Re: TerryBixler (#395),
This has been my experience as well. Most CS people have no idea how the underlying computing and networking infrastructure work. Hence the Internet bubble. They set up the website but were puzzled when people would not buy pet food by mail order. I suppose the same thing is true of CDS and other derivatives. The people who bought and sold them had no idea how the underlying economy worked. Very complex math used to create models that did not model reality.
If I understand the thumbnail sketch of what is happening here correctly it is this — a group of people who are in the forefront of causing financial problems are now asking for 700 billion (now has become 805 billion) dollars to save their failing businesses. But the money will be repaid so making it a “loan”.
Now let’s see… how about this : since their methods of handling money up to now have been poor then in the real world (meaning,def. ;), the world where you can’t print money to solve your financial problems, where ‘average’ people live) this poor handling of money would have earned them a low credit score, i.e., a SUBPRIME rating. So what Washington is doing is loaning money to subprime borrowers…. I thought we were trying to solve the subprime “crisis”?
…the doctor says to stop hitting yourself with that bat…(see GeneII (#369))
Don’t get me wrong, I’m not against the government helping in some way. But the lion’s share of the corrections need to be left in the hands of the people. Dave Ramsey has a plan that does this, The Common Sense Fix. And the letter to Congress from 166 economists (I posted these both already in this thread) says the same
The Bill still has to be voted on in the House of Representatives. I can only hope it fails there. If not, then I can only hope Martin Kenney is right and “This is simply the final act in a long bout of “crony capitalism.””
Re: GeneII (#398), I read the “Common sense fix” proposal, the name is inaccurate, the proposal requires too much knowledge of industry terminology like “FHA-type insurance”, “mark to market accounting rules” etc. most of the public wont understand it. Not sure why making the real estate and stock markets into tax havens is good for the economy. It all seem investor focused to me, I am trying to find the angle that will help the overall US debt crisis in it, but I can’t see one yet.
Perhaps if a whole bunch of foreign investors were encouraged to buy up the oversupply of empty houses, that would be kind of an export to help the US bottom line. But that would depend on the pros and cons of the US foreign ownership laws how they apply to house and land sales. I don’t know much about those laws being Australian.
– Ernie.
Re: Ernie (#403),
“Rewrite any mortgage that is more than three months delinquent to a
6% fixed-rate mortgage.” i.e. people can keep their houses and continue payments, those payments work toward paying off the debt
“Roll all back payments with no late fees or legal costs into the
balance. This brings homeowners current and allows them a
chance to keep their homes.” and make payments
“encourages mortgage companies to go the extra mile while
working with the borrower—” so to keep payments coming in
“money that stimulates the economy.” movement of money, which is one thing needed now
I can see debts being paid with the Dave Ramsey plan. Is it an explosion of debt elimination? No. But neither would this 700 billion be an explosion of debt elimination. The truth is we still have not been told where this 700 billion will be going. It’s been more than a week and people have been asking where it will be going but still there are no details. Dave Ramsey’s plan is one where people will actually see what is happening. It is real progress that would be seen with our own eyes, held with our own hands.
Did I answer your question?
BTW, I am not just advocating Dave Ramsey’s plan. I have posted ideas from other people in this thread.
Re: GeneII (#404),
The common sense plan sounds great but there or those silly problems of funding and fair play.
You say give every home owner a 6% loan if they are three months behind. I have an 8% mortgage, I’ll quit paying to get a better deal. How about this? If you need to refinance your home, the government buys a share of your homes equity if you agree to stay in your home x number of years. When your home sells, the government gets back their initial investment plus a share of any profit or loss. Yes, the government helps, but not without a price for the home owner.
Ramsey’s FHA type insurance. Sounds great, but those bonds to back the insurance program have to be funded. If the interest rate is not attractive there won’t be enough buyers. If the interest is too high, it costs the government money. One percent too high and it could cost as much as the bailout.
The use of the bailout money is deliberately vague. Here is how I think it is supposed to work. Paulson buys 50 billion dollars of MBS for 30% of their hold to maturity value and warrants in the corporation needing to sell the MBS for liquidity. Whether he buys a good batch or a bad batch they are still worth something. Since the government doesn’t need to hedge, billions of dollars of Credit Default Swaps evaporate. In the mean time Cox frames regulation for the unregulated CDS market.
A month later, Paulson buys another $50 billion MBS at 30 cents on the dollar plus warrants. Owners of the MBS realize that 30 cents on the dollar plus warrants is bull$hit. So they break up the bundles by risk, hold the good ones, sell the okay ones on the open market and plan to sell the crap ones next go around to Paulson.
Next month Paulson buys $50 billion at 30 cents on the dollar but this time the warrants are increased because the bundle is obviously less attractive. The bankers find that it is cheaper to hold these toxic securities if they drop the CDS hedge money they are paying. Regulated and with an assigned value, the CDS market is charging more to insure them.
Next month Paulson tries to buy $50 billion at 30% but finds there is not as many sellers. With ML, MS and GS now regulated because they are banks they are buying MBS based on discounted hold to maturity values. Fannie and Freddie are writing better paper because the taxpayers are up their butt.
Obama thinks about increasing funding for sweetheart low income housing loans, but the radically altered congress wants no part of it. Instead they want to start realistic infrastructure projects to increase employment in their districts. Obama much like Clinton, becomes much more conservative because that’s what the polls indicate he should do.
Eight years later Obama is hailed as the greatest American president because he bailed out the economy.
The End
Of course Paulson’s replacement could screw the pooch and we end up in soup lines watching our national football team Manchester United lose yet again 3 nil.
Re: captdallas2 (#406),
How did Manchester United get into this US fairy-tale, and when do they ever lose 3-0?
Americans DON’T want it!
Politicians’ Phones Ringing Off Hook on Bailout,
93% of calls to California Senator Dianne Feinstein’s office ‘nay’ but she’s voting yes (btw, she’s not up for re-election in 5 weeks on November 4th. Here re-election is not until November 2012.) Dave Ramsey “I’ve never seen public ire like I’m seeing on this” in this video.
Bender #348 said
“It’s not “unknown”. It’s known, but with an unknown amount of uncertainty.”
Now this statement doesn’t make a lot of sense to me. We have a positive with 2 negatives. Sort of 0 + 0 = 1. Now the only place where I can find that equation is an exclusive OR. For those who need a refresher, exclusive OR is
0 xor 0 = 1
0 xor 1 = 0
1 xor 0 = 0
1 xor 1 = 1
Somehow I doubt that the English language is ever Exclusive OR. Do 2 wrongs = 1 right? I somehow cannot, using logic and reason, believe that something known could possible be unknown and uncertain.
Just my 2 pennies worth
I think foreigners to America do not understand why Americans are dead-set against this bail out.
America was built by the people. It was not built by the government. The government did not work on assembly lines during the Industrial Revolution. It does not work on the farms. It does not work in Silicon Valley. It did not build any cars during the hey-day in Detroit. It did not invent the light bulb. It did not fight the wars. It did not win gold medals in the Olympics. It was not a settler in the Old West. It did not build McDonald’s or Wal-Mart. It did not start repairing shoes on the street and then grow to owning a shoe repair business with several employees. It did not lay the railroads. It did not pave the roads. It did not make chicken with 11 herbs and spices. It does not run the busiest airport in the world. The government did not and does not do any of these things. The government did not build America. “We the People” built America. And we are perfectly capable of handling any problem that failing companies, companies that we’ve been told “are too big to fail”, could present. YOU CAN BE CERTAIN that if these places were let to fall there would be people waiting in line to pick up the pieces–it would be an awesome opportunity for so many to grow their businesses and make some more money. The people of the United States are ready, willing and able to handle this situation. America has always been that way. We put a man on the moon–we can handle this too. Isn’t that why people in the rest of the world believe in us so much?
One thing Americans DO NOT want to do is to go in to debt to give the government 700 billion dollars to spend in ways Americans will never see. You guys from outside the U.S. do not know that up until about 1 1/2 weeks ago most people had never even seen Henry Paulsen’s face. Now we are being told we are supposed to trust him with this huge amount of money and with these kind of powers no less :
from TEXT-U.S. Treasury proposal for asset-purchase fund (Apparently the revised bill has oversight in it. But who will be overseeing who? We don’t know.)
We are supposed to leave this problem in the hands of the government?! I think many people would rather give the government the bird than give them this money.
What do you foreigners to America think–should this problem be put in the power of the government or in the hands of the people? Do you foreigners believe in our government or in our people? The problem in America now is a problem of confidence. It is not a problem of lack of solutions. It comes down to this : do we have confidence in the government or do we have confidence in the people? The clear choice is “We the People”!
We need to heed the 166 economists :
p.s. this line “Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency” makes me think there’s something that stinks to the high heavens going on behind the scenes. But maybe it’s just me thinking that. 😉
I don’t have a mortgage or other debts. I’d have to pay higher prices if this plan was enacted. How do I get my free money?
Here’s a beautiful piece of the Senate bailout.
Any foreign owned bank can transfer any chunk of toxic MBS’ to a US subsidiery and then Paulson will buy it. So, the US is in effect bailing out every foreign bank with a US presence.
Anybody at this point believe that the bailout isn’t so much to help out Wall Street as it is to protect the sale of US Treasuries to foreign nationals so that the US can continue to live beyond its means?
I’m struck by the similarities of the financial “crisis” to the AGW “crisis”. Where have you heard these before…
We have to do something now before it’s too late
Whatever we spend now will be recouped (treasury gains vs new “green” technologies)
Bad modeling of financials vs climate
Carbon trading vs derivative trading
I’m sure there’s plenty more out there.
Latest additions to help the bailout pass:
You can’t make this up.
$223M for Alaskan fisherman
$192M for rum producers in Puerto Rico and the Virgin Islands
$128M for auto racing
$33M for companies operating in American Samoa
$10M for film & TV production
$6M for producers of wooden arrows
Steve: Reference please??
The “bailout” bill is now up to 451 pages.
link for 415 http://hotair.com/archives/2008/10/01/senate-bailout-bill-hits-the-internet/
I do not know how accurate but includes section numbers. I haven’t seen the bill yet.
Check out sections 117 and 118 starting on Page 180 of the bailout bail. Apparently some sort of carbon credit/trading cap/scheme has made its way into the bill.
#415 Steve: Reference please??
PDF of 3 page Bill that has become a 451 page Bill. I found it in this blog. My condolences to those who venture to wade through the entire PDF.
Page 132 of PDF
page 154 of PDF
page 175 PDF
page 176 of PDF
I scream, you scream, we all scream for tertiary injectants.
page 180 of the PDF :
pages 300 and 301 of PDF
Hard to buy the idea that this action is saving the world from “far reaching ramifications”.
Now can you readers from outside the United States begin to understand why I say we don’t know where the money is going and why Americans don’t want this left in the hands of the government?
Page 339 of PDF
What the… How the…
The bill is available here.
New Tax earmarks in Bailout bill
– Film and Television Productions (Sec. 502)
– Wooden Arrows designed for use by children (Sec. 503)
– 6 page package of earmarks for litigants in the 1989 Exxon Valdez incident, Alaska (Sec. 504)
Tax earmark “extenders” in the bailout bill.
– Virgin Island and Puerto Rican Rum (Section 308)
– American Samoa (Sec. 309)
– Mine Rescue Teams (Sec. 310)
– Mine Safety Equipment (Sec. 311)
– Domestic Production Activities in Puerto Rico (Sec. 312)
– Indian Tribes (Sec. 314, 315)
– Railroads (Sec. 316)
– Auto Racing Tracks (317)
– District of Columbia (Sec. 322)
– Wool Research (Sec. 325)
Somehow, adding all these things makes the bill more acceptable? The only thing acceptable was the change to the ATM which will remove about 20 million voters from the alternative minimum tax fiasco.
There’s still some hope the house will bail, but from what I’m hearing, it’s more and more likely to pass.
BTW, I wrote to my Senators and Representative. Cornyn and Hutchison both voted for it. No surprise there. Senate republicans, outside of a few like DeMint, Shelby, etc., are generally much more middle of the road than on the conservative side. Dr Michael Burgess, my representative, voted no on the first bill. I actually received a very lengthy reply from him detailing his position, why he voted no, and what he thinks is necessary to get a package passed. I’m grateful that he replied and with such a well thought out response.
From Page 8 of the PDF:
Observe the phrase “without limitation” in “C”. I presume we are supposed to be reassured by section 104, which describe a “Financial Stability Oversight Board”. But if you read that section, the Board’s power seems to be limited to “making recommendations”.
And check out number 3. The Secretary can designate financial institutions to be agents of the Federal Government, who must then do what he wants, provided it is “reasonable”? Who gets to determine what is reasonable?
If the Secretary wants to purchase Bank of America’s “troubled assets” for 10 cents on the dollar, and BoA refuses that offer, he just “designates” them “financial agents” of the Federal Goverment and orders them to make the sale?
After years of listening to complaints about this administration accruing too much power to the Executive Branch, people want to give it these kinds of powers?
Re: Michael Smith (#423),
What people who own Gulf Stream Jets and 30 million dollar mansions on the Mediterranean think is reasonable and what an average person thinks is reasonable could be two different things. 😉
You think they could use some of the money to ensure their lifestyle?… nah
(but maybe that’s what this is all about…nah, who would have such ideas)
I have a vision of a march on Washington by pitchfork weilding people arriving by the busload…
I’m not sure, at this point, which thing is more offending…the carbon content, or the arrows.
To see a situation that is absolutely begging for leadership, and to see such a void is beyond embarassing and very disappointing.
Jim
From George Will–we have been living beyond our means and now it is bighting us back.
“We are waist deep in evasions because one cannot talk sense about the cultural roots of the financial crisis without transgressing this cardinal principle of politics: Never shall be heard a discouraging word about the public.
Concerning which, a timeless political trope is: Government should budget the way households supposedly do, conforming outlays to income. But the crisis came partly because so many households decided that it would be jolly fun to budget the way government does, hitching outlays to appetites.
Beneath Americans’ perfunctory disapproval of government deficits lurks an inconvenient truth: They enjoy deficits, by which they are charged less than a dollar for a dollar’s worth of government. Conservatives participate in this, even though deficits fuel government’s growth by obscuring its cost.
The people can emulate the government because credit has been democratized. Democratization of everything is supposedly an unquestionable good, but a blizzard of credit cards (1.5 billion of them, nine per cardholder), subsidized loans and cheap money has separated the pleasure of purchasing from the pain of paying. Furthermore, the entitlement mentality fostered by the welfare state includes a felt entitlement to a standard of living untethered from savings.”
cont.
http://www.jewishworldreview.com/cols/will100108.php3
Good article
This one on the Monday timeline and other factors is good also.
For Stocks, Worst Single-Day Drop in Two Decades
Re: Sam Urbinto (#429),
Those who bought on Monday had already begun to make money in less than 24 hours. 😉
Re: GeneII (#431),
And have lost it since
Re: Stan Palmer (#432),
wasn’t aware the market fell worse than monday. can you send a link to for this?
Re: GeneII (#433),
Check the 5 day plot
Re: Stan Palmer (#434),
In 1987, the DOW fell 22% in a single day. This week, the DOW hasn’t dropped 10%. The drop is nothing to cheer about, as my 401K can attest to. OTOH, the sky hasn’t fallen despite the best efforts of certain cheerleaders who seem to want it to. You can thank Harry Reid for every major insurer having to issue special statements that they are having no problems whatsoever. His yammering about a “major insurer” about to go bankrupt caused a mini-meltdown for most of the big insurance companies. And yet not surprisingly, none of them are actually having any issues at all.
These politicians were the initial source of so many of the problems, they don’t know what the heck they are doing, they are being completely irresponsible with their comments, and yet they expect us to just shut up and fork over dollar after dollar to cover for their mistakes and their Wall Street bretheren. Well I for one, am darn sick and tired of watching them screw the pooch over and over again, and just keep taking more and more of my money. Isn’t it ironic that while we run a huge national deficit, we continue to take money and give it to nations as foreign aid. Money that we borrowed from other foreign countries?
I could go on and on, but I wont. The bottom line is these people screwed up. Big time and on many levels. A number of good proposals have been put forth to help resolve the problem. A number of bad ones have as well. Hopefully the HR will hold strong and deny the bailout again, then get to work on a real plan that minimizes the cost to the taxpayer, and not give the current or future unnnamed Secretary of the Treasury carte blanche to spend money willy nilly with little or no oversight.
Re: Jonathan Schafer (#435), The market can no longer fall 22% in one day, after October 1987 the NYSE implemented Circuit Breakers to limit crashes, 10% is the threshold. http://www.nyse.com/press/circuit_breakers.html
– Ernie.
Re: Ernie (#437),
yes, but that’s not the point. The point is even over nearly a week, the DOW has not even dropped 10%. There are plenty of people buying in on opportunities while others are losing on their positions. Exactly the way it is supposed to work and the sky is not falling.
Re: Jonathan Schafer (#440),
The New York Times reported yesterday that a fund worth several billion dollars had restricted redemption. This is a fund that served universities. The universities used this as a repository for their operating cash. The fund is solvent but because of the credit crunch it is now illiquid. It cannot sell the underlying securities. The universities will receive their money as the securities mature but are unable to quickly access money for operating purposes. Universities which have not arranged other lines of operating credit are now facing cash difficulties making payroll, student aid grants etc.
The point is that the underlying economy is relatively sound but they financial system is facing a crisis of confidence. If it is left unchecked this can spread to the broader economy. If a university cannot make a payroll, even though it has sufficient assets, this is going to affect other businesses in its area. This is a contagion that can spread.
Recriminations are not going to help here. Statements about the benefits of the free market are not going to help either. Keyne’s great contribution was to show that there can be multiple equilibria in the economy. We can have an equilibrium with prosperity and full employment, There can be other equilibria with poverty, hunger and unemployment. This was the equilibrium of the 1930s when there was a surplus of manufacturing capacity but no one could buy anything because no one had any money. The lack of money reinforced the unemployment that caused it and so an era of persistent poverty was created.
This poverty was a property of the free market just as prosperity can be.
Re: Jonathan Schafer (#440), 799 key stocks have been restricted from short selling, they don’t want a 10% drop in a week! It’s not 1987 anymore. http://www.nytimes.com/2008/09/20/business/20sec.html
Short selling and automated selling programs, have been blamed for the magnitude of the 1987 crash.
– Ernie.
Re: Jonathan Schafer (#435),
This money is not coming from taxes. It is being created out of nothing. The problem that the world is facing now is deflation. The economy will be severely affected because a great deal of money is being destroyed by a crisis of confidence. What the economy needs now is money.
The response of Hoover in the 1930s was that of “sound finance”. Taxes were raised to bring the books into balance in order to restore confidence. This choked off any recovery by removing the money that people had to maintain the economy. As a result deflation and the resulting poverty set in. This was the operation of the free market. It can create poverty as well as wealth.
Sir Humphrey, in a special edition written by Dame Margaret Thatcher discusses a possible fix to the economy in
http://www.yes-minister.com/thatcherscript.htm
Sensitive economists might not wish to read this.
Stan, a free market does not feature the following elements: a fiat money supply, a government-controlled central bank with arbitrary power to expand/contract that money, fractional-reserve banking with reserve requirements dictated by the government, a massive tariff (Smoot-Hawley) that imposed an effective tax rate of 60% on over 3,200 products imported into the United States, banking laws that restricted banks to local markets thus denying diversification and making banks extremely sensitive to local economic conditions, a National Credit Corporation and a Reconstruction Finance Corporation both funded by taxes imposed on sound banks for purposes of subsidizing unsound ones, a President (Hoover) that personally intervened in wage negotiations and forced businesses to keep wages high even as demand was falling, and a blizzard of interventionist regulations agencies and acts including the Agricultural Marketing Act (1929), the Federal Farm Board (1929), the Norris-La Guardia Anti-Injunction Act, the Timber Conservation Board and the Federal Oil Conservation Board — just to name a few of the statist, interventionist acts and entities that were involved in precipitating and prolonging the Depression.
To blame the Depression on a “free market” is like blaming it on Martians — you‘re blaming it on something that simply did not exist.
Steve: I’ve asked over and over that people not argue over generalized concepts like “free market” or “regulation”. Don’t use this as a pulpit.
Re: Michael Smith (#444),
This reminds me of Henry Ford paying his workers $5/day. With this wage, people could buy his cars and if he paid it others would have to as well. So more people would buy his cars. The police had to be called multiple times to control the crowds of people applying for these jobs.
It is also reminiscent of a column I read in the Times of London. The columnist was talking to a banker about the current economic problems. The banker said this time would be better because businesses would respond more quickly by cutting back on staff, purchases etc.
So it everyone cuts back on staff, purchases etc, what happens to the economy? Cash is conserved but the economy falters.
Re: Stan Palmer (#458),
You can’t create economic growth by simply raising wages. All other things being equal, an increase in wages granted by a company means a decrease in some other spending — usually it means a decrease in profits. But profits get spent in the economy just like employee wages. Any increase in “spending power” granted to the employees will mean a corresponding decrease in “spending power” for whoever is receiving the profits.
And even if the decision to pay higher wages causes other employers to pay higher wages, the same logic applies to them. Any increase in the “spending power” of their employees will be negated by the reduced “spending power” of whoever is receiving that company’s profits.
What’s more, under no conditions can anyone make money by simply giving their employees enough money to purchase the company’s product. If your cost of wages equals the sales price of your product, you will definitely lose money.
Only an increase in productivity can result in a net increase in “spending power”. As Ford perfected his manufacturing technology, his output of cars per man hour of labor rose drastically. This allowed him to pay a higher wage without suffering a net increase in the cost of his product — in fact, he reduced his costs so much that he was able to lower the price of his cars, meaning that his productivity improvements increased everyone’s “spending power” by making their dollars buy more.
Stan, in the case under discussion, the economy is already “faltering”. A lower demand for one’s product means less money coming into the business. Therefore, if it continues for more than a very short period of time, there will be less money coming out of the business. If you don’t cut back on staff and purchases, the result will be a “cut back” in profits.
As noted above, profits get spent just like all other money. A dollar diverted from profits to maintain employee wages simply means a dollar that won’t be spent by whoever is receiving the profits. So you do not “limit the damage” by maintaining wages and spending.
I strongly urge you to read, “Economics in One Lesson” by Henry Hazlitt. It’s easy to read , easy to understand, has little in the way of math and statistics, but a whole lot in the way of logic and reason.
Almost all the punditry on the bailout takes on the cast of propaganda, much like the pro war frenzy about WMD. I immediately discount any advice these sages have about how to fix things. Looking about for somebody that seems to speak reason on it, I am of the Ron Paul- Peter Schiff persuasion. The doom predictors say the world will end in a couple of weeks if we don’t pass this.
Well lets do nothing and watch the weak banks fail, watch the wise arise to take their place, and it wont take take more than a few months. To go from 0 attention on the dial to national disaster overnight tells me they craft the news to not spook consumer confidence. So it’s pure propaganda, the press and both parties. Peter Schiff wrote books on this long before it happened. (crash proof) and the court economists dismissed and almost ridiculed him. Steve, I hope you would be more sensitive to this clique/herd propaganda media blitz and look about for other opinions.
If you serve only the truth, you don’t have to worry about ridicule because you will be have your day.
They “create money from nothing” is accurate. The government prints/issues interest bearing bonds, and walks across the street to the federal reserve, which buys them (as if they are in investment for whatever piddly yield they have), and the government then opens a checking account for the “money” the fed paid them, and gives it to whomsoever they deem worthy. This will kill
the dollar and need to stop this circus. Why tax anybody then? Taxes are obsolete.- hell just run this scam and Paulson has all the money he needs, aparently without anybody being angry about
being taxed.
Re: Lawrence Hickey (#446),
People are taxed to pay for the services they get. If they weren’t taxed the money supply would increase and teh value of money would decrease -.i.e. inflation.
The problem now is not inflation. It is deflation. If you think inflation is bad, you will think deflation is very bad. The value of money goes up but the value of everything else – people, goods, services – goes down. People who have access to money through government pensions, salaries etc. can live very well indeed. Everyone else will be destitute.
The doom sayers are pointing to the experience of the 1930s. Believe them, it was real.
Re: Lawrence Hickey (#446),
Money is nothing. The real wealth of the economy is in the people, the infrastructure, the ideas etc. Money is just a medium of exchange that is useful to maintain eh economy. If the money system has problems that are affecting the operation of the real economy then the money system should be fixed and not allowed to destroy the real wealth. This is what the proposal is about.
The dollar will not be destroyed by this. The danger is deflation. The value of money will increase. No one will part with it to buy anything. So the economy and the people who depend on it will be injured.
Re: Stan Palmer (#451),
Money, as a medium of exchange is enormously valuable. It is not just for immediate use, it is a storage of value over time. It allows people to decide whether to buy now or buy later or not buy at all.
How your regard inflation and deflation depends entirely on whether you are a borrower or a lender. Inflation is the borrower’s friend. It assures that he will pay back money of lesser value than that which he borrowed. Deflation is the lender’s friend. It assures him that he will receive money of greater value than that which he lent.
Neither inflation nor deflation is a problem so long as they are consistent and predictable. The market rates for loans adjust quite quickly to perceived increases or decreases in the long term value of money.
If a banking system decides, for whatever reason, that debtors should be helped then it will likely increase the amount of money in circulation thereby lowering the value of the money which must be paid back. This almost always occurs when the biggest debtor is the entity that controls the banking system i.e the government.
This helps short term but the as the market adjusts to the new inflation rate the amount of money in circulation must be increased again if new debtors are to be given the same advantage as old debtors. Eventually, that leads to runaway inflation.
When Paulson, et al talk about “stabilizing” the financial markets I really don’t know what they mean. Historically, the markets are most stable when the inflation rate is consistent. Is the goal of the plan a stable currency, a consistently devaluing currency or a simply a burst of money into the hands of borrowers?
The constant talk about “frozen” credit markets seems deceptive. Dave Ramsey, who offers economic advice on the Fox business channel, says that there are basically three credit markets. There is a credit market that deals primarily with loans between banks and very large businesses. That market is frozen solid. Apparently either banks don’t have any money to lend because the value of their assets has plummeted or possibly banks don’t think that other banks are good credit risks.
A second market is for loans to consumers with good credit. Ramsey said that there is no problem in this market. I believe him because two of my credit cards have had major increases in my credit lines in the last two weeks but I never requested any increases. In fact, I have been reducing the amount of debt for several years and do not want any more credit. I also continue to receive offers for credit cards with very good rates.
The third market is for loans to consumers with poor credit. There is no money for that at all and considering the mortgage mess this shouldn’t come as much of a surprise.
Can a massive injection of capital into various loan markets “save the economy”? Or is it only a move to save debtors for the short term? Who knows? A month before a presidential election just about anything can happen and you can’t tell if it’s real or if it’s politics.
Re: Bob Meyer (#453),
Because he does not mean American ones.
Mebbe Bush thought he could ride out a whole eight years of overseas financing for his grotesque spending without the feriners callin’ in dere chits.
In the words of Maxwell smart – Missed it by that much
Re: Bob Meyer (#453),
That is wrong in so many ways that I don’t know where to begin. I’ll just say that both deflation and inflation cause misallocation of resources and thus reduce economic efficiency. Just because markets can adjust to low levels of deflation or inflation doesn’t make either a good thing.
Re: DeWitt Payne (#456),
A moderate level of inflation encourages people to spend and thus aids the economy. The want to get rid of money to create assets that appreciate. For example, it encourages R&D spending.
Michael Smith has it right. Since Roosevelt’s presidency the fantasy has persisted that Hoover was a do-nothing laissez-faire president who sat by idly watching the failure of the market. Then along came Roosevelt who promptly fixed everything with massive government intervention effectively ending the Great Depression within a few minutes of his inspiring televised speech to the American people.
Few people have bothered to check the facts. Those who did know that the depression was deepened and extended by Hoover’s and Roosevelt’s actions. But then, how many people know that the earth’s temperature has not changed significantly for the last 10 years? Then consider that, unlike the Depression, they actually lived through this period. For them the Depression is only a tale told to them as children by their parents and grandparents.
Things will undoubtedly get worse for a while but bear in mind people actually did survive the first Great Depression.
Steve: Again I do not want people to argue about laissez-faire.
Steve said:
“Again I do not want people to argue about laissez-faire.”
I wasn’t arguing the merits of economic systems, I was agreeing with Michael that you first have to get your facts straight. I was further pointing out that most people don’t bother to check facts.
If you are trying to understand the progress of a disease you have to know something about the patient’s history. Your beliefs about the causes of a disease control how you look at the problem.
For years it was believed that ulcers were caused by stress or bad eating habits. Doctor who diagnosed ulcers were guided by these beliefs and looked at the patient’s history for these factors and treated them on that basis. The problem is that ulcers are not caused by stress, they’re caused by bacteria. The false belief in stress resulted in millions of dollars of wasted research and millions of people undergoing useless treatments. There’s nothing evil here, it’s just the normal progress of science.
Facts guide your beliefs and your beliefs guide your search for facts. These are complementary processes and a basic error in one or the other prevents all progress in that area.
No one wants this forum to become a political debating society but to understand any problem you have to begin with the facts.
Thought many were saying the bailout would give confidence to the stock market?
Looks like people are believing with or without a bailout this situation is going to take time. (Nouriel Roubini talks in April about how long he thinks it will last.) It could have been solved in the private sector instead of the public sector. It would have been much less expensive that way, would have built more confidence in the American people, and would not have required (as I’ve heard but don’t know if it’s true as I also don’t know if what so many things that have been said in the last 2 weeks are true or not, but this one does sound reasonable) a deduction from payroll checks for the next 10 years to pay for it, i.e., a raise in taxes — just what people don’t need right now. I would rather have had confidence in the American people in the private sector than in the government.
But my opinion amounts to nada.
(BTW, who really cares if the stock market is up or down on any given day? Is it a trustworthy gauge for anything? Seems to be a weak indicator. Seems like there has to be far more reliable gauges–but again, my opinion counts for nada.)
“Thought many were saying the bailout would give confidence to the stock market?”
It will. To the European bourses. But only temporarily. US stock markets are irrelevant here. The administration merely played some “scar’em” games about the stock market to push the monstrosity through. Smart people juiced the market up before the vote, then sold. A counterintuitive strategy if one follows the Bush/media’s interpretation of the ups and downs of the last week as it related to the bill. Intuitive, and acccurate, if you saw what Bush and the urban Democrats were up to.
Wisconsin Congressman Paul Ryan seems to be one of the few Congressmen that seems to know what he’s doing and has the courage to act in the country’s interest rather than doing the popular thing to get re-elected. See the op-ed in today’s WSJ : What Leadership Looks Like. In fact, with the exception of their token liberal op-ed contributor, the WSJ editorial pages are far and away the best sources of information and opinion about the current problem.
#459. Again, as an editorial position, I don’t want to use this blog to have pointless debates about the pros and cons of inflation. OTher than to say that I will bear the scars of 1970s inflation until I die. People worry about increased interest rates today – well, in 1980, I was doing well, but my mortgage rollover went from 8% to 22%. I had friends that lost everything.
I’ve seen inflation from both sides now, both up and down, and still somehow — low inflation is better.
Please no more discussing this here.
self-snip that reply.
Sorry, but it’s hard to talk about the current situation without reference to the value of the currency.
Steve: there are a couple of different issues in the currency. One is the relative value of the currency to other currencies. If the currency is out of line, then you can’t hold the currency merely by domestic policies and, yes, there will be increased costs and a lower standard of living. I think that the role of the US dollar as a reserve currency has papered over problems for quite a while. I don’t see how the US can ad infinitum import oil from the Middle East, cars from Japan and stuff from China by selling bonds and mortgages. And whether I or anyone likes it or not, there may well be some painful adjustments to come that can’t be wished away. I think that there may be a unique severity here because the role of the US dollar as a reserve currency has permitted the situation to continue unadjusted for far too long and massive imports of stuff have resulted in the destruction of economic “ecosystems” in the heartland (i.e. manufacturing skills and knowhow) that take years to build up and can’t be turned back on by changing policy now. There’s also no law of nature which says that someone from the US can import a barrel of oil for 2 hours of work, while someone from India has to work 2 days.
Look, inflation is an option in a complete mess (Which may well apply right now). All I’m saying is that it is a very destructive option. Rather than get into ongoing inflation, I think that policy makers would be better off figuring out where the US currency needs to be to be competitive in the world, take the haircut, tell people that their standard of living is going to be reduced by x% as a result.
Re: Steve M.(#461),
Yes, this would be very much better than what we have now. If you watch some of the YouTube videos with Fed Chairman Ben Bernanke’s testimony before Congressional oversight committees, it’s apparent that in the past he’s taken great pains to lay the blame for any potential downturn at Congress’s feet. When criticized for allowing too much currency and credit to build up he often brought up the fact that he was merely complying with Congress’s mandate to pursue full employment and combat growth in the CPI .
Those politically-driven goals are much different than figuring what the dollar should be worth and sticking to it, no matter how it affects the polls. One can only guess what situation we would have been in if bad economic effects had been experienced in real time, rather than papered over until it was time for a major correction.
Re: DeWitt Payne (#461),
Steve McIntyre wrote:
The US economy is the most innovative and productive in the world. With innovation they are creating wealth. Foreigners wish to invest in the US to participate in the creation of this wealth. This is much more significant than selling bonds and mortgages. Is it too much to expect that Americans to not use the wealth they create to purchase foreign goods.
Note that I heard a European commentator say that the recent strength of teh US dollar was a reflection of the economic problems in Europe were worse than that in eh US and eh the US’ problems were bing addressed while those in Europe were not.
Re: Stan Palmer (#463),
Note also that gold fell today as investors moved to the safety of the US currency
Re: Stan Palmer (#463),
Yes, well, this is the party line. The trends you talk about are generally recognized by all but the “how much” is key. How much wealth are Americans producing, now that most mining and manufacturing have been driven out by regulatory forces ? How much are foreigners investing, and why ? Is it because they think the U.S. is the greatest place to invest, or simply because they have a lot of petrodollars to unload ?
Steve raises a good point, and you can’t just swat it away by noting that we’ve done well providing financial services, Hollywood movies, and some tech-sector stuff. Software and bio-engineered drugs are profitable, but those markets are dwarfed by the aggregate of things like toothpaste, schraeder-core valves, and light bulbs. More movies are being made in Toronto or elsewhere. Once they advance, many countries could easily question why they’re sending billions to the U.S. for financial services, when they could do it “in house”. Will we continue to expect to get our toys, clothes, and oil for free ?
The fact that Europe may have a worse business climate than the U.S. is not particularly germane to the problem of a huge imbalance of trade in natural resources and manufactured goods with China and the Gulf States.
Re: DeWitt Payne (#461),
Since you brought the subject up and others have commented, it’s not that simple. There’s this thing called productivity and comparative advantage. At the turn of the twentieth century more than half the population had to work on farms to feed the rest. Now it’s just a few percent and we export a lot. The same thing goes on with manufacturing. It take fewer and fewer people (but more capital investment) to make the same amount of stuff per capita (actually more stuff). So what are the rest of the people to do? If they were still making stuff, who would buy it? Certainly not the rest of the world outside of Europe because they wouldn’t have any money. That’s the real origin of the service economy. I should look this up to be sure, but I pretty sure that we’re assembling as many or more cars in the US as we used to, it’s just that fewer and fewer are being made in Michigan by the big three. We went through the same thing with shoes and textiles. Initially they were big industries in the Northeast. Then when labor became too expensive there, they moved to the Southeast. Now they’ve moved to Asia. The majority of the population, including the Asians, benefits from this.
Do we worry that, say, New York state, runs a balance of payments deficit with the rest of the country? It’s like the federal budget deficit, it is manageable as long as it’s not too large a fraction of the GDP. The railroads, among other things, were built with substantial foreign investment. Frequently there was financial chicanery and the foreign investors lost their shirts. We went through a similar thing with the Japanese at the height of their boom buying real estate here at inflated prices and being forced to sell it back at a loss later. Maybe we can’t keep doing this forever, but I’m not sure I see why not unless we shoot ourselves in the foot somehow, say by passing the modern equivalent of Smoot-Hawley or chasing the chimera of energy independence.
Re: DeWitt Payne (#471),
I agree completely. However, that argument raises some interesting questions. If fewer and fewer people are needed to produce the same amount of goods then the comparative advantage of countries with cheap labor begins to disappear as goods become less labor intensive.
If jobs are moving overseas and if labor costs aren’t driving this then what is? Is commercial real estate overpriced like residential real estate? If so then could the increase in facilities cost be more of what’s driving work overseas and not so much labor costs?
It would be strange if one of the unintended consequences of a huge bailout would be to send more jobs out of the country by driving up the price of commercial real estate.
This bailout is starting to look worse and worse to me.
Re: Bob Meyer (#480),
Comparative advantage seems like a relatively simple concept but there are subtle and not so subtle ramifications. There’s lot’s of references on-line. But for anyone interested, here’s a good place to start.
Re: Lawrence Hickey (#485),
That would be true if the world economy were a zero sum game. It’s not.
Steve: I agree with this last point and editorially I don’t want people to spend time discussing this sort of issue, if you don’t mind.
Stan, GeneII:
Actually, if last week one moved most/all investments into bonds, cash, or a company or few that went up 🙂 either they made money (on paper at least) or stayed about steady. Those that shorted indexes did well, perhaps. I believe that overall, we’re still down a few hundred. Not great, but a disaster? Like the way that little drop from over 2.5K to 1.8K at the end of 1987 totally ruined the world economy did, right? 🙂
The end of 1990 wasn’t too happy a time either. It happens.
But really, go check out the DJIA for the last 2 years; the moving average goes from 11,500 to 13,500 and back to 11,500. So at worst, this crash, difficult as though it might be for those that got in at the top et al, is not wildly out of line with the past, more a reduction in 2 years of gains. Overall.
Let’s see. A little bit of random history. 2003, at 10K, 2001 all the way down to 8.2 (from 10.5 before 9-11). When the tech-boom started unravelling in 1998 it was hanging around 8-9 — before the tech-bubble started, it was around 2-3.
For real interesting times, check out from 1928-1932, where it dropped from around .4K to under .05K Yep, June 1932, 42.84. Up to a grand 150/200 at the end of WWII. Woo!
Dow from 1928
Kinda looks like the anomaly trend, doesn’t it?
From Nouriel Roubini’s web site : Live-Blogging the Roubini/Ritholtz Conference Call
Some of you guys commenting here are giving lessons in economics. It’s too late for lessons. It’s test day. You can’t take class on test day.
The only things that matters on test day is what is you already know. We already know the American people have tackled enormous tasks in the past and won. And we already know the American government has failed over and over–just have a look at the US educational system and welfare system for two glaring examples.
This problem should have been given to those who have already succeeded.
America will get through this situation. But it would have come out of it sooner if it had been put in to the hands of the successful and not into the hand of two entities that already have a poor track record, i.e., the US government and those who have caused this problem in the first place.
I have been looking for a way to get a handle on what’s going on and this is what I’ve come up with.
Let’s assume that the problem is exactly as it is portrayed: About 5% of all mortgages are in serious arrears. If that were true then the problem could be attacked in the following way:
Put a 5.2% fee on all mortgage payments and use that money to cover the bad paper. Foreclose on the properties, sell them off for whatever they can bring (maybe 20%-40% of the mortgage amount) and give the proceeds to the homeowners paying the mortgage fee. (Please don’t start about how this can’t work, I know that. This “proposal” is solely to illustrate a point). The effect would be more or less the same as if the homeowners borrowed money at a high interest rate between about 15% and 25%.
This would be relatively painless and not subject to all kinds of political manipulation.
Now lets try having the fee paid by the banks. Better yet, right? Homeowners are spared the pain, the people paying the fees are actually more responsible for the original problem and again, it seems relatively painless.
(By relatively painless I mean relative to the soup lines, the Hoovervilles and men selling apples on the street corner of the Great Depression.)
The problem obviously isn’t just the 5% of mortgages that aren’t paying off. The banks could easily cover those payments themselves. The real problem is that virtually all of the real estate in the US was grossly overpriced, not just the homes in foreclosure. We are now witnessing one of the most extreme market corrections in recent history.
Where did the money come from to bid up these prices? Obviously from the mortgage industry but where did they get it? Only the federal government controls enough money to do this.
So it would appear that the “solution” being offered is to use hundreds of billions of dollars to drive real estate prices back up! But that’s what got us into trouble in the first place!
This sounds suspiciously like the “hair of the dog that bit you” theory of how to cure a hangover.
If we keep pumping money into the mortgage markets we deprive other businesses of the capital that they need to expand. We are now experiencing the effects of what was perhaps the greatest mis-investment since the Great Depression. Continuing this mis-investment with the bailout bill seems like suicide to me.
We will have to take the hit of a crash in real estate prices eventually, we might as well do it now instead of later.
Re: Bob Meyer (#469),
Elementary economics: It’s not just the amount of money M that counts but also the velocity V — the effect is M*V. In other words, the same amount M can cause more buying if the velocity increases, the number of transactions per month increases. Remember every sale not only requires $ from the buyer but provides them to the seller — the money doesn’t disappear.
The frenetic pace of mortgage loan issuance provided a lot of V.
Re: Bob Meyer (#469),
Correct. The decline in property values is reflected in the decline in value of the derivative paper in which they are wrapped. And traded as securities.
The money center banks are more into these securities than regional and smaller banks. Few outsider economists will say, or understand, what should be obvious–the Paulson plan of buying mortgage backed securities favors the largest banks. The kind of Paulson is genetically wired to protect first. Also, these largest banks are more likely than the smaller regionals to have foreign shareholders, like the Arabs, Chinese, Japanese. Also again, the foreigners disproportionately to Americans have parked their money in American mortgage backed securities.
Winners, of sorts, the largest banks and foreigners. Both have tremendous influence on Paulson and Bush. Ergo, why this bailout is structured so.
FTW
P.S. to repeat my earlier, these foreigners also finance Bush’s fiscal deficits, borrowed temporary prosperity. Beside wanting their investments protected first, they hold the card of slowing down or stopping the financing of Bush’s economy.
This is posted for those who thought the stock market was going to react positively to the bailout.
(Reuters) – The U.S. government enacted a landmark $700 billion bank bailout on Friday
H R 1424 YEA-AND-NAY 3-Oct-2008 1:22 PM — this is the official count and time from the Office of the Clerk, U.S. House of Representatives web site.
So now have a look at the chart of the stock market (^GSPTSE) for October 3, 2008. Move your mouse over the chart and line it up for yourself. Look at the time in the upper right hand corner of the chart and move the black dot on the graph until the time says 1:22 PM EDT. Look what happens after that point.
Re: GeneII (#474),
There’s a classic Wall Street maxim that covers this: Buy on rumor, sell on news.
Re: DeWitt Payne (#475),
Very true, and also when the house and senate are working on emergency bill to put confidence and capitol into the marketplace in the most cost effective way possible, and it grows to hundreds of pages and is filled with the usual ear-marks, and the perties exhibit partisian public bickering, well, by the time it passes none of the above instills what is needed most, confidence.
Its late, I can no longer spell, In the words of the night bus driver in Harry Potter, “Clinch your bottoms, were in for a bumpy ride.
Good night all
Takeo Hoshi, UC San Diego professor (his CV), also member of Nouriel Roubini’s Asia/Pacific team, from his study of Japan’s 1990’s housing crash says
in his column Will Expanding Deposit Insurance Coverage Prevent Bank Runs?
Re: GeneII (#478),
Expanding deposit insurance from $40,000 to $100,000 for S&L’s made that problem worse rather than better. The concept of moral hazard applies here.
I just hate the fact fact there is not going to be the needed transparency on how they spend the money from the bailout. Well, except for all the earmarks they put into the bill. Why when your economy is tanking and everyone is saying that the world will collapse if this bill doesn’t get signeddo they still insist on putting pork into it?
Re: IT Governance (#481),
I dont know, something about “lip stick on a pig…
Steve M, the devil is in the details and I do not see this debate going anywhere without being more specific about basic causes and proposed remedies. People can readily agree on the problem and even the end results but the debate has to be how did we get here and specifically what are the suggested basic remedies. Otherwise we have discussions that are too much like those Washington had last week which that reveal more about the politicians than any intellectually derived concepts.
I would suggest that a separate thread might cover some of the writings of prominent economists leading up to the crisis. I think we will find that some did not understand the situation and some appeared not to want to understand it. I think there are similarities between climate scientists and economists that have a basis in confusing the science with policy preferences.
Root of the problem: In a global economy, the US worker and homeowner is vastly overpaid compared to China, India, Russia … . Regression to the mean in a global economy means we will get poorer, and functioning as the consumer for the world will only work just so long. If we are part of a global economy, now is the time to play the game. We are no longer masters of the universe like we were in 1946.
Steve: Over the 20th century, workers in Britain got “poorer” relative to the rest of the developed world but the standard of living increased. There are lots of issues but please stay away from moralizing ones, as there are enough empirical issues to keep people busy. The relative decline of UK is worth bearing in mind when you look for precedents. In one of my first jobs, I looked at copper consumption where the declining role of the UK and US in world consumption was visible well before this was reflected in GDP statistics.
Steve McIntyre said:
Determining the relative value of currencies is what floating exchange rates was supposed to do.
You look at the Indian worker and ask why should he have to work 2 days for what an American can earn in 2 hours. The difference is the capital invested per head of worker and that capital came from the very countries whose workers earn so little. Why? Because an investment in America paid off much more than an investment in China.
We constantly hear about the balance of trade deficit. If foreign countries have so many dollars, then where are those dollars now? Under the beds of all those Chinese? No, those dollars came back to America in the form of investments in American businesses and securities.
You can make a case that the Saudis and Chinese were swindled by American brokers who sold them dud securities but that magnitude of mis-investment requires a lot of help from the “victims” who were usually not investing their own money.
We don’t need a new “Bureau of Currency Value” to manipulate markets to accomplish some politically desirable goal. The last time that happened we ended up with the Community Reinvestment Act, a Fannie Mae and Freddie Mac on steroids, a mountain of corruption and the present credit crisis.
Re: Bob Meyer (#487),
Not necessarily. Some of these overseas dollars have been propping up our monetary system by being invested in government bonds, but the author whose pen name was “Adam Smith” wrote a book called “Supermoney” a number of years ago, in which he pointed out that a great deal of American dollars have never come back to the US. Instead they are traded abroad between foreign countries and businesses, much as the pound sterling was previously. If faith is really lost in the dollar they could come flooding back looking for physical assets to buy, instead of our bonds, which we would then have to cover.
Re: Bob Meyer (#487)</a
Bob can you explain this, why can they not use these dollars to buy and build their own factories, to invest in their own domestic policy? If fact why can they not use this revenue for their military?
What economic law says those dollars must come back here?
Thank in advance for responding.
Re: David (#498),
It’s not a matter of an economic law per se, it’s just the fact that businesses and individuals in China expect to get paid for things — like factories or soldier’s salaries — in Chinese currency, the yuan, not in dollars.
So if the Chinese want to spend the dollars we’ve sent them in payment for imports, what can they do? They can: 1)Buy something priced in dollars — which, generally, means, buying something from the U.S. — either a manufactured product or stocks, bonds, U.S. Treasury Securities, etc, or 2) Find someone who has yuan and needs to trade them for dollars, then spend the yuan in China as they please. But even in the case of number 2), what is the usual reason someone would want dollars? To purchase something in America. So either way, the dollars come back here.
There may be some quantity of dollars staying overseas, but I’m very skeptical of claims such as the one in comment 495. If that claim were true, then the supply of dollars, as reported by the Federal Reserve, should be falling — and as far as I know it isn’t.
Re: David (#498),
The economic law is that money is only held when it cannot purchase something of value or when it is believed that the money will appreciate in value, meaning that you will be able to purchase something later for a lower price than you would pay today. Since inflation is a worldwide phenomena the second reason for holding on to money isn’t operative.
What else can foreigners* do when they sell goods to Americans, be that oil or consumer electronics, and receive payment in American dollars? The choice for the Chinese, Japanese, Saudis and Canadians is to do nothing with the money or buy something from America. Mostly, they purchase securities and services.
Recently, due to the drop in the dollar, there has been some increase in exported goods from America but that is still only a small portion of the dollars that foreigners use to purchase things from the US.
As for why don’t they use dollars to build their own factories, they do, but they they only invest in their own country when the yield is better than it is in America. Thanks to the geniuses in Congress, the Treasury and the Federal Reserve, I expect a real boom in foreign investment in their own countries.
This is an oversimplification because it doesn’t cover the role of central banks in foreign countries manipulating the exchange rates so that their countries can sell goods to America. Nor does it cover the role of the Federal Reserve Board in manipulating US currency to control inflation (or accomplish some politically driven end), but those matters are way beyond a blog entry and are best covered in textbooks written by real economists.
(*For those outside of the US please don’t be offended by my use of “foreigner”. I just don’t want to keep using silly phrases like “non-US persons and/or entities”.)
I agree with Steve that the dollar value needs to rise. The Fed should not reduce rates because that is part of the problem. Americans need to quit watching late night TV and get back to old school budgeting.
BTW. The FBI is starting to nab a few predatory lenders and the SEC has a few firms in their sights. Well Fargo seeing Wachovia as a good buy is a good sign. Next week will be interesting.
Re: captdallas2 (#488),
And we should raise taxes and tariffs to balance the budget and to keep from importing so much. Oh, wait. We tried that back in the 1930’s. Didn’t work out so well did it.
This is not to say that the Fed has done a great job of maintaining the value of the currency recently. But unfortunately, that’s not their only job thanks to Humphrey-Hawkins.
Re: Lawrence Hickey (#489),
Steve: snip – I’ve deleted a sentence from the prior post in discussion which broke red-letter blog policy.
Re: DeWitt Payne (#491),
Insert [, let the banks fail] after raise taxes in the first sentence in #491.
re 485 “There are lots of issues but please stay away from moralizing ones”
There was no moralizing dimension to the comment, intended or from what I can tell, inferred. Somebody may be projecting. If you think industrial workers in the US can earn 20 dollars an hour, while those in developing countries earn a tiny fraction of that, and that will not have a dramatic impact on the regions of the US where
that is their bread an butter, then this position is absurd. Maybe all those people can replace their 20 dollar an hour job in service industries, giving each other haircuts perhaps.
snip
#489. Let’s not use the US for a comparison, as in many ways UK is more instructive. In my career, I’ve seen the international purchasing power of Japanese workers rise from a fraction of UK workers to surpass them. During the same period of time, the standard of living of UK workers has risen.
There’s no reason why domestic standards need to collapse, but people will find themselves more budget conscious when they travel. This happened years ago for English travelers (and has already happened for dollar holders in Europe over the past 30 years).
snip – no moralizing please.
These things resonate with me:
“The money markets have completely broken down, with no trading taking place at all,” said Christoph Rieger, a fixed- income strategist at Dresdner Kleinwort in Frankfurt. “There is no market any more. Central banks are the only providers of cash to the market, no-one else is lending.
“Once you run current-account deficits, you depend on the kindness of strangers,” he said, pausing to let out a resigned sigh. “This might be the beginning of the end of the American empire.”
“Another aspect to the present situation that doesn’t fall simply into traditional categories is the role of state-sponsored investment agencies (China, Middle East) in holding U.S. securities, facilitating a huge current account deficit that might well be connected to the present situation.”
“We’ve been running around, buying stuff and handing out IOUs. We could do that indefinitely, as long as our suppliers continue to accept the IOUs. The problem comes when they stop taking the IOUs [bad] or line up all at once to cash them in [worse].”
“I think that the role of the US dollar as a reserve currency has papered over problems for quite a while. I don’t see how the US can ad infinitum import oil from the Middle East, cars from Japan and stuff from China by selling bonds and mortgages.”
Now, a little local knowledge:
Local Governments across Australia have lost money investing in high interest bearing AAA credit rated paper out of the US. So have our banks. How much, we are yet to discover.
Your financiers have been clever at gathering up the dollars that you have spent on imports and financing offshore expenses including the military interventions. But, all that is now gone. Your dollars are about to shrink in value because they are an embarrassment. The first thing about money is that it should be a store of value. Your promises are apparently worthless. The rest of the world is on strike. No loans to you!
The Chinese, and the Arabs are now your masters. What value can you provide for the dollars they hold?
Seriously: It’s cap in hand time. I can not see a US Government bailout of improvident borrowers as a solution to this problem.
A panel of speakers, Michael Klein, Chairman of Citi Institutional Clients Group, Adam Posen, Peterson Institute for International Economics, Nouriel Roubini, and Nikolaus Piper, international correspondent for Süddeutsche Zeitung are featured in this video. Nikolaus Piper gives some interesting views on how Europe is looking at this situation. Nouriel Roubini begins speaking at about the 30 minute point. This video is from April 14, 2008. The more optimistic predictions made then by some of the panelists are by now proven wrong. As you might already guess Roubini is not one of the optimistic panelists. Roubini says this in the video
The video: The Global Credit Crisis: How Bad Will It Get?
The video is 1 hour 38 minutes long. It is broken down in to smaller segments with superfluous minutes trimmed out and with much higher video quality here.
Wish I could post happier stuff right now than Nouriel Roubini. But he’s been pretty accurate up to now. I wonder how many people took him seriously on April 14? I wonder if I would have taken him seriously. It seems like it’s important to be informed. I’m not much for candy coatings in the news myself. I’d rather hear Roubini. It may be he is being too pessimistic. But if things do get as bad as he is saying at least I won’t be taken by surprise.
Next….
this video is some comic relief (it may have a short advertisement before it begins)
Steven Colbert and Secretary of the Treasury Henry Paulsen (well…)
Places not only waiting in line to buy up failing businesses BUT FIGHTING over them!!
Wells Fargo’s Wachovia Bid Sparks Feud With Citigroup
…guess the whole situation isn’t as toxic as we’ve been told… I just went outside and looked up, and yep, the sky isn’t falling… it’s still hanging around up there, same as always.
Apparently the government didn’t need to save things (oh, maybe bits here and there, sure, they could have scooped up some toxic debris). Looks like there would be places fighting over would have got to vacuum up the mess! Imagine how many smaller banks, real estate brokerages and other financial institutions would have benefited from a piece of the Fannie/Freddie pie!
Steve,
This is a major part of the problem IMO. So long as what we’ve got can be propped up somehow it is going to get a bandaid. Americans are simply not going to accept solutions that require they give up the luxuries they don’t even think about most of the time. Until the entire mess collapses that is, and by that time it’s going to cause a major bloodletting.
This may sound like a moralizing point but I see it much more in terms of political reality, the best options simply aren’t on the table because those options would cause pols to lose their seats which is far more important than doing the right thing.
#500. The problem is that the purchase of securities or stocks is NOT the same thing as the purchase of goods for someone in an industrial job. On an overall basis, the US is buying stuff and issuing an IOU, sort of like a sharecropper at a company store. My concern (also expressed by Conrad Black) is that this practice carried out over a generation has resulted in the erosion of the manufacturing base – and I am very fearful that it’s a lot harder to start up industries than to shut them down.
THat’s why people like Black and Roubini focus on current account deficit and I’d urge CA readers to do so as well.
Re: Steve McIntyre (#501),
I didn’t say that it was the same thing.
Not true. Walmart, Home Depot and all the other U.S. retailers that are selling imported goods pay for the imports from China and elsewhere with cold, hard U.S. dollars they’ve earned in the U.S. economy. They do not pay with an IOU.
The fact that China and other countries then choose to invest (some of) their dollars in U.S. Treasury Securities (and other types of investment) simply indicates that they think that is the best thing to do with their dollars at the moment. If we were running a balanced federal budget, like we ought to be, the Treasury would not be constantly selling securities and China would have to invest their dollars in something else here.
Conrad Black is confusing cause and effect. If the manufacturing base “erodes” for some reason, then one symptom might very well be a trade deficit with another country. But the trade deficit is a result of the erosion, not a cause of it.
There IS one very obvious “practice” that threatens the U.S. manufacturing base and puts us at a severely competitive disadvantage relative to certain other countries and no doubt accounts for much of the loss of manufacturing to other countries. But you’ve declared any discussion of that “practice” to be off-limits.
Re: Steve McIntyre (#501),
The US manufacturing base isn’t declininh. Output is actually up, but due to dramatic increases in productivity employment is down. Surprisingly, China has lost more manufacturing jobs than the US has, and due to the same reason. There’s a Powerpoint presentation here that covers this with some pretty clear graphs.
If the link doesn’t work here is the URL
http://www.swissbusinesshub.com/photos/news/Presentation_02_William_Strauss.ppt
It only covers up to 2003 but I don’t think that much has changed since then.
Re: Bob Meyer (#507), Services are up to 78.5% according to Wikipedia, some of those slides are quite old data. Although it’s easy to say manufacturing output is up, you have to remember the population has grown significantly, so they need more manufacturing output. And it’s pretty clear they are not manufacturing what people want, else the balance of payment would be much better: http://www.census.gov/indicator/www/ustrade.html
But it’s ok cause the US are not paying for most of their imports, just printing more IOU’s 🙂
– Ernie.
Re: Steve McIntyre (#501),
Here is a second link to an industry supply chain site that also disputes the idea that the US manufacturing sector is falling apart.
NAM
I think that the problem with US manufacturing has been exaggerated by unions looking to get more members back into manufacturing.
Steve: My examples have primarily been to the U.S> auto industry. I’ve made the simple and IMO unarguable observation that you can go out of business overnight and it takes a very long time to create a complicated business like the auto industry. To say that this particular industry is healthy is absurd. Even if some other industry is doing OK, IMO it would be very shortsighted for the US government and consumers to stand by while this industry and its panoply of suppliers and designers goes under. And it’s idle to try to allocate blame to unions or management on a moralistic basis. My point here is that, whatever the faults of these two and doubtless they are legion, the role of the US as a reserve currency and the preference of foreigners for purchasing securities to purchasing products, has put this industry under additional pressure that it can ill afford. This seems very obvious to me and is not the sort of thing that I am interested in debating.
Re: Bob Meyer (#509),
What is the ratio of imports of automobiles imported in North America and has it changed significantly recently?
I ask this since the ownership of a manufacturing plant is unimportant.
Jane Jacobs argued strongly against efforts to preserve urban areas against the forces that would change use over time. She saw this as the means by which a city could renew itself over time. She made teh same point with companies. They cannot remain static. If they try they will ultimately fail. So if the previous leaders in the North American auto industry are being replaced by new firms. She would see this as natural and healthy.
She made this point in many places but especially in the book “Cities and the Wealth of Nations.” Her ideas on innovation have been adopted and confirmed in economic research as a valid model of innovation and increased productivity.
Re: Bob Meyer (#509),
But you can’t really fix the problem unless you understand what went wrong and why, including the moral issues involved. The American car industry has been going down for decades, this is no overnite event. The oligarchy that was the big three, coupled with unions made their business model (such as it was) untenable if there was outside competition. If we are throwing money at the problem, and the problem is the amoral nature of the players, how will this solve the problem?
Steve: There are a lot of troubles and no easy answers. Money is one issue, but only one. I’m not saying that I know how to fix things, only that there is an asymmetry in starting and closing industries that is not well reflected in simplistic theories and models or opinions derived from such theories). And yes, I obviously believe in understanding exactly what the “problem(s)” is/are.
Re: BarryW (#526),
A big part of the reason that GM, Ford & Chrysler are in trouble is the anti-business climate in Michigan. Jobs leave Michigan (from many industries, not just automotive) not bound for China but for Texas and Nevada. The autoworkers union (which Toyota, Honda and Hyundai avoided by only putting plants in “right to work” states) are also a tremendous drag on the industry.
Another reason that General Motors is hurting now is because, like GE, it decided to convert itself into a financial services company and financial services are in the toilet all over the world.
The US business taxes are the second highest among developed nations so auto companies spend more on tax lawyers than on engineering because one good, clever tax lawyer can save a company more money in taxes than any ten engineers can produce with superior designs.
Then we had the jump in gas prices. Supposedly knowledgeable pundits proclaimed that there is no limit to oil prices and that we will never, ever see $100/barrel oil again.
The collapse of home equity took away one of the less expensive ways to finance cars (I said “less expensive”, not “smart”).
Personally, I would never buy any American car except maybe Jeep because American cars are junk. Every time I look at reliability ratings for cars the Japaneses are at the top and Americans are on the bottom (well not quite, the worst rated car is usually German).
There are probably dozens of things that are taking down the auto industry and it would take a really good analyst to determine which factors are dominant. To put the problem on the balance of accounts would require some real number crunching along with a detailed explanation of why other industries are not nearly so affected by forces that appear to be universal.
Without some analysis the balance of accounts theory is just one more “hunch” about why the American owned auto companies are in trouble.
Steve: I didn’t say that it was “the” reason that they are in trouble. I observed that that they are in serious trouble and IMO it’s a very big problem not just for the companies but for everyone. I noted a potential impact from the currency side as something that exacerbated an already serious problem – I explicitly did not say that it was a root cause. And again, I think that people need to start thinking long and hard about the potential impact of the loss of large chunks of this industry. YEah, yeah, I know all the quality issues. I’m not living under a stone. All I’m saying is that once it’s gone, it won’t come back by waving a wand. Does this mandate a particular policy? No. Just that it needs to be on the radar screen.
Re: Bob Meyer (#528) and Steve,
And why did GM go towards financial services? Could it be that the “suits” running GM weren’t “car people” but “financial people”. Read DeLoren’s book and read Halberstam’s “The Reckoning”. Ford was almost destroyed by the likes of McNamara, the financial “genius”, and Chrysler was saved, in part, by Iacocca, the car guy.
Steve, what’s an american car company today? Ford and GM building cars in Mexico and Canada or Honda and Toyota building them in Ohio and Kentucky?
And giving money to people who have proven they can’t run a major company in the present world climate will just be throwing good money after bad. The quality problems were, in part, created with malice of forethought by the senior management who thought they could save money since they had thought they were the only game in town (till the Japanese showed up).
Re: BarryW (#533),
Bullseye!
Back when I was a boy (and sabre tooth tigers roamed the land) heads of manufacturing concerns were called “industrialists”. They were individuals, usually from a strong technical background, who started companies and then moved into management because they couldn’t find anyone who could run the business in the way they wanted.
Men like Bill Hewlett and Dave Packard, Edwin Land, William Lear etc. Do you really see Carly Fiorina as a plausible successor to Dave Packard? I doubt that she could change a light switch if her life depended on it.
An earlier era had Edison, Ford and Firestone, men of extraordinary technical and business skills. We desperately need people like them but all we get are Welchs and Immelts. There are plenty of reasons for this from stupid tax laws to the cultural collapse that values Brittany Spears more than Burt Rutan. (Burt who? Check out Rutan)
Henry Ford could do any job in his company because he not only worked on the design of the cars but he designed the assembly line that built them as well. He knew his company like few businessmen ever know their companies – from the ground up.
I don’t pine for the “good ol’ days”. Those days weren’t all that good. I just want to see a business leader who actually understands his business in particular, not business in general. The idea that any CEO can run any business from manufacturing cars to running hospitals to making real estate loans because he is a “businessman” is idiotic.
Re: Bob Meyer (#535),
Demming, the process control guru, ranted that the problem extended all the way down the management chain, where the low level managers were college guys who had never done the job they were supervising and who ignored the worker with 20 years doing the job who actually knew what was wrong with the assembly process.
The sad part of that is that this idea has been running around since, at least, the sixties with the rise of the conglomerates such as Litton that made everything from electronics to office furniture to ships and considered the management interchangeable.
The successful companies seem to be those who, as you say, seem to be the ones who have senior management who either founded the company or “came up through the ranks”. Apple went from a product that everyone in my office wanted to one that no one wanted to touch when Sculley (from PepsiCo, that high tech company) took over and cheapened the product. I had a Mac VX that would lock up and the only way to restart it was to pull the plug out of the wall (the off button only triggered a software program to shut down, which had crashed).
I still feel that the point is being missed by not fixing the real problems while giving the money to the jokers who created this mess and assuming they’re capable of fixing it.
Re: BarryW (#536),
The politicians ?
Re: fFreddy (#569),
You asked me to write #333, but you never responded to it.
Re: jim edwards (#580),
I can only repeat what I said in #328 :
Your secession of California and poppies and things looks like great fun, but it does not serve the purpose of making a clear presentation of what you are trying to say.
If you want me to discuss this, then please make a precise, concise presentation of your point with one central bank, one private bank, and two private individuals.
Or, if you need three individuals, then use three individuals – but don’t use twenty.
Re: fFreddy (#587),
I’m pretty sure SM doesn’t want me to do that, here. I think it sounds like fantasy to talk about a monetary system designed for two people. I’m sorry I couldn’t be clear enough. Let’s agree to disagree.
Re: jim edwards (#588),
As stated, you’re welcome to use three if that’s what’s needed.
OK.
Re: BarryW (#533),
Just an FYI for those who haven’t read it. The Reckoning shows the world through the eyes of Ford and Nissan. An excellent book that covers a number of issues and factors about the modern age (well, at least up to around 1986). But still very illuminating.
Re: Steve McIntyre (#501),
Steve M, I have been following this thread and all I have heard from your sources Black and Roubini are pronouncements about balance of payments. I would welcome a exposition on the balance of payments and what it means in terms of current financial problems for various nations and what those like Roubini and Black would do about in specific terms. There are many sources on this topic besides Roubini and Black.
As a further note and as a Chicago land resident, I saw Black run the Sun-Times newspaper enterprise into what will probably be an early retirement (I think that newspapers in general and at least as we know them are going to experience a long decline) and therefore have little faith in his pronouncements.
Japan has had a surplus balance of payments for many decades and once was a candidate for surpassing the US economy in the 1980s. Since then, the surplus of payments have continued for Japan as have recurrent recessions and stagnant GDP and stock market values.
Michael
Dollars are held by banks all over the world and used in settlement between countries. The volume held has expanded with the growth of production and trade. You print em, they hold em, and will enjoy the feeling while they have value. Ultimately, if the value of the dollar starts to fall there will be a scramble out of dollars into something else. Then, the value rests on what can be purchased from or bought in the US.
If assets in the US decline in value it will encourage people to buy. If you delay the deflation and your borrowers continue to default it extends the credit crunch because no one will want to lend to you.
Having the privilege of consuming the product and service of others in exchange for an IOU (the greenback) has been an enormous advantage. It’s like being born with the silver spoon in the mouth. From another point of view its a con, the biggest in history.
Re: Erl Happ (#502),
Yes, but that is irrelevant to David’s question.
Re: Erl Happ (#502),
Nonsense. The American people that purchase the imported goods have the money to do so only because of what they themselves have earned by their own effort. They aren’t giving Walmart, Home Depot and all the other retailers IOUs to pay for those imports, they are giving them a portion of their paychecks, earned (for the most part) by their own honest efforts.
Again, I think that Roubini’s analysis observing current account deficits at the heart of many recent financial crises in different countries is far more compelling. If you choose to ignore that approach, that’s up to you. Also, IMO any post that includes any amount of moralizing loses effectiveness.
Re: Steve McIntyre (#508),
Where does Roubini explain how the current accout deficit caused the issuance of billions of dollars in bad mortgages and the huge (and apparently unsustainable) run-up in housing prices? I didn’t see any explanation in that article you linked to in comment 157.
Steve said:
I didn’t know it was a debate, I thought it was a search for empirical facts.
Michael Smith wrote:
“………They aren’t giving Walmart, Home Depot and all the other retailers IOUs to pay for those imports, they are giving them a portion of their paychecks, earned (for the most part) by their own honest efforts.”
They weren’t giving the retailers IOUs; they gave the IOUs to the banks.
Re: Wansbeck (#512),
What makes you think such a thing is true? A small percentage of people get in trouble running up credit card debt, but the great majority of people pay for things with the money they earn at a job, not money they borrow from a bank.
The entity that is financing a significant percentage of its operation with IOUs is the government — it is currently financing about 13% of its spending by borrowing, but it certainly isn’t borrowing that money to purchase imports.
Speaking of auditors and debts…
Comptroller General of the United States (chief auditor of Washington) from 1998-2008 David Walker talks about America and debt in this video. His presentations (complete with pie charts, graphs, etc, etc) while he was comptroller that gave warning about America’s out of balance budget can be found here. Down the left column there you can click on all years going back to 1999 to see more of his work. Walker also is in a documentary called I.O.U.S.A., the trailer, clip about deficit, Paul Volcker on Dave Walker. Unfortunately the documentary still isn’t out for rent. It will be in theaters in the U.K. in November.
Those of you outside the US–look at the US now and see what happens to a nation when it leaves off common sense for about 20 years. Don’t end up like this, as a nation if you can help it, and especially not in your personal life, which you can help.
I’ve put Dave Ramsey’s name in some of my comments. If you want to know what he thinks of debt see it here.
Re: GeneII (#513),
I hope we do not confuse the differences in government debt and balance of payments deficits from trade. There is third measure of government debt which is often referenced as unfunded liabilities and results mainly from under funding government sponsored retirement and health care funds.
Nations vary considerably in surpluses and deficits for their balance of payments, but most advanced nations of the world suffer even larger looming problems with their national debts and particularly with their unfunded liabilities and some have much more national and unfunded liabilities debt (as a percent of GDP) than the US.
An article linked at:
http://www.aei.org/publications/pubID.28704/pub_detail.asp
gives some critical history of Fannie Mae and Freddie Mac that could shed some light on the current financial crisis. I included some history and some excerpts that might leave one some doubt on how well some economists understood or wanted to understand what these government sponsored enterprises were all about.
Excerpted background history on Fannie Mae:
An economist’s apparent confusion:
Nobel winning economist, Joseph E. Stiglitz, before and after:
Before:
After:
Re: Kenneth Fritsch (#517),
That’s some pretty good material in that article. Thanks
Economic studys tend to be dominated by politics. Back in the 1960’s when I lived in New York the mayor, John Lindsay, had the Rand Corporation do a study on the effects of rent control. The study concluded that rent control was hurting the city’s economy and recommended that it be phased out. Lindsay went ballistic and tried to refuse payment to Rand on the grounds that no one should have to pay for such a “ridiculous” conclusion.
Most people just find it very hard to accept certain facts that call into question some of their basic beliefs.
David Walker from a BBC video interview March 2006
The whole edifice came down not because of the high end mortgages, but because of the flood of sub prime defaults. Look around in Indiana and Chicago where I live, at the industry that is gone- manufacturing is gone, and the jobs that allowed, maybe foolish when considering the risk, that former employees to live in their small house. They are now busy flipping hamburgers and they can’t afford a house on that any more. So atlas shrugged. Possibly it was foolish to not suppose that these people would somehow find jobs sufficient to make them homeowners. But the foolishness and good hearted but misguided efforts securitized the bad loans and pushed by government fiat programs like CRA. Still, the root of it is the dry rot from the base- The US is in decline in the heartland. All those industrial workers are not going to be retrained to do anything that can replace their former salary. All this nonsense about zero sum games can’t fix this. I read Roubini’s paper, and although he thinks Kanes is a genius, I am more of a Mises fan, he is dead on about the root of this. This is not moralizing. Morals and right have nothing to do with it. England is a smaller country where a former industrial worker and find a place in the alternate English economy, finance, tourism, high tech, and the service industry that keeps that boat afloat. The US is way too big to absorb the formerly prosperous lower middle class workers that are now competing with people in the developing world. Now that the economy is tanking, the price of commodities like steel is way down, and this is the nail in the coffin that forces the iron rule of economics, – in a drought , only the most drought resistant will survive. That is not us.
This is one real intertwined mess that has occured.
“How AIG’s Collapse Began a Global Run on the Banks
By Porter Stansberry”
http://www.dailywealth.com/archive/2008/oct/2008_oct_04.asp?printdoc=print
Perry Mason would have a hard time figuring this one out.
“Guess who killed AIG
Terence Corcoran, Financial Post
Look at AIG. In a wave of corporate head-hunting under Eliott Spitzer, AIG was dragged through a public flogging, its illustrious CEO, Hank Greenberg, driven from office. The old AIG-style of board governance was branded one of the weakest in Corporate America. Seven of its directors were considered insiders.
In the wake of Sarbanes governance jihads and Spitzer attacks, Greenberg was thrown out and reform brought in. The world’s largest insurance company took on all the corporate governance fads imaginable and every clause of Sarbanes. One might assume its risk management regimes would therefore be under the constant eye of scores of independent directors and top-flight accounting firms equipped with new powers and rules.”
http://www.financialpost.com/analysis/columnists/story.html?id=467d489f-0dc8-48b4-877e-9fe40b3a0d1d
As Steve commented in #509, we have to keep our eye on the ball, not on the number of fans holding hotdogs.
We know the general point; the specifics of blame and the details of everything is simply noise and really unimportant to fixing the issues now. Car-makers in a country or the world economy.
As far as other comments about how things used to work, we can no more directly compare the situation now to the situation 10 or 20 or 50 or 100 or 200 years ago than we can directly compare the behavior of carbon dioxide between Mars, Venus and Earth.
If economics was easy, all the economists would agree about cause and effect and order of magnitude and how everything interlocks and feeds back.
These people might know something about how things work; know who they are offhand? And no, they’re not climate scientists, economists or politicians.
Li Ka-shing, Kushal Pal Singh, Lawrence Ellison, Rinat Akhmetov, Ingvar Kamprad, Carlos Slim Helú, Lakshmi Mittal, Amancio Ortega, Alwaleed Bin Talal Alsaud.
Michael Smith (#520) wrote referring to consumer IOUs:
A small percentage get into trouble, so far, but millions more have been using borrowed money to finance their retail spending. The idea of living within one’s means is looked upon as old fashioned by a large number of modern consumers. Others find it simply impossible.
US consumer debt is around 2.5 trillion dollars. That’s a lot of IOUs.
Re: Wansbeck (#525),
So what? U.S consumer annual incomes are in excess of 6.1 trillion dollars.
What are you trying to claim? Statements like the one you made in comment 512 make it sound as if Americans produce nothing, earn nothing and just borrow endlessly to pay for things. That is simply not true — at least, it is not true of more than a tiny percentage of us.
Has the global economy reached the point whereby countries behave like departments of one giant organization, the deficits between the countries are akin to interdepartmental billing for pure accounting purposes, fully knowing the debts are never really going to be paid?
– Ernie.
Re: Ernie (#529), \
Yes, sort of. It’s, IMO, more like the US where trade imbalances between states aren’t even calculated, AFAIK. You also have movement of jobs and capital investment from states with high taxes and bad business environments to states with lower taxes etc. Right now the US has the highest or second highest corporate income tax rate in the developed world. Companies failing or moving off shore would seem to be a logical consequence. But what do I know.
Michael Smith (#527) wrote:
That certainly wasn’t the intention. Anyway I am not moralizing and I can’t criticize since I am writing from the UK where sadly the above is far too close to the truth. Yes, people do work and earn money but all too often they augment their buying power by borrowing. To many the idea of saving for a new car or a holiday is completely alien; they just take out a loan.
The September figure for new car sales in the UK has fallen by 21% compared with the same period last year. A large part of that fall will be due to economic uncertainty but it gives an indication of how important credit is to retail sales.
Re: Wansbeck (#530),
I wrote many comments ago that the credit card debt is the other shoe waiting to drop. The chart on consumer debt is a hockey stick. The chart on savings is a flipped over hockey stick. This = bad
This combined with the loss of thousands of billions in the monetary supply, through the reduced value of assets in a fractional reserve(read leveraged) banking system, in conjunction with fear ((difficult to fight the emotions of the market) along with the brutal and unnecessary drain on limited assets due to a very restriced energy policy = very bad.
Re: David (#538),
The monetary supply has not dropped by thousands of billions. Most of the money dropped was in paper (i.e., not real) profits. The actual monetary supply M is pretty much the same (probably growing as the Fed pumps ‘liquidity’).
However, the effect of money is actually M*V, where V is its velocity, and we can expect V to drop as the economy slows down. Those $s were whipping around at very high velocity with all those easy mortgages being given and repackaged and sold several times over.
Re: Pat Keating (#545),
The monetary supply has not dropped by thousands of billions. Most of the money dropped was in paper (i.e., not real) profits. The actual monetary supply M is pretty much the same (probably growing as the Fed pumps ‘liquidity’
Pat, I am not an economist so perhaps I do not mean the money supply directly from the Fed. However the money within the system already, as in the asset value of bundled mortguage securities held by financial institutions has taken a very big hit. And of course the capitol in the stock market (that is the purpose of the stock market yes, to finance publicly held companies), has also taken a hit.
So is it fair to say that the money supply within the system has contracted significantly, and not just in the US. I do not mean the amount of material $s, but the amount of paper money leveraged into the economy through the fractional reserve banking system and the stock market. Please correct me if I am incorrect.
Re: David (#548),
It is the velocity of the money (how often it changes hands) which has contracted, not the supply of money.
If you had an investment in a stock or loan note, and you thought it was worth $x and now find out it is worth $(x-y), there is no change in the money in the system — it’s just paper loss. If you liquidate it, you have lost some money, but it is offset by the fact that the buyer has gained the same amount by acquiring the investment at a cheaper price. However, you feel poorer and are less likely to buy a new car or yacht, so the velocity of money goes down.
Monday, October 6, 2008
WHERE IS THE CONFIDENCE THAT WAS SUPPOSED TO BE GENERATED BOTH IN THE U.S. AND ELSEWHERE IN THE WORLD FROM THE 700 BILLION DOLLAR BAILOUT?
Wall Street tumbles amid global sell-off
Dow finishes below 10,000
The big rush to put 700 billion dollars into the discretionary spending power of Henry Paulsen and save the world appears to not have done so. In fact it appears to have had the opposite effect. The American people did not want this bailout (reference – [1], [2], [3]). Our desire for private market solutions where we have seen successes, and our hard experience with seeing Washington drag things down like a lead balloon, made us know there had to be a better, quicker, and much less expensive way.
But now we’re stuck. Our politicians acted against our wishes. They did not show confidence in the private sector which is the same as saying they did not show confidence in the American people. This situation is FUBAR!
I can only hope that the ‘toxic’ loans have already begun to be dealt with and the wound is being cleansed so it can heal. I cannot see where the 700 billion is going so I have no idea if that is immediately happening.
From September 30, 2008, from Bloomberg news, 43 minute audio interview of Nouriel Roubini on ‘triage’, liquidity, ‘silent’ bank run, keeping people in their homes, the flawed plan. The interview is from before the bailout was passed but he felt it was going to pass and spoke as if it was going to. In any case he feels the bailout is flawed and won’t give real help where it was needed.
I agree 1000% on the importance of people in a business knowing how to operate a business as opposed to “pure” management. I believe in details. I also agree that there has been a cultural erosion of the proportion of such people at the top of important businesses and that that has been a factor in the relative decline of competitiveness of US (and Canadian business). There is a Mr Honda and I presume that he knows a lot more about manufacturing cars than the suits at the big US companies.
Everyone knows that the problem is not just money, so please stop lecturing on this.
But there’s an abyss here. An assembly plant in Tennessee is not the same thing as an integrated auto company with design and development capability. The point that I’m trying to convey is that an integrated auto company is a type of national asset. Markets may be “self-correcting” but there’s an important asymmetry between collapse and start-up. Things can collapse in a nanosecond, but take generations to rebuild. I do not share the let-‘er-rip views of many readers here, simply because of this asymmetry.
I don;t have any magic bullets. I think that there are many problems, not just money. I think that too many readers have views that are insufficiently attentive to all the issues; unfortunately, I don’t have time to respond individually to comments.
Re: Steve McIntyre (#537),
I agree with your assessment that it’s easier to “disappear” an auto industry than it is to “reappear” one from nothing.
In the particular case of cars, I think you’re being overly dramatic about the “abyss”, however.
Why should we care about this “national asset”, if the same number of manufacturing jobs remain here under the Toyota or Honda nameplate ?
Nissan has had a design center in La Jolla, California for almost twenty years. Other foreign companies do, too, because they want to sell cars that appeal to our market. There’s no reason to believe the imports would stop doing design work in the U.S., if ALL THREE of the big, American manufacturers actually went extinct. The imports would probably do MORE design work here, to accomodate their increased market shares.
You may not be aware of the number of automotive start-up companies we have in California, as well. A number of them are in the electric or fuel-cell niches. In the past, they’ve been bought by GM and at least one of these cars was successfully brought to market by GM. There are fewer mechanical engineering barriers to market entry in these industries because the big makers’ current platforms are entirely optimized for internal combustion.
You’re also ignoring the facts that auto industries do seem to pop up with regularity [Cf. Hyundai], and that we would have a lot of skilled, human capital ready to be snapped up by anyone with an idea and financial backing.
I remember a story I read in the San Jose Mercury about 12 years ago. We had our peace dividend, and Lockheed finally laid off some of the engineers from their missile division in Sunnyvale. Many were offered jobs in China. A number contacted the State Department to see if this was OK, assuming they didn’t disclose any of the advanced secrets they knew. They were cleared to go.
When the first group of engineers got to China, they were given a tour of China’s “advanced” rocket facility. The Americans said they wouldn’t work there. Why ? It was unsafe, they said. That fuel tank needs to be at least 150 yards from that assembly area. You need to have a trench from point A to point B. These valves need to have gate valves made from stainless steel. Those fittings need to be electrically isolated; those need to be electrically grounded. The Chinese took notes of their criticisms and invited them back in six months to a completely rebuilt factory. It was estimated in the article that their rocketry program had been advanced twenty years by that visit.
Today the Chinese Taikonauts are spacewalking, God bless them. A few knowledgable individuals can go a long way toward building a large industry.
Re: jim edwards (#541),
I don’t know if I’d categorize a company like Hyundai as “popping up”; Hyundai Auto Service goes back to 1946, and Hyundai Motor Company to 1967 (co-producing with Ford the Cortina and Granda from 1968-1976).
And that said (8 years of gathering assembly knowledge, technical documents, engineer training with Ford). Jump to 1975; the government developed a plan to stimulate economic growth, and Hyundai, Daewoo, Kia and Sangyong started work. What Hyundai did was submit
Re: Ernie (#553),
One of the things The Reckoning goes into. Here’s a Library Journal review.
Re: Ernie (#553),
I remember a rule; buy low, sell high. Seems like a good time to buy right now. On the other hand, it might not be for 3 days, 3 weeks, 3 months, 30 years or 30 years before things stop down or start up again. On the other hand, dollar cost averaging is your friend. Think of it this way, the lower things go, the more you can buy for the same price!
Re: Michael Smith (#559),
The “lack of credit” is the distrust of banks to lend to each other. Or something like that; what a mess.
Re: Steve McIntyre (#537),”pure” management. That is the core of the problem. It is not about “management” it is all about leadership. With more leadership and less “management” this would be better. Leaders care about their people. Managers care about their pay check.
Re: captdallas2 (#544),
As a former business executive, I would like to suggest that you need both types.
You need leaders/visionaries to lead and grow the business, but you also need good managers/administrators to make it tick along efficiently. It is very unusual to find individuals who are really good in both of those roles — few visionaries are adept at detailed business administration, and vice versa..
Re: Pat Keating (#546), True but a good leader will find the resources to make things happen. The overall well being of a company or corporation is better in the hands of a leader than a manager. Leaders instill confidence. Managers instill fear.
Re: captdallas2 (#547),
Yes, in an ideal world, but many of the visionary leader types don’t realize they need the detail guy until it’s too late. And vice versa, of course, for the latter types, if they take over as CEOs.
Re: Pat Keating (#561),
There is no ideal world. A good leader is grounded in reality. While he/she may have visions for the future, they know to surround themselves with quality people and treat them as such. They promote from within to instill confidence. When they have to fire someone they do it eye to eye. They never ask of anyone what they would not do themselves. They give credit where it is due.
I was promoted to VP of a small corporation in 1989. The Corp could not make payroll, which seems to be why I was promoted. Instead of laying off anyone I withheld my salary, the president/owners and the other VP’s who seemed to have contributed to the problem. It took a month to turn things around but I never touched the Corporation’s line of credit. We were paying too much outsourcing to Register Professional Engineers (PE) so I hired one. We had low sales so I sold. We had Navy contracts, so I charged more and still got more contracts because the quality of our work was never compromised. I was in the office at 5:00AM every day and I locked up at night until things settled out. In the real world you do what you have to do and hope like hell you do it right.
Re: Steve McIntyre (#537),
Maybe, but the car industry has been decaying for years if not decades. So has the financial. The demise may occur in the blink of an eye but the rot was already extensive. It’s sort of a “but he looked so healthy” when his heart gave out from too much of everything. Look at the computer mainframe and steel industries. Gone? Both went from “too big to fail” to something else. IBM and steel both survived but not in their original forms. Maybe the only real answer is to let them fail and take that generation to rebuild in a more viable form.
Re: BarryW (#549), The car industry has declined because it was not innovative. It fell behind the times and regulations didn’t fit the focus of the American manufacturers. Times change. The auto industry can either innovate or deteriorate. Ideas are the true worth of a company. It is a brand new world. Time for Detroit to embrace reality.
$700 billion dollars is a lot of cash but it is the sort of money that the wealthiest 385 parts per million of the US population have down the back of the couch.
This gives the pointiest hockey stick I have seen:
Hope the link works this time
lcurve
link
Above link is to a column by Jeffrey Sachs, the noted economist, on the causes, implications and needed actions for the current financial crisis
Fed to Lend to Companies in Emergency Move
It looks like the money to be loaned is not coming from the 700 billion, odd that, but anyway….
Does anybody know what is happening with that 700 billion? If anyone knows maybe you could fill us in.
Re: GeneII (#551),
Well, there is one small problem with their plan: the Treasury Department doesn’t have the $700 billion to spend. They are already running a budget deficit, meaning they are already having to borrow some $400 billion a year to run the Federal government.
So what their plan amounts to is a proposal to borrow an additional $700 billion from an economy supposedly suffering from a lack of credit — for purposes of giving that $700 billion back to that same economy to ease its lack of credit.
U.S. Stocks Drop; S&P 500, Dow Post Worst Retreats Since 1937
From what I have read the collapse of the traditional US auto industry came in two waves, firstly they tried to make small car models to compete with imports and failed, yet Toyota and Nissan ran successful car plants in the US, located in low-wage, non-union areas that gave more flexibility. So Detroit abandoned cars, and focused on large vehicles SUVs. SUVs were protected by a 25% import tariff and also escaped government rules laid down to boost fuel efficiency. With the rising oil prices, the top sellers became imported smaller cars. SUVs sales have been in a decline since about 2005.
– Ernie.
I have noticed a rather link deprived discussion of the plight of US manufacturing and auto manufacturing in particular.
First of all, the decline in manufacturing in the US is not unlike that in other advanced economies of the world. Manufacturing trends (a) as a percent of GDP for US is decreasing, (b) manufacturing activity is increasing, but not as fast as overall GDP, (c) manufacturing productivity is increasing and (d) manufacturing employment is declining.
Click to access State_Manufacturing.pdf
Look at Charts 1 and 2 on page 2 in the link below to compare the US manfacturing decline to that of other advanced economies.
Click to access osgdp20044_en.pdf
Auto manufacturing while still a large segment of total manufacturing in the US has been operating with some distinct disadvantages that might well mean that it will decline to a significantly smaller percent of total manufacturing in the US. If the business model is failed then why would a government subsidy or trade restrictions provide any help other then to hurt the US consumer. A foreign auto manufacturing operation in the US would be little different than a domestic one other then the difference in where it is “owned”.
Us auto manufacturing has an approximate $2000 per car profit margin disadvantage against the leading Japanese manufacturers. A goodly part of that comes from what are termed legacy costs of the US manufacturers stemming from agreements to pay retirees retirement and health benefits and the resulting long ratio of retirees to current workers.
http://www.autoblog.com/2006/09/20/explaining-the-burden-of-legacy-costs
US auto manufactures also have inefficiencies due to the lack of standardized parts globally, i.e. they have multiple parts that are unique to one model, while Toyota and Honda have standardized parts for nearly all models.
http://www.msnbc.msn.com/id/20134718/page/2
Japanese auto makers can charge a premium for their cars as they have a preceived quality advantage. If the premium were considered the same as buying an extended warranty I would personally judge from the last time I made some calculations,that it is too high, but the US consumer does not.
Re: Kenneth Fritsch (#554),
As I said before, the car companies have been run by financial types (to be nasty beancounters) who don’t understand the product they are selling. Before the imports made inroads into the US, it was more profitable to give in to union demands and pass the costs onto the consumer. With only 3 major players, and really only GM, having the lions share of the market the consumer had to take what they were given and suffer. The imports broke that stranglehold but the damage was done. The old guard running the US gave us such great cars as the Falcon, Vega, Citation, and Pinto and convinced the American public that the only good car was Japanese. Only in trucks and SUVs did they still have some sort of reputation, and with the introduction of trucks such as the Titan and Ridgeline even this area is no longer safe. Only recently have they been trying to change, but it may be too late.
On the other hand, Japan is still in the doldrums economically, so they ain’t perfect either.
Re: Kenneth Fritsch (#554),
The European arm of Ford Motor Company is doing quite well. But then it isn’t forced to build and sell cars for little or no profit by ill-considered CAFE rules. Logic would seem to dictate that Ford and GM should close most of their US operations and relocate offshore.
Today’s WSJ reviews a book on the rise and fall of Bethlehem Steel. It sounds very much like what’s happening the the US auto industry.
Re: DeWitt Payne (#563),
The beauty of the market system (without outside intervention) is that it has a creative destruction that promotes the best ideas to come to the fore and the not so good ones to languish or be destroyed – even when it may take many years to get a final result. I think we get too wound up in reminiscing the past and not recognizing that letting go of the past can be a good thing, viz., manufacturing as percent of GDP and who makes our TVs and automobiles. We spend way too much time second guessing the losers and conjuring up ways of propping them up when we should be concentrating on what worked and what might work better in the future.
GM and Ford moving operations off shore may have some economic benefits, but it would not rid them, in and by itself, of the legacy costs or some of their other inefficiencies. I suspect that GM and Ford are legally obligated, short of bankruptcy, to continue to pay the pensions it has promised its retirees, but I am not so sure that applies to the health care costs for retirees. The health care part if significantly reduced I would suspect would result in strikes by the UAW. I have read about the auto makers providing a substantial up front sum of money to unions in order for the unions to take full responsibility for retirement benefits, but nothing concrete has occurred on that issue as far as I know.
Another consideration with an insolvent GM and/or Ford is that the federal government guarantees the pensions of insolvent companies and with companies, such as these two with their huge pension obligations, I would guess that federal funds for this would be depleted and that the US taxpayer may be on the hook for some of it.
Without the legacy obligations, I would suspect that the US auto manufacturers might be more attractive to buyouts by foreign interests. The biggest potential problem that I see with the US auto makers would come from the attempts to prop them up if they do not get better on their own.
Re: DeWitt Payne (#563),
I grew up just south of Baltimore Md, where Bethlehem had a major complex, Sparrows Point Shipyard. The furnaces they were using were as from the turn of the century, while the Japanese, who of course had a major “house cleaning” due to world war II, had modern furnaces, and newer facilities. Bethlehem could have updated over the years but that would have affected the immediate bottom line. By the time the competition arrived it was too late.
The quote you have from the book is all too familiar. Companies use benchmarks like ROI (Return on Investment) or, as one I worked for, ROGA (Return On Gross Assets). Seems reasonable until you run into a situation like we did where a ceiling caved in and ruined a computer. The company wouldn’t repair the roof because it would have affected the division’s ROGA and the division’s president’s review was based on how few assets he had for the profit he made. Of course they didn’t want to spend anything on new equipment either so we were very inefficient, at least on the software side of the house.
Arnaud de Borchgrave, [1], on the bailout:
from his column U.S. Decadence Challenged Abroad.
He also has this angle on what is happening around the world as the “…American Gulliver is tied down by millions of Lilliputians subprime mortgages…”.
Nouriel Roubini could be right: “This might be the beginning of the end of the American empire.”
Re: GeneII (#555),
Please note, Roubini is not talking about the end of America but the end of it being as powerful as it is.
Color me dumb, but I began buying US stocks this afternoon.
Re: David Smith (#556),
Re: GeneII (#466),
Some have already made money from these deep falls with rally’s the next day. But please be careful in the stock market now. It is still falling. If you know what you’re doing then more power to you, buy.
The S&P 500, meanwhile, is off 655 points, or 41.9 percent, since recording its high of 1,565.15
What if it falls to 5000 before it starts back up? Have you thought about that possibility? I’m not trying to scare you. It’s just a thought.
559: We are borrowing money from the Chinese, not ourselves.
Re: Carl Gullans (#562),
We are borrowing some from the Chinese, but most we are borrowing from ourselves. Right now, the Chinese hold about 5% of the national debt. 75% of it is held by domestic entities such as private investors, insurance companies, state governments, the Federal Reserve, etc. The $700 billion the Treasury proposes to spend exceeds by some 40% the total amount of Treasury Securities China has purchased to date.
The comment about buying in the market perhaps being the time now was in regards to David Smith buying US stocks in #556
#563. I worked in the metals business during the decline of the once powerful steel companies and thought quite a bit at the time about the reasons for the decline, which was much discussed at the time.
I’m glad to see some readers talking about the need for businesses to be led by smart people who understand the nuts and bolts of the business. This is a much underdiscussed problem. People and leaders make businesses and you can’t just assume that the right people will be there when you want them (an assumption made all too often.)
The decline of the US steel industry was blamed by some people on excessive regulation or excessive investment in environmental compliance. But elsewhere companies succeeded under similar circumstances. My own take was that the US steel industry made some really bad investment decisions. I remember one company that complained a lot of regulatory costs building a vastly expensive strip mill using a slightly obsolete technology and getting their heads handed to them.
I thought about why these sorts of bad decisions were made, when companies in Korea and Japan got them right, and concluded that the leadership of the companies by this time was in the hands of people who didn;t really know how to make steel and didn’t have a “feel” for where the technology was going. Too many accountants, lawyers, B-school types at the table.
But it’s also idle to just blame people. All too often, it seems people analyze only with a view to allocating blame. I get really tired of people always blaming this thing or that thing.
Yes, there were too many of the wrong sort of people, but why was that? One factor IMO was that the sort of very bright production guy that might have emerged in an earlier generation (Ford, Edison say) and was emerging in Japan and Korea probably was in a different industry. You had stolid production guys( but, by and large, I don’t think that they would be the standard of a (Mr) Honda, as his equivalent would probably have gone into a different industry in the US.
Culturally, a real bias arose against smart people going into heavy industry. Conrad Black noted the present cultural bias in the US towards financial rather than manufacturing industries and I think that this is a pertinent observation.
Re: Steve McIntyre (#568),
First let me apologize for the use of jokers and bozos (I missed your last post chiding me, sorry). I will refrain in the future. Your house, your rules. Long term frustration I guess watching what I see as an arrogance of senior management who would do things that are obviously wrong, illegal or immoral but not seem to grasp that the rules are supposed to apply to them also. The link in my comment #577 at least shows that they often have a tin ear when it comes to public perception.
Companies seem to go through a cycle of leadership. The people who start the company are often visionaries who want to accomplish something concrete. They, in turn, bring on people who are not themselves visionaries but can see the vision created by the founders and want to be part of it. As the company grows a hierarchy develops. The visionaries retire and the reins are turned over to the second tier followers who still try to follow the philosophy of the founders. But what of the third group that came into the company when it has become a bureaucracy? Their success is based not on the adherence to the original vision, but to how they can operate in and using the bureaucracy itself. Eventually they reach the top as the first and second tier founders retire, but they’re intent is to grow their power, not to further the original vision. Why would a bright production guy go into a company that has reached that stage? They’re probably either one of the first two types, so they’re going to go into an industry where they can either lead or follow a leader, not into a job that involves office politics.
If the company turns into a corporation I think its even worse. Why do financial types often wind up as CEOs? The board is composed of financial types who were put there by stockholders who bought stock because they saw a company that would make them money, not because they wanted to make cars or widgets. A “widget” person wouldn’t fit in and would want to use profits, not to increase the value of the stock in the short term, but to increase the quality of the product. Which is not what the financial types are interested in. This seems to be the major flaw in the concept of corporations, for all their positives.
Maybe part of the solution is the way capital gains is taxed. If there was a long term incentive to hold stocks for a period of time where the owners of the stocks had an interest in the company’s long term viability then maybe they would take more interest in the actual product or at least in insuring the management of the company did.
If your post includes words like “jokers”, you’re probably venting and blaming. EVeryone knows that there’s lots of blame to go round. Alayse if you will, but your analysis will be improved if you delete terminology like this from your thought processes.
Steve,
I would be very interested in your answer to the question of what is a US auto company at this point.
Is it limited to GM, Ford and Chrystler, or do Honda, Toyotoa etcdesigning and making cars in the US count?
The whole problem was caused by to much easy credit and to much debt carried by both the governments and the people. Combined with the governments desire to provide a mortgage to those who could not afford one. We have been living beyond our means for years and now it has caught up.
I have worked in the Auto industry for over 30 years. A lot of the blame to go around there. The biggest mistake was the thirty and out which has resulted in a huge bubble of retired workers compared to active workers. I would need to look up the exact figures but GM is in the area of 70k active workers and 400k retirees. Just a tremendous cost to carry that is likely to be one of the next emergencies in the economy. What happens when GM goes and declares bankruptcy and these pensioners are left on the outside looking in?
#574. While your recollection is doubtless accurate, I’m pretty sure that Bethlehem invested a huge amount of money in obsolete steel technologies in the 1980s. If you get a chance to examine the old financial reports, you’d be able to tell if they were actually capital deprived. Again, I have a very strong recollection that there are many myths about capital deprivation in the U.S. steel industry. My own recollection was that they invested just as much as the Japanese and Koreans, but made very bad technology decisions.
#572. It’s better than nothing but not the same. I think that it’s important for a country that aspires to manufacturing leadership to have head office decision making. Otherwise it loses a lot of edge.
I don’t pretend to know what this implies for the present situation, given the buildup over a generation and a half. It can’t be reversed overnight and it’s not just about money, though money matters.
One of the bright aspects of the energy crisis is that it gives the US companies a chance to re-invent their product lines. I suspect that their very desperation is causing them to try to outflank Honda and the Japanese on the electrical car front, where the U.S. companies seem pretty active and the problem seems to be attracting the interest of bright young engineers who wouldn’t have been interested in the auto industry a generation ago.
Re: Steve McIntyre (#575),
Based on Wikipedia:
I think both our recollections have part of the story. They resisted investing in new systems and when they did, invested in old tech. I don’t think they were starved for capital, I think they didn’t want to affect their short term profitability. Which, IMHO, is a major defect of present day corporate capitalism.
Rarely is it one thing that can bring down anything so massive. Being successful can lead to stagnation while the world changes around you making what you do obsolete. In my line of work you had Wang, and Digital Equipment Corporation, two of the most successful companies in the word processing and mini-computer fields. PC’s came along and where are they now? Couldn’t or didn’t adapt. Add in bad financial decisions and your gone.
Re: Steve McIntyre (#575), The Innovator’s Dilemma by Clayton M. Christensen (first published in 1997) includes an analysis of what happened to the US Steel industry. You’re right there was no lack of capital or investment.
The book has some interesting things to say about how best to get started in the electric car business and a four door family sedan isn’t the answer.
Steve: What did they suggest? It seems to me that something new would be better to start with niche markets and that efforts to start with the family car are too hard. Even Honda started with motorcycles. I notice that “electric bikes” seem to be a developing niche in China. I saw recently that lead prices had soared because of this market. When I was in the metal business, lead was almost worthless. Now it’s a real commodity again. I don’t know what the supply position is on lead, but I hope that one of the other battery technologies works out.
Re: James Erlandson (#585), I am not a fan of battery powered cars. I had a professor in 1978 that was talking about solid state batteries as being the ultimate technological breakthrough. Battery technology has improved, but not at the exponential rate that one would expect with thousands of people working on the technology.
Fuel cell technology is making some major leaps. Ballard Power and Plug Power have industrial FC conversions for fork lifts in operation now. A British company, sorry brain fart I can’t remember their name, has a low pressure FC that also has low cost because of its design and manufacturing process. Neat concept. They were able to eliminate platinum from the membrane design that is a huge cost saver. The British company’s auto design is doomed to failure due to limited range, but the concept has potential.
Fuel Cell Vehicles are the future of Detroit. But the same hysteria that drove American Nuke plants in the dirt has to be overcome. The Hindenburg effect you know. Also idiots that think HHO car conversions and other perpetual motion crap are not helping things.
Re: captdallas2 (#595),
The irony of the present hybrids is that their best milage is in stop and go traffic. So what did they do in Washington, D.C. area? Of course they let them use the HOV lanes so they don’t have to sit in traffic.
The trick is how to transition to a new infrastructure. Chrysler is supposedly introducing a battery/hybrid set of vehicles that have enough battery capacity for about 40 miles (about the average trip distance for most drivers). This seems to me to be a viable approach which won’t require massive infrastructure up front that hydrogen or other systems might. With some forethought it wouldn’t be hard to use the same designs and transition to fuel cell/battery models or other designs.
Of course no one is really talking about the unintended consequences of massive batteries. Lead contamination, importation of exotic metals for other battery types, handling of crashes with acid spills or other contaminates and high voltage at crash sites.
Re: BarryW (#596),
Do you think originally they worried a lot about pumping gasoline, that toxic and highly flamable substance that causes cancer?
In 1996 it was estimated there were almost 700 million motor vehicles registered worldwide. That’s a lot of batteries…. And we seem to have figured out pretty well how to clean up gas and oil and anti-freeze and battery acid leaks from conventional vehicle accidents.
A lead-acid battery isn’t shipped with the acid in it most of the time, the fluid has to be added and the battery charged for a few hours. A $50 battery such as that can be replaced by a $100 battery that uses a semi-solid shippable media that is ready to install into a vehicle and has 30-50% more life and power to it. It all comes down to choices, often involving money.
I’m fairly certain we can figure out how to minimize the effects of hydrogen or fuel cell vehicles in use or in accidents.
Re: Sam Urbinto (#602),
I’m not really sure that hydrogen would be any worse than gasoline already is.
I think the major impediment is the infrastructure costs required to build hydrogen “gas stations” as well as get the hydrogen to these stations. Until that problem is solved, the best fuel cell in the world is totally meaningless.
Re: Jonathan Schafer (#604),
As long as we haven’t been snipped yet for being too far OT: The real problem is how do you generate the hydrogen in the first place. The industrial process of choice is to use methane and water to make hydrogen and CO2. It makes more sense to burn the methane directly in an IC engine, IMO. A fuel cell may be more efficient than an IC engine, but the overall process, including the energy cost for generating, transporting and storing the hydrogen likely makes it a wash as far as EROEI and carbon footprint. Second best would be to put the gasifier to generate hydrogen for the fuel cell in the car and use methane or methanol as fuel. Of course we were supposed to have nuclear power generated electricity by now that would be too cheap to meter and then we could electrolyze water. That was the inspiration for the concept of the hydrogen economy in the first place.
Re: Jonathan Schafer (#604),
As far as stations for hydrogen and fuel cells and the like. Battery technology isn’t nearly a climber like solid state stuff is. Which reminds me of the solar cell/LCD TV/LCD Monitor prices and advances in that direction. I’m sure that the development of the telephone, telegraph, automobile, assembly line and the like seemed pretty slow and initially overly expensive and having a ton of unintentional consequences for the people that lived through it. Which reminds me of Beta/VHS and DVD HD/Blue Ray and a lot of similar things. Would anyone have though ahead of time that recording length was more important than quality, or that giving away a player in a gaming system would force domination and do so more quickly? The world is an odd place.
But as far as alternative fuel “filling stations” a lot of it depends upon not just the degree of implementation but population density. We’re a ways away, but things can often be surprising.
Re: Sam Urbinto (#602),
Sure, but this is 2008. We used to siphon gas by sticking a rubber hose in the tank and sucking on it to get the gas flowing. Now the directions from EPA for a broken florescent light entail evacuating the house and calling a hazmat team. We’ve had schools evacuated around here for a broken mercury thermometer. We don’t have the same level of risk acceptance about certain things that we used to.
Hydrogen probably is safer than gasoline in an accident since it is lighter than air and dissipate when released, but on the other hand you can’t see it and it’s going to be under pressure. High voltage batteries in an accident, relative to the safety of the responders, will be a problem that has to be addressed. None of these are technically insurmountable, it’s more of an issue of how the public sees the risk. If it hasn’t happened already there is going to be some “yellow journalist” who opines about the risks of all those lead batteries, and a story about the first fireman electrocuted while trying to rescue someone after an EV crash.
Re: Sam Urbinto (#602),
The company I worked for in the early 60’s was working on fuel cells. They even had a little demo model car which you dumped your Martini in and the car started running around.
Fuel cell technology doesn’t seem to have made big strides forward since then. I understand that the big problem is catalytic poisoning. You need a catalyst at at least one of the electrodes to get significant current, but these deteriorate badly with time.
Re: Steve McIntyre (#575),
The July/August 2008 issue of The Atlantic: Electro-Shock Therapy
And if you wonder why I’m hesitant to give the bailout money to these bozos:
AIG execs’ retreat after bailout angers lawmakers
Perhaps a more numerical appraoch to credit rating might
be appropriate. And a more explicit public audit of the
rating people.
The AAA and AAb always seemed to me to be unscientific.
Better a number btwn 0.000 and 1.000 (perfect=impossible).
Paul Keating, former Aussie PM and highly regarded Treasurer
said that the rating agencies were the kernel of the problem.
While looking to see if I kept a copy of the Science article on cost allocation and how it can lead you down the garden path, I came across this quote attributed to Gaius Petronius Arbiter, a satirist from the time of Nero that seemed somehow appropriate to the thread:
Re: DeWitt Payne (#579),
Yes, that quote was one of my treasured “top quotes”.
I lived through multiple re-organizations as new top executives came and went. They are usually extremely non-productive, even counter-productive. Another, related problem is all the fads that come from the management gurus. Most of them have a good kernel of value, but their mandatory adoption by Central Office fiat are also often counter-productive.
#578. Also disclosure seems very unsatisfactory. I looked at the Lehman Bros 10K. Clearly they were hugely at risk in the mortgage market. The key to protection of the public is “full true and plain disclosure” – a theme that I’ve harped on re climate scientists.
Could an investor without access to their books discern that Lehmann Bros was a huge punt on mortgages? Reading their 10K, they portray themselves as primarily an operating business.
Also, the terminology “subprime”. Who’d have known from this name that they were the mortgage equivalent (or worse) of junk bonds. The fiascos seem somewhat reminiscent – both based on simplisitc model concepts of credit risk.
Re: Steve McIntyre (#581),
Steve, lots of people in the US know what subprime means as it relates to loans. The term I hadn’t heard about prior was Alt-A. But I believe most people who heard of subprime knew they were the equivalent of junk bonds. A junk bond rating doesn’t mean it won’t ever pay off. In fact, many people have made a tremendous amount of money off junk bonds. Others have lost their shirts. But trust me, those who invested in junk bonds knew exactly what they were getting into. Similarly, people who bought subprime backed MBS’ knew they what they were buying but willingly took the risk. And of course, companies that held their own subprime MBS’ knew what they had, but made poor decisions based on an everlasting real-estate bubble, and likely thought they had hedged enough with their CDs to manage both sides of the equation. Remember, these are companies who are used to making money on both sides of the equation, whether the market goes up or down.
I suspect that regardless of what a 10K said, it is unlikely that individual investors are not the primary holders of stock in these investment banks anyway, unless they were very wealthy, and the very wealthy are usually pretty good at identifying their risks.
Steve: The purpose of 10Ks is to provide full, true and plain disclosure. A company isn’t entitled to argue that “regardless” of what it says, the holder was “wealthy” and “pretty good at identifying their risks”. In my opinion, Lehmann Bros, its lawyers and accountants had an obligation to disclose the risks. Perhaps the form of disclosure was sufficient to avoid liability. If so, then IMO the form of disclosure should be much improved. Whether anyone will litigate is a different question.
Re: Jonathan Schafer (#603),
That should say it is unlikely that individual investors ARE the primary holders.
Here is an excellent review and summary of the causes of the mortgage mess: Link
Re: Michael Smith (#583),
Michael Smith, from your link I excerpted below an account of a study made that had significant policy implications leading up to the housing mortgage and financial crisis. Does it sound familiar?
Re: Kenneth Fritsch (#593),
Kenneth, yes, I groaned when I read that passage. A study based on “horribly mangled data” with conclusions that don’t survive statistical analysis but which nonetheless are touted as “established fact” by those pushing a pre-determined agenda — and look at the results. Where does it end?
From the WSJ book review in Dewitt’s post we have:
I have been involved with US technologies that were simply not in the proper position to compete and even though it had some affects on me personally, I am most pleased that the natural course of events was allowed to occur. In such situations it is easy to get trapped into thinking “if we were simply smarter or worked harder we could make this enterprise succeed/profitable” when often the fate of the enterprise was sealed some time before. It is not a disgrace for an enterprise to eventually be replaced by a better and more efficient one – that is how the system is suppose to work.
The lobbying for outside help/interference is too frequently the holding action of an enterprise that will eventually fail. The reasons for failure, as outlined in the excerpt below and above, are several and probably well beyond any heroic effort to turn it around or worse to bail it out. As I recall, the current President of the US imposed trade restrictions to ”help/save” the steel industry and the strategy worked in getting him needed electoral votes from West Virginia, but it failed miserably to save the steel companies and in fact had unintended consequences that were so evident that the restrictions were dropped.
I couldn’t find the article I remembered. It was about how allocating indirect costs as a percentage of sales could easily lead to the conclusion that a company was making a profit on product lines that were actually losing money and vice versa.
Re: James Erlandson (#585),
We already have electric vehicles in niche markets, they’re called golf carts and lift trucks. In gated golf course/condo communities golf carts are used as daytime transportation inside the gates, not just on the golf course itself.
As far as battery technology, I’m still waiting to see some lifetime statistics on the Prius batteries. Then there’s the Kinetic Energy Recovery Systems in next year’s Formula 1 racing cars.
Steve: Electric cars and niche markets …
When Christensen asked MBA students who would buy vehicles with a limited range one suggested “the parents of high school students who buy their children cars for basic transportation, to and from school, friends homes and activities … these parents might see the product simplicity, slow acceleration, and limited driving range of electric vehicles as very desirable attribures for their teenagers’ cars … ”
DeWitt is right about golf carts and forklifts. I’ve seen milk delivered by small electric trucks in London.
“Another possible early market might be taxis or small-parcel delivery vehicles destined for the growing, crowded, noisy, polluted cities of Southeast Asia.”
Re: James Erlandson (#589),
Of course, the teenagers in question will have a very different view of the desirability of such “cars”…….
For anyone who hasn’t seen the SNL bailout signing send-up video. Go here. NBC put it back on their web site after some minor editing. It no longer advocates shooting the Sandlers (the people who sold a portfolio of MBS’s to Wachovia for $24E9).
snip – energy policy is important but editorially it will spiral and consume this blog. So please let’s not get into it right now. Maybe some other time.
This snip is patently unfair, unless you SNIP a bunch of previous posts. You are being very unfair, here, Sir.
I fear we have some serious political partianship on this blog.
http://au.youtube.com/watch?v=4dpJL6ANnV0
well worth having a look at this small video.
it explains a lot. but doesn’t go into the owhership of the Fed & the Treasury(usury) as it should. then you can see the real reason as to why GS & JPM became deposit banks that can now unload their worthless Level 3 “assets” onto the taxpayer.
regards
Now for something more on-topic: In today’s WSJ, There’s No Easy Way Out of the Bubble. The graph of housing prices is pretty ugly. It doesn’t look like we’ve seen the inflection point, much less the start of a bottom.
Re: DeWitt Payne (#607),
It looks to me that we have passed an inflection point, judging by the crves shown at your link.
There now calling it a Recession:
http://finance.yahoo.com/banking-budgeting/article/105935/Economists-Expect-U.S.-Crisis-to-Deepen
GM shares fall to lowest level since 1950
http://biz.yahoo.com/rb/081009/business_us_gm_shares.html
Time for the “Plugin” electric vehicle like the MiEV
http://en.wikipedia.org/wiki/Miev
– Ernie.
#610. Uh, they’re “calling” it a recession. That’s really stepping out on a limb.
BTW the Mistubishi link shows cars with in-wheel permanent magnet motors. I was interested in cobalt about 28 years ago – an interesting story than I remember – and I remember getting some amazing permanent magnets using Co-rare earth alloys. The scientist talked about exactly this ocncept in 1980 or so – the motor size was so reduced by using permanent magnets that the motors could be placed in the wheel eliminating a lot of parts and mechanisms.
Re: Steve McIntyre (#611),
Which leads to interesting thoughts about how the car industry might reconfigure itself once the problem of electricity storage is solved … one company specialising in “motor-wheels”, another doing the chassis, another in coachwork …
Re: Steve McIntyre (#611), Yeah Agreed, the definition of “recession” seems to vary a lot, I suspect WSJ is jumping the gun.
The latest version of the Mitsubishi MiEV has a single motor, I like it a lot, if it were shipping I would probably buy one for general commuting. The attraction is the ability to charge it overnight from the power point in the garage at home.
I do see the full electric “plugin” vehicles as an opportunity for the US “big three” to get a foothold in the small/medium electric car market which is only just forming. It’s how Mitsubishi expects to progress http://www.evworld.com/article.cfm?page=article&storyid=1473
A major issue is the crisis is that the banks are refusing to lend to each other in favor of buying US Tresury Bills.
So why dies the US government not institute policies to discourage this. So to get access to T-bills, banks would have to demonstrate a minimum level of inter-bank lending. Another possibility is favored interest rates for cooperative banks and punitive interest rates for recalcitrant ones. So if a bank wants to sell low quality loans to the government then a demonstration of cooperation would ease negotiations.
Professional economists will likely see many difficulties with such ideas but do they have any merit?
Re #615 stammering lips, thanks for the concern. We’re in the “catch the falling knife” stage and the bottom may still be some distance below.
My buying is paced and is with cash I will not need to spend for many years, even in a very bad recession. It is of businesses I know. I won’t catch the bottom but I am catching bargains, given my extended timeframe.
The heading for this thread needs to be corrected:
The Global Financial Crisis
and maybe even to
The Global Depression
Re: Dan Hughes (#617),
From what I read in the Washington Post this morning, Global Panic is probably more appropriate. “The only thing we have to fear is ….” and so on.
The banks in Iceland have been taken over by the government partly because Britain froze the Icelandic bank’s assets from fear that the British depositors wouldn’t be able to recover their money.
Re: Dan Hughes (#618),
This link provides the perspective one needs on all the prophecies of doom coming from the stock market
Working our way back around to evolving industries (SM 575, 585, 589 and on) …
Big steel was brought down by a disruptive technology — mini mills.
Christensen’s book (see 585) says that disruptive technologies typically come from outside the mainstream and get started in small niche markets unattractive to mainstream producers. This is because the market and gross margins are too small to interest large firms. In addition, disruptive technologies exist in “ecosystems” different from that of the mainstream producers — suppliers, distributors, sources of capital etc. These are reasons why making a four door family car that will successfully compete with the Honda Accord, Toyota Camry and Ford Taurus is probably not a good idea unless the producer is nimble (the first iteration is likely to be flawed), has lots of money and a very long time to make it successful.
All of the above is in addition to the large and well recognized economic and technical problems associated with moving from a petroleum/internal combusion based transportation system. And I don’t think we need to debate those here.
Re: James Erlandson (#622),
Interesting point about niche markets. Thinking back that sounds like what the Japanese automakers did in the 70’s. Small trucks, small motorcycles and cars (I’m thinking Datsun trucks and Honda scooters and 250’s , and the original Civic which was like the original Morris Minor as I remember). Also had terrible rust problems, but it was a market american makers did not deign to enter so the Japanese sort of had it to themselves.
Re: BarryW (#623), Honda motorcycles are covered in the book. Existing motorcycle dealers (Harley Davidson, Triumph, Norton, BSA etc) wouldn’t take on the brand because the selling price was small and their existing customers weren’t interested. So Hondas were sold in hardware stores (for example) using the “You meet the nicest people on a Honda” slogan. The Super Cub is now produced in 16 plants in 15 countries and just passed 60 million in unit sales.
The first car Honda brought to the US was a 600cc chain drive two seater that failed.
In both cases the market and therefore the ecosystem for such small, inexpensive, reliable products didn’t exist so the manufacturer was forced to start small, work hard and be flexible in order to succeed. The same can be said for anyone developing an alternative fuel automobile.
About in-wheel motors … They will add somewhere between 25 and 50 pounds of unsprung weight to each wheel along with some cooling requirements while freeing up space inside the vehicle for people and packages. But like much of the technology discussed here they’re not ready for prime time. Yet.
Re: James Erlandson (#628),
<blockquoteAbout in-wheel motors … They will add somewhere between 25 and 50 pounds of unsprung weight to each wheel along with some cooling requirements while freeing up space inside the vehicle for people and packages. But like much of the technology discussed here they’re not ready for prime time. Yet.
I am not knowledgeable about the unsprung weight issues, but the cooling problems were addressed by Volvo I believe, they over built the motors conductors to reduce motor waste heat and had a nice cooling fin design. There are no problems in engineering, only opportunities.
Hydrogen cars make sense for reducing urban pollution, but what happens to a pressurized tank in an accident? Also, it seems unlikely that it will do anything to help reduce CO2 since you are still burning fossil fuel.
Electric cars: for taxis? after an hour they would need to recharge. And why do people think an electric car reduces green house gases? You need to burn fossil fuel to make the electricity. They are good for reducing urban pollution because you can generate the electricity at a power plant and capture lots of the NOX and stuff. snip
Steve: I’m OK with comments on technology, but I really want don’t want people editorializing on energy policy. Whether or not manufacturers can resolve technical issues for transportation remains to be seen. Nuclear is obviously a technological alternative to fossil fuels and some jurisdicstions rely on it more heavily than others. Ontario electricity is over 50% nuclear, way more than fossil fuels.
Re: Craig Loehle (#624),
Yeah, and do a Life-Cycle-Analysis, including the true energy costs of manufacturing a battery.
Steve: Again, please don’t use bandwidth here to complain about energy policy.
Re: Craig Loehle (#624), I was pretty impressed with some of the composite high pressure hydrogen storage tanks for automotive. Incredibly high pressures on the order of 10,000 PSI with burst ratings of nearly 15,000 PSI. Hydrogen while highly flammable also has a high dispersion rate. So there are scary high pressures, but probably less risk than expected in a well engineered vehicle.
Unfortunately, a FCV would still need a battery bank for in city efficiency. With regenerative in wheel motors, battery bank and 10 liters of hydrogen, a truck/suv frame vehicle could do 50 MPGE city/35 MPGE highway with a 350 mile range.
Fossil fuel based hydrogen would be the initial main fuel source, but electrolised hydrogen from wind, off peak electric and eventually solar PV should become bigger players.
To keep this response somewhat on topic, there are a number of things that indicate the stock market is at or very near a true bottom. Record volatility, Friday bull confidence, drop in gold prices, drop in safe haven stock prices and the Lehman CDS auction while low did have value. Things are stellar, but looking better.
Re: captdallas2 (#626),
Not to mention crude has dropped significantly, now down to just under $78/barrell. Gas prices are dropping fairly rapidly as well.
Here’s an interesting issue that was recently brought up…
For more on TED spreads, read here.
Some are saying the the Paulson – Bernake plan was never to resolve the situation, just lessen the pain down the road. Honestly, I don’t know anymore. I was against the bailout, but you get so many conflicting stories of what’s going on, it’s hard to know for sure.
Re: Jonathan Schafer (#627),
Very accurate. The vagueness of the plan is really required. I hate to trust any politician, but this is a time that a little trust is required.
Re: Jonathan Schafer (#627),
One problem we have is that there are very few really smart people who are well educated and experienced in business, finance and economics and who can explain things in a way that most people (even Congress) can understand. Like climate, it is a difficult story with lots of moving parts, variables, unknowns, complicated relationships and people with an ax to grind. One guy made a great impression using dramatic pictures of melting glaciers. Maybe Paulson needs better visuals.
Re: captdallas2 (#626),
Yes, but how about in a closed garage. The explosive range of hydrogen is something like 5 to 75%. You’re also neglecting that hydrogen has a negative thermal expansion coefficient. That is it heats up when it expands. A relatively minor leak at 10,000 psi can self ignite instantly. Unless it’s dark, you won’t see the flame. Of course, that may be better than having in build up in an enclosed space and exploding when a light is turned on.
Unsprung weight is evil. It lowers the natural frequency of the suspension for a given spring rate, and greatly complicates damping (shock absorbers, i.e.). Increase the spring rate and suspension travel decreases and ride goes out the window. You might as well be driving a go kart. In wheel motors might make sense for a bus or truck, not a car.
Re: DeWitt Payne (#634),
Hydrogen does not obey the Ideal Gas Law?
In any case, hydrogen will not be powering ten million family cars soon. It will be tested in small pilot projects and likely get its commercial launch in small niche markets where flaws will be discovered and fixed, costs will be driven down and a base for commercial expansion will be created. Or not. Maybe batteries will be better. Or compressed gas. Or flywheels. Or teleportation. It’s a recurring story.
Re: James Erlandson (#637),
Of course it obeys the ideal gas law as well as any other real gas, which is only approximately because of things like Van der Waals attraction. But a high pressure gas leak is a free expansion, not an adiabatic expansion, and the Joule-Thomson effect applies. In free expansion, no work is done, so an ideal gas neither heats nor cools. A real gas, OTOH, can heat or cool depending on the temperature. At room temperature, helium, hydrogen and neon heat when they expand.
Great boosts in efficiency could come from weight reductions. More aluminum and composite materials. Fewer bells and whistles. A long time ago, I had a full-sized ’69 Pontiac Catalina, with a monster 389 cubic inch V8 engine. It got about 25 mpg on road trips, not much worse than the full-sized cars of today. But it didn’t have all the safety equipment and other stuff which add weight. And weight is one real problem with batteries.
Re: jae (#630),
Numbers are hard to come by but the 1962 Pontiac Catalina Super Duty 421 weighed 3575 pounds. The 2008 Pontiac G6 V6 GXP two door coupe tips the scales (as they say) at 3487 pounds.
Fuel economy is a function of three things: Brake Specific Fuel Consumption (BSFC) of the engine (pounds of fuel per horsepower-hour), weight (mass) and drag. Today’s engines are far more efficient (and lighter) than the large displacement, cast iron, carbureted, pushrod monsters that some of us grew up with. Cars today contain more light weight high strength materials and are in general smaller and more aerodynamic.
The last 1950s behemoth I bought gas for was big, comfy and had a great AM radio but fuel economy was mostly high single digits or low teens.
Re: James Erlandson (#633),
Yes, but I am surprised that we have not done better, considering all these advances. I still own a ’69 Ford 1/2-ton pickup truck with a monster 360 ci V8 with 240,000 miles on the engine. It still gets 14 mpg in city driving and 20 mpg on the highway (it is a very rare model with an overdrive transmission). That is comparable to today’s pickup trucks. The biggest advance has been the use of overdrive transmissions, like Studebaker did in most of their vehicles way back in the 50’s and 60’s.
Re: jae (#640),
Trucks are a slightly different kettle of fish when it comes to efficiency. From Ford’s website it looks like there are no more half ton pickups and today the base models are capable of pulling trailors weighing between 5400 pounds and 5900 pounds. This requires a stout chassis and engines with high peak horsepower. Under normal (non trailer towing) conditions those big engines are operating far outside their most efficient (pounds of fuel per horsepower-hour or Lbs/hp-hr) range. Small engines working hard are more efficient than big engines loafing. The horsepower required to move a vehicle down the highway at a constant speed is surprisingly small and for pickup trucks it hasn’t changed much in 40 years.
Fuel economy numbers for trucks are a little hard to come by but I’ll throw this out as possibly valid … Ford lists their F-150 pickups’ mileage aroung 14 city/19 highway similar to your 1969 beauty. All big motors, all big towing capacity. GMC claims 22-25 highway MPG for the Canyon, a midsize but not tiny 3/4 ton pickup with just 4,000 pounds of trailor towing capacity that can be bought with a four cylinder 185 HP engine.
Re: James Erlandson (#644),
Well, maybe they are using the term “light-duty” insetead of 1/2 ton, but it’s still the same truck.
So?? How much have we gained in 40 years?
Re: jae (#648),
The new Ford half ton is a much bigger heavier truck than your old 69, can tow and haul more weight and has 5.4l 320 hp which is at least a 100hp more than your old 360cu in. (360 cu in is around 6 liters and hardely a monster engine) And your tranny is not an automatic like the new truck.
I have a ’76 Chevy silverado with a 350 four barrel and could only dream of those mileage figures.
Roubini Urges 1.5 Point Rate Cut to Avert Disaster
video
No Quick Fix: Roubini Forecasts Worsening Economy, 2-Year Recession
Cars with 2 engines are heavier, especially if one uses batteries. They are by definition less efficient because of this. People like Prius say they recover energy using regenerative braking, making electricity to recharge the batteries. But there’s more weight to break. Would you rather pay to replace a set of disc pads or to pay for a complex piece of regenerative emechanism when the brakes wear out? It is all too easy to omit cradle to grave testing results.
BTW, does anyone have a figure for the CO2 emissions from a typical internal combustion car versus the power utility CO2 emissions, for the plug-in-the-wall electric car under similar running tests? I would not have thought there was much difference, especially because of battery weight again.
Re: Geoff Sherrington (#638),
The generation and transmission of electric energy from a large power plant is only about 35%, as I recall. If the electric car is 60 % efficient, well, you do the math…
Re: Geoff Sherrington (#638),
According to Honda’s US website the Honda Civic Hybrid has a curb weight of 2877 pounds. The non-hybrid four door Civics range in weight from 2630 pounds to 2954 pounds depending on transmission, trim and options. The Civic NGV (Natural Gas Vehicle) weighs in at 2910 pounds.
A regenerative braking hybrid vehicle has the greatest potential for fuel savings in stop-and-go driving. UPS, Eaton Corp and International Truck were testing such a system (hydraulic, not battery/electric) in 2006 and I suspect that UPS knows as much about vehicle total cost of ownership as anyone in the world. And with their huge fleet they have a lot of skin in the game. Package delivery represents a niche market (a big market but just a fraction of all the vehicles on the road) with a small number of sophisticated players — ideal for such a disruptive technology assuming it works and can save them money.
Update: In 2007 UPS deployed 50 electric hybrid vehicles.
Update 2: UPS ordered 200 diesel electric hybrids for delivery in 2009.
Dang it, I quoted the wrong statement.
I would also be interested in a fuel economy comparison between gas deisel and electric vehicles under significant load. At least with older deisels that’s where the real savings were at. I don’t know if that remains true.
Then there were two:
Rumor on the news that the owners of Chrysler want to sell to GM in exchange for GM’s share of GMAC.
“… voodoo finance…. toxic… collapse… no transparency… walking blind in a mine field… panic… no trust….. so what needs to be done?”
Professor Roubini explains in some detail what happened and offers his ideas on what to do.
Approx 35 minute video,
page opens slow
For those who want more of the economic mechanics that went in to this situation:
from this study Liquidity and Leverage, a PDF file, by Hyun Song Shin, Princeton [his CV], and Tobias Adrian, Federal Reserve Bank of New York [his CV]
Scientific models are less than perfect, the Value at Risk formula could not capture all the uncertainties in the market?
http://online.wsj.com/article/SB122385689217827341.html
Personally, the Volt seems like a better concept than current gas/electric hybrids. The combustion engine in the Volt can be highly optimized since it need only run in a very narrow rpm range to power the generator. Even at 20 miles on the battery my commute would all electric.
18 minute video that shows the statistics of the housing crash:
Joseph Gyourko on Fannie, Freddie, and the Housing Bust
Areas where house prices have fallen the most because the bubble inflated the most (minute 11:52 to 13:42 of the video): Las Vegas, Phoenix, Miami and the Inland Empire of California. Not coincidentally (and this is not mentioned in the video) these areas are also where there is a very high concentration of illegal immigrants from Mexico, Central America, Cuba and Brazil. Up until about two years ago not only could illegal immigrants buy houses in these areas but it was very easy to do so. They were a huge market. Their income didn’t matter much. It was easy to change numbers in application forms. And banks weren’t looking closely.
I don’t know how Texas was spared from the bubble.
Re: GeneII (#653),
Re: Jonathan Schafer (#654),
I wish you could edit a crappy post like I did above. This is my response…
In part due to the high availability of cheap land and the ever spreading suburbia where new businesses are locating. CA has so many restrictions on building that real-estate is already overly inflated. AZ and Las Vegas are in the desert which limits available development to a degree. Not sure about FL.
But look around DFW area for example. There are so many new developments and builders who build spec homes (partial completion where you pretty much only pick out your flooring and wall colors) that it makes it harder to sell existing real-estate. This tends to supress values some. That and frankly, so many companies are moving to TX that there really is no recession here at all.
Re: Jonathan Schafer (#655),
So even though illegal immigrants are flooding in to Texas just as fast as in to California, Nevada, Florida and Arizona the pace of new houses being built kept up well enough with the demand? I thought maybe the reason was illegal immigrants weren’t allowed to buy houses in Texas.
Re: GeneII (#660),
Like you can’t imagine. You have no idea the number of new houses going up here. And so many people are moving here from other areas, like CA, but they just keep on building.
Re: Jonathan Schafer (#666),
I’ve thought about moving to Texas myself. California is an odd place. They seem to enjoy doing things in a nonsensical, backwards way. I guess they call that being “progressive”.
GM just announced it’s closing one of it’s factories that mainly makes SUV parts:
http://biz.yahoo.com/ap/081013/gm_factories.html
Is astounds me that the Dow is so volatile:
http://biz.yahoo.com/ap/081013/wall_street.html
Nothing has fundamentally changed except some promises from governments and cash injection into the market. Perhaps that’s all they expect is required to turn the economy around.
– Ernie.
Re: Ernie (#656),
This looks a lot like a “sucker’s bounce”.
Usually, after an artificial bubble pops, people panic and sell like crazy. After a few days there’s generally a point where the Warren Buffets start picking up the severely discounted diamonds that are indiscriminately discarded along with the crap. Then the daytraders rush in to pick up the crap at 40% off the earlier, inflated price. This causes a brief recovery in the market, which is followed by the real crash.
Re: jim edwards (#657),
There is often a series of ‘Bear Traps’ (sucker’s bounces) on the way down, until the optimists have been burnt enough times to become pessimists (see the DIA during the 1930s). Then you get a long ‘bottom’ before optimism can arise again.
Re: Pat Keating (#658),
Or not, as in 1987. If you didn’t move fast then, you missed it completely.
Re: DeWitt Payne (#659),
Actually, this is not a valid counter-example.
The drop in 1987 wasn’t a long bear market, it was a very sudden, large correction in an ongoing bull market. The DJI dropped extremely quickly, in just a couple of weeks or so, but still took about 15 months to get back to its peak.
The length of the bottom tends to be roughly proportional to the length of the bear market which precedes it. It takes participation in a number of Bear-traps to turn most of the optimists into pessimists.
Re: Pat Keating (#682),
A decline from the peak of 36% and a one day drop of 22.6% is a little bit more than a large correction. It’s a crash. But you are correct and I was wrong about how long it took to recover. The crash bottomed on October 20 and the bottom was tested again in early December. By the end of the year, the Dow was actually up slightly compared to the previous year end close. If you didn’t start buying during early December, though, you missed about a 10% rise.
Re: jim edwards (#657), Re: Pat Keating (#658),
Re: Pat Keating (#658)
Re: DeWitt Payne (#659),
Did that “dead cat” really bounce that high?
We will see, fortunately (unfortunately I had no great fortune) I got out 6 months ago. No way am I ready to rush back in, will wait and see if the cat grabs a branch and how the election goes.
Re: jim edwards (#657), You got it, already turned around again. Until they do something that makes the rate of repayment match or exceed the rate of borrowing, nothing has really changed except some short term top up of the borrowing pool. Pretty good dead cat bounce though!
– Ernie.
The hedge funds are sitting on the sidelines with a huge amount of stocks they must sell before year end. They will wait for the highs and then dump these stocks into the market.
Re: Shawn Whelan (#662),
And guess what happens when large numbers of stocks get dumped all at once.
Re: Sam Urbinto (#664),
People don’t realize that a small number of people control a huge amount of the market. They will drive the price up and then dump the hedge fund stocks. More than once this is going to happen.
Up slightly today, we’ll see what the end of the day brings. Afraid to look at my retirement.
It appears that the comedians forecast the economy better than the economists. They even have the terminology. See:
http://www.brasschecktv.com/page/187.html
Re: Gerald Machnee (#665),
Thank you Gerald for that video How the markets really work. I got so many good laughs from it. I found a second one with the same two guys:
Bird and Fortune – Financial Adviser
Did you see this one that I posted earlier in the thread:
Formidable Opponent – Business Syphilis
Re: GeneII (#668),
No, but I will check it now.
I heard Roubini interviewed (again) last evening by Charlie Rose and he pointed to the problems of lack of US regulation of the financial markets as the cause of the recent crisis along with the propensity of the US populace to spend beyond its means. He did mention the Federal Reserves role in the crisis by their maintaining artificially low interest rates and encouraging mal investments (not his term but one I borrow from the Austrian school). After exclaiming the problem of spending beyond ones means he unabashedly recommended that the US government goes on a (deficit) spending spree on the infrastructure. What’s up with that that so many who lament spending beyond ones means (and sometimes forgetting the main reasons for this to occur) as the cause of the crisis turn right around and suggest that that is the only way out of the crisis.
Roubini seemed to be intent on making the point that the lack of US regulation was the cause of the crisis, but I did not hear him explain how the regulations in other nations failed to stop the problem at their nation’s borders. It is my understanding the banking regulations in most advanced nations of the world differentiate the reserve requirements, depending on the risk of the bank’s investments, and that that risk can be mitigated with insurance. In the current case, once the insurance was determined insufficient to cover the losses the real problems began.
I think that Roubini and Bernanke alike are academicians who have this sense that government regulations and actions can be idealized, unlike their view of the private sector, and that is where they become disassociated with the real world sometimes. In their view it is never that regulation is the problem, but only that the wrong regulations were applied as determined after the fact. Home buying was regulated/influenced for the “good” of the potential home buyer with the unintended consequence that it created a bubble that was aided and abetted by another regulation of the US on interest rates that in turn were lowered to avoid an economic pullback when in the end it was a major part of an even bigger economic pullback.
Re: Kenneth Fritsch (#670),
Good question. Federal government spending has gone from $1.789 trillion in year 2000 to $2.901 trillion this year. So the government is now spending an additional $1.112 trillion every year. I’d say we are already on a “deficit spending spree”.
I wonder if the American people are aware that the $700 billion bailout bill that we were told would solve this crises has now been abandoned and replaced by a new package that will cost the taxpayers an estimated (by the New York Times) 2.25 trillion dollars.
Here is a link to the story LINK.
Re: Michael Smith (#674),
at the link you posted
America no more needed a 700 billion dollar bailout to be saved from financial disaster than the environment needs to be saved from co2!!
So I have to ask again, what is this whole thing really all about??
Re: GeneII (#679),
A very good question indeed.
For a long time, all we heard were denials that any problem existed.
In several public appearances in 2003 and 2004, Alan Greenspan, Chairman of the Federal Reserve, specifically stated that there was no “bubble” building in the housing sector.
In 2004, there were Congressional hearings on Freddie and Fannie and we were told both were in “excellent shape” with no signs of trouble brewing.
In 2005, when housing prices were maxing out, then vice chairman Ben Bernanke investigated the housing market and publicly reported that the market was in fine shape and “better and more efficiently regulated than at any point in history”.
In July of 2006, as it became undeniable that housing was in a downturn, Bernanke testified before Congress that all was still well and that “The downturn in the housing market so far appears to be orderly”.
In May of 2007, with foreclosures of subprime loans rising rapidly, Bernanke still foresaw no problem. “We do not expect significant spillovers from the subprime market to the rest of the economy or financial system,” Bernanke said.
Then the story began to change.
By February of 2008, both Bernanke and Paulson were warning of that dreaded “r” word: recession. The solution, we were told, was a $150 billion “economic stimulus” rebate, so Congress promptly passed it.
Then in March of 2008, the Fed suddenly had to arrange the hasty JP Morgan Chase bailout of Bear Stearns. Treasury Secretary Paulson defended the move, claiming that it would strengthen the entire banking system. He said, “I’m convinced that they’re going to come out of this situation very strong.”
By July, the problem had reached the point that Congress held hearings on the matter — but still Paulson assured us that: “Fannie Mae and Freddie Mac are also working through this challenging period. Their regulator has made clear that they are adequately capitalized.”
Then just a few weeks later, in early September there was the emergency bail-out of AIG and the “seizure” of Fannie and Freddie, followed shortly by the rather stunning claim from Treasury Secretary Paulson that unless he was granted essentially unfettered discretion to spend up to $700 billion buying “troubled assets”, we faced “disaster”.
So Congress passed a law and gave Paulson everything he said he needed to fix this mess.
Only now we discover that the plan to buy “troubled assets” has been set aside in favor of a forced purchase of shares of stock in the 9 largest banks, a plan to temporarily guarantee $1.5 trillion in new senior debt issued by banks, as well as insure $500 billion in deposits in noninterest-bearing accounts, mainly used by businesses.
And whatever happened to the claim that the Treasury could hold on to the “troubled assets” until housing prices recovered, then sell the “troubled asset” at a profit to the taxpayers? Remember that claim?
The only thing I can conclude from this story is that both Bernanke and Paulson seem to have been wrong about everything — wrong about whether or not we would have a problem, then wrong about how big the problem would be, then wrong about how to fix the problem.
At this point, I don’t know why anyone would believe anything they say.
Re: Michael Smith (#680),
The American people didn’t want the bailout. 90%(+) of Americans were against it. So regular people aren’t listening to Paulsen, Bernanke, Dodd, and Frank. Only politicians listened to them and, as unbelievable as it is, rushed to give 700 billion dollars to him, a man they barely knew, and on top of that gave him, by law, the power to do anything he wants with it. But wait, there’s more: his decisions
Looks like this statement didn’t send up any red flags with politicians. They voted yes anyway. And their offices getting flooded with calls and emails telling them to vote ‘no’ didn’t do anything for them either.
But oh ya, Paulsen has to have an overseer (phew, we’re saved). The new and improved Bill the second time through said he has to have oversight. Funny thing is the Bill said he, i.e., the new kid on the block Henry Paulsen, is the one who chooses who the overseer is (scratch that ‘we’re saved’ little thingy I said). It was useless to have used the word ‘oversight’ in the Bill when the wording of the Bill says the overseer is chosen by the one being overseen. So, to everyone’s surprise (lol), he chose a guy he worked with at Goldman Sachs to be his overseer–showing us he is interested in only the strictest transparency and accountability. Henry Paulsen, by law, has the power to do anything he wants with that money. It doesn’t matter at any given point what he says he will do. He can change on a dime. No matter what he does it will all be legal. He is completely unaccountable. It even appears he can do illegal things and never have to fear consequences–“may not be reviewed by any court of law”.
With all this is it any wonder that someone like Nouriel Roubini has an antagonistic tone in his writings about America and economics?
Re: GeneII (#684),
I think one should be more specific in what is antagonizing an economist like Roubini – it might not be what you express above. We might also want to look at the general methods used by all nations in this crisis.
What I see is a rather time honored process (that I find totally objectionable) whereby governments of world react to a crisis -starting with never accepting any blame for the problem and going on to finding as many villains outside of government and then adding to the crisis atmosphere, if not initiating it, and finally coming up with a poorly thought out or understood “solution” that is sold or forced on a voting constituency more as a psychological salve to their constituencies (by showing them that something is being done) than any thing of substance.
I could give a number of examples, but will limit it to pointing to the efforts of the “committed” nations of the world to mitigate AGW.
Re: Kenneth Fritsch (#685),
Or if the their guilt is obvious or no scapegoats exist, saying: “But that’s in the past, we need to focus on the present crisis, not assign blame!”
I’m starting to think there’s something rotten here beyond the obvious. It’s beginning to look like socialism is back in vogue.
Re: BarryW (#686),
Beginning? You clearly haven’t been paying attention the last decade or so.
Re: DeWitt Payne (#688), BarryW #686
.
I guess it was inevitable. It happened because all those ambitious activist kids from the ’60s grew up to the age of taking power. Soon they will be dead and the next generation can straighten things out.
Re: DeWitt Payne (#688),
Oh, I’ve been paying attention. They’ve been putting “lipstick on a pig” to steal a phrase, calling it anything but socialism, now even so called conservatives are on board.
Re: Pat Keating (#689),
Except a certain person is very popular with the younger set, and it’s not “Joe the Plumber”.
Re: BarryW (#690),
I could think of a name to call what is being done to Joe the Plumber in the media… but this is a financial crisis thread.
Of course raising taxes at this time is going to make the crisis worse. So maybe people should be listening to Joe the Plumber.
Re: Kenneth Fritsch (#685),
Thomas Sowell has written a couple of books about the crisis process you outlined. One is more academic and the other is a polemic. The academic version is: A Conflict of Visions: Idealogical Origins of Political Struggles . The polemical version is: The Vision of the Anointed: Self-Congratulation as a Basis for Social Policy. Once you get general acceptance that something is a crisis, reason and logic go out the window.
I thought this was a good description of how the whole thing melted down in laymen’s terms…It’s so easy even a caveman could do it
For those of you that like to watch documentaries, here is a link to an Australian 4Corners program that first aired Sep 2007, it’s an pretty clear example that these recent events in the subprime lending market were foretold in some detail: http://www.abc.net.au/4corners/special_eds/20070917/subprime/default.htm
– Ernie.
Re: Ernie (#677),
Ernie my take away from the interviews with Robert Shiller, Satyajit Das and Mark Seiffert were what they never mentioned as much as what they did. They did not mention the Fannie Mae and Freddie Mac, or the US Federal Reserve or CRA or other government policies that encourage consumption over savings involvement in the current crisis.
Shiller does a good job in describing the psychology of home buying in the US and in the world and the unrealistic expectations involved, but seems to use that as the basis of the problem and not something arising from and abetted by other factors. In fact he says that the central banks of the advanced economies of the world were benign in this problem and only do their thing to stabilize the economies – which is correct if we judge by intentions and not consequences. Shiller gets credit for predicting that the housing bubble would implode and not gradually deflate.
Das does well in pointing to the extent of the world involvement in holding sub prime debt instruments (why did not their regulations work?) and the psychology (in very general terms) of economic slowdowns. He also gives a good explanation of leveraging vehicles in the financial world and why they can fail and fail precipitously.
Seiffert discusses the problem associated with packaging home debt and passing it on to third parties without once mentioning the FMs. He seems intent on the seeing the crisis as relegated mostly to the faults of the lenders.
One of the wisest investors is buying…
The crisis would not have occurred if the pertinent securities had been rated accurately. So, why were the securities rated very inaccurately? Most of the answer is given by
Jones S., “When junk was gold“, Financial Times, 17 October 2008.
Re: Douglas J. Keenan (#692), It would have occurred anyway. It just may be much more sever than most. When junk Was Gold is a good article, but the ratings were based primarily on inflated values that only changed when the bubble burst. Foresight is what is needed to spot these bubbles. Moody and others don’t have crystal balls, heck they don’t even have good modelers.
Bubbles are best determined by long term trend analysis. Every one can be predicted in hindsight. Most in foresight by the smart crowd. Long term, 20 plus year trends are not the norm for investment advisors. They should be.
So to me it looks like this housing crisis comes down to Triple A rating given to subprime loans. Will there be criminal prosecution for those who did this? I have heard Henry Paulsen was one who gave AAA Rating to subprime loans when he was CEO at Goldman Sachs. I haven’t found verification for this. Are any of you fellows good at searching the net to find this kind of thing?
Re: GeneII (#694),
Only Moody’s, Standard and Poor’s, and Fitch Ratings can rate bonds. Since Goldman Sachs isn’t one of those organizations, Paulsen could not have given AAA rating to any bonds as CEO.
Re: DeWitt Payne (#695),
I am curious whether any official organizations or researchers track the performance of the rating agencies. I would guess that these agencies do not have a perfect record in predicting future and ongoing performances; otherwise, I would suspect they would be using the information for investing on their own.
If the agency ratings involved with this recent crisis are not the first time there have been errors in ratings that required sudden adjustments, I would be surprised at the reactions to current problems.
Perhaps we should consider agency ratings in the same vein as peer reviewed papers – not infallible but the best we currently have. There certainly appeared to be a consensus about the ratings and in the reactions to the ratings, so perhaps consensuses are not always infallible either.
In the past sub prime mortgages had always been considered a very risky proposition. I think a change occurred when the FMs and other lending institutions, encouraged by the US congress and CRA, began producing prodigious amounts of sub prime and sub prime like loans. Financial institutions reacted by attempting to find new ways of spreading the risk through insurance and hedging and packaging high risk with lower risk loans. The situation was distorted further by the low interest rates that our Federal Reserve put into effect at the same time. I have heard tell that some of the rating agencies (and I would assume lending institutions that would want further confirmation of risk beyond agency evaluations) used models that saw the failure rates of sub prime and packages containing sub prime loans in the context of the then current housing market and low interest rates and did not sufficiently weight the historical fail rates of these loans. They seemed to over rate the current situation as being much different than the historical one.
Agency ratings can change in a rush: we owned some Washington Public Power System bonds in the ’80s that went from AA to unrated in 6 weeks. This was the largest municipal bond default in history at the time.
Hard to believe that people who make their living rating bonds didn’t see WPPS or the current debacle coming for a long time before the event.
Re: John M (#697),
WPPS, otherwise known as Whoops!
The reason that there are only three rating agencies is that they are the only ones approved by the Federal Government to rate bonds. There is, AFAIK, no oversight other than the threat of Congressional hearings. It’s sort of like Good Laboratory (or Manufacturing) Practice. As long as you have procedures in place that you follow to the letter, you’re safe. It doesn’t matter that those procedures may not work or may not work all the time.
Re: John M (#697),
Is not that like saying if they could predict performance long times before the event they could make lots of money rating the bonds (and related securities) for their own investment purposes.
That also applies to what the Federal Reserve is asked to do by US law, i.e. keep the economy humming and at the same time control for inflation by predicting what the econmy will be doing six to 12 months in advance (the lag time for Fed actions on the economy). If that were possible with any good degree of skill would not we have people using the model to make lots of money.
This link points to a very interesting article from the Financial Times. The world economy was risked on a set of unverified computer programs that had critical errors. It is a wonder that the the mortgage bubble lasted as long as it did before it popped
So Long, Suckers. Millionaire Hedge Fund Boss Thanks ‘idiot’ Traders and Retires at 37
Bernanke, Paulsen and Frank act like they didn’t know it was coming. Either they did know or they’re one of the ‘idiots’.
Re: GeneII (#701),
Gene were you able to make any money on the crisis?
If he had such sure bet, why the need to repair a stress-damaged health. Bitterness in a loser is not healthy but perhaps easy to understand. Bitterness in a winner seems unusual and an indication of other problems
Rating agencies use matrices such as past performance, quality of management, and what’s in the pipeline to rate the company. There is not much in depth forecasting involved in the process. Rating agencies applies the above factors for benchmarking against industry performance. The problem here is that the norm for the industry is skewed so benchmarking become less useful. Basically, if everyone is bad but you are better than bad than you are good.
My feeling is that some people in the lending industry probably had a gut feeling that the lending practices weren’t sustainable. But with intense competitive pressure (if I don’t offer this loan, the bank down the street will), job, bonus and commissions on the line, it’s easy to look the other way. Plus, everything is legal so besides moral obligations there really was no incentive for anyone in the industry to speak up.
Someone in the tread mentioned the use of insurance as backup plan for the bailout. Remember though, insurance is the pooling of risks. If we don’t have enough money in the pool, we won’t have enough to cover the risks. Money don’t grow on trees; the wishful thinking for easy money is part of the reason why we are in this mess to start with.
Re: AllAboutTheNumbers (#703),
Creating prosperity through debt was the closest humans could come to getting money from a tree; but the funny thing is debt has to be repaid…. creating the mess you speak of.
Anyone know the formulas for these simulations that someone like Moodys runs overnight to rate these CPDO (constant proportion debt obligation) bundles as mentioned in the “When Junk Was Gold” article?
– Ernie.
Re: Ernie (#704),
Hi Ernie. I imagine they would be propriatory.
DE BORCHGRAVE: Apocalypse delayed
So much for the bailout generating loans, the Washington Post reported this morning that a number of the banks are just using the money for acquisitions.
Re: BarryW (#708),
The bailout is doing its job.
The three-month LIBOR has fallen to around 3.6% today. The bail out is taking effect and addressing the issue of the crisis of confidence in the credit system. I have heard commentators today mention that the fear of a widespread banking collapse is now fading and is not longer a factor in the activity in the stock market. The stock market is now reflecting activity in the general economy. This is a vast improvement on the situation pre-bailout when there was real fear of an economic collapse.
Re: Stan Palmer (#710),
Fine, but my problem is the level of obtuseness that the senior officers of these institutions have. They mess up, get a bailout, then reward some of their people by sending them to spas. Now they look to feather their nests by using taxpayer money for acquisitions! It’s analogous to a charity giving me money for my daughter’s operation and I spend part of it on a new car. There may be good business reasons for them to do what they’re planning on, but from a public relations point of view it’s horrendous.
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Here is a paper — authored by 3 Federal Reserve economists — that refutes the notion of there being a “credit crunch”: LINK.
Here is a must-read article by anyone who believes our financial crises to be the result of “laissez faire” capitalism: LINK.
Quote of the Week
‘I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered.’
Thomas Jefferson 1802
Re: jae (#714),
Someone said to me recently that while we revere Thomas Jefferson, we, or at least our government, actually follows Alexander Hamilton.
Re: jae (#714),
I am a little confused by that Jefferson quote about private banks. Jefferson, and Madison and Jackson, as I recall, were dead set against government controlled central banking, whereas Hamilton was a very active advocate of it.
Of course, any of the currency trouble we have had would have to be attributed to the government central bank (Federal Reserve) controlling the issue of currency, since private banks do not.
Have you noticed the congressional hearings lining up individual bogey men for the source of the current crisis? It is evidently not the general problem we have with the Federal Reserve attempting the impossible in (over)reacting to the economic trends 6 to 12 months into the future but the vaunted Greenspan. It is always this villain or that and never a systemic government failure.
Greenspan I think realizes now that no person or government institution is sufficiently bright and omnipotent to see the future problems in the economy and while they put him to his knees to confess to market failures I think he knows that it is the unhindered market that will provide the answers or at least a mechanism for finding them and not some government guru/bureaucrat.
What if Greenspan had stated at a congressional hearing that the government edicts and actions in encouraging sub prime home loans was a dangerous proposition? What kinds of reactions would that have provoked? Would it have changed the course of action? I believe Greenspan did make comments about potential looming problems with the FMs? What was the reaction to that?
Greenspan is a closet Austrian, but he’s been forced to work from within the current system. I think his political currency with both sides of the fence would have been seriously undermined had he let those beliefs out once he was (and since he has been) the Fed chairman. Stating the obvious would have gotten him ignored.
Mark
Re: Mark T. (#717),
This is, supposedly, why the Fed Chairman is appointed for a term of years. He can’t be summarily fired by the President or Congress when he says or does something unpopular. When Greenspan was Fed Chairman, he had freedom to act without immediate repercussions. He didn’t need political currency. The Federal Reserve was specifically set up to be independent of political pressure. Now that he’s retired, he certainly doesn’t need the support of either party.
It looks more like he got addicted to being the superhero that saved the day, and liked [likes]getting credit for good economic news. It wouldn’t be the first time a “small-government” Republican went to Washington and ignored his political principles to pursue popularity.
Yes, very sad. I’m in the midst of a similar discussion on another message board – which consists mostly of “third way” proponents – and they really buy the nonsense pushed by Sarkozy that this is all a failure of the free market. The solution, obvious to them, apparently, is to replace the already heavily regulated market with even more regulations, while at the same time remarking about the bailout with phrases like “Good job, Comrade!” Sigh…
Mark
Re: Mark T. (#720),
Mark T, for ammunition in your discussion, I highly recommend the article by George Reisman that I linked to in comment 713. He demonstrates that the notion that we have a “free market” is a fantasy.
Here is the link again: LINK.
Re: Michael Smith (#724),
I already read it. None of what Reisman says is really new to me, or at least, different than what I’ve always believed. I’m going to spend a little more time reading some of Reisman’s works.
Mark
It appears that a good part of the problem stems from a lack of independence by the very groups that are supposed to provide that function. The last time around it was the auditors, this time it’s the ratings agencies (not to forget Fannie and Freddie). Both wanted to make the clients happy when their real job was to objectively assess the thing they were rating. I’ve gotten the impression that part of problem was insuring these funky bonds (based on a comment about AIG in the Wash Post). An insurer has to set their rates based on the probable risk that they will have to pay out. With the bond ratings artificially inflated, even if they did their job properly, there would be no way they could have set the cost of the insurance at a realistic level.
AIG is another story of government meddling.
“Look at AIG. In a wave of corporate head-hunting under Eliott Spitzer, AIG was dragged through a public flogging, its illustrious CEO, Hank Greenberg, driven from office. The old AIG-style of board governance was branded one of the weakest in Corporate America. Seven of its directors were considered insiders.
In the wake of Sarbanes governance jihads and Spitzer attacks, Greenberg was thrown out and reform brought in. The world’s largest insurance company took on all the corporate governance fads imaginable and every clause of Sarbanes. One might assume its risk management regimes would therefore be under the constant eye of scores of independent directors and top-flight accounting firms equipped with new powers and rules.”
http://www.financialpost.com/story.html?id=798153
Conrad Black has an excellent comment on FDR in this week’s Globe and Mail, strongly disagreeing with your statements. Black is a very right wing Canadian, presently living in Florida. 🙂 Black has written a biography of FDR.
Re: Steve McIntyre (#725),
Being from the UK and not having studied this era in any kind of detail, this stuff is interesting to me but purely as an outsider learning. It is obvious there is a lot of political advocacy in the various positions, making it difficult to get a feel for what is objectively the most convincing points.
What struck me as interesting in Conrad Black’s article was that he cited a falling unemployment rate. If you go to the comments section, a Canadian (“Moe Unting”) questions Black’s unemployment figures, provides a contradictory set of data. Unlike Black, the commentator includes a source reference.
I’m aware of the difficulties in measuring unemployment rates (in the UK this statistic is regularly tweaked and abused by politicians and apples-for-apples comparisons are hard to come by), but it seems to me this disagreement would need to be resolved… a bit of auditing of these figures is needed perhaps?
I note that the commentator, rather than claim their figures are correct, notes the discrepency and merely points out that the conflicting figures support opposing claims and that further investigation to understand the differences would be needed. Full marks for objectivity 🙂
Re: Steve McIntyre (#725),
I think it’s ‘excellent’ that people of varied beliefs should participate in the public dialogue; I don’t know how ‘excellent’ Black’s comment is. Without disputing his economic ‘facts’, it seems the internal logic of Black’s essay are troubled by his politics, or his desire to sell books.
Re: Yalta
This is a strange and inflammatory statement. Stalin didn’t need to enslave Eastern Europe.
Dr. Gatling invented his gun during the war, but gas-powered automatic machine guns weren’t invented until much later. Neither was deployed in Washington during the Civil War.
Roosevelt mandates reduced food production and higher food prices while a full third of the country is unemployed, but it’s the “extreme supply-side revisionists” who are advocates of starvation as public policy.
This is bizarre. The only way to avoid becoming a Stalinist or Maoist is to resort to central planning. Huh ?
Roosevelt also gets posthumous credit for:
Poor Truman, Marshall, McArthur, and Eisenhower.
The contemporary belief of the majority was that Roosevelt’s policies were good, so we shouldn’t appraise subsequently available economic statistics to determine whether the majority could have been wrong in their assessment of those policies.
It’s safe to ignore the very large minority who opposed New Deal policies, at the time. They were just:
Re: Steve McIntyre (#725),
It’s only “excellent” if you fall for all the Keynesian myths that Black has obviously fallen for. Let’s take one such myth as an example: the idea that government can reduce unemployment by spending on “public works“.
Black talks glowingly about how Roosevelt hired millions of unemployed for “public works” projects:
What Black fails to consider here is this: “Public works” like this are always paid for by taxes — either taxes collected directly and immediately or indirectly and over time in the form of the inflation that results if the project is financed by deficit spending.
So the billions of dollars spent by the Roosevelt’s administration to pay the people hired for the public works jobs was necessarily billions of dollars the taxpayers were no longer able to spend. Any “job creation” accomplished by such government spending is necessarily offset by the job loss that occurs when these billions of dollars are no longer spent by the taxpayers.
Roosevelt’s massive public works program, therefore, did nothing to address unemployment. It simply created jobs for some by destroying jobs for others.
And in fact, it is not likely that it was even a break-even proposition. Government is notoriously less efficient at running undertakings like “public works” than is the private sector at running productive businesses. Analysis shows that the amount of taxes collected are generally higher than the amount of money spent on wages for the people that get hired to actually do the work. This means that in all probability more jobs will be lost in the private sector than are created by this public sector works program — so the net effect on total employment is likely to be negative.
If you investigate the rest of Conrad Black’s claims about Roosevelt’s “achievements”, you will find similar fallacies.
Re: Michael Smith (#731),
Couldn’t agree more. This is basic economics 101. Hazlitt’s book, “Economics In One Lesson” shows very clearly the fallacy that you point out.
I am not sure why us humans in general have such a hard time understanding this sort of stuff but I think it is somehow wired into our brain. I recently read a study of how the human brain is wired to see ourselves as doing more work than other people. The argument was pretty compelling for why that is. And I can sure attest to the fact of that as a manager of a large organization. Perhaps it is simply because our reality is so centered on our own personal experience – sort of a confirmation bias. It is very clear that Roosevelt’s actions caused X number of people to have a job doing something – it is something we can see as reality – but it is just not clear to anyone how that displaces all the multitude of individual actions that would cause other jobs to be done – thus it is not real. It is just too diffuse or something.
Everyone is entitled to their opinion of course, but describing Conrad Black as very right wing does not seem particularly accurate to me, as his history of comments indicate and the arguments in this article itself do as well. He is right of center, but the center has never seemed that distant from most of Mr Black’s stands. I suspect he may seem more right wing than he actually is because he has seldom stinted on the bile he directs toward those with whom he disagrees.
The article is also replete with one of the banes of this blog; cherry picked statistics.
The link below and excerpt shows the unemployment rate for the US from 1933 to 1945.
That is historically a very long period of high unemployment and only with the drafting and employment of millions (soldiers and civilians) for the war effort did it subside. I think Conrad Black had an oversight there when he used the end points without explaining what happened in the middle. Similar oversight problems are why he now resides in Florida.
http://en.wikipedia.org/wiki/Unemployment_rate#United_States_Bureau_of_Labor_Statistics
Year/Unemployment (% labor force)
1933/24.9; 1934/21.7; 1935/20.1; 1936/16.9;
1937/14.3; 1938/19.0; 1939/17.2; 1940/ 14.6;
1941/9.9; 1942/4.7; 1943/ 1.9; 1944/1.2;
1945/1.9
I disagree with you but am not really interested in debating the topic. So let’s leave it at that.
This topic remains an important issue, but I’m not really interested in what I regard as simplistic discussions of regulation vs non-regulation, government vs non-government. As I’ve said above, my impression is that the American crisis is a peculiar brew, involving poor regulation of things that ought to be regulated and ill-advised and poorly governed federal institutions intervening in the U.S. housing market (areas left to the “free” market in other jurisdictions), combined with an out-of-control current account deficit with the role of the U.S. dollar as a reserve currency delaying the day of reckoning until the problem was much worse.
If this thread is to continue, I want readers to lay off editorializing – I realize that this is hard and that I fall prey to it, as well. But I re-iterate the request. I’d rather that people limit themselves to fairly factual points as much as possible.
Re: Steve McIntyre (#734),
Agreed. Now is it fair game at this thread to audit those statements that you quote from that right wing Canadian business man with a British title, now residing in Florida (where admittedly he does not have access to the resources we have even though he probably has more time on his hands to contemplate these issues than a retiree like myself)? Also, I think in dealing with Sir CB comments it is important that we define precisely what “fairly factual” means. Does it mean the facts are fairly presented or that the facts are approximately correct?
Re: Steve McIntyre (#734),
Why do you regard such discussions as “simplistic”?
Re: Michael Smith (#740),
Perhaps by lumping the Sir and the sirs.
Re: Steve McIntyre (#734),
The Economist (Oct 11th) makes an interesting argument that high-growth emerging markets pegging their currency to the dollar was a significant reason for long-term rates staying low and thus fueling the asset boom. It also caused confusion about what was happening:
They then go on to argue that when the Fed started reducing interest rates the effect on those emerging markets (because they are pegged) was to cause their real interest rates to go negative and thus continue to drive up commodity prices leading to a confusing mix of banking problems and high inflation.
Here is an unhappy fact reported in the Economist (Oct 11th):
“According to this year’s Pew Global Attitudes Survey, only 53% of Americans think trade is good for their country, down from 78% in 2002.”
They go on to say that well-known American economists, including Paul Krugman, Alan Blinder and Larry Summers “have begun to doubt whether increased globalisation is good for the American middle class.”
Re: Richard Patton (#736),
I was mumbling the other day to wife about Paul Krugman getting the Nobel prize for economics and how wrong I thought he was about the FMs involvement in the current finacial crisis as noted from his NYT columns. She asked me if he was getting the prize for his columns and I said, no, that the Nobel committee usaully gives the prize for a specific work and in Krugman’s case I said I suspected that was for his work showing the benefits of free trade. I thought later I heard that indeed his prize was for the work he did for his analyses of international trading.
Would not that be something if Krugman accepted a Nobel prize for something that he is now refuting or at least backing away from? I think Krugman could do it — and expalain it all away in one NYT column.
Re: Kenneth Fritsch (#739),
Here is more of the article I quoted from:
“Quantum of Failures
Forget the markets: massive government failure is behind world financial chaos
Terence Corcoran, Financial Post
Published: Saturday, October 25, 2008”
http://www.nationalpost.com/opinion/columnists/story.html?id=aa229c17-58f3-4693-b259-493dd140c00b
Re: Shawn Whelan (#737),
The excerpt from your link has an interersting take on the issue of how the rating agaencies could get it so wrong — as was questioned on this thread previously.
Re: Kenneth Fritsch (#738), The role of the rating agencies is interesting. I happened to catch part of the Committee on Oversight’s hearing on the rating agencies, and found the testimony of Jerome Fons, Frank Raiter, and Sean Egan very interesting. Both Fons and Eagan called for reform of the NRSRO. Eagan described what it took to get rated:
Their prepared statements (called “testimony” but does not include their answers during the question period), are also excellent and worth a read. They describe how management at the big three became preoccupied with maximizing profits to the detriment of rating quality because ratings were paid for by the issuers.
I didn’t stick around for the session with the presidents and chairmen, so I cannot speak to its usefulness.
Nouriel Roubini: I fear the worst is yet to come
I’m trying to figure out what the difference is between editorializing and what is acceptable in this thread. Seems like 95% of what is in this thread is editorializing, the other 5% being data.
Re: GeneII (#745),
It is certainly not for me to say, since Steve M owns this blog, but I have the impression that poster editorializing is what Steve M wants to keep to a minimum or eliminate. From Steve’s example, I would think it is safe to link and quote the likes of a Sir Conrad Black or a Nouriel Roubini and I would assume those who might present a counter view/opinion.
I am not so certain what the rules/wishes are on a poster “auditing” a published commment. I would hope that it would be appropriate as long as the poster does not personally editorialize.
Re: Kenneth Fritsch (#746),
That didn’t work too. A column was deleted i has posted quotes from.
Not sure, but don’t care at the same time too.
The hedge funds are a big problem in the short term. A huge amount of money(and nobody knows how much) needs to be dumped in the market by the end of the year. Whenever the markets rise the hedge fund money will be dumped and drive the markets down.
I happen to know something about the Great Depression and to have some views on why it was so severe. But I don’t want to spend the time setting out these views or arguing about it.
I mainly want people to stay away from arguments about markets vs regulation as, while posters feel strongly about these things and the issues are important, editorially, I think that such opinions spiral very quickly into point-of-view.
This discussion has probably reached the end of its usefulness.
Re: Steve McIntyre (#748),
Steve, all due respect, and I do respect you; anyone who was part of this:
I have a great amount of respect for. So I hope you don’t take this wrong:
hasn’t every comment in this thread from the very first been everyone’s point of view, even if they were posting links to columns and videos? Weren’t those links showing their point of view? I think everyone was looking for how to react to the economic situation.
Maybe this thread was for you to help you find what to do in this economic situation. And after finding what to do, then to find why these economic problems happened. I read a comment along the way where you said you bear the scars of the economic crash of the late 70’s. My heart went out to you when I read that.
Again, I have to say, I have a lot of respect for you. It doesn’t matter to me what reasons you had for starting this thread. I think everyone learned something along the way. I did. Though what I learned wasn’t something I expected to learn.
Whatever the case I hope that in some way I have been an encouragement to you and everyone else.
And I hope you shred this new, current edition of the Hockey Stick so extensively, and expose it so openly, that it leaves Michael Mann wondering if he even knows how to spell his own name correctly–all of his crew too!
Do I go too far in hoping that? 😉
To those who think the current account deficit played some role in this problem, I pose a question.
If the current account balance were zero, meaning exports matched imports, that would presumably mean that we are importing less because we are producing those goods here in the U.S. instead of seeing them produced overseas. That in turn would simply mean that the profits from the sales of those goods would be in the hands of U.S. businessmen that produced them instead of in the hands of Chinese or Canadians or Mexicans or whoever we are presently importing those goods from.
Thus, those profits would still exist and still be available for investment — they would simply be invested by U.S. investors instead of overseas investors. In short, the current account deficit doesn’t create new dollars out of thin air; only the U.S. Federal Reserve can do that. The current account deficit simply means more of the dollars are being invested by overseas investors and fewer by U.S. investors.
Why, then, do you think the current account deficit has anything to do with the housing price bubble and the bad loans that were made?
Re: Michael Smith (#749),
That’s one possibility, the other is that Americans would have consumed less.
I think Steve is saying that the trade imbalance hid the problem long enough for it to grow to immense proportions – not that the trade imbalance caused the crisis. Consider that some of the dollars we sent to account for the trade imbalance were used to purchase mortgage-backed securities – creating a larger market for bad-mortgage debt. I don’t think that we can assume that the same number of dollars would have been in world-wide circulation had the same number of goods been manufactured domestically. Nor can we assume that the hypothetical domestic manufacturers, were they still in existence, would have invested in mortgage-backed securities.
Re: jim edwards (#752),
And in that case, the money would still exist. It would simply be in the bank account of all those Americans who chose not to “consume”. It would still be available to be invested, either by the individual or by the bank.
But in what sense has the trade imbalance hidden anything? The price of houses rose steadily and spectacularly — right out in the open for everyone to see. The assets of Freddie and Fannie swelled from something like $1.5 trillion to more than $5.0 trillion — again, right out in the open for everyone to see.
Even Congress saw the problem with the housing “bubble” and with Fannie and Freddie. They held hearings on it 2 years ago — but the government regulators in charge of Fannie and Freddie told them there was no problem and nothing to worry about. So if you are going to blame someone or something for “hiding” the problem, why aren’t you blaming those government regulators?
What’s more, Greenspan, Bernanke and Paulson consistently denied there was a problem all through 2003, 2004, 2005, 2006 and 2007. Why aren’t you blaming these government officials for hiding the problem?
Consider that if those dollars had stayed here they may also have been invested in bad-mortgage debt. Indeed, the majority of what’s been invested in Freddie and Fannie came from domestic sources as it is. According to the New York Times, foreign investment only accounts for about $1.5 trillion of F&F’s $5 trillion total.
Why not? Why would the number of dollars have been any lower? The Federal Reserve has pursued a steadily inflationary policy with the money supply even in times when the trade imbalance was much smaller or even zero. See the 1990 – 1998 period, for instance.
No, indeed, the “hypothetical domestic manufacturers” may have invested MORE in mortgaged-backed securities than have the foreign investors.
Simply put, I can’t see any reason to blame foreign investors for the actions of Freddie, Fannie, the Federal Reserve and all the other U.S. government agencies involved in this problem.
Re: Michael Smith (#753),
What makes me wince is that people saw the problem coming. It wasn’t stopped. It came anyway. So I have a question in my mind: why do human being act like this? I will be circumspecting that question for a long time.
Re: Michael Smith (#753), Re: jim edwards (#752),
I was attempting to think of a simplistic approach to showing the alternative courses for money spent by the US consumer. It might be overly simple to the degree that it becomes incorrect, but if so I am sure that will be noted in replies to this post.
The spendthrift US consumer spends money on a foreign good (instead of alternatively saving that amount of money) and the foreign producer has US dollars that it has alternative ways of spending. It can buy US debt and debt that in the final analysis could be directly mortgage debt or other debt in the US that would make more money available for mortgage debt. Obviously foreign holders of US dollars have purchased large quantities of US debt. They would have choices of buying home mortgage debt directly if they considered it a reasonable choice and evidently many did as witnessed by their financial problems. Anyway this in one avenue through which the balance of payments might affect the availability of mortgage money, but even here it is not so straight forward to see. The question becomes why and how was the money channeled more into mortgages and not corporate bonds, for example, or buying US assets or products and services.
Part of that question, I think is answered by the cultural differences in savings between the US and those nations with which we have a large balance of payments deficit and influences that the respective governments have on import/export trade and with policies that promote consuming over savings.
If the foreign dollar holders judged the debt to be an inferior/risky choice, they could also use that money to buy US goods/services or assets. In that case the balance of payments could affect the mortgage debt but at the discretion of the foreign dollar holders.
Alternatively now that US consumer from above is enlightened finally by years of lecturing by those appalled with their spending habits and/or by government policies that encourage saving over consumption and decides that instead of purchasing that foreign good it saves that amount money by investing it in US equities/debts/assets. Now my first impression of that scenario says that the US balance of payments deficits could decrease while at the same time providing funds for mortgage debt.
Finally we have the alternative where the US consumer continues on its spendthrift ways, but through government policy or a sudden streak of “patriotism” (not necessarily my kind) opts to purchase US products over foreign ones. In this case I am once again unclear as to how it would affect the funds for mortgage debt. The consumer savings from the paragraph above is not available nor is the foreign spender of US dollars in the US and therefore it implies less funds for mortgage debt. I some how think that without savings/investments in the US enterprises that the US economy would not be able to sustain itself and this becomes an unworkable alternative whereby our balance of payments deficits are reduced (hooray, hooray says Lou Dobbs) but at a price no one would be willing to pay.
Re: Kenneth Fritsch (#767),
Kenneth, I don’t think what you posted in 767 is “overly simple”. I agree that the situation is complicated — the money could have followed many different paths. My only point is that the current account deficit does not create money — it simply represents a transfer from domestic hands to foreign hands.
And some of that money in foreign hands certainly did go into purchasing these questionable securities. According to an article in the New York Times (see link at bottom), foreign investors purchased about 1/5th of the assets sold by Fannie and Freddie. So 4/5th of the investment came from right here.
That article also tells us something about this issue you raised:
The article answers this way:
One foreign investor is quoted as follows:
So what’s to blame: the current account deficit or the too-big-to-fail interventionist philosophy of the Federal Government?
Here is a link to that Times article: Link.
Re: Michael Smith (#785),
Your statement is, in my view, profound and what some would argue gets to the real root of the problem, at least in part: malinvestment from the Federal Reserve lowering interest rates and inflating the money supply. I am not at all certain, but I thought Jim Edwards was going in the direction of making the point that these effects of the Federal Reserve, i.e. increasing the money supply (or making money out of thin air), can be “hidden” for a time by the balance of payments we have in the US.
Re: Kenneth Fritsch (#790),
There have been a lot of descriptions of credit in the media as being like oil for the engine of the economy. If the credit all flows overseas, I’d expect the Fed to do whatever it could to make sure there is enough ‘grease’ in the domestic economy. We can’t go back in time and discover what the Fed would do with / without trade imbalance, but I predict that the more money that gets removed from the economy and sent overseas, the more comfortable the Fed becomes in producing ever more money, because the greatly enhanced demand for dollars would tend to mask inflationary effects [until everybody decides that, below Washington’s picture on the dollar, he isn’t wearing any clothes]. Foreigners were treating our federal reserve notes like gold, why not make more ?
So I agree with Michael Smith that the economic indicators of a bubble were long apparent. I suspect, however, that the increase in demand for dollars sustained an artificially high price of dollars for longer, promoting domestic overconsumption, leading to more borrowing, allowing the bubble to grow a while longer, and making the crash that much more precipitous when the bubble finally popped.
A lot of these borrowers were using home equity loans to pay off existing credit card debts. If the value of the dollar had declined earlier and we had to pay higher prices for all the imported goods, we may have reduced consumption sooner. Once the dollars were out there, and the choices were made by foreigners to invest in mortgage-backed securities, it simply facilitated additional borrowing.
I didn’t want to get into a back-and-forth with Michael b/c he was accusing me of being an apologist for gov’t regulators and Fed officials, in spite of my earlier posts. I didn’t predict a fruitful end.
Re: #791
And I’d guess we’d agree that’s a wonderful attribute of capitalism.
Re: jim edwards (#793),
Jim, my apologies if I have misunderstood or misrepresented your views. That wasn’t my intent.
As far as the scenario you outline in 793 is concerned, the only thing I can say is that a graph of the money supply shows a basically uninterrupted, steady increase whether we are running a current account deficit or not. The only real exception being the Volker years, when the growth slowed somewhat.
I would post a graph, but for some reason, links have stopped working for me. I can give you a URL to a Federal Reserve website that shows the money supply (M1 and M2) since 1959. Since January, 2000, M2 (which the Fed says is the best indicator of the money supply) is up over 66%.
The URL is: http://www.federalreserve.gov/releases/h6/hist/h6hist1.txt
Re: Michael Smith (#795),
You’re very gracious. I think we’re in 95+% agreement.
I can’t say you’re wrong about what would have happened without the trade imbalance, because I think we’re both guessing.
66% growth in money supply would be appropriate if we had a constant 6.5% growth in GDP over the last 8 years. Needless to say, we haven’t experienced that sort of growth – it’s only found in third world nations where you can build a highway to link an isolated portion of the country to the national economy.
The Fed prefers M2, but others look at M3 – which is a broader measure of the money supply, and has been growing much faster than M2 in recent years. The Fed stopped reporting M3 in 2006. Look here:
http://en.wikipedia.org/wiki/Image:Components_of_the_United_States_money_supply.svg
All spring and summer we were told that our economic future was in peril because of two things: high oil prices and a weak dollar.
Now just a few months later, oil is down 60% and the dollar is up nearly 30% against the Euro. And things are worse.
One contributing factor to the current world-wide economic downturn I’ve not seen discussed here (and I confess to not having read each and ever post) is the tight money policy pursued the past several years by European Central Banks.
Money. There was a payoff at the end, and they knew it. The payoff? No holds barred profits along the way followed by a trillion dollars in bailout money, maybe more.
Mark
Re: Mark T (#757),
Bailout money that is currently being used for executive bonuses and purchasing of smaller banks, with no recourse by anyone because they gave unlimited and unquestioned authority to the treasury secretary. Senators are already expressing regret and my only response is “what a surprise”. I opposed the bailout but of my congressional delegates, only my representative voted against it (and by the way, sent me a very nice email detailing his opposition). Both of my senators supported it. And now there’s nothing to be done about it except watch the money swirl down the drain.
hey, just delete all my comments
just kidding
Here is another historical perspective on the Great Depression and how the government dealt with it:
http://www.econlib.org/library/Enc/GreatDepression.html
– Ernie.
The Stupidity of the Market
In the summer, at the height of the bubble, the New York Times reported a practice that is the best example of the weakness of these speculative markets. Financial speculators had set up a grey market in reservations for very exclusive restaurants. One could call a number and be given a reservation for the current or a nearby date. This was for a hefty fee of course. The reservation cost nothing but was being sold for a large profit.
The customer would be given a false name and told to use it in the restaurant. This was necessary because the restaurateurs did not approve of this practice and would decline any such reservation that they discovered.
The Times reported that the speculators had a hard time understanding this opposition since all they were doing was maximizing the money-generating potential of the restaurant. Everyone would make money – “greed is good” The restaurateurs saw it another way. Their business was about hospitality and creating an atmosphere of this in their restaurant. People came to their restaurants because they enjoyed coming there. These places were more than money-making kitchens which pump customers through. One restaurant owner said exactly this and told of a number of regular customers from the neighborhood who never spent much money but were a valuable part of the restaurant’s family. Their presence made his restaurant more valuable.
The speculators had entered a market that they did not understand and were engaging in a practice that would seriously harm it. Their theories of business management in this market were primitive and inadequate. However, restaurateurs were able to overcome this attack and retain the best aspects of their business.
This is the same thing that I saw in the high tech bubble of the late 90s. During that time, I read the commentary in the financial press about fiber optic networking and could not match what they were saying to what I knew about the field. I just could not see how all of the bandwidth would be paid for. However, at the time I assumed that these highly paid analysts knew what they were talking about because senior executives in the industry were completely accepting their views. Huge sums were invested in building large companies for this market. We all saw what happened with that. As an example, the newspapers had a report yesterday about Nortel Networks. In the bubble, this company became the largest fiber optic manufacturer in the world. For a brief time, it was worth 30% of the value of all companies in Canada. It was a colossus. Now the analysts are saying that it is worth only its breakup price. The shares had traded at $124.50 in the bubble. Yesterday they were trading at the equivalent of about $0.50. The entire colossus is worth only about $700 million dollars. Parts are being sold off to raise cash.
So the entire episode shows not the ‘Wisdom of the Market” as so may free market proponents proclaim but the “Stupidity of the Market”. Greed isn’t good since it blinds us to the true value of what we have. One can think of these last years as a bargain with the devil of greed. He fulfilled his part of the bargain precisely. He gave us profits while we destroyed that which is valuable to us.
Restaurateurs resisted greed’s temptations. High tech and housing didn’t and now have only
Re: Stan Palmer (#762),
My version of the story was that there were restaurants that were upset with that situation because their product was not sharing in the revenue of selling reservations. I suppose a restaurant could sell some of its reservations to a third party and all that does is allow the third party and restaurant to make money serving a need of some patrons who are willing to pay a premium. Obviously if all patrons faced this single choice it would be the same, in effect, as the restaurant raising its prices and perhaps losing some of its customer base not willing to pay the premium.
If the system serves a need (without fraud) and it works – fine, the market has spoken. If it does not work, by perhaps those customers willing to pay premiums being more transient and being not as loyal as the former long standing customers then so be it – the restaurant owners will pay the price and the market works.
On the other hand, if one has an operation for which the government provides a monoploy for its services/products and its customers have no alternatives and have to satisfy a basic need, I suspect not many imaginative or creative options would ever be attempted.
As Steve M points out, a product/stock can be “incorrectly” priced for awhile, but the market will eventually get around to making the correction. The home mortgage debt was for many reasons, as pointed to in this thread, “incorrectly” priced and now the market is correcting (as much as it can with the interference provided). Many governments around the world evidently were “incorrectly” pricing the home mortgage debt vis a vis the fact that their regulations did not detect a problem. It is almost as if the whole world got it wrong.
There were, of course, a number of viewers of this pricing situation who saw the problem, but when one has a consensus on the other side, these people are seldom heard – regulations or no regulations.
Re: Kenneth Fritsch (#764),
The version of the story that the New York Times published is that the speculators did exactly that. They offered the restaurateurs a price of the action and were refused. The speculators had a difficult time understanding this because they did not understand the restaurant market. They had to instruct their clients to sue false names and hope not to be discovered.
Re: Kenneth Fritsch (#764),
I am reminded of a Canadian scandal concerned with the collection of income taxes and Revenue Canada ( the Canadian equivalent of the IRS). In the early 1980s, Revenue Canada decided to abandon its previously benign methods of managing the collection of income taxes and instead emulate the aggressive tactics of its American cousin the IRS. Emulating the IRS, Revenue Canada began an aggressive practice of audits. Their aim was not to helped the taxpayer pay his taxes but to increase collections suing any means necessary. One famous ad shown on television showed the Revenue Canada computer with an iron boot which it would use to squash those Canadians unwise enough to offend it. This naturally caused an uproar that the government tried to ignore with gentle words. Eventually, after weeks of controversy, even the government realized that it could not cope with the protests and moved the head bureaucrat at Revenue Canada aside and abandoned its emulation of the IRS.
One set of gentle words that the government tried was that if the taxpayer could prove that the taxes seized by Revenue Canada were unjustified then the taxpayer would get his/her money back. So, according to the government, a company which had its working capital seized could, after a delay of several months, carry on when it got its capital back. Or an individual who had his savings seized and wages garnisheed could being his mortgage up to date with the money Revenue Canada would return.
It seemed to surprise the geniuses in the Canadian government when most people that that this was a crock.
So if the market is self-correcting, restaurants do not have to worry if they lose their customers. After the market corrupts and eliminates foolish policies introduced by financial speculators then the customers will return and everything will be fine. That the customers will find a bankrupt restaurant with its doors locked is only a detail.
Failures ,caused by the stupidity of market participants, have real consequences. Grand theories about the working of the free market do not pay the bills of people who are currently losing their jobs.
Re: Stan Palmer (#773),
True, but what exactly to do? Your neighbor bought the same house you own. You paid $750,000, he paid $850,000 one year later. You put 10% down. He put zero down. Now the house is worth $450,000 at best. He cannot make his variable interest payments. You are making your fixed payments. The government pays the bank the difference between what your neighbor owes, and gives him a new lower rate fixed loan for $450,000. How do you feel. Do you demand the same loan? Do you just walk away? Many people may, or they may do whatever it takes to get the same treatment. Unintended consequences?
Re: Stan Palmer (#773),
I take it you have some alternative to the market that you prefer. Other than that, sorry, but I do not have a clue as to what you are showing here.
Re: Kenneth Fritsch (#777),
The problem that we are experiencing is financial people with hot money and little business experience entering and disrupting an existing market. The market functions but the hot money disrupts it and causes serious harm. Regulations that could discourage rampant speculation such as the Tobin tax would do much to alleviate this. Some sort of time-graduated capital gains tax that would penalize short term speculators would be along this line as well. Such measure are pro-market. They allow the market to adjust with having to accommodate wild fluctuations in panicked money.
Re: Stan Palmer (#781),
Stan, thanks for summarizing your thoughts on the cause and possible solution to the current crisis.
I think, as Steve M is prone to say on this thread, the problem is not quite as simple as you say. First of all the market is not stupid nor does it possess wisdom – those are attributes of human beings. In my view you are confusing the message and messenger both in terms of what you claim for the market and speculators. When we do not like the message, we tend to want to kill the messenger.
The market and speculators can be very efficient messengers and the regulations/taxes that you suggest would only delay and make larger and less efficient the corrections that the market will eventually make regardless of those impediments.
Re: Stan Palmer (#781),
Kenneth is right. You’re implicitly assuming that “wild fluctuations” are “panicked money” guided by “short term speculators.” Some “wild fluctuations” are certainly the result of thoughtful reevaluations by prudent investors, of both the short and long term varieties.
A prudent investor will understand a corporation’s business activities, and how they are affected by natural disasters, changes in government policy, and other market forces [such as the release of competing technologies.]
A speculator typically understands little to none of this, as you stated. [“…financial people with hot money and little business experience…”]
Prudent investors will scan for news of patents awarded, lawsuits filed or settled, injury to a corporation’s customers and competitors, damage to key facilities, poor harvests, swings in currency prices affecting raw materials pricing and export markets, etc.
There is no way for the IRS to read minds and differentiate speculators from prudent investors.
Your scheme would prevent prudent investors from changing their minds if a better business opportunity came along, and punish prudent investors who follow the news affecting the companies they own – if they act sensibly on that information in order to prevent unnecessary loss of their investment.
What if an investor had a once-in-a-lifetime opportunity to buy a dream house or share of a small business, or needed money to pay for a child’s medical treatment ? You would penalize them. The effect of your scheme is to unnaturally increase short-term financial risk to the investor.
At the very least, such a policy would likely direct prudent investors toward blue-chip mega-corporations and away from smaller, more innovative start-ups. It would also likely cause many less wealthy investors [less risk tolerant in the short-term] to shy away from stocks and stick with lower-yielding investments. Is that what you want ?
Re: jim edwards (#784),
For every “speculator” there is someone else on the other side of transaction.
Re: Stan Palmer (#762),
I wrote of the “Stupidity of the Market” and the high tech bubble but fibre optic moguls were geniuses compared to the current crop of investment bankers. From Forttune magazine
#762. When you write a sermon like this, please keep in mind that part of the motivation for this blog was an interest in matters like the collapses of Enron and Bre-X, where there was a market “consensus”, led by seemingly competent experts, that these were good stocks. There was fraud and cupidity in each case and I, for one, am well aware of the existence of wolves and scoundrels. However, the question that more greatly interested me in each case was how people could have done a better job in early detection – thus, the ongoing themes of disclosure and due diligence.
In the cases of Enron and Bre-X, markets were eventually “self-correcting”. However, the failure of these companies became an issue for the broader community because of “market imperfection” i.e. the consensus on the value of these stocks was radically incorrect, despite the analyses of competent specialists.
Much of my frustration with climate science obviously has arisen out of what I believe to be inadequate disclosure and due diligence.
In addition, one of the constant themes of this blog has been a demand that the National Science Foundation comply with its existence obligations to ensure that climate scientists archive their data and that journals both improve their policies and/or administration of their policies to require climate scientists to archive data and code. I’ve certainly not advocated “less regulation” of archiving; on the contrary, I’ve consistently asked that NSF comply with their regulatory obligations.
Yes, science is “self-correcting”, but, so as we’ve been seeing, are markets. In both cases, policies should be aimed at improving the “efficiency” of the correction process.
Re: Steve McIntyre (#763),
Well, just off the top of my head, I can’t think of anything that interferes with the efficiency of the correction process quite like a government bailout that rescues those who made bad investment decisions — and rescues them at the expense of those who did NOT make the bad decisions, to boot.
Re: Steve McIntyre (#763),
There’s only one way to do that. 😉
Mark
Re: Steve McIntyre (#763),
Self correcting, but the collateral damage can be extensive.
The greatest danger we face is the MSM which will not report on the true causes of this meltdown since it does not fit in with their political beliefs. Instead it is blamed on capitalism and the solution proposed is greater government intervention. This isn’t going to get better until the housing market and stock markets are allowed to correct themselves.
This is very true.
“Would the Last Honest Reporter Please Turn On the Lights?
By Orson Scott Card
It was a direct result of the political decision, back in the late 1990s, to loosen the rules of lending so that home loans would be more accessible to poor people. Fannie Mae and Freddie Mac were authorized to approve risky loans.
What is a risky loan? It’s a loan that the recipient is likely not to be able to repay.”
continued
http://ldsmag.com/ideas/081017light.html
Re: Shawn Whelan (#769), Ah, but why were there suddenly so many poor people that needs the rules of lending loosened? It’s clear that the problems started before that change.
– Ernie.
The signs of greed are obvious but ignored. What else is new in human behavior.
So things go askew, creating both crisis and opportunity.
Pick up Nortel for about $1 a share. Janus Twenty for $8. Buy a house at a 20-30% discout, or maybe even an 80% discount. Oil is back to 2006 prices.
The system is spontaneously rebooting. Hopefully, you’ve backed up your data.
It is pretty clear where the problem came from back in the Carter Administration and was compounded in the Clinton Administration. Neither of the laws to force banks to lend to low income/high risk individuals that helped creat the problem was the fault of the individual presidents, just that it was passed during those administrations. Though the efforts of ACORN and the dems in congress, FANNIE MAE and FREDDY MAC started to buy up high risk loans. This started the housing bubble. What brought this problem to a head was the low cost of debt, active blocking of any effort to correct the problems by the democrats – mainly Dodd and Wrangle. Then basic greed in the market place happened. This is fourth time that a crisis has happened due to the finanical sector when they have tried to have mortage backed securities, yet it keeps happening.
Not the same house , but the same model.
Thanks
An interesting article from Martin Fell in Australia’s “The Age” newspaper this morning:
http://business.theage.com.au/business/we-cant-live-on-moonbeams-and-air-20081028-5am2.html
I see the Dow jumped +10% today, I wonder what rational market theory caused that?
– Ernie.
Re: Ernie (#776),
This assumes rationally acting consumers, an unfettered price mechanism, and scare resources.
The index value of the DJIA* doesn’t seem to have anything much to do with optimal allocation theory.
————————-
*That is to say, the prices of the shares of Alcoa, AMEX, Boeing, Bank of America, Citgroup, Caterpillar, Chevron, Du Pont, Disney, GE, GM, Home Depot, HP, IBM, Intel, Johnson & Johnson, JPMorgan Chase, Kraft, Coca Cola, McDonalds, 3M, Merck, Microsoft, Pfizer, Proctor & Gamble, AT&T, United Technologies, Verizon, Wal-Mart and Exxon Mobil.
Which at 11:55 AM Eastern today were worth $1,142.70, and were up overall $4.63, and a total of 417 million shares traded so far today.
The index itself is at 9,058
Let’s take a look at the similarities between the financial crisis and the global warming “crisis”.
1. Both use sophisticated computer models to generate output
2. Models from both are unable to properly deal with all postive and negative feedbacks, especially when some are unknown or unmodelable.
3. Government intervention is deemed required in both cases, including immediate action lest a disaster occurs
4. Government intervention costs the tax payers hundreds of billions of dollars (or more)
5. Government actions involve redistribution of wealth through various schemes
6. Both “crises” are man-made
7. The average citizen gets screwed under both.
I’m sure there’s plenty more of these.
Re: Jonathan Schafer (#778), I listened to a podcast recently by Dr Steve Keen, Associate Professor in economics and finance at the University of Western Sydney, where his strongly criticized classic economics teaching for being pretty light on maths. He pointed out many of the classic models which are flawed, no doubt resulting occasionally in bad advice given to governments. As you suggested similar to the “global warming” advice we have seen.
There is a new wave of economic thinking called “Econophysics” http://en.wikipedia.org/wiki/Econophysics where they are trying to apply mathematical techniques used in physics to solve problems in economics, mostly from probabilistic and statistical methods taken from statistical physics.
Very early days, however it looks promising.
– Ernie.
Re: Ernie (#779),
As was referenced here(#692), in the post by Douglas Keenan, a flaw in the rating software model was fixed and suddenly all the AAA ratings basically become junk status, which is where they should have been all along.
There are no doubt similarities in GCM’s, either through direct bugs or invalid models, which can only then be constrained by parameters to keep the system from moving drastically out of the bounds of reasonable possibility (think hot house and/or snowball earth). These adjustments may simply be masking junk bond status from the gcm’s.
The link to the Times article I provided in 765 doesn’t seem to be working, so I’ll try again: Link.
Still didn’t work. One more try: Link.
http://www.gold-eagle.com/editorials_08/peterson102908.html
SMc. may be of interest to you. It isn’t only the Gols market that is heaily manipulated. Early in the year the 3PM ramp became common.
regards
It’s not like an insurance company or pension fund can just move or yank its investments out all at once. Both short- and long-term consequences dictate certain behaviors.
Even recognizing a bubble doesn’t mean you can do anything about it but try and minimize the damage, if anything at all.
Peter Schiff says the US is broke. He is right.
Where is Unthreaded when I need it? Obama intends to bankrupt coal plant operators. Impact on Ohio, Pennsylvania, Virginia, Colorado, New Mexico and Arizona. Surprise!
========================================================
Nobel prize winner Aumann believes the “simplistic” solutions of not interfering with the markets is correct.
http://www.bloomberg.com/apps/news?pid=20601087&sid=azH.b7NrSh3k&refer=home
There is a very interesting article in today’s Wall Street Journal blaming the near collapse of AIG on unreliable computer models – http://online.wsj.com/article/SB122538449722784635.html?mod=testMod (behind paywall).
The article includes a great quote from Warren Buffet: “All I can say is, beware of geeks…bearing formulas.”
Any similarity to the climate world is just an illusion.
Re: gens (#800),
But if the rating agencies can’t be trusted then no matter what computer model you’re using you’re liable to get a wrong answer.
There’s also an interview in today’s WSJ with the founder of modern portfolio theory. The foundation of diversification to minimize risk is to mix investments in asset classes where the risk of each asset class is uncorrelated. Mortgages alone are by definition correlated so a diverse collection of mortgages is not a diversified investment.
BarryW,
The article was not about rating agencies – it referred to internal AIG risk models created by a Yale professor.
Some additional excerpts from the article that may, or may not, resonate with those auditing climate research:
“Risk Models Failed to Pass Real-World Test”
“AIG’s models are … designed to make them very robust and to introduce as little model risk as possible” (a quote from the professor in question)
“the models we use are simple, they’re specific and they’re highly conservative”
The internal models would use rating agency ratings as inputs in a lot of cases, thats where i think Barry’s comment is coming from. From what i have seen of financial sector modelling a lot of companies are using probabilities of default implied from rating agency ratings as inputs into their models instead of examining underlying risks (which would be a whole lot more complicated).
I had the opportunity to speak to a number of ERM and modelling people involved in the insurance industry earlier in the year in both the US and Europe, and the black swan principal was understood when it came to modelling insurance portfolios and the company as a whole (ie your model is fine but you need to have an overlay of risk management and appropriate governance to cope with those catastrophes that the model cannot forsee).
I dont think this principal is understood at all well in the wider financial community.
AIG has a good handle on the insurance part of their business. It is surprising to me, however, that they didnt have a better handle on the rest of the business. They have one of the most sophisticated ERM structures i’ve seen. But i guess a structure is only as good as how it is implemented. Its interesting that management was aware of the potential for sub-prime loans to default at a high rate as long ago as 2005 but that this was not reflected in the models that had been developed to price the risk. The ability to build a model is nothing without the understanding of what you are actually modelling.
Poid,
I have had in the past fairly extensive dealings with the AIG FP people and they were (are?) some of the sharpest minds I have met on the Street (or Connecticut to be precise). It is amazing to be how they could have got it all so wrong. I guess it is another case of when genius failed.
As regards using rating agency inputs, AIG specifically stated that they “… didn’t rely on the default-risk predictions of credit-rating services, and instead came up with his own estimates of what was safe enough for AIG to insure…”
Re: gens (#805),
Interesting, that they used their own estimates. The problem from what I’ve been able to glean from the description of the bonds that were insured is that they are so far removed (at least tertiary) from the original debt (mortgages) that any risk assessment would be a WAG (and these were relatively new instruments, weren’t they?). Couple that with the fact that much of the exposure seemed to be due to “betting” by third parties and a large leverage, so that a large failure couldn’t be covered. Sort of a Titanic mind set: we don’t need all those lifeboats, we have multiple waterproof bulkheads so we can’t sink if one is breached; however multiple breaches….
Gens: yeh the AIG models didnt use agency inputs from what I understand, being an insurer first and foremost they would have looked at the underlying data. A lot of players do use the rating agencies as an input which is just worrying. The AIG ERM guys that i have met are some of the best around as well.
A reliance on models can undo even the best minds. When working on the past data they would have stress tested the model by creating various ‘realistic’ scenarios. Of course, the actual outcome was much worse than the scenarios would have told you and by then its too late, you hold the exposure. The exposure would have been far larger than the risk appetite would have normally allowed for because the “certainty” in the model effectively told them that the risks were managable. So that governance layer was compromised in its effectiveness.
After all, who would have expected 30% falls in some areas of the property market based on past data? No one, and i’m sure that none of their models would have had anything this extreme.
Models have undone lots of genius’ in the past and will continue to do so.
Re: poid (#807),
I guess this is what I do not understand. A lot of people did. They observed ten plus years of declining intrest rates combined with over ten years of ever easier credit led by Fannie and Freddie. In particular the last three plus years, 04 through 06 and part of 07 saw truly insane loans. I (no genuis) and a lot of people were amazed to watch this unfold. It appears that in all the complexity of computer models, common sense was maybe forgotten.
Re: David (#808),
Linear projection of a trend, like one of the main subjects of this blog. Standard practice in a bubble.
Re: poid (#807),
You should read the actual WSJ article. Your local library probably has a copy. It’s not that the AIG models failed to predict the risk, the problem was that the models did not include all the consequences, specifically collateral calls on the CDS’. As the value of the insured security dropped, the holder of the CDS could demand that AIG pony up real money. They didn’t have it. They never modeled the need for reserve capital. So they’re borrowing it from the Fed and we haven’t seen the end yet.
David: Common sense is quickly forgotten when they are consumed by the data unfortunately. Often the stress test scenarios are constructed based on the variability seen in the data rather than common sense.
DeWitt: I have read the article (it was conveniently reprinted in Aussie media). The model that Gorton built is a specific model for probability of default, but AIG also had modelling at an enterprise wide level which was designed to model the risk of the entire company (including all consequences). Effectively a giant VaR model of the entire group.
Its that layer of their modelling and governance that failed. As the article states, modelling of the full consequences (consequences are included in the risk, its not a separate concept) wasnt implemented until 2007. Their enterprise wide economic capital model should have had that included far earlier while the swaps were being sold. It meant that AIG was undertaking a level of risk far higher than their risk appetite because their VaR models were not reflecting the full level of risk in the company.
CAFE needs to be tweaked to put Ford, GM and Chrysler on the same footing as other manufacturers. Having two separate fleets, foreign and domestic, for CAFE purposes forces the production of low quality, but relatively high fuel mileage, cars in the US that still sell at a loss. Of course a better idea would be to get rid of CAFE entirely, but that doesn’t seem to be in the cards.
The iPod made Apple profitable because they could produce and sell a lot of them for a premium price, not to mention selling the music to put on them at the iStore. Somehow I don’t think that anything like that will happen with the Volt.
I want to make some observations and ask some questions in this post, while at the same time avoiding the appearance of editorializing.
My observations are that in the US many media types and other commentators on the topics of the financial crisis and economic downturn have lost all former tendencies to criticize the government and the current administration for acquiring debt and appear to be calling for the government to spend huge sums of money without any thoughts of where this money will eventually come.
Am I being overly sensitive or are others seeing this phenomenon unfold before your eyes? And since there is a heavy international participation at this blog what are others here seeing as a reaction to economic downturns in their countries?
Also we have many commentators in the US, attributing the problem in the US to Wall Street greed and under regulation. The economic effects and downturns seem very global and those many nations facing economic downturns of their own could not have the Wall Street greed or lack of US regulations as these commentators claim for the US. My question then becomes to what are people in these other many affected nations attributing their economic problems.
Re: Kenneth Fritsch (#814),
In the UK, every time Prime Minister Gordon Brown opens his mouth on the subject, he refers to “problems arising from elsewhere” or some other such phrase, making it quite clear that it’s not HIS fault – rather like a little kid being asked where all the cookies which were in the jar last night have gone.
First, it does seem to be true that many UK banks bought large blocks of sub-prime debt from USA banks without exercising due diligence and examining the true value of the contents. That was stupid and the few banks which exercised traditional caution and did not buy these packages are now relatively healthy – after being much derided at the time for being too “conservative” to take advantage of the opportunity to make easy profits.
To this extent, some of the problem was imported, but the blame still rests with the guilty banks and with the Government’s FSA organisation, which is supposed to oversee banks and ensure their business models and operations are sound. Since Gordon Brown was Chancellor of the Exchequer at the time, he is directly responsible for this lack of proper oversight – which is why he clearly places the blame elsewhere at every possible opportunity. Standard political operating procedure.
Secondly, a significant part of the UK share of the problem was wholly home-grown. The Northern Rock bank was deliberately targeting sub-prime mortgage risks and offering mortgages up to 125% of the property value to borrowers who had little chance of maintaining payments if the bank rate increased – which it inevitably did. Smaller banks and Building Societies were issuing mortgages to borrowers without adequate checks on income (I know – I took out a mortgage in 2001 at a variable interest rate of then less than 4% which was fixed up in fifteen minutes over the phone with absolutely no check on my income. OK, I’m good for it, but thousands are not.) Northern Rock went spectacularly bust and is now owned by the taxpayer – but its problems were known to the FSA for nearly a year beforehand and no action was taken. Another major bank offered to take it over quietly at an early stage to help stabilise the banking industry but for some mysterious reason the takeover was blocked.
So, a large slice of the trouble was imported but British banks did their share. Imported or home-grown, the problem was made worse by Government incompetence and attempts at cover-up for political motives.
Re: Peter Lloyd (#818),
Peter Lloyd, thanks for some insights into what has transpired in the UK. I hear some of what the British parliament has to say when they broadcast here in the US the weekly exchanges they do there.
What I see, and was looking for some more insights on, was that the economic down turn, while being affected by the financial crisis, seems to have deeper roots and it would appear that most advanced national economies are throwing caution to wind and bailing out anything that moves (and has acquired huge debts). I saw professor Roubini this morning on TV, who after pointing to the spendthrift US consumer, rationalize a most profligate spending strategy for the US to spend its way out the current problem. I wonder from he thinks the US consumer gets its spending habits and rationalizations.
From what you say then, Peter, the UK has suffered the same problems as the US and without, specifically, Wall Street greed and the lack of US regulations. I would be interested in seeing what people have to say they see as the causes of the economic downturns in their countries.
Re: Kenneth Fritsch (#819),
Kenneth,
I obviously didn’t make myself clear. Some – at least half – of the UK problem was imported directly from Wall Street, but UK banks brought this part of it on themselves by not exercising due diligence over purchased WS debt. As for the rest, they proved to be apt pupils at the school of homegrown greed and irresponsibility.
Over here there is also a significant (very conservative) part of the financial industry which holds to the theory that the lack of adequate UK Government FSA oversight in London enabled some British banks to operate so loosely (= greedily = profitably) in international markets that Wall Street banks were forced to compete by matching their inappropriate standard of operations. I’m not sufficiently knowledgeable to judge this claim, but I can’t help believing that WS banks are quite capable of dreaming up their own dumb ideas without looking to London for inspiration.
There is no need to look outside the banking crisis for a reason behind the global economic downturn; the freezing of available cash due to the collapse of banks was enough to stop the operations of any company anywhere in the world engaged in manufacturing, retail, housebuilding, travel, etc., and requiring loan capital to run its business. Very few companies these days are run on the “old-fashioned” principle of financing next year’s growth from last year’s profit, avoiding the need for loan capital from banks and their consequent interest charges. I have run a couple of medium-sized businesses in my mis-spent past and can attest to the heavy pressure exerted by the bank to take out a large bank loan for rapid expansion.
Re: Peter Lloyd (#827),
Peter, to summarize what you think was the problem in the UK is that it can be attributed to UK greed and the lack of UK regulation. You also think that the international economic downturn can be attributed nearly entirely to the financial crisis.
Do you have any references to those many other countries having economic problems and whether they attribute it to their national greed and lack of regulations?
Re: Kenneth Fritsch (#829),
Not altogether. As I said previously, if the debt packages sold by Wall Street banks to UK banks, and others around the world, had not contained so much very low-quality debt, the purchasing banks’ lack of due diligence would not have mattered. Put the blame where you will, but when ‘caveat emptor’ becomes ‘trust no one’, the world’s banking structure seizes up and capital is no longer available, even to healthy businesses.
Note the input from poid/830 –
Alhough he says that Australian financial institutions have had very little direct exposure to failed US institutions, they are nevertheless afflicted with the general freezing of credit markets – because big banks are interconnected round the world, and if one or two links in the chain fail, the whole system seizes up.
Re: Peter Lloyd (#833),
Peter, thanks for your replies and also thanks to Poid for the insights into what is happening down under. I do read what the US and international financial media has to say about the financial crisis, but I have good reasons to look for insights independent of what these sources might say. Peter, I believe that your comments are more in line with what the financial pundits are saying around the globe.
I found Poid’s views in Australia a bit conflicting as I am not aware of the degree of the Australian banking system’s dependence on the global or other nation’s banking. I have another take on the situation and that is that banks, in all advanced national economies, in light of the rude awakening, are questioning past lending policies and that that awakening was going to happen regardless of the US financial crisis.
It would be the equivalent of the Federal Reserve in the US suddenly raising interest rates and stating that they were heading off some very unwise mal investments (Mark will be familiar with that term) in light of their past easy money policies. I also think that some enterprises such as the US automobile industry (as well as the obvious needs of the over extended home mortgage industry) were depending on easy Federal Reserve policies to keep the business boom going. And the Fed tried to keep the boom going, but in the end (and I think Dr. Bernanke may be coming to realize this – even with his academic studies in opposition) that it is difficult to push on a string. I do not judge that GM in the US is suffering from the effects of the financial crisis, at least directly, but more from a fall off of consumer demand that leverages their ongoing weaknesses. With that in mind and in my view, the stimulus packages and bailouts are only measures to prop up otherwise failing business plans that the governments could not affect through monetary measures and that in the end those enterprises will eventually fail due to the realism that governments do not have the unlimited resources to subsidize them.
I want to hear more from others on their nation’ problems, so that I can determine whether my conjectures are valid or not.
Re: Kenneth Fritsch (#835),
Kenneth, Aussie banks are tied into the global banking system in the same ways as all other banks. The major difference is the direct exposures to the sub-prime type securities that have caused the early losses. The lack of large exposures meant that the Aussie banks remained in a strong position in terms of capital.
In terms of funding, however, they have suffered because of the freeze in credit markets just as everyone else has. Its not so much to do with lending standards; standards here didnt drop anywhere near as much as they did in some other countries (though they did noticeably drop). The regulator was monitoring lending standards quite closely, and the Basel II requirements penalise high LVR loans that arent insured (in the form of higher capital requirements). Sub-prime type loans are almost non-existant and even low-doc type loans are a small percentage of loan books. There hasnt been a massive increase in default rates yet. An increase in default rates will happen as normal because of an economic downturn rather than the loan book having a large number of bad loans. Our fundamentals in most of the country are stronger than those in the UK and US so a property downturn wont be as severe.
The banks here (and other companies) have sourced funding from overseas, just as other banks have globally. Securitisation markets have dried up globally, so banks relying on securisation for funding have had to drop that model. Also the lack of trust in the market meant that interbank lending dried up so the central bank is providing most of the liquidity that isnt being provided by deposits (thats partly due to the distortions introduced by the govt as well). The lack of trust is a global problem, its still difficult to get medium to long term funding and short term funding is still restricted compared to before the crisis hit properly.
A good example is in the short term commercial paper market, a lot of that market in Australia was provided by US institutions. Some of them have significantly tightened up CP requirements, so companies here are having to find other sources of liquidity and funding. Other notes are being issued for shorter terms, so it means there is a constant rolling of securities to provide funding and hence increased funding and liquidity risk.
Its this lack of funding and liquidity that has led to a reduction in lending by banks, as well as their desire to incraese capital due to the uncertainty that currently exists.
Re: Kenneth Fritsch (#829),
All you need is to have read the financial columns of the world’s newspapers for the last 3 or 4 months. The lack of credit and business working capital has been an ever-growing complaint. This has been due to the inability of banks all over the world to do normal business with each other, because they could not trust borrowers to pay back. This has caused them to stop lending working capital to businesses, which has caused the current ‘downturn’.
That this originated with US banks’ sub-prime loans is widely accepted. My take on this is that some of the blame must be taken by the banks, world-wide, that bought the debt from the US banks without valuing the purchase.
Re: Peter Lloyd (#834),
It astounds me that the banks, who “conjure money into existence out of thin air”, would be unable to compensate for bad debt by just conjuring more money. eg. give the bad debtor another loan to help him pay his first loan. It sounds stupid, but it might be a short term solution. Or have they blown their fractional reserve ratio already?
– Ernie.
Re: Ernie (#836),
A bank normally lends more money than it has, but is supposed to protect itself by investigating the borrower to ensure there is a better than 50/50 chance that the loan will be repaid, and also by asking for reasonable collateral. What has gone wrong over the last ten years is that these conservative precepts have been ignored in the race for increased profitability, growth and executive bonuses.
When a bank has over-extended itself in this way, and instead of retrenching, proceeds to borrow more money to cover itself, using unsafe – even unlikely – repayment of its existing loans as collateral, the total debt is therefore increased without any associated increase in collateral. For simplistic example, if a badly secured debt of, say, $100MM is covered by a loan from another bank of $100MM, covered by the existing bad loans, the total debt on the market becomes $200MM on the same unreliable collateral base. I read recently that by this means the world total of dodgy debt has now become greater than the world total GDP.
Even if the body of poorly secured debt is sold on, rather than covered by a further loan, it is sold at a profit and the cost of the body of debt has increased without any increase in collateral. Even if it is sold on at the face value of the original loans, the costs of the transaction (accumulated interest charges on the capital) will increase the total cost of the body of the debt – again, with no increase in the inherent value of the collateral.
This is how money is “conjured out of thin air”, but at some time the cycle has to stop – when someone along the line suddenly refuses to accept the unsafe valuation of the underlying collateral.
Ernie’s solution is not stupid, but, as he says, it was short-term and now the term has run out!
Incidentally, it is worth noting that the few banks which refused to play this game and stuck to old-fashioned conservative banking principles have survived the credit crash with their accounts in good shape. All Spanish banks – notably Santander, the largest, with a recent history of aggressive expansion outside Spain – have survived because under Spanish law banks were forbidden to buy derivatives and dodgy loans. Similarly Standard Chartered, a notably conservative UK bank. But even in these cases, although their own accounts are in good shape, they are finding it difficult to do business because there are few other trustworthy banks to deal with and potential customers are scared of taking out loans in the current global climate.
For a much better explanation than mine, and certainly funnier, search Youtube for Bird Bremner and Silly Money. You might as well get a laugh out of the situation, desperate as it is.
Re: Peter Lloyd (#837),
Re last sentence – this is, IMHO, the funniest of the several sketches on this subject:
Very, very funny.
Enjoy!
Re: Peter Lloyd (#834),
There are plenty of places to place blame, including Fanny Mae and US politicians like Barney Frank, but one of the core problems is the fact that Moody’s and other US investment-rating agencies erroneoulsy rated the bundles of sub-prime garbage as AAA quality.
Re: Pat Keating (#841),
You are referring to the cartel of rating agencies that is protected from competition by the U.S. government. In a free market, this fiasco would have destroyed their credibility to the point that no one would use their services and they’d go bankrupt, opening up opportunities for new, more rational rating firms. But in a regulated market, they stay in business and firms are still required by law to use their services.
Re: Michael Smith (#846),
Indeed.
And these rating agencies started to be paid by the originators of the investments they were rating! Talk about foxes and hen-houses…..
When I bought my first house, a certain % down was required. If you put a little more down, you could avoid $100/month in private mortgage insurance. That was a lot of incentive for me back then and I did put more down. It has been not mentioned much that the PMI requirement has virtually gone away, and also that many of the foreclosures are NOT poor people, but $500,000+ houses. The PMI would have prevented much of the current meltdown, as would the down payment requirement.
Re: Craig Loehle (#815),
Only if there was some discipline imposed by the insurers to avoid high risk loans. One of the issues in the meltdown seems to have been insurance on the bonds without adequate reserves for the true risk involved. If the same were true of the actual mortgages then we’d still be in the same situation. Remember the S&L crisis had all of those insured savings accounts.
Re: Craig Loehle (#815),
PMI is for the lender, not the lendee. Foreclosures still would have happened. The difference would be that the banks would have had their loans insured, but a run on an insurance company is about the same as a run on a bank. PMI would not have been able to cover the massive number of foreclosures we’ve experienced. Forcing down-payments would have meant fewer loans overall, but I can’t see how it would have made much of a difference.
Mark
Re: Mark T. (#820), Here is the difference. With 20% down, if the market went down 20% the loans would not be underwater. With PMI, the individual loans would not be toxic. It is the FEAR of the toxic loans bundled with the good ones that has made the market illiquid. The volume of defaults per se has not sunk the market. The problem with AIG was not mortgages, but insurance they sold on swaps and other instruments, the things that brought Lehman down. Even Lehman and AIG could have been ok if the downslide had been slow so they could have sold stuff off, but with the sudden drop they had no liquidity. For example, I know an upper manager in a large company that just sold itself for 1/10 their last year’s value because of liquidity issues, not profitability. They had a huge amount of money in instruments that froze up. On the books they had $ but could not access it and were forced into default.
It would appear that Gordon Brown and Bloomberg have provided an authoritative link for me to avoid the editorializing label on the issue that I introduced in my previous post on this thread. Re: Kenneth Fritsch (#814),
http://www.bloomberg.com/apps/news?pid=20601087&sid=aYcW5btjaU.Y&refer=worldwide
The statement in the Bloomberg report that China is ‘the world’s fourth-largest economy’ may come from an official source is wrong. In total size China is the second largest economy after the US, and is far larger than Japan and Germany. The myth that these economies remain larger than that of Japan is perpetuated by the continuing use of the discredited method of comparisons using exchange by the IPCC and by institutions that should know better such as the World Bank and sometimes even the IMF.
In 2001 I criticised the then-President of the World Bank, James Wolfensohn, for having used the wrong measure for political effect. He persisted in doing so even after acknowledging that it was wrong to do so. According to the transcript of a speech made by Wolfensohn in Sydney:
‘I have been criticised by an Australian Statistician [Ian Castles] for not drawing your attention to the fact that dollars have different values in different parts of the world … Well, let me acknowledge tonight that he’s right, but I’m using 80/20 because it’s the only way I know how to express it…’ (Australian Financial Review, 3 August 2001, p. 72).
Soon after Wolfensohn’s return to Washington the Bank’s Chief Economist, Nicholas (now Lord) Stern – presumably acting under the President’s instructions – sent me a strong rebuke and an attempt at a justification of Wolfensohn’s claims. The Bank has persisted in using the wrong method for many purposes, even though they host the International Comparison Program which produces the ‘right’ numbers. The Program has recently celebrated its 40th birthday, and eminent economists such as Nobel Laureates Paul Samuelson and Robert Lucas Jr have paid tribute to this extraordinary statistical achievement.
Re: Ian Castles (#822),
I assume you are referring to the Purchasing Power Parity vs. Exchange rate controversy. The WSJ had an article a while back that put this in terms that most people can understand: The Big Mac index. PPP means that a Big Mac sandwich, which is available in many countries, always has the same value regardless of how its price in dollars is affected by the local currency exchange rate. At the time of the article, the exchange rate corrected price in dollars ranged from above $5.00 in Switzerland to about $0.77 in Argentina.
Re: Ian Castles (#822),
Ian,
To what extent does the does the Chinese economy depend upon US demand?
To what extent does the ability of the US to purchase Chinese goods depend upon the willingness of the Chinese to hold $US assets.
What proportion of those Chinese held $US assets have vaporized?
Do the Chinese not face some very difficult choices?
Re: Ian Castles (#822),
I think that while you are right on the use PPP, the economy of nations ranked 1 through a reasonably large number are all suffering essentially the same problem and yet no one has been able to inform me how we can distinguish the problems of all these downturning economies. Surely they do not have, or at least all not have, the greedy Wall Street of the US or the lack of regulation of the US. They do, however, seem to all have the same instinct to simply spend their way out of the problem.
I do find the irony of your “lack of regulation of the US” comments amusing Kenneth Fritsch. Not that I’m being critical of your positions, as I agree with much of what you have said, but that the 78,000 pages in the Federal Register (last number I saw) and 50,000+ pages (again last I saw) in the Code of Federal Regulations is widely referred to as a “lack of regulation,” which seems alien to me being an Austrian on economic issues. 🙂
Mark
Re: Mark T. (#826),
Mark T. i think its safer to say that the crisis is the result of misguided regulation in the uS, rather than too little regulation.
I’ve spent some time studying the various regulatory regimes, and the US state-based regimes were seen to be extremely inefficient and not particularly effective by most outside the US. Additionally, you had the various regulations requiring loans to be made regardless of the ability of the counterparty to repay.
So basically, there was excess regulation in what the banks had to do, and inefficient regulatory overview of financial institutions in the meantime. Almost a perfect storm in regulatory terms; the mandated loans combined with a lack of oversight of the effects of that.
Very much un-Austrian.
I think a safe position to take is that while easy credit, encouraged by central banks, is the desired outcome that financial institutions cant help but get themselves into trouble without regulatory oversight. Unfortunately their behaviour, when not subject to effective regulation (ie something like the Australian or Canadian model), is very much that of self-destruction. Elimination of the central banking system IMO would go a long way to solving that issue.
Re: Kenneth Fritsch (#829),
Kenneth: The view in Australia is very much that it is an externally generated crisis, although our Prime Minister Rudd has attributed it to “extreme greed”. what that means, i have no idea. Personally i think that Rudd and his Treasurer have very little idea of how the economy operates and he is simply grandstanding.
Australian financial institutions were hampered most by the freezing of the credit markets, which continues to restrict interbank lending. The Reserve Bank (Aussie central bank) is basically supplying most of the liquidity at the moment. We’ve had very little exposure to the US institutions that have failed, and the Aussie subsidiaries of companies like AIG remain well capitalised. Its accepted that the health of the finance sector is due to good regulation.
In fact, the financial sector as a whole remains well capitalised. Its just that credit remains dried up. The govts recent initiatives have helped prolong it and have distorted the markets.
The govt maintains that the country wont enter recession. A large number of economists disagree; whether Australia enters recession depends on the Chinese economy and the signs there arent great.
There is very little discussion of the role of credit expansion in the current downturn, nor the various bubbles that have developed. The housing bubble in Australia is not as bad as in the US or UK; we have an undersupply of housing and infrastructure problems that have driven housing price growth. The credit bubble has contributed, and will certainly contribute to a contraction in house prices, but not to the same extent.
There is also very little discussion of the role that govt policy has played in driving the various price bubbles around the world.
Forgive me for opining without following this thread closely; I may err her.
But Mark T says “Greenspan is a closet Austrian” strikes me as untenable. Didn’t he say that credit had to be expanded in the 70s (and thus the gold standard abandoned) because of the growing need for credit? ie, a distinctly un-Austrian position?
Another fascinating variation of the explanation for the financial panic and crisis: everywhere the housing bubble is identified and blamed. But those high-growth areas without any extensive land-use controls like Houston, Dallas, and Atlanta, have not endured much (if any) housing price decline!
Single or limited variable explanations for the crisis, therefore, do not seem viable.
Help me out here: am I wrong?
Re: Orson (#828),
His position changed, and his policy followed. Back in the 60s he was giving talks to the Ayn Rand Institute (or whatever it was called). He was clearly Austrian then, and lost it on a power trip I suppose. It is like a drug. That’s why I used the term “closet,” because he went in to the closet with his beliefs, beliefs I think he knew deep down were true, but was afraid to give up the drug he so adored.
^poid: No, sorry, but I disagree. The regulations themselves created an artificial risk. Lenders did exactly what they were expected to do: gave out loans based on this risk, in spite of it being an artificially low risk (a simplistic view, but all that is doable within a sentence or two). The Austrians predicted it, and it happened. Hardly a surprise.
Mark
Re #823-825. Thank you for your comments. The only point I was making in my #822 was that the Bloomberg report on the Chinese $800 billion package mismeasured the relative size of economies, by using the wrong method of comparison. So China is much bigger relatively than the report suggested.
Yes my point IS about the PPP/MER debate. In fact, there is no debate as far as the world’s national accountants and index number theorists are concerned: to the best of my knowledge, they are unanimously of the view that the IPCC, the US Climate Change Science Program and other leading world institutions are simply wrong on this matter.
Erl Happ and Kenneth Fritsch ask a number of large and important questions, and I certainly don’t know the answers to many of them. But everyone takes for granted that when the World Bank predicts that the economy of the US or the UK will contract by (say) 2% next year, it is predicting the REAL change in output – GDP after the effects of changes in prices have been removed. But when they are talking about the relative sizes of the US, China, Japan and other countries, they have some mental block about the notion that, in this case too, the influence of differences in price levels must be removed. At times like the present, when exchange rates are showing great volatility, it is of more-than-usual importance that international comparisons be made on a technically sound basis. The IPCC’s performance in this area has been pathetic.
I found these quotes today which summarize my feelings much better than I ever could have.
The statements that have been made against the free-market and lack of regulation are just plain wrong.
Also, this is an excellent read.
From the two sorces linked below, I get the distinct impression that (1) most advanced economies of the world were on the verge or into recession before the financial crisis broke in the late 3Q to early 4Q of this year and (2) that some of what we hear from the investment pundits on the state of the financial markets in the US is off the mark.
The Wikipedia link below was the best source I could find for a compilation of the recent national GDPs with most national economies listed in one link. The final severity of these recessions, without the intervening financial crisis, is, of course, difficult to quantify, but I am of the opinion that those interests looking for government bailouts will receive more response if it can be attributed to a relatively rare financial crises over a global economic slow down with unknown dimensions for severity or duration.
The second link from the Minneapolis Federal Reserve (linked on this thread previously) provides actual and real time data that would seem to put a very different light on the US lending capabilites than I see from the mainstream media. I provide a few excerpts below from that paper.
http://en.wikipedia.org/wiki/Economic_crisis_of_2008
http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4062
Re: Kenneth Fritsch (#840),
Kenneth, I believe there are a number of economists that have objects to the Minneapolis Fed paper. I don’t know that I would call it authoritative.
Re: Jonathan Schafer (#842),
“Objections”…not objects
Re: Jonathan Schafer (#842),
Jonathan, could you link to a critical source? I would have liked to have seen a breakdown of those dollar amounts for ongoing loans and new loans by the authors, but I suspect that might be difficult to determine or the authors what have done it. On the other hand, I never see any hard data from the financial talking heads or policy makers, for that matter, that reveal just how much the financial system has broken down. In this case it is not my usual trust, but verify, but rather do not trust but verify.
Re: poid (#844),
Poid, could you link me to an Australian source such as the Federal Reserve US one above that I linked to? Lack of funding and liquidity does not mean much to me unless I can get my hands around the changes that have occurred. The uncertainty in face of a recession and/or mal investments is something that financial institutions have been reacting for years. My problem has been in separating those reactions into that strictly arising from the financial crisis, those arising from the underlying global trends for an economic downturn dispite the crisis and another factor which I will label the “awakening” that would be attributed to the reminder that the financial crisis presents to those who were over extended. We, of course, then have the “fear” reactions and effects that will eventually over time work its way out. It seems most commentators are willing to generalize the situation by vague references to liquidity.
I suspect that those interests in the US that are trolling for hand outs are very much interested in using the financial crisis and lack of liquidity gambit over appeals for the same in the face of what might be a reoccurring phenomena like a recession. You know, the brave new world approach.
Re: Kenneth Fritsch (#845),
Kenneth,
I don’t know that it’s “authoritative” and I don’t have any stats in front of me to provide. I do know that shortly after the Minneapolis Fed paper (aptly titled working paper 666 I might add) came out, there were some vehement disagreements over their report. The Boston Fed came out with their report “refuting” the Minneapolis report (available here)
I suspect both papers may be right but for different reasons and are probably measuring things in different ways. But I’m no authority on it.
Re: Jonathan Schafer (#848),
My point has been and my own online searches have been part of an effort to get a quantifiable and historical view of the current “liquidity” crisis and that part caused by the financial crisis as distinct from an ongoing economic slow down. I think that the original Federal Reserve paper and the Federal Reserve reply that you linked are telling me what my search has to date, i.e. the claims made in the financial press are qualitative and vague and without hard data. To that point I excerpted the following from your Federal Reserve link.
Re: Kenneth Fritsch (#849),
Kenneth, that is exactly my impression as well.
There are endless stories about the “credit crunch”, “credit freeze”, “market lock-up”, “financial meltdown”, “collateral damage” — but where is the data supporting these claims?
I have absolutely no doubt that the housing industry is in for a bad spell. But I see no inherent reason why this must damage the entire economy.
Yes, housing starts are down something like 40% from last year, which puts them back in line with the rate of starts before the bubble began. That reduction will certainly put people in the housing industry out of work.
But it also means that a lot of people won’t be moving out of a $1000 a month apartment into a $1500 a month mortgage they must struggle to pay — so those people will have $500 a month more to spend in the economy than they otherwise would have. (Those numbers are made up, but they illustrate the point that money not spent on mortgages is going to be spent on something else.)
The same applies to those people who’ve “lost their homes” to foreclosure. They will (presumably) move back to something they can afford and will actually be better off, with more money to spend in the economy than before.
(Granted, there was a percentage of people that enjoyed the opposite phenomena: they got the house for nothing down, made no payments and thus lived without rent or mortgage payments for a while. But I think that’s a small percentage.)
So while the housing reduction will reduce the number of workers needed to build houses, it will increase the number of workers needed to produce the extra products that will be purchased with all the money that isn’t going into a new house. That’s why I don’t see why a housing slump will necessarily cause an economy-wide recession.
Yes, the stock market has taken a beating and auto sales are down precipitously. However, if you get enough economists and politicians screaming “Crises! Crises! Crises!” for a long enough period of time, you can get the same result.
I’m not saying there is no problem, just that I can’t determine the extent to which it is real versus over-hyped.
Re: Michael Smith (#850),
Be careful you don’t fall into the Broken Window Fallacy. The housing bubble caused real damage to the economy. Assets were committed to building houses that will never be recovered. The deflationary aspects of that are also real and are not mitigated by your examples. The jobs lost due to businesses that close from cash flow problems and/or consumer spending cuts are also real. Government solutions will inevitably reward at least some of the wrong people, but that doesn’t mean nothing should have been done.
Re: DeWitt Payne (#852), Re: Michael Smith (#850),
DeWitt and Michael, I want to stay on point with my criticism of the financial press and policy makers in that I do not see the hard quantifiable data that can be compared to other historical financial crisis and/or economic downturns. I hear from them and posters here about a “liquidity” crisis and implications that the drawback in investment funds was entirely due to the mortgage melt down and ensuing financial crisis.
My problem is that the current crisis is being “sold” as very unique in kind and quantity and, therefore, used to push some very extraordinary measures. Now I admit to not being philosophically attuned to even small measures (as I predict that they will prolong the correction and make it worse) but that is not my point here. I want to know more about that hard data that has been very allusive for me to find, but, evidently, so obvious to those pushing for extraordinary measures whether they be looking for a handout or giving the handout. With the (over)selling of the Iraq invasion so fresh in our minds it is a bit surprising.
DeWitt, I know to what you refer with the broken window fallacy, but I am not so certain it applies well here to Michael’s comments. The fallacy is of course that, when one looks only at the money provided to the repair people and glass makers for fixing the broken window, it paints a rosier picture then when we remember that the store keeper now has less money to make purchases from the baker and shoemaker.
We have “moved on” in or modern economic thinking from that broken window fallacy, viz. the current solutions: The shop keeper has a broken window and the feds step in to give or lend funds to get the window fixed and the action is sold as providing jobs for the repairer and glass maker. On hearing this a shopkeeper across down appeals for getting his windows fixed by the feds and, of course, they oblige by applying fairness to the situation and rationalizing more jobs to keep the economy going. In fact this cycle has no logical end once initiated.
But it is argued that in the broken window fallacy that either the government or the shopkeeper has to forgo spending money in the future in order to pay the loan back and that will have the opposite effect on the economy. In fact, the fed money given or loaned has to be borrowed somewhere and that lender then has less money to use for consumption. Ah, but we then say that feds can print money out of thin air to pay for things as Dr. Bernanke has said would be done if the feds found it necessary to avert an economic downturn that did not react to the usual medicine. We hear someone in the background mumble about the future effects of inflation, the future credit worthiness of the feds and the creation of another bubble in the future. And then like a ghost from the economic theories past, the reply is pronounced: in the long run we are all dead.
Re: Kenneth Fritsch (#853),
I agree completely that hard data is not immediately available. But it never is. We always have to act on what we think we know rather than the unknowable what actually is.
If the shopkeeper doesn’t have the money to fix his window, cannot obtain a loan from the local bank and will have to close his business and fire his employees unless it is fixed, then what? Printing money may well have the effect of replacing wealth lost when a bubble collapses and will avoid a severe deflation. We know we have a deflation in housing relative to the peak where even people who made what used to be the standard 20% down payments are under water on their loans. That really shouldn’t be a problem as long as they can keep making payments and the payments are about the same as renting an equivalent dwelling. After all, if you borrow money to buy a car, you’re probably under water on that loan as soon as you drive the car off the lot.
I don’t know if the current government actions are correct. They probably aren’t. But they don’t seem to be completely wrong headed as they were in the 1930’s under both Republican and Democratic administrations.
Re: DeWitt Payne (#854),
Inflation or printing money is pretty well recognized as a major factor in causing the housing bubble. A housing bubble implies inflated and unsustainable prices so rather let us call the decrease in those prices a reasonable adjustment and not deflation. The feds are certainly not deflating the money supply and I have not seen any major decreases in prices outside of housing. Besides there are some beneficial effects of lower prices and prices trending downward.
I am very concerned that these extraordinary measures (and, if we do not have all the necessary hard data, why not some under reaction instead of over reaction) are going to have very detrimental and lasting effects. There is also evidence that Paulson and Bernanke are playing it by the seat of their pants.
Certainly these (over)reactions are not lost on the consumer and business interest and I do not see any of it giving comfort or having positive psychological effects. I would like to see poll results of what the US public thinks and wonder why I have not seen one prominently displayed.
Re: Kenneth Fritsch (#855),
True, but velocity is important as well and a that tends to drop during a recession, IIRC.
You must not drive much. The price of crude oil has dropped below $60/bbl from over $140/bbl. Gasoline is down to less than $2/gallon here, also less than half of what it was at the peak. The Euro has dropped a lot too. Diesel hasn’t fallen quite as fast, but it’s heating oil season. E-85 isn’t much of a bargain, though, at essentially the same price as 87 octane E-10, which is about all you can buy any more.
I have seen somewhere that the greatest increase in living standards, or some sort of index like that, happens in a slightly (~2%) deflationary regime. I don’t see that happening any time soon, though.
Just because the bubble was caused in part by the Fed trying to delay the recession doesn’t mean relatively rapid monetary expansion is the wrong thing to do now. We know what contraction of the money supply is likely to do during bad times.
Re: DeWitt Payne (#856),
You caught me there, but like I said falling prices have some beneficial effects. I assume lower gasoline prices are a good thing for most people. Actually, if I want to buy a home for the first time, lower home prices are a good thing also.
The dot com bust was answered by the fed by lowering interest rates and in part causing the housing bubble. Their answer now was lowering rates as they did for the dot com bust. The fed quite frankly is acting as though they will attempt anything and want us all to forget the longer term consequences. In fact this has been the general demeanor for all these extraordinary measures. The fed, unfortunately, looks primarily at what it takes to keep the economy buzzed and was not nor probably are they now capable of dealing with bubbles. Think dot com and housing.
The other problem the fed is having, and this is were the Keynesians (Paul Krugman) and Austrians part company with the monetarist and the Chicago School, is that you cannot push on string. That is, when velocity of money decreases in a severe economic down turn, lower interest rates and increasing the money supply can have little or no effect (even though I still love you Uncle Milton). In fact, I am of the view that that is what the fed is currently facing (Krugman agrees). Of course, Krugman and the consensus then recommend even more extraordinary measures of government deficit spending and at unheard of levels. That is where we are at currently.
I think, DeWitt, that we have moved on from the monetarist phase although I admit there is a several month lag in its full effects, but again the Fed has been cutting rates for awhile now and certainly it has given no psychological boosts to investors.
We should probably be talking about the effects of bailouts (repairing all thos windows) and where and when they will end and the old stand by in economic hard times of deficit spending on the infrastructure and how they turn out when the spigot is turned on – bridges to nowhere become a good thing.
Re: Kenneth Fritsch (#857),
Speaking of lower prices: If you want to buy a new car, now is probably a good time. There was a report on NPR yesterday of a survey in the UK of new car prices using fake customers who were instructed to negotiate the best possible price with car dealers . Discounts of up to 45% under list price were offered, even, or especially, on luxury cars like Jaguars.
IIRC, Friedman made the same point: Monetary policy should not (cannot perhaps even) be used to fine tune the economy for that (string pushing) reason and the long and variable delay between cause and effect. Humphrey-Hawkins, passed during the Carter administration along with the Community Redevelopment Act, whipsaws the Fed. Their responsibility should be only to maintain the value of the currency not to try to maintain full employment, whatever that means, and the value of the currency at the same time.
Re: Kenneth Fritsch (#857),
I have taken all recent Krugman writings on economics with a very large grain of salt if I’ve bothered to read them at all. I think you, not to mention Krugman, have a serious misunderstanding of Friedman and his contribution to understanding monetary policy. See for example this article by Anna Schwartz. Or this more technical article by Edward Nelson of the St.Louis Fed.
Re: David (#859),
Unfortunately true. This illustrates the extreme danger of attempting to apply counter cyclical monetary policy as the Fed has done for much of the last decade, completely forgetting the lessons of the previous nearly two decades.
Re: DeWitt Payne (#860),
DeWitt, I have a high regard for Milton Friedman (and Anna Schwartz – I have read their classical treatise on monetary history in “Monetary Trends in the United States
and the United Kingdom: Their Relation to Income, Prices, and Interest Rates,
1867−1975”, from end to end) and I have always admired and appreciated his “practical” suggestions for solving economic problems with the least amount of government interference – given the political realities of the time. With Krugman, on the other hand, I have little agreement except some of his earlier work (that I think for which he was given the Nobel prize) on the benefits of international trade.
I do not know how closely you have followed Friedman’s treatment of the Federal Reserve’s actions or lack of actions during the Great Depression (I suspect that you have), but I think some of what he was attempting to test may well be in the process of being tested in the current downturn and it certainly bears on the “pushing on a string” analogy. It is also ironic that Bernanke, a well know student of the Federal Reserve’s actions during the Great Depression, is at the helm presently. As we know Bernanke has or had great faith/insight in/into the Feds capabilities to affect a major economic slowdown with monetary policy. In his latest testimonies and statements I seem to perceive that he is calling for fiscal remedies. The Japanese have, of course, attempted all these monetary and fiscal remedies already and I do not seem to hear much about those results in the current debate.
Before we get too far astray from my original broken window analogy, I want to remind you that my reference to inflation (as in rising prices and money supply) there was not the efficacies of monetary remedies for the current situation, but more applicable to a well quoted Milton Friedman comment that inflation is always and every where a monetary phenomenon. That is that all this borrowing that the feds are doing or are proposing to do for bailouts, infrastructure and broken windows will need to be repaid with interest some day or effectively monetized by printing money and paying it back in cheaper dollars. Deflation, on the other hand, would make repaying those loans more difficult, but an incentive to savers and investors. Inflation is considered a disincentive for saving and the US public is oft criticized by those same people who appear now to think the government should spend huge amounts of money it does not have. Go figure.
Finally I would put the oil price bubble (different in nature no doubt than housing but certainly acting like a bubble nevertheless) right there with the housing bubble as an unintended consequence of the feds low interest rate policies. I suspect also that (at least in the US) the auto industry’s weaknesses were effectively covered up temporarily by the feds easy money policy and what we are now seeing is the industry warts and all. Ironic as it may seem that just when the fed is back with easy money policies, the consumer shocked by the financial crisis is making the economy face reality.
I do not see any precipitous drops in the overall price index, but as noted I am not in the market for a house, a car or a lot of gasoline. I do know that my inflation adjusted SS payments will be increasing by 5%+ soon.
Re: Kenneth Fritsch (#862),
On this we are in complete agreement. The Fed was pumping out money too fast for too long and it had to go somewhere. Where turned out to be housing, oil, the Euro and other commodities. But when the bubble finally burst, that money and much more besides has simply evaporated.
The Japanese ‘lost decade’ is what we must avoid. But the Japanese were in denial for most of that period. They allowed banks to stay alive by keeping bad loans on their books at their nominal value rather than the market value. They concentrated on just nominal interest rates rather than the inflation/deflation adjusted rate so even with a near zero rate, their monetary policy was actually still tight. It doesn’t look to me that we are following in their footsteps, or at least not directly. The proposed loans to the Big 3 in Michigan strike me as being very similar to the Japanese bank situation. They only delay the pain and probably make it worse.
Re: DeWitt Payne (#863),
DeWitt, we may disagree on the particulars, but I think this link and excerpt below captures the Japanese story (without mentioning the failure of the Japanese government to allow businesses to fail). While I think we well may be blindly following the Japanese model, I say let us disagree on the details, but my point is that these details of the Japanese experiment and the results are not being discussed prominently by policy makers or even the financial talking heads on TV. Why?
I am also curious what those commentators, who see a connection between the US trade deficits and its putative cause of and/or effect on the current crisis, see when they look at Japan with trade surpluses having had and continuing to have similar problems.
http://www3.villanova.edu/realtimefinance/Japan%20EconomyII-Deborah%20Sesok-Pizzini.doc
Re: Kenneth Fritsch (#864),
“When all you have is a hammer everything starts looking like a nail.”
Everyone expects the government to “do” something. So what are their options? Spend money (public works, purchase stakes in businesses, stimulus package), loan money (lower interest rates, bailouts), ( prop up domestic businesses (impose trade restrictions, take over pension, health benefits). I can’t think of anything else they can do proactively. The only thing they haven’t done yet is the last one or more of the same.
Re: BarryW (#865),
Do something about the financial crisis or AGW mitigation or … you fill in the blank, but still that is no excuse for not discussing the details, and particularly so for the current crisis where we have real life experiments.
Re: Kenneth Fritsch (#866),
I don’t think they know what the details are. Wasn’t the bill something over 400 pages and we don’t have details?
They’re flailing about changing direction as they keep finding out new information. Somehow they expect the bankers to do the right thing (whatever that is), such as loan money, and they’re shocked when they look to buy other banks instead. So they try something else, which doesn’t work. Now the automakers, states and lord knows who else is asking for part of the pie.
Re: Kenneth Fritsch (#864),
I almost forgot:
Hear, Hear!
Re: DeWitt Payne (#852),
Actually, DeWitt, my comments in 850 were inspired by Hazlitt‘s broken window fallacy.
As I understand it, the broken window fallacy consists of focusing only on the benefits of the spending necessitated by the broken window while ignoring the spending the broken window prevents. Everyone hails the new business the shopkeeper must give the glazier but they ignore the business the shopkeeper can no longer give to the tailor. Thus they come to see an ever-widening circle of benefits flowing from the initial loss — but it’s wholly imaginary because it ignores all the spending that the loss prevents from ever occurring. The lesson that Hazlitt teaches us is too consider the whole picture, the unseen events as well as those that are immediately obvious.
This doesn’t mean that the broken window results in no net damage. It only means that the gains of the glazier are balanced by the loss to the tailor. The shopkeeper is most definitely out the $250 it will cost him to fix the window. The economy as a whole has lost the wealth that was the unbroken window and some amount of productive effort must now be diverted from creating new wealth to creating replacement wealth.
I agree that the housing bubble caused real damage. My point in 850 is only this: just as the spending necessitated by the broken window does not create an ever-widening circle of benefits, so the losses of the housing bubble do not necessarily create an ever-widening circle of losses that endangers the whole economy.
Has there been any actual deflation? Just as rising prices don’t necessarily indicate inflation, so falling prices don’t necessarily indicate deflation. Deflation — as I understand it — requires an actual decrease in the money supply. As far as I know, that has not happened.
As Hazlitt points out, the only way government can give a dollar to one person is by taking that dollar from some other person — either by taking it directly in taxes or by borrowing it (which only delays the taxation into the future) or by printing a new dollar, which only decreases the value of everyone else’s dollars. So when government rewards the wrong person, it necessarily means that government has also punished the wrong person — which is the very definition of an injustice. I can’t think of anything that justifies an injustice.
Re: Michael Smith (#871),
The problem with Milton Friedman’s original monetarist prescription, targeting the growth of the money supply rather than interest rates, is the definition of the money supply. The only one we know for sure is the amount of currency in circulation. All the recent innovations in managing money have so broadened the definition of money that it’s nearly impossible to measure in anything close to real time. So what do we have left: commodities and maybe currency exchange rates. Saying we don’t have deflation now is just the converse of saying we didn’t have inflation when the price of oil etc. were heading for the moon and the value of the dollar was plummeting relative to the euro. We clearly did have inflation then and we do have deflation now. You also have to add the deflation rate to the nominal interest rate to get the true rate just like you have to correct nominal rates for inflation. That’s how a nominal interest rate of zero can coexist with a tight or even decreasing money supply. Interest rate targeting alone won’t get you out of a deflationary spiral.
Re: DeWitt Payne (#872),
I think it is a mistake to call any fall in prices “deflation”. Doing so can make people believe that increased production — which can cause prices to fall — is a cause of depression and impoverishment. In fact, that was exactly the belief of both Hoover and Roosevelt and it led them to make tragic mistakes. Increased production is the path to getting richer — it means the creation of more wealth, not the disappearance of wealth.
A fall in prices that comes about as a result of increased production and/or increased efficiencies in production is, ceteris paribus, beneficial. The lower price means everyone’s dollars buy a little more. But a fall in prices from a contraction in the money supply represents a potential disaster; it means there has been a net reduction in aggregate demand, which can lead to massive problems (especially if mishandled the way Hoover and Roosevelt did). That’s why it is important to have a separate word — “deflation”– to denote the contraction in the money supply. If we use one word for what are, in fact, two very different phenomena, we are sowing the seeds of confusion.
No matter what difficulties there may be in measuring the money supply, let’s not broaden the meaning of the word “deflation” to include both highly beneficial as well as potentially catastrophic events.
Re: Michael Smith (#877),
Increasing productivity is one of the things that makes the economy a non-zero sum game. But it’s rather easy, IMO, to tell the difference between prices going down because of increased productivity as opposed to deflation, look at the GDP. Increased productivity will increase the GDP. In a deflation, the GDP in nominal dollars will almost certainly decrease. Has productivity by the Big 3 suddenly increased to justify the massive discounts from MSRP being offered now?
Re: Kenneth Fritsch (#878),
I agree in principle, but it wasn’t one or a few items. Whole classes of commodities fundamental to the economy, not just oil, were going up, feed grain, metals (nickel, copper , zinc, iron ore…), etc. The dollar was falling relative to other currencies that weren’t pegged to the dollar. That is the very definition of actual inflation. And I’d like to see your sources showing that other economic activity and or prices were in fact falling commensurately until the bubble burst. Now we have the dollar going up and commodities falling as well as economic activity. If you don’t define that as deflation, your definition is too exclusive.
The problem goes back to how you define money. The various M’s didn’t show a rapid expansion during the boom and aren’t contracting now, but the increase in the price of oil and other commodities was clearly being monetized somehow, most likely through the highly leveraged derivatives, and real and perceived, wealth has since vanished into thin air.
Re: DeWitt Payne (#880),
Well, it apparently wasn’t easy for Hoover, Roosevelt and their dozens of progressive economists and advisers. Those economists and advisors convinced them both that overproduction had launched us into the Depression and that the falling wages and falling prices they faced constituted deflation that had to be stopped, when, in fact, the falling wages and prices were the key to getting out of the depression.
No, I’m sure the productivity of the Big 3 has not improved that much (if at all). Given the huge decreases in sales from last year (GM is down 40%, for instance.), I’d guess the price cuts are the results of decreased demand. But is it due to a decrease in the money supply — or is it a shift in demand as consumers prefer to spend their money on something else at the moment, like savings, for instance?
Since the latter — a shift in demand to something else — is certainly a possible reason why prices might fall, we have now mentioned three separate causes of falling prices: contraction of the money supply, increased productivity and a shift-based fall in demand. One is potentially catastrophic, one is highly beneficial and one is essentially neutral.
Now we have a term that covers all three accurately: “falling prices”. What do we gain by calling it “deflation” instead? “Deflation” has a well-earned and well-deserved negative connotation. If you are going to use it to cover all three, you’ll have to change that connotation or confusion will result.
It’s like deciding to refer to homocide, suicide and expiration from natural causes as all being instances of “murder” instead of merely being instances of “death“. You can use the term “murder” that way, but every time you do — for a long time — you’ll have to clarify what you actually mean by it.
Re: DeWitt Payne (#872),
DeWitt, Michael is using the Austrian definition of inflation/deflation, i.e. expansion/contraction of the money supply.
I strongly disagree with your implication that the price of one or even a few items can determine whether we have are having a general increase/decrease in the price index. In fact, with a steady money supply and a constant velocity of money, higher prices for some items mean lower prices for others, i.e. if I spend more on gasoline I will need to spend less dining out – given that I do not increase my credit card balance.
I am curious where you get your sources that show we are having deflation (using your presumed definition that the general price level has decreased).
I should have mentioned in my last comment that there is indeed one way that I can see how the housing slump can damage the wider economy.
If, instead of letting the costs fall on those who caused and participated in the bubble — namely, the borrowers who took out loans they couldn’t repay, the lenders that granted the loans, the institutions who purchased the loans in the secondary market and the builders who profited from the bubble — if the government, by bailout, spares these people and instead spreads the damage to the taxpayers as a whole, then the damage will be widespread and numerous sectors of the economy will suffer.
I see so many things becoming deflationary besides houses. You all have mentioned cars and oil and oil related products, such as gasoline. Many areas (virtually all areas) of the economy are struggling. I personally work on sixty plus trade shows a year. My company does as many as 30 trade shows each month. Every company I talk to is nervous. Electronics, sporting goods, boats, I could go on. Inventories in most durable goods are high. Now as to why the housing market effected all these other areas.
When we had ten plus years of declining interest rates and easier money the lending institutions, flush with cash and assets from ten plus years of rising home prices as a result of the above, came up with “home equity lines of credit”. Virtually every home owner I know took out one or more of these. What did they do with this money. Wow, we bought cars, we remodels the house, we bought boats TVs and other toys and claimed the interest on these loans as a cash deduction. In short we went on a spending spree. And we used our credit cards as well as these loans.
This has all stopped. Just think about this last sentence. No government policy is going to bring this back.
A useful article by Michael Lewis, particularly the discussion with the hedge funder who saw credit derivatives for a load of tosh.
Here is an article written by Ben Bernanke on Japanese monetary policies while he was still in academia:
Click to access 7iie289X.pdf
I could not copy excerpts from it, but I think it is must reading for those who might doubt that Bernanke will attempt just about any experiment with the Fed in attempts to ward off an economic downturn.
The Japanese monetary policy reached a zero interest rate and Bernanke concedes that is an expansionary policy, but that the BOJ should look to new horizons (much to where he is now looking in the US). The BOJ had shifted policies to print more money than maintaining a zero interest rate would require. Bernanke suggests they do more and even suggests, to make a point, a helicopter drop of printed money to the Japanese consumer that would be kind of a combined fiscal and monetary friendly bomb.
So folks if you think the US Fed has departed radically from its limits of the past, I would suggest that you have not seen anything yet from Dr. Bernanke’s test lab.
Re: Kenneth Fritsch (#868),
My god, Kenneth, you’re absolutely right. After reading that article, I now see why they call him “helicopter Ben”.
What’s more, Bernanke closes that article by praising Roosevelt’s willingness to “experiment” during the Great Depression. He gives Roosevelt credit for being “willing to abandon failed paradigms” — but Roosevelt never abandoned any of his paradigms, even though they failed for seven long, painful years. The only reason ANY of Roosevelt’s “experiments” were terminated was, first, because the Supreme Court found some of them unconstitutional and then, second, a great war erupted and Roosevelt solved the unemployment problem by putting 12 million men in uniform.
As near as I can tell, Roosevelt never gave up on his belief that the Depression was caused by “overproduction” and that it could be cured by massive government spending, mass government intervention in the form of things like price supports and price fixing and steep tax increases on the rich and on businesses.
For instance, in one of his “fireside chats” from April of 1938 he tries to explain why national output is still 16% lower than it had been in 1929 and why unemployment is still near 20%, despite his “experiments“ of the last 5 years. What does he say is the cause? The same as the original cause of the Depression: overproduction. And what is his proposed cure: more government spending for his programs. Here is a link to the text of the chat if you want to see for yourself: http://www.mhric.org/fdr/chat12.html
I can only wonder: are we now destined to repeat that disastrous series of “experiments”?
Re: Kenneth Fritsch (#868),
That’s not how I read that article, which is indeed very germane to our current situation both in how it got started and how to get out of it. A nominal interest rate of zero is not, by itself, necessarily expansionary or enough to end a deflationary spiral. My reading of the article is that the central bank, the BOJ in the article and the Fed in ours, needs to substantially increase the monetary base, i.e. print money, and preferrably give it directly to individuals. Fiscal stimulus, whether by public works projects or transferred directly to individuals, that is financed by the sale of bonds with fixed maturity doesn’t work. It is effectively sterilized by the bond sale and the anticipation of higher taxes down the road.
Re: DeWitt Payne (#874),
DeWitt, the BOJ, when it reached zero interest rates (which in anyone’s judgment must be considered expansionary) it did expand the money supply beyond what maintaining the zero interest rate required. That was a step noted in my link before the Bernanke one and that was the BOJ’s next step in the progression of extraordinary measures (fiscal policies have been extraordinary in Japan also).
Bernanke suggests, with some condescension, that since those monetary actions did not work one must go another step and if that does not work go another because in his mind something has to work to raise prices (inflation rate) and never mind the consequences.
Bernanke is of the mind that an inflation rate of 3 to 4% has to increase economic activity. I am not sure how he explains stagflation –and something that happened in practice in the 1970s as opposed to a theory in an economics paper.
A rather ironic aside in Bernanke’s paper is where he reprimanded the BOJ for allowing the asset bubble to occur. Of course, that was before the US housing bubble occurred.
Bernanke mentions the liquidity trap that zero interest rates imply and here he references a Paul Krugman discussion of the liquidity trap and essentially agrees with his proposed extraordinary measures.
Anyway it appears to me that with Bernanke’s rationale, one never has to say that monetary policy (expansion) failed as there is always the next step. It also means that his definition of an expansionary policy is that final step that finally “works”. He refers to the “Japanese” problem as one of simply having the will to make the strategy work regardless of the legal or other implications.
Of course, what Bernanke proposes has not been shown to work in practice or tested for unintended consequences – so we may well be embarking on a brave new world.
If you want your children to grow as financially responsible adults, I believe you must let them handle money often. At an early age, they need to handle money and understand the importance of depositing money in a bank on a regular basis. They also need to develop the habit of saving money for major purchases. These lessons will help your children develop a much more comprehensive understanding of money and how to manage it.
have to admit that with the way the economy has been going I’ve been so focused on my own budget and credit repair that I’ve completely forgotten to teach my kids money management. I found an article about teaching kids how to use money responsibly, and it was definitely a great reminder for parents everywhere, including myself. If I can teach my kids how to use money responsibly during a recession, they will be much better off, especially when the economy decides to turn around. I used to have credit problems, and if I could somehow prevent that hardship for my children, I would feel like an accomplished parent. There are too many kids that go out into the real world without understanding the value and importance of money. I won’t let my kids out from under my roof until they are prepared to handle their own finances. I really like the idea of setting up visual aids for my kids to learn money management. I need to figure out a way to use visual aids to teach my kids the consequences of using credit cards irresponsibly. I got in a lot of trouble using credit cards. I’ve used credit repair services to get myself back on track, but I don’t want my children to have credit issues to begin with.
Click to read more on Payday Cash
One of the biggest problems that our country if facing nowadays is the huge financial crisis caused by the improper practice of some lenders. Everyone, young and old, should be aware of the importance of financial responsibility. Many adults struggle to sustain a good budget or base their entire focus on credit repair, forgetting about the little ones who rely on them the most. I am guilty of this as well. I found the linked article on ways to teach kids money management and responsible money usage. This was definitely a wake-up call for me. It is our responsibility to educate our children on money management. If they can be trained to use money responsibly during a recession, they will be much better off in this world we live in, especially when our economy decides to turn around. I used to have credit problems and desperately needed credit repair. I don’t want my children to go through what I’ve gone through. We, as parents, can save our children from future financial hardships if we take the time to properly equip them with the skills and knowledge of the importance of financial responsibility. There are too many kids that go out into the real world without understanding the value and importance of money. I must figure out a way to use vital aids to teach my kids the consequences of misusing money, like using credit cards irresponsibly. Somehow, I had managed to get into a lot of trouble just by one credit card. I had turned to credit repair services to get myself back on track, but I must say, it was not a pleasant ride. I don’t want any credit issues to be the beginning mark of my children’s independent lives.
Click to read more on Credit Repair
Re: Lisa P (#870),
Lisa, your point is well taken, but I am curious how you handle all the evidence that are political leaders are not providing very good examples of the financial responsibility that you (and I) see as so important. If sufficiently young, I guess we can ask our kids to divert their eyes or cover their ears when the politicians are expounding, but as they get older are not they liable to ask you questions like: why should I be so careful when my savings could disappear in a rash of inflation or why should I be responsible when government seems to help those who are not.
Re: Kenneth Fritsch (#879), Unfortunately our politicians at the local, state and federal level were just like the people that elected them, spending like their was no tomorrow. What did the state and cities do with the immense property tax revenue that inflated their revenue? (So add governments as going into a deflationary cycle of less dollars less everything really) They spent every penny and more! What is being printed now is a drop in the bucket compared to what disappeared.
There was one government group that set aside and invested 8 to 10 % of their revenue for the past 12 years. Soon they had no taxes as the interest they earned financed all their needs. Unfortunately this responsible government only exist in my mind
So I looked to see what the monetary base has been doing lately, and sure enough it’s going up and going up rapidly since about August (see here). So Bernanke does seem to be taking his own advice.
The LME historical price chart for copper is typical for most non-ferrous metals.
Not calling the period of rapidly increasing prices for a variety of important commodities inflationary is the reasoning used by the Fed to keep pumping out money. They were wrong. The converse is also true. Whether printing money now will in fact cure our problem is unknown. But it has to be better than tight money.
Here is another side to the deflation story.
http://mises.org/story/3219
It seems that the re-inflationists are reacting to a spendthrift public and government and saying, in effect, we must save them at all costs. I believe many of the commentators on the US consumer have pointed critically to their lack of savings and their propensity to spend. Now some of those same critics are recommending government intervention to increase prices and get the US consumer back to spending. And all this without data that says we are experiencing a general decline in prices. As I recall Paul Krugman would be one of the contradictioners.
Re: Kenneth Fritsch (#884),
Yes, during the Great Depression, deflation also liberated the people from their farms, their jobs, and their homes. Let’s do it again! Let’s balance the budget by raising marginal taxes on incomes over $200,000/year to 94% and put tariffs on imports while we’re at it too. Hoover and FDR live again.
Money is not just the monetary base. Can anyone say: home equity line of credit? When someone defaults on their mortgage because it’s under water or can’t pay their credit card debt, money in any real sense is destroyed. You won’t see a general price decline outside of basic commodities like oil and metals because labor is the largest part of most prices, service economy remember? What you’ll see instead is business failures and lost jobs.
It’s worse than futile to complain that people weren’t saving enough. That horse has left the barn. Now we have to keep the barn from burning down.
Re: DeWitt Payne (#887),
DeWitt, I am certain that the writer to whom you replied or any Austrian economist, for that matter, would not have advocated raising taxes or restricting international trade in the 1930s or now and would, in fact, have attributed those actions to causing the severity and duration of the Great Depression. The issue here and during the Great Depression is what is the efficacy of an expansionary monetary policy. You referred to one of the major drawbacks of that policy when you noted:
And each time this cycle continues the Fed has to do more to prevent the barn from burning down. Do you know what an economic correction means and its beneficial effects? I am sure that Dr. Bernanke is a smart man and thinks his theories will work, theoretically, just as I judge that those who were hedging with the mortgage derivatives were smart people who thought their theories would work.
I really see some curious changes in attitudes in the political world. We got into Iraq based on some very dire warnings about what would happen if we did not. Now those people, who correctly saw that as an overreaction and also correctly noted we could not afford to continue there, are now giving us even more dire predictions of what will happen if the government does not react to the current economic downturn and nothing is beyond imagination as to the amounts that can now be spent.
Those reactions are what leads me to believe that AGW mitigation with a hot year or two under our belts will be easy to sell. It seems we do not learn, but in hind sight when the consequences come home to roost.
Re: DeWitt Payne (#887),
You’ll have to better than that, DeWitt. What you describe is wealth being destroyed much the same as when the stock market goes down and then only if one has to sell when it is down because one either needs the money for current needs or one is forced to sell to cover a leveraged purchase. You’ll have to make the connection here to the supply of money as it is not immediately obvious.
I believe that Bernanke and the Feds react to the general price and employment levels (by law) and not by gains or loses in wealth. Jobs and businesses are not lost due to the stock market going down, but with sufficient job and business losses the stock market will decline.
Re: Kenneth Fritsch (#893),
How about the CPI dropping by a full percentage point last month? That’s not just gasoline either, so-called core inflation was -0.1% as well. That hasn’t happened in more than 25 years. That would be the early 1980’s when money growth was being severely restricted.
Re: DeWitt Payne (#894),
Let us see now. As I recall I had heard much moaning not too long ago about the price of gasoline and that it was becoming unaffordable and that inflation (general price level) must be much higher than the CPI was indicating because the consumer was experiencing and complaining about high prices. What we are experiencing is a correction and it has some benefits. Savers, like me, I might add, are having no problems with less inflation. The 1980s experience was, as you probably recall, a correction that had to occur to head off runaway inflation and was due to Paul Volcker’s monetary policy changes from the wrongheaded ones of the 1970s.
I am hoping we can agree that the Federal Reserve got it wrong in the 1930s, they got it wrong in policies leading to the dot com, housing and oil bubbles and that Bernanke while criticizing the BOJ for lack of efficacy has not been able to do any better (to date anyway, but perhaps we need to await the Fed’s helicopter drops). Let us be clear that no one is calling for a deliberate and interventionist contraction of the money supply currently and were not as a strategy for the 1930s. Milton Friedman wanted a monetary policy tied to a constant rate of increase in the money supply which could have been accomplished without the Federal Reserve. The Austrians judge that the Federal Reserve is the root of many problems and many of them propose a strict gold standard and hands-off monetary policy.
Based on the past experiences of central banks around the world, I see no reason to think that they will get it right this time. The only silver lining I see is that this time some necessary corrections are probably going to occur despite what the central banks attempt to do to avoid it.
In spite of the knowledge that Keynesian economics simply don’t work, we continue on unabated towards Keynesian policies. It is staggeringly ignorant.
Mark
Re: Mark T. (#885),
Keynesian policies in the form of public works projects have not been shown work to stimulate the economy. Japan has proved that most recently. An immediate rather than phased in marginal tax rate cut for the ‘wealthy’, otherwise known as trickle down economics, does work as proved by both Reagan in the early 1980’s (stagflation) and Bush II in 2003 when the tax cuts actually went into effect. Whether trickle-up economics works, i.e. ‘tax’ credits for low income earners or dumping money from helicopters, isn’t known.
David: 883
The reasons for not permitting governments to accrue an independent endowment were obvious to the Founders.
Agreed, though the Austrians predict that the helicopter approach won’t work, and will simply drag the current situation out longer than it would otherwise exist. Certainly FDR’s solution was similar, and it did not work as hoped, either. Of course, putting 12 million to work in a war is the instant solution that I’d like to avoid.
Mark
Re: Mark T. (#889),
Not to mention paying people to make stuff and then blowing it up and forced savings through pressure to buy government bonds combined with rationing. Fun times!
Somehow “fun times” isn’t the catch phrase I’d apply to the present. What I need to do is go ahead and win the lottery so I won’t need to worry for at least a few years.
Mark
Consumer prices drop record amount.
[my emphasis]
Now tell me again that this isn’t a deflation.
The question is, however, what is the next boom to bust? Over at the Mises boards people are speculating that we should all invest in green technology (short term), though one astute poster did note that green stocks are plummeting.
Mark
I think it should be noted that a lot of (if not all) the recent inflation woes were a direct result of the oil issues. Oil comes down 50%, as does gasoline (more than 50%, actually), and it impacts everything, i.e., a correction. I wouldn’t be surprised if we see more than a single percentage point coming in the next few months (uh, total).
Personally, I’m just getting tired of all the “corrections” the market needs to make to counter bad monetary policy by the Fed.
Mark
Mark T.
Not just oil Mark. Many commodities were skyrocketing, from fertilizer to steel. I think you have to look further than oil. I would start with the impact of BRIC at the margins on top of U.S., U.K. and European growth.
Green technology is certainly useful, but with oil moving towards…the latest prognostication is $40/barrel..green gets quite expensive. Funny how this happens every time we decide we want off oil.
At any rate the price of a beer seems to be pretty stable:)
Well the US Congress has done it again. They have taken a bad situation and made it much worse. Previously, Nancy Pelosi used sharp words and hurt their delicate feelings. Now the Big 3 executives used private jets so a necessary economic recovery measure was refused. So if the Big 3 go bankrupt and take their suppliers with them, everything will be fine because the sensibilities of some lame duck house members will be preserved. There will not be mass unemployment and suffering. A bunch of defeated lame duck politicians have told us so.
We are going to have 2 months of economic chaos until these lame ducks lose their votes and some real economic solutions can be brought forth. I hope that the damage that these economic geniuses will do in the mean time will not be irreparable.
Re: Bill McNabb (#901),
Cool down. Going into Chapter 11 does not stop production, it just gives them some time to re-organize for a leaner, meaner operation. This includes closing some plants and eliminating of payments to workers for doing nothing, but these are things any good management needs to do. The longer it is put off the more money will be wasted (and we are talking about maybe a $100 billion).
The suppliers are UAW unionized, are also in trouble, and probably need Chapter 11 too.
Re: Bill McNabb (#901),
No, Bill, we don’t want the Big Three, or their dependent suppliers, to go bust, but we do need them to reorganise completely and should only aid them with public money if they show total commitment to a completely revised business plan. Or they don’t get the money. And, as a matter of fact, I have some sympathy with the pols, (for once) in their reaction to a bunch of proven incompetents swanning in, hemorrhaging money like it was the Fifties and holding national pride to ransom for public cash. No way. And I’m sure a private investment company would say the same if it were brave enough to buy its way into the auto industry today. (Actually, not a bad idea if you consider the immanent revolution in automotive transportation – a lot of money to be made in replacing the entire national fleet!)
I am reminded of the time many years ago when they were asked to reduce US dependence on imported oil by reducing mpg across the board. A gang of US auomotive execs sat in front of a Congressional committee and swore blind they didn’t have the technology to meet a 30mpg requirement. At that time their European subsidiaries were routinely producing 40 and 50 mpg cars – and not microboxes either. Ten years or so later, (and ten years ago) my Pontiac Bonneville was regularly giving 35mpg with a 3-litre V6 engine. With a nice ride and plenty of room. But not many of those made. Detroit can’t be trusted, and must be whipped into doing the right thing for the right reasons. How many American lives and how many billions of dollars has it cost to pay for the subsequent Detroit-generated fashion for huge gas-guzzling SUVs and big trucks? How easy would it have been for them to use their marketing skills to generate a fashion for efficient, medium-sized diesel-engined low mpg autos?
They are also aware, through their now defunct UK subsidiaries, of the dangers of giving in to ridiculous union demands. Unions have an important and vital place in securing good industrial relations and humane working conditions – but giving in to power-crazed little union Mussolinis, as US-owned UK automotive subsidiaries did, is industrial suicide. The UK now has a couple of benchmark efficiency, high output and world class auto plants – owned and run by the Japanese. All US or UK owned mass production auto plants were sacrificed to the unions by incompetent management, ably assisted by political interference. The biggest losers were, of course, the auto workers who saw tens of thousands of well-paid jobs disappear and now work on dead-end jobs for half the pay – or less.
Big Three need to watch, learn, eat humble pie, seriously think about what sort of products the market needs, (which is not necessarily what it wants at present) and use some good old-fashioned American ingenuity to re-organise and do it right.
Concerning deflation it should also be noted that retailers are doing all possible not to get into a pricing war with the holiday season upon us. This is helping hold off deflation for now, as for many the holiday season is the make or break time of the year. After Christmas prices will plumet more then usual, especially with many retailers such as Circut City liquidating inventory.
Uh, why is bailing out automakers necessary? For that matter, why is any bailout necessary? They can’t compete, therefore they need to go away, simple as that. This is yet another example of a litany of regulations that created an environment in which unions had too much control over free enterprise. The Big 3 bit it on way over valued labor contracts and now the taxpayer gets to pick up the tab? Thanks, but no thanks. These line workers were making twice as much as they should have been then, no reason I should help pay their way over valued retirements now.
If the Big 3 want to compete, tell the unions to stuff it and that they need to make concessions on their ridiculous contracts.
Mark
Re: Mark T. (#903),
We can all comment on economic theory and political ideology when the economy collapses. We will all have plenty of time. Very few of us will be working. I imagine the same sort of conversations were held in Rome when the barbarians were at the gates.
Re: Bill McNabb (#905),
Then drop the ideological hyperbole (in bold) if you expect to be taken seriously. The Big 3 have been in trouble for years, and it had nothing to do with the current crisis. They made the bed, now it is time to lie in it. This is as good a time as any for their management, as well as union leadership, to realize that being competitive in a global marketplace means, well, being competitive. Over paying your workers and guaranteeing blissful retirement packages that make government workers jealous is not the way to accomplish this goal.
Besides the simple fact that I shouldn’t be responsible for the automakers woes (nor the lenders for that matter), bailing them out won’t do anything to help. It will only drag out the inevitable. The only way for them to survive is, as Pat noted, to restructure in a leaner fashion. Ultimately, this means letting supply and demand determine wages.
Mark
Re: Mark T. (#908), Re: Kenneth Fritsch (#907),Re: Pat Keating (#906),
The duress that affected congress was much because of the collapse of the stock market when the first credit bailout was defeated. We have had a comparable collapse today. The dollar is also appreciating due to the loss of confidence resulting from congressional inaction A few more layoffs, as the Big 3 “restructuring” percolates through the economy, and a few more people losing their retirement savings will cause much the same to happen as happened previously. A chastened congress will do what they should have done in the first place but the damage will be permanent.
Re: Bill McNabb (#909),
We should be a little more clear on the stock market declines because a considerable part of that decline happened after the financial bailout bill was passed and signed.
I would also guess that part of the market decline in the past few days had much to do with the testimony of the auto company CEO’s and their obvious lack of an ability to articulate a plan to use the bailout money. It is rather obvious that they are (and particularly GM) hoping that the economic down turn will be brief and a trip or two back to congress will keep them going until the economy recovers. I do not think they are being realistic about the duration of the economic down turn. Also the psychological effect of all these bailouts on the investor does not give the investor reason for confidence — an unintended consequence.
I also suspect that it was not lost on some investors that congress had not asked for business plan from the auto companies until a member mentioned it in passing.
I think we all need to be realistic about the current economic situation, but that does not necessarily mean gloom and doom. We needed a correction and I suspect there will not be much our representatives can do (constructively) about it.
Re: Bill McNabb (#909),
Bill, why would the dollar appreciate from a lack of confidence? The dollar is appreciating now for the same reasons it has in previous global crisis and that is because it is (still)considered a safer haven. That could change in the future as could the AAA rating for US debt. A few hundred billion here for a bailout and few hundred billion there for a bailout could conceivable cause the dollar and US debt ratings to decline.
The dollar is rated against what other nations are doing and it would appear that they are following similar strategies.
In case people have not noticed, the US dollar is appreciating against the currencies of its trading partners again. This, of course, will do wonders for the health of the US economy. The next two months will be of critical importance. The current lame duck congress can do a lot of damage in the next two months with tis demonstrated adherence to a failed ideological position. They struck again today and already the dollar is going up putting US workers out of work.
Bill McNabb, perhaps you do not realize that the doubts about the bailout are bipartisan and that’s why it did not come to a vote. (Someone said something about the auto companies presenting a business plan before getting the money and now congress cannot simply throw the auto industry the money — you will hear business plan quite often now that someone mentioned it).
The bailout for the financial institutions was voted through under great duress from politicians going against the wishes of their constituents. Those same constituents are against the auto bailout and it is having an affect on Washington.
Do you think those constituents opinions will change after the lameduck congress fades into history? Do you think those constituents just might call your bluff?
The dollar is most likely appreciating because caught out investors are selling all their gold, foreign stocks, currencies etc. to pay their unexpected margin calls, which they have to pay back in US currency, which will cause a temporary shortage of $US on the market. It won’t stay that way after most of the margin calls have finished.
– Ernie.
Re: Ernie (#912),
Or foreign investors see the US economy as a safe haven. Whatever the reason it makes US manufacturing less competitive and moves US jobs to other countries
Re: Ernie (#912),
Ernie, that is an interesting theory. I was under the impression that only a small percentage of the trading in international currencies (5%) is used to satisfy contractual agreements. The other 95% is trading for profit, or speculation.
Could you expound on your theory with a little more detail?
Re: Kenneth Fritsch (#914),
Here is an article that explains it a bit.
http://londonbanker.blogspot.com/2008/11/dollar-strength-sustainability.html
– Ernie.
I know less than squat about economics, but I’m curious about Chrysler. They’re owned by Daimler-Benz, now, right? So why would the US bail them out? Shouldn’t that be the job of the German government?
Re: Jeff Alberts (#916),
I believe Chrysler was sold off by Daimler-Benz, to a little-known consortium called Cerebus, I believe.
Re: Pat Keating (#917),
Thanks Pat. Actually it’s Cerberus Capital Management. You’d think that a company who manages capital wouldn’t need a bailout.
What if the government money supplied to the auto makers only prolongs their existent and what if they come back a couple of times for more money and still go into bankruptcy – and a prolonged recession would certainly do that. Who will be blamed for that? All companies in trouble will ask for a handout given the opportunity. Will the politicians be held responsible for an error in judgment?
The only plan that the Big Three could possibly have under the current conditions is hope for a short recession that might buy them enough time to make some major changes in their business plans. I doubt that they or their unions have the will to make those changes or they would not have waited this long.
Re: Kenneth Fritsch (#918),
Kenneth, regretfully, I have to agree. I am, however, an eternal optimist in spite of having been around for too many years to believe in the tooth fairy.
For the sake of all the people involved, I just hope that the pols. can use their current whip hand over Detroit to force them to do what they should have done a long time ago. Detroit certainly has people who can do this – every so often a US auto gets produced (in spite of the dinosaurs?)which shows that a few engineers there know what they are doing.
Efficient, economic autos need not sacrifice style, room, comfort or performance and certainly need not be boring. In Europe Jaguars and even Alfa-Romeos are available with high mpg diesel engines with little, if any, sacrifice of performance. As for US-style room and comfort, the Peugeot 607 2 litre diesel is one of several roomy, comfortable high performance autos which nevertheless give 35mpg or more.
This is, perhaps, their last chance.
Re: Peter Lloyd (#921),
Peter, with all due respect, I sincerely doubt that you have an answer for Detroit. Their costs dictated that they build the bigger cars with higher margins. I suspect that a bailout with real congressional strings would demand that they build energy efficient and ultra safe cars that the consumer does not necessarily want. Congress is going to be very hesitant to demand that the unions make meaningful concessions.
In other words, Detriot has a failed business plan, but that does not mean that Washington cannot make it a lot worse.
Re: Kenneth Fritsch (#922),
Correct, but you miss the point of my argument. Good businesses change their cost structures when the market changes. The German auto business had the same problem years ago – high wage costs, high ancillary costs such as pensions, health care, vacation pay, sick pay, etc., which threatened domestic production. Unlike the UK, they grasped the nettle and managed to retain more major carmakers than any other country in Europe. Mercedes, BMW, Audi, VW, Porsche and even US-owned Opel(GM) and Ford have thrived against all predictions 20/30 years ago, because they had the will and knowhow, driven by economic necessity and national pride.
I just do not believe there are no managers and engineers in Detroit capable of the same financial, technical and cultural reorganisation. Only internal corporate politics stands in their way.
As for being ‘forced’ to make energy efficient and safe cars – of course! It is for lack of these that they are in trouble now. As for what the market wants, Detroit has had years to deploy their marketing skills to educate the public and have failed to do so – in fact have actively refused to co-operate with the Government on CAFE standards.
Re: Peter Lloyd (#926),
And businesses that fail to do so are punished by the market for their failure, usually by going away. If the US auto manufacturers are unable to do so, then they should suffer the fate of the market.
It makes no difference whether they exist or not. They are not running the company, and for those that are, they are bound to the contractual agreements they’ve signed with the union. So unless they union is willing renegotiate and give up a large chunk of benefits immediately, the only way to do so is via Chap 11 bankruptcy filing.
No, it is not the lack thereof that is putting them in trouble. What put them in trouble is the high cost of producing the vehicles they build and the inability to retain a high enough market share to handle those costs. Gas mileage is not the primary driver of a purchase decision when buying a car, price vs features/design is. The big 3 are at an inherent disadvantage to foreign manufacturers when it comes to price. Add to that perceived quality issues and its easy to see why their market share continues to dwindle.
When government overrules the market and intervenes to save the inefficient — as it has already done with various financial institutions and is contemplating with the Big 3 — it achieves five things:
1) It denies to the more efficient firms and producers what they’ve earned, namely, a larger share of the market, which they would surely get if their competitors had not been bailed out and had instead gone into bankruptcy.
2) It keeps the less efficient producers in existence at the expense of the very consumers that have already indicated they don’t want to fund the operations of the failing firms.
For instance, at the moment the market is saying to the Big 3, “At present, “X” number of us are willing to buy your product at “Y” dollars per unit, but we are not willing to buy at the 30% higher price per unit you are asking for and apparently need to keep operating. Sorry, we‘ll spend our money elsewhere.”
A bailout is the government responding, “No, you won’t, because we are going to take by force as much of your money as is necessary to let the Big 3 stay in business. We, not you, will decide whether your money will be used to support the Big 3.”
3) It sends the message to all producers that productivity and efficiency don’t necessarily determine economic success — those factors can and will be trumped if your competitors happen to have enough political pull.
4) The bailout money is money the taxpayer can no longer spend, which means that other businesses where the taxpayer had previously spent this money will suffer a loss of demand and a corresponding loss of employment. In effect, other businesses have to be smaller so that the “bailed out” firms can stay in existence.
The net effect of this is that labor and capital are driven out of industries where they are more efficiently employed and diverted into businesses where they are less efficiently employed. Thus, there is a net loss in the creation of wealth, and a net reduction in standard of living.
5) Bailouts contribute to the deadly enemy of economic activity and progress: uncertainty.
At the moment no taxpayer knows what his future income will be because no one knows how much money will be taken for these bailouts. How many more industries — or banks — or financial institutions — will need “bailing out”? How many more times will GM, Ford and Chrysler have to be bailed out?
Every week we hear of a new bail-out plan that dwarfs in size the plan that last week our leaders promised would save us. Where does it end?
Faced with the future confiscation of an unknown percentage of his income, either by taxes or by inflation, the wise and rational consumer has little choice but to reduce his spending as much as possible and conserve what resources he can until it becomes clearer just what will happen to his income. Thus, uncertainty has a paralyzing effect that reduces overall demand.
The same sort of effect operates on businesses as well. Since no business can know how much his customers will be impacted by the increased taxes and/or inflation, expansion plans get put on hold, inventories are drawn down, output is decreased, etc.
The bail-outs must stop.
Re: Michael Smith (#923),
Is this the market whose players created the oil bubble and the tech bubble, all in less than ten years. I have a difficult time seeing how this market is efficient. My own experience with the tech bubble was that high tech market analysts knew very little about both high technology and the market. Putting aside outright fraud, the ignorance of these analysts created economic inefficiencies through misallocation of resources that Henry Paulson can only dream of.
Re: Bill McNabb (#924),
Let’s not confuse the concept of an efficient market with the efficiency or inefficiency of various firms within the market.
The efficiency of the free market does not mean that it guarantees that all the players within it will be rational. It only means that reality will punish the irrational and reward the rational. In a free market, those that make bad investment decisions or bad management decisions will experience economic punishment — losses — perhaps even bankruptcy — and capital will be free to flow those who can use it more ably.
But we don’t have a free market. We have a regulated and manipulated market, with the current bailout spree being only the latest example of government intervention that negates the market’s ability to punish the irrational and prevents capital from being redeployed accordingly. There are many, many other such interventions that distort the market — far too many to discuss in a single comment — so for the moment let’s just focus on the bailouts and justifications being offered for them.
The bailouts, we are being told, are necessary to prevent mass unemployment.
For instance, CNN reports on a study by one “think tank”:
Link: http://www.cnn.com/2008/POLITICS/11/17/big.three.auto.bailout/index.html
The loss of 2.5 million jobs certainly sounds bad. One can imagine all sorts of collateral damage “spreading through the economy” from the “ripple effect” loss of all the purchasing power of those jobs.
However, in addition to the excellent points already made by Jonathan Schafer, let me make a few more points.
A closer look at this CAR analysis shows that it suffers from the same problem noted by Henry Hazlitt in the “broken window fallacy“. It looks at only the immediate negative consequences of an economic event — the Big Three “going under” or drastically downsizing — while ignoring the secondary positive consequences.
Based on last year’s sales and market share, a 50% decrease in the output of the Big Three as projected by CAR in their analysis would cause a 25% drop in the supply of automobiles and trucks. The CAR analysis assumes that when this occurs, the demand for automobiles simply falls by the same amount. That is, it assumes that some $200 – $220 billion dollars currently being spent by consumers and the banks that are financing new car purchases simply stops being spent on anything.
What reason is there to believe that new car demand would fall like that? I’m sure that some Big Three die-hard fans will refuse to buy from Honda, Toyota, Nissan etc. But a permanent 25% drop in demand? Not at all likely.
Far more likely is that much of this lost supply will be made up by the other domestic suppliers. Which means, as jobs are lost at GM, Ford and Chrysler, they are gained at Toyota, Honda and Nissan. And as the suppliers of GM, Ford and Chrysler experience reductions in business, suppliers to Toyota, Honda and Nissan experience an increase in business.
What’s more, since more of the cars are now being made by the most efficient producers, consumers, on average, will be spending less to buy a car than before — which means, they will have more money to spend on other things, thereby increasing the demand in other areas of the economy and increasing employment as a result.
The CAR study ignores all such secondary, positive effects.
And even if CAR is right that total automobile demand goes down by 25%, this doesn’t matter in aggregate terms, because that $200 – $220 billion is going to be spent on something.
Now, it may be simply be saved by the consumers — but saving is also a form of spending, because the banks don’t just sit on the money you put in your savings account, 401K or CD. They loan it out to both individuals and businesses for business expansions, productivity improvements, purchases of other big-ticket consumer items, etc.
So even if there is a $200 billion reduction in the demand for cars, there is going to be a resulting $200 billion increase in the demand for other things. The jobs lost in the automobile sector will be balanced by the jobs gained in all the other sectors where this money will now be spent. In fact, given how high wages are in the Big Three relative to other sectors, the shift in demand may well cause a net increase in employment.
What’s more, the shift in demand is a shift away from inefficient producers — producers that are running at a loss — over to firms that are making much better use of capital. Thus, the net production of wealth will go up as a result.
As near as I can tell, all of the economic analyses predicting mass unemployment from the failure of this business or that business makes this same mistake. It sees the loss of employment resulting from the failure of one company, but fails to account for the employment gain that results when those revenues begin flowing to another company.
Let the Big Three enter bankruptcy. Let the market work — for a change.
Re: Michael Smith (#923),
You are, of course, absolutely right and if we were discussing a housebuilder or chain of fast-food joints I would agree with you unequivocally. But we are talking about three fundamental businesses which have supply lines right down through the US economy and tens of thousands of US employees. If there were a couple of them operating at a profit who could take over the lost production of an inefficient unit, then by all means let the loser go bust. But if the Big Three fail, a big slice of the US economy goes to Japan and South Korea, with all its future profits. That would create more trade imbalance, which is already a serious problem.
I don’t like bailouts, but in this case I think we have to hold our nose and do it – but at least use the leverage over Detroit to force manufacturers and unions to adopt the sort of business plan their successful foreign competitors have been using for years. And if the undertakings are not given, or are unconvincing, then let them go – but it’s the US taxpayer who will suffer the long-term consequences.
Re: Peter Lloyd (#927),
There is no fundamental difference between a homebuilder and a car manufacturer, other than size. There is nothing fundamental about US auto manufacturers. This country could survive if there were no US manufacturers. The void would be filled by either new startups, companies who purchased the remaining assets/remnants of the one or all of the big three, or existing foreign manufacturers.
As to your statement that a big slice of the US economy goes to Japan and South Korea, that’s simply not true. No foreign manufacturer could build enough cars overseas and ship them here for consumption. This means that some quantity of workers, plants, machinery, equipment, etc., would
be purchased/utilized here in the US. This means wages and profits for existing or new companies and employees here. Only some of the money would head overseas.
If a car manufacturer is unable to successfully execute a business plan, what makes you think the government, a non-expert in the business, would be able to successfully develop and force successful execution of a business plan that would enable the business to survive and thrive? And if they don’t, or if they simply provide the money and they fail anyway, which is highly likely, then you are simply throwing good money after bad. Money that has to be taken from us to give to them despite their failure. No, our reliable alternative is to let them file Chap 11 and give them a chance to reorganize their debt and existing contracts with current and retired union employees. That is the only way they can successfully change their cost structure, without which they are doomed to fail.
Re: Peter Lloyd (#927),
There’s two serious problems with this statement as it hinges on two very unproven, if not outright incorrect, assumptions (and a third, which requires the first be true, but I’ll mention anyway). First, the Big-3 won’t “fail.” They’ll go into bankruptcy, restructure and continue operating, likely with less of the crippling overhead that currently inhibits their competitiveness, i.e., they’ll be more efficient and less prone to future bailout requests. So “all its future profits” is very much an overstatement, if not just plain untrue. The second assumption is that a bailout will prevent this. It can’t. The problems with the Big-3 were present long before the current economic problems and will continue with or without a bailout. Any bailout will only delay the inevitable.
The third is an assumption that even if they “fail,” and completely go away, all profits will go to Japan and SK. If I’m not mistaken, most foreign cars sold in the US are actually made in the US (since it’s cheaper than paying import fees and costs), plus many Big-3 cars contain foreign parts, so the trade imbalance statement is a stretch at best. As RomanM pointed out earlier, many of the employees at the Big-3 will get hired up at the US manufacturing plants since demand for their cars would skyrocket (or greatly increase), requiring more bodies, so the employment issue isn’t nearly as bad as it seems, either. This one requires that demand will drop the same as supply, and that just won’t happen.
Mark
Re: Michael Smith (#923),
For more on this, see http://www.capmag.com/article.asp?ID=5365 and http://www.capmag.com/article.asp?ID=5366
Peter Schiff has an article about Deleveraging pushing up the Dollar
http://europac.net/externalframeset.asp?from=home&id=14753
– Ernie.
Peter Lloyd and Michael Smith, 923 and 927
Both your arguments make good sense to me. So what is the resolution? Is their some point at which protecting the benefit to be gained by the five excellent points in Michael Smith’s #923 is outweighed by the perceived disaster Peter Lloyd alludes to?
I’m thinking something like war, a severe exogenous threat to the economy, which could be from outside the nation or from within or perhaps when the premise of “efficiency” is seriously threatened.
I much prefer the Austrian approach to the ongoing financial and economic crisis but alas that is not the approach of choice by almost all advanced economies around the world.
I suspect the best one of my viewpoint can do is point to the more obvious defects in rationalizations of the currently accepted approach. The “broken window” concept of throwing all this government money at the current crisis suffers in spades from looking at the immediate problem and excluding the long term ones. Almost all commentators and even most economists play the crisis as so severe that we must not even contemplate the long term effects and only concentrate on the present. Is it not that kind of thinking with government deficit spending and attempts to keep the economy going at all costs that got us into this situation? Why do not the advocates of the current approach want to even broach the subject of the long term effects.
I saw a recent letter to the editor of a major newspaper questioning why the US government is not printing more money and handing it out to its citizens. The writer noted that there were no ill effects from what had been done to date, i.e. no loss in exchange value of the dollar, no high interest rates on treasuries and no inflation. A simplistic argument indeed, but very much to the essence of more scholarly treatments that I have read.
Re: Kenneth Fritsch (#933),
You know, Kenneth, when I hear people like Krugman urging the government to print more money, I wonder: Why not allow each of us to print up our own money?
After all, with my scanner/copier, I can be turning out reasonable facsimiles in no time. We could all print ourselves a fortune and end this economic mess. None of us would ever have to work again.
I think as long as Steve M allows this thread to continue it would be appropriate and timely to address the issue of the auto bailouts in the US. Peter Lloyd made the arguments for the bailout – with provisos and I would like to look at those comments in light of what has and is transpiring in the UK and Germany.
Peter Lloyd has commented that:
Re: Peter Lloyd (#927),
But we know that the UK auto industry survives with a reasonably large workforce without any British-owned carmakers as stated in the link and excerpt below:
http://www.automotive-business-review.com/article_feature.asp?guid=20E0573E-E924-46BB-AFE9-F43E81466C79
We also know that that situation in the UK is dynamic and that to me denotes something healthy and encourages investments that use limited resources most efficiently. So when Peter Lloyd says:
Re: Peter Lloyd (#926),
I think we must look at the UK and determine just how devastating or not that change actually turn out to be.
It would appear that Peter Lloyd judges that the events that transpired in the UK auto industry were bad and that they need not be a precursor of events that may well follow in the US auto industry and as a matter of fact should be avoided at all costs (to the US taxpayer).
Then Peter Lloyd uses the German auto industry as an example for the US auto makers to follow in these comments:
Now the German auto makers are essentially in the business of exploiting a brand built up over decades that include many of the globally recognized premium priced luxury cars and a pricing that can and necessarily has to include the latest safety and environmental features of the day. It is a niche market that one would have to question how readily and practically large concerns like the Big 3 in the US could adapt to. Having said that we still have a global dynamic that can and no doubt will affect even the German auto makers as noted in the link excerpted below:
http://www.time.com/time/world/article/0,8599,1849410,00.html?xid=feed-cnn-topics
While Peter Lloyd remarked about the German auto makers cooperatively working with their labor unions one has to look at that relationship a little closer as in the link below about German style labor relations at Volkswagen:
http://iht.com/articles/2008/01/15/business/corrupt.php
I have been tracking the major stock market indexes of the world in light of claims heard in recent times about the decoupling of the fortunes of the various economies of the world. Why the losses in all major stock markets have been essentially same for the current economic down turn and financial crisis is fodder I suppose for some academic research. I assume that the stock markets give us a snapshot of the estimated/perceived effects of an economic down turn by the holders of those stocks and that those holders are somewhat independent on going from nation to nation.
Below is a table showing the percent losses for major stock indexes in the past year from market high to the price at Nov 28, 2008.
There appears to be a general consensus evident here about the global economic down turn. That does not make it right as the markets appeared to not have a clue about the down turn/crisis a few months ago.
Worth a read.
America, Watch and Learn
Dr. Michael J. Hurd
3 Dec 08
I don’t get it. The American auto industry is failing. For whatever reasons, they can no longer make a profit. Note that people still want cars. It’s just that not as many want American cars as foreign cars, since foreign cars are known for being better. However, some do actually want American cars—but the American car companies happen to be poorly run. Plus, they are hampered by all kinds of regulations and government-supported union rules that competing, foreign companies are not hampered by.
I get all this. What I don’t get is why or how pouring billions of taxpayer dollars into these companies is suddenly going to make them profitable. I understand that those who now control Washington don’t really care about profit. In fact, they got elected telling people that profit and capitalism are largely bad. What these politicians do care about are the labor unions. How labor unions are supposed to survive without profit generated by capitalism is anybody’s guess. The politicians also care about forcing automakers to manufacture environmentally friendly cars. If they bail out the auto companies, it’s easier to force them to do this. Yet, if environmentally friendly cars don’t sell when private capitalists own GM and Ford, then why will they suddenly start to sell when the government takes over GM and Ford? No answer is given because the question is never asked. Why is the question never asked?
The premise beneath all this is simple: Government officials think they are smarter and more capable than capitalists. They think they’re much more moral too. If this were true, America should have abandoned capitalism (or what’s left of it) a long time ago. Instead, America has held on to capitalism more tenaciously than most. In the process, America got a lot more done.
I may end up wrong, but I have a funny feeling that the American automakers are going to get their billions (or is it trillions?) in taxpayer dollars. For all practical purposes, the U.S. government will own them. This will be an example of all out socialism right here in the USA. Socialized cars. Government officials will get their chance to show how much more competent, and how much more virtuous, they supposedly are. America, watch and learn.
Kenneth, my two retirement funds are tracking the market lately as well… which kinds sucks if you think about it. 😉
Mark
Mark T. (#939),
Only if you are retired and need to sell your assets at current prices in order to maintain your standard of living. Fortunately for me and my retirement that is not the case.
Of course, a significant number of bond defaults and bankruptcies could change all that.
An intergenerational advantage for the coming year is that SS payments will increase at 5%+ with price levels steady or falling. I leave it to my wife to make sure that that generational advantage and others are eliminated (and reversed) by her generosity to the kids and grandkids.
The UAW wants the bailouts more than the Big 3. I’m guessing that the manufacturers would take advantage of the down turn to remove the unions from the equation. Whether the big 3 make it or not there will be an auto industry here, just that the various boards of directors will be in Japan or Europe instead of in Detroit.
Re: Jaye Bass (#941),
But all the best jobs will be overseas, the research design etc. The engines and transmissions built abroad and just assembly here. A huge loss of jobs and a major hit to the US economy.
Re: Phil. (#943),
If the only alternative consequence to the feds providing a small (in terms of what eventually will be needed) bridge loan was a suddenly profitable Big 3 in the midst of a looming recession then we could be forgiven for looking at the Big 3 bankruptcy with jaundiced eyes — as noted in your comment. On the other hand, if the money were provided only to delay an inevitable bankruptcy further down the road or opened the fed money spigots for future bailouts and then a bankruptcy ensued, I would say that would provide an even bigger hit to our economy.
I have watched as much of the congressional questioning and testimony of the auto executives in Washington as my stomach could stand, but believe me when I say I have been involved in trouble shooting discussions with vendors and customers and the performance that the politicians and executives are providing is simply posturing and would be labeled as such in the real world.
What you have is a jittery congress that wants to throw some money at this problem as they instinctively are wont to do, and thus it needs some kind of cover for their constituents who the polls indicate are largely against the auto bailout and now against the financial ones already completed. Remember that congress was in such a big hurry to do the financial bailouts that a business plan was not even discussed. In fact it was Paulson and Bernanke who had to summons bank executives to Washington to “encourage” them to take the money. The business plans from the auto executives was an after thought to the original hearings that is obviously being used currently to market the idea to the politicians constituents. Making those cars green, taking a dollar in executive salary and driving to Washington in green cars is more of the same marketing plan that will have little or no effect on the auto industry avoiding bankruptcy and in fact are distractions from the real problems and real world.
Re: Phil. (#943),
also, KF writes (935) –
Phil is right, because this is precisely what has happened in the UK. Not only are all the high-value components imported from the holding companies’ low-cost foreign factories, but the inter-group invoicing is arranged so that little or no profit – or taxation – takes place in high-cost UK. Plus the considerable financial incentives given the holding companies to locate in the UK and the higher management jobs being only held by the holding company nationals mean that little if any profit is generated in the UK. The only advantage is several thousand high-quality jobs, which are desperately needed in a country which over the last thirty years has lost most of its manufacturing industry.
That is what would undoubtedly happen in the USA if the Big 3 were allowed to founder. Recovering by going through Chapter 11 is unlikely – it is far more likely that Toyota, Nissan, Honda and Hyundai would use the situation to entrench their already well-established market share with their more efficient and reliable products and use the current situation to educate North Americans that high efficiency does not necessarily mean lack of room and comfort.
As for the earlier comments about German cars being mainly for high-value niche markets, that is how it appears in North America because that is how they have been deliberately – and cleverly – marketed. In the rest of the world that is not the case – the products of VW, Opel and German Ford address all sections of the market, including low-cost economy hatchbacks. And many proud American owners of an upmarket Mercedes would be distraught to see their pride and joy constituting the majority of the taxi fleet in many European cities – because of their reliability and high mpg.
Having seen the UK-owned auto industry almost willfully destroyed by interfering government, weak management and bullying, short-sighted unions, and personally having a foot firmly on each side of the pond (not necessarily a comfortable stance) I do not wish to see the USA following down the same broad road to economic disaster. That broad road is well lit – as is the cliff at the end. Don’t take it.
By the way, using reports of individual corrupt practices in German unions as a reason not to adopt the generally consensual management-worker relations typical of German industry is egregious.
Re: Peter Lloyd (#949),
By the way, just to make it crystal clear, I do not want Government to run the US auto industry – Heaven forbid, it’s in a bad enough state already. Nor do I want a socialised auto or any other industry. Been there, done that, got the teeshirt, doesn’t work.
I would like (and like all wishes, this one is unlikely to be fulfilled) Government to use the Big 3’s present desperate need for a cash injection to force them to allow their more aggressive and visionary managers to take charge and to show plans to make cars that the USA needs. I know that such cars are not what many US customers want just now, but that is what a marketing department is for. We do not want our young men to die for our oil any longer, nor will oil be down at $45 a barrel for ever.
Re: Peter Lloyd (#951), Your post contradicts itself, Peter Lloyd. Marketing is not a sufficient tool to get consumers to buy a product they neither want nor need (nor can afford). The only sufficient tool that would do this is government intervention, which you flatly oppose in your first paragraph. 😉
Mark
Re: Mark T. (#953),
Mark, the whole history of the auto industry in the USA is conclusive evidence against you!
Re: Peter Lloyd (#949),
Peter, I am afraid that you have this idea that in a market situation an outside observer, like you, can determine what it will take to kept an otherwise failed business going. I saw the same problems in parts of the US electronics businesses and people such as you had ideas on how it could be saved and admonishments that without it our economy and national defense would be imperiled. It went the way that the automobile industry will eventually go and the US suffered no long term detrimental consequences. In fact, I am glad that it did not have the political clout of the auto industry that would enable it to waste taxpayer money.
The ownership of the auto industry in the UK is gone and I see no long term detrimental effects from the industry’s lose. For whatever reason, if a business or industry fails, it releases funds for better and more efficient ones – that is how the market works.
Manufacturing jobs all over the world are decreasing and as a percent of the workforce in all advanced economies due do to labor saving devices that make the remaining workers more productive. (Actually the last figures I saw US workers were among the most productive in the world). That is a fact of life and sentimental feelings for the good old days will not bring it back. Even the German auto industry will be losing manufacturing jobs and relocating factories to other countries. As a matter of fact, some rather confident concerns in the auto industry will be facing some major tests in the midst of the global economic downturn.
By the way, Ford, many years back, made a management decision that it could market an ultra safe car and lost their proverbial tailpipes in the deal. The US consumer has the choice of a wide spectrum of autos to purchase and marketing ideas to listen to and from that information the US manufactures can make their choices. Unfortunately the auto makers’ decisions are much constrained by an approximate $2000 a car cost differential, long retooling times and brand names that are fading with the younger generations.
I, like you, think that the US auto industry could build luxury cars as well as Germany does and compete cost-wise, but Germany has a brand that would make competition very unfavorable to the US makers. Talk about a marketing program. The German image would have to be damaged internally before it would work.
As for the link to the German style labor relations we have:
When combined with the following one might question the extent of a problem that the top executives knew nothing about:
Re: Kenneth Fritsch (#952),
That’s because you have no personal experience of living or working in the towns which lost big auto plants, nor have you a personal interest in maintaining the economic strength of the UK.
Thirty years ago, economists in the UK were reassuring us with exactly the same economic theory you are now repeating – ‘Don’t worry about losing our manufacturing base, weak companies must be allowed to fail and the future is in the knowledge and service industries. Our workers are too skilful to be wasted in mere metal-bashing’.
They were badly wrong. The loss of jobs, of high added-value exports to maintain a necessary trade balance, has been catastrophic. France and Germany made huge efforts to retain as much manufacturing as possible because they saw through the fallacy and as a result now have enviable exports, with much stronger economies and higher standards of living than the UK. I cannot understand you posing the loss of jobs because of increased productivity as a reason for letting these industries go – surely increased productivity, lower costs, increased profitability are excellent reasons for not allowing these industries to go to foreign competitors.
Whether or not Germany and France will continue to retain their national manufacturing bases remains to be seen – I would not write them off as easily as do you – but if they do move their manufacturing to cheaper countries THEY will retain ownership and bring home the profits. That is very different to freely handing over your assets and home markets to foreign competitors.
You misunderstand completely. Germany does NOT manufacture only luxury cars – its auto industry just chooses to serve the up-market niche in the USA. Elsewhere it sells over the complete range, from economy hatchbacks and taxis to luxury sports cars. Nor do I suggest that the Big 3 attempt to compete in the luxury car segment. The USA needs (not necessarly wants, at present) autos which are well adapted to its environment but with far higher efficiency than generally available today, as an important contribution to the elimination of socially and economically damaging oil imports. I believe it is important not to hand over such an essential business to foreign competitors on the strength of doubtful economic theory, because the USA already has a dangerously poor trade balance and cannot afford to make it worse.
As for me having “sentimental feelings for the good old days”, nothing could be further from the truth. I want the Big 3 to change radically to meet national economic needs, to stop operating in the past and to look to the future. You seem to react to current problems by giving up, as has UK manufacturing industry. I want the USA auto industry to learn from the UK’s mistakes, and to fight for survival.
Finally, the massive economic growth of Japan, Korea and China has been based on their manufacturing industries eating our lunch. Doesn’t that tell you something?
Steve: For what it’s worth, I agree entirely entirely with this comment. While the auto industry has been undoubtedly mismanaged, I think that people calling for the collapse of the industry have insufficient understanding of the inter-generational effort to create the sort of infrastructure and know how to have such an industry and how hard it is to put the egg back together after it’s been broken.
Re: Peter Lloyd (#954),
I have had personal experiences where operating small farms and manufacturing electronics devices were no longer viable. I am happy to say that by adaption to new situations the ending was not all gloom and doom. I also feel fortunate that my fates were not delayed by interventions. I did note during those times that their were those who were proclaiming these changes as the end of the world as we know it.
My point here was that for the US auto industry to survive under its current business plan it would need the higher margins that the more expensive cars provide, but that unfortunately there brands are no longer strong enough to take business away from Germany. I have also been exposed to the manufaturing business plans that make their profits on high end items but maintain a full line of products for other reasons.
It will be interesting to see what the auto industries in other countries go through in this global down turn and how much of a drag bailing them out will have the remainder of their economies.
I would doubt that the US auto industry bailout will not happen. It appears that it is no longer subject to rational discussion but simply based on blackmail using the worst case scenarios. The advocates of the bailouts will be the first to criticize the auto industries when the bailouts fail and more government intervention will be devised with bigger bailouts. Then either the government runs out of money to throw at the problem or the recession will end and the auto industry will survive a little longer.
The current mantra that we totally ignore the future consequences of these bailouts because we must concentrate wholly and thoroughly on the immediate consequences is something that does not speak well for making responsible decisions. I heard a commentator on a business show yesterday exclaiming about how we are living beyond our means and must change our ways and bring our government spending back into line, but only after we spend whatever is required to avoid immediate consequences of our current economic down turn. Huh?
Re: Kenneth Fritsch (#963),
Sigh, throw fuel on the fire then blame water when it gets bigger, justifying more fuel.
Mark
Re: Peter Lloyd (#954),
GDP growth for UK:
2000/3.8%; 2001/2.5%; 2002/2.1%; 2003/2.8%;
2004/2.8%; 2005/2.0%:; 2006/2.9%; 2007/3.0%
GDP growth for Germany:
2000/3.2%; 2001/1.2%; 2002/0.1%; 2003/-0.2%
2004/1.6%; 2005/1.0%; 2006/2.7%; 2007/2.5%
True, Kenneth, which is why I have put off making any changes. I’m at low enough levels that contributions far outweigh interest anyway, so putting my money into anything truly volatile doesn’t make sense yet, and any losses I’ve suffered will be moot by the time I actually start drawing on it (27 years from now I’m guessing).
Mark
You guys do know how bankruptcy works, right?
Mark
Btw, one positive regarding my retirement funds: I’m getting many more shares per purchase now since they’ve all dropped so much. 🙂
Mark
Btw, aside from the auto bailout talks, now they’re talking about… dropping mortgage rates to all-time lows (well, since the 60s). Um, forgive me for being obtuse on this issue, but isn’t that not unlike the situation that got us into this mess in the first place, namely, an attempt to increase home ownership rates? I am absolutely baffled at government that wants to throw gasoline on a fire, and the world believes it when government blames water as the fuel. Sigh…
Mark
I have seen some signs of admission by the participants in the actions that are, at least partially, to be put into place to quell the fears of recession and the feedback effect that that fear causes and makes the consequences worse. An auto executive (CEO of GM) commented that their appearance before congress and actions in preparation to the hearings asking for bailout money could have adversely affected auto sales.
I truly believe that, by Paulson and Bernanke apparently wanting to be proactive and using drastic measures by historic comparison in dealing with the economic down turn, they have put into effect a great psychological fear factor among consumers and businesses that has become the overriding and unintended consequence. If that factor continues to operate then the actions that they have proposed to help the situation will be seen as counter productive and the start of an even deeper and more detrimental feedback as people lose confidence.
At some point they must simply say that the correction must and will take its course and their interventions are at an end. I am not at all certain whether Bernanke is willing to do that.
Re: Kenneth Fritsch (#948),
Of course he’s not. He’s suffering from the same illness that Greenspan had: God Complex. He’s in charge of the economy now, and damn it if he can’t beat the theory that says intervention won’t work! Just because Greenspan failed at it for 30+ years doesn’t mean he can’t find the secret sauce.
Mark
Peter; Mark is correct. Marketing only leverages an existing desire towards a specific direction.
Mark; Peter is correct. Over time, marketing develops either wants or needs that didn’t exist before, through repetition.
🙂
This is an interlocked global economy. Things are going to work how they work. According to global situations, including civil unrest, terrorism, weather, markets, international relations, per capita income, wages, raw materials and so on and so forth.
Mark: No, dropping mortgage rates isn’t what got things into the situation. A whole bunch of things did, but as we know, probably mostly due to blindly buying and selling iffy packages of them. That and the illusion of government oversight.
Kenneth: Of course things are at least partially to quell fears. Everything runs on optimism and pessimism to a large extent.
Peter: Do you really think the attempt to control the geopolitics of a region is so simplistic as to be mainly about a commodity?
Anyway, this isn’t a US financial crisis, it’s a worldwide one.
Re: Sam Urbinto (#956), Uh, my previous comment was directed towards Peter. I don’t disagree that you can create a market, but there has to be something worthwhile to begin with. Even at $4/gallon of gas, US consumers did not want “environmentally friendly” cars. They simply drove less often. Better marketing won’t convince people that environmentally friendly cars are worthwhile.
However, w.r.t.:
I wasn’t really saying simply dropping mortgage rates was the problem, it was the massive increase in the money supply created by the Fed, which is evidenced by dropping mortgage rates. Lowering rates is what the fed does to spur buying/spending. If they do this again, we will end up with mortgages going to people that cannot afford them long term, again, as well as another increase in investments (which are particularly dangerous because they intentionally default as soon as nobody is buying). Rates are supposed to be based on risk. Artificially reduced risk is where the problem lies.
The Fed needs to simply let the market decide.
Mark
Nonsense. Marketing only helps if there is a need or a desire to begin with. Marketing opens up a door. Even when marketing is credited with “creating” a market, there is something worth selling in the new market to begin with. Hybrid/electrical/etc. cars are not selling poorly in the US because of bad marketing, they selling poorly because people do not want them, period. Not only do they not need such things, they are simply not affordable for the average consumer. There’s a point at which a turd simply isn’t marketable.
Mark
Peter, apparently you believe that outsourcing of manufacturing jobs has a net negative economic effect on a country. Can you explain why you believe that and in what form the net negative effect is manifested? In other words, are you saying it cause unemployment or lowers wages or reduces economic growth or what?
Also, can you explain why you think a “trade imbalance” is a problem?
MarK:
I agree there has to be something there to create a need (markets for non-existing products). But if you want to get to work a mile away, a bike is fine. But still people buy 2 ton pickup trucks to get there. 🙂 I was thinking more of things like “premium imported” cigarettes and $4 cups of coffee and the like.
On the other hand, sometimes lowering rates results in less buying/spending. Tweaking the world’s economic system sometimes works. Maybe things will result in mortgages to people who can’t afford them long term, but for some reason I think we’ve always had that problem. A “bad” mortgage is not a bundle of unknown ones. Eh. It’s rather an unknown. As far as the Fed letting the market decide, I don’t think conditions are such that’s possible, and probably not likely anyway.
I disagree that better marketing won’t convince people that environmentally friendly (EF) cars are worthwhile. It depends on how they’re positioned. Like I mentioned somewhat on the boards, work on getting people to implement emission reducing plans, not on convincing them it’s warming or convincing them emissions cause warming. The goal isn’t to market EF cars, it’s to market cars that are cheaper or trendier or flashier or safer or have a lower cost of operation. Not to focus on if they’re EF or not. (Note that if this is possible or not is another subject…)
My mentioning of EF cars was really specifically oriented towards Peter Lloyd’s comments about cars the US consumers need compared to cars we want (since he referenced dying for oil, he was obviously referring to EF or alternative fuel cars). The problem with Peter’s statement is that we (consumers) buy what we want. Peter is making a subjective judgement that we need alternative fuel cars. By whose standards?
Often what we want is what we need, but not always. The only way to determine what this is is to let the market decide, i.e., cars that we don’t want will not sell, regardless of the marketing campaign used to promote them (the Edsel is a perfect example). Ultimately, you can’t polish a turd. You can even try putting blinkies on the turd, and though that might sell it in some Marketing 101 class, it won’t necessarily sell it to consumers.
Mark
After “By whose standards?” was supposed to be a follow-up statement that claimed “What we need is cheap (or low-cost) transportation.” Unfortunately, alternative fuel cars, while perhaps a good idea in the future, are not by any stretch low-cost (and not nearly as EF as claimed).
Mark
Steve wrote:
In the first place, what justifies the notion that my money should be seized to prop up those guilty of the “mismanaging”? Nothing justifies the notion that the mistakes of some should be paid for by others — others who played no part in the mistakes and had no control over them. Punishing the innocent for the mistakes of the guilty is the very definition of injustice.
What’s more, allowing the Big Three to go into bankruptcy will not constitute the “collapse of the industry“.
To the contrary, putting the Big Three into bankruptcy will give them a chance to reorganize into more efficient producers. Yes, it will probably also mean a loss of market share to the other domestic manufacturers, Honda, Toyota and Nissan — but that’s a good thing, too, because the more efficient firms deserve a larger share of the market.
Even if the Big Three don’t survive bankruptcy, that, won’t mean the “collapse of the industry”. The loss of Pan American, Eastern Airlines, TWA and Midway to bankruptcy in 1991 did not “collapse the air line industry” — it just opened the door to much more efficient firms like Southwest and Air Tran.
Ridding an industry of firms that are wasting vast amounts of capital is a good thing. Sapping the taxpayer’s money so that the waste can continue is a bad thing.
Re: Michael Smith (#965),
Well stated.
Re: Michael Smith (#965),
It often shocks me how people can have contradictory positions depending on which sectors of business and economics they are talking about. What you say is absolutely true. Markets work best when capital is effectively and efficiently available to successful organizations. Capital that gets tied up with ineffective organizations represents an opportunity cost to the successful business. At this point, the big 3 are failing organizations, both of their own issues as well as government interference. Any capital spent on propping them up is capital not available to other enterprises which are successfully operating.
Now, the fact the government is contemplating stepping in is a bigger concern. Since the government has no money of it’s own, all it can do is either print money, which causes inflation and isn’t good for anybody, or borrow it, which is taking it from other people either now, or in future obligations, again, ensuring that capital that should be available to more successful organizations will not be because it was wasted on failing enterprises.
This really is free markets 101 stuff. There is a reason that bankruptcy exists. It allows organizations to try and deal with their financial situation through a reorganization and failing that, to close up, freeing up resources which can be better utilized by others.
Mark:
Yes, I agree that what we need is what we buy. Or vice versa. At least on one metaphysical plane. 🙂 If that “need” is logical or real or sensible, well…. I’m actually not arguing with anyone, just pointing out there’s different ways to look at the same thing without actually having an argument there.
Although I would probably contend that we have cheap transportation. Gasoline and diesel run them. That’s why there’s been no move, transient issues with the price of commodities is another issue. Solar, hydrogen, cold fusion, shale oil, natural gas, nuclear engine cars; it will work itself out, eventually.
Geopolitics and social issues are related but not part of the real issue. People will fight over anything.
Re: Sam Urbinto (#966),
Yup, that was really my point. EF cars don’t (and won’t) sell as long as gas is cheap, no matter how well you polish that turd. Even at $4/gallon, gas is pretty cheap. At $10/gallon we might view things differently over on this side of the pond.
Exactly, Michael Smith. I had forgotten all about the airline problems we had. Bailout talks were pretty happening then, too. We managed. I lived in St. Louis at the time when TWA was going under. I knew a lot of TWA employees looking for jobs. I don’t recall any of them moving to the streets, nor did our economy collapse. In fact, at the time I was a recent engineering grad and McDonnell Douglas had just dumped 10,000 people onto the St. Louis engineering market. I went back to school (and paid for it by working as a bartender!). 🙂
Mark
Re: Mark T. (#969),
I dunno. I don’t believe there is a global climate or energy crisis, but I’d buy a good electric car in a heartbeat. Would be perfect for my wife’s work commute of just 5 miles one way, and for puttering around town. I’m hoping the Chevy Volt is all it’s cracked up to be.
But, I’ll still have my V10 F-250 for hauling heavy loads (stone and soil for landscaping, firewood, stuff going to the landfill, etc.) If they come up with a viable electric version of one of those, I’ll buy it too.
Why? Because I’d rather just plug the car in at night than pay islamic nutbags money, or even than pay already filthy rich oil barons money.
I know, SNIP!
Re: Jeff Alberts (#973),
Good for you, and please note that you are one anecdotal story. The fact remains that hybrids aren’t selling because people don’t want them, at least, not at the costs involved. Besides, as you note, you still need the gas guzzler. My brother has one of those, too, and I drive an Xterra, which I need.
Mark
Re: Mark T (#977),
Actually my stepmother bas two Priuses (Prii?). She bought the second one just recently, the first was a 2004 I think. I see a LOT of them in Western Washington (State), so they ARE selling.
Here’s the start of an AP story:
Holy Moly – October had the deepest cutback since … August.
And another headline from this morning:
Wow. October-to-November was the worst in 34 years as the economy wastes away ever more rapidly. I wonder what this catastrophe looks like on a percentage basis –
Wow. That final data point, for 2008, sure confirms the apocalypse announced this morning in the AP report.
I’m not trying to diminish the severity of this downturn but rather to suggest that people be wary of media hype. The media is caught in its own economic downturn, which has its origins unrelated to US housing, and they may be inadvertently painting the news in funeral colors due to their poor personal circumstances.
Or by making one feel stupid or inadequate if one doesn’t buy the product.
Too many individual comments to quote and endeavour to counter.
But broadly, and in no special order –
Yes, clever marketing does create demand where none exists. Staying within the auto industry, who wanted huge gas-guzzling V8 engines, tailfins, SUVs, whitewall tires, mountainous heavy chrome grilles, several nameplates on the same design? Edsel was an example of poor marketing – it fell outside the styling fashion into which the public was being “educated”.
To say that under current business plans the Big 3 needs the higher margins from luxury vehicles is a circular argument. My argument was for new management and more rational business plans – which would include the low-cost manufacture of more efficient mass-market autos. Who needs five or six different nameplates on one design?
Alternative fuels such as electricity, hydrogen, etc. is a step too far at present as cost-effective technologies are not available – though plans should include research. But high mpg modern auto diesel engines are almost indistinguishable from gas engines in terms of driver experience. Ford, for instance, have developed a fine 2.2 litre diesel in conjunction with Peugeot which is quiet, flexible and delivers phenomenally high power and mpg. All the Big 3 already have small 50-70 mpg diesels in their European autos which would be an eye-opener for Americans to drive. Diesels can run on home-produced vegetable oils from many sources, or synthetic oil from coal, and may in the near future run on cellulose butanol made from existing crop waste – note, NOT made from food crops.
MarkT said that even at $4 a gallon, Americans did not want EF cars. Absolutely untrue, to my own knowledge and experience. When gas prices peaked recently, my own daughter and many friends and acquaintances sold their gas guzzlers and bought high-mpg replacements. All Japanese. Ok, gas is now cheaper again, but how long do you think that will last? And as national policy, do you want to continue to be energy-reliant on unstable foreign countries, none of whom have any love for the USA? Yes, of course many Americans still love their big sedans and trucks but higher gas prices will make these products uneconomic.
Kenneth, I know the GDP figures you report. GDP is not the whole story. Look at the lifestyle and environment of the average German or French worker, especially in manufacturing industries, compared with his/her UK equivalent – I assure you there is no comparison, the British worker is less well paid, has a smaller pension, works harder and lives less well. UK GDP is also composed of a high financial industry component because of the importance of the City of London in world finance. The success (HA!) of this sector provides high living standards for a very small proportion of the UK population. Meanwhile, the towns in the north which used to thrive on manufacturing are now among the most deprived in Europe. Drive through them, look at their rotting, empty factories, boarded-up shopping centers, slum housing and consider your GDP comparisons.
Let’s get down to the basics. Why do you all think that countries like the UK and USA built up big manufacturing industries and fought hard for export market share? And why do the French and Germans still fight to retain their manufacturing industries? Because these industries generate wealth. Because if you buy these high added-value products from other countries you pay top dollar to pay for their profits and the taxes they pay their governments. If these home industries are not being run well, you don’t give up, you make changes until they run properly – as did the Germans and the French when their auto industries were failing in the seventies. In the UK, we let ours fail. Do you want to make the same mistake?
Letting an inefficient national company go down if it is badly run is good because it leaves the field open to more efficient companies within the same nation. To let its share of the home market go to a foreign competitor is dangerous. To let all the national companies in that manufacturing sector go down and to allow the whole home market to be taken by a foreign competitor is madness.
Someone also questioned whether a negative trade balance was bad. Are you serious? Would you admire a company that persistently traded at a loss – would it last long? The USA has had a growing negative trade balance for years and no one has worried about it. Now it’s getting serious because economists realise that if large amounts of the resulting debt were called in the US economy would be in even worse trouble than it is now.
Re: Peter Lloyd (#974),
You can’t have low-cost manufacturing without a complete cost restructuring of the company. And the only way to get that is via Chapter 11 bankruptcy.
So in your words, regardless of how poorly the US companies are run, we should just throw billions of dollars of future taxpayer money at them now, and likely again on an ongoing basis, simply because a foreign mfr might take over the market? Sorry, but that doesn’t really cut the mustard with me. What is the foreign mfr going to do, stop selling cars and making money here? Stop employing people and building factories here? Of all the nonsensical things I’ve heard, this one is at or near the top.
You are conflating trade deficits with deficit spending by the government. A trade deficit for the country overall does not have anyuthing to do with the debt of the government which it uses to finance operations.
As to trade deficits specifically…
Re: Jonathan Schafer (#975),
No, it is NOT, by any means the only way. Aggressive managements have restructured companies before without Chapter 11 and will do so again. Anyway, there is nothing against the Big 3 going in to Chapter 11 re-organization – but since it is highly unlikely that private investors will be found to buy the ruins, public money will still be needed if they are to be kept going, so the result will be the same. If you are prepared to see the whole lot collapse, of course……..as, apparently, you are, and that is the central issue on which we differ. Of course foreign manufacturers will take advantage and increase their US production – and take their profits out of the US economy. You see their growth as nonsense, I see facilitating US loss as nonsense.
If you would take the trouble to read what I wrote, you would have seen that is the opposite of my argument. I wrote that the need for capital must be used as a lever to bring up from the ranks younger, more aggressive and imaginative management and present a business plan to respond to the USA’s vital need to be independent of oil imports. The capital injection is, of course, a loan to be repaid with interest or a formal purchase of preferred shares. I also wrote that if that was not forthcoming, let them go down. It’s very difficult to understand how you can interpret that as you have.
I am most certainly not and, again, it’s very difficult to see how you derive that from anything I posted. Deficit spending by the Government is debt “on the books” and while it is to be avoided except in emergency, it is at least evident. The trouble with the trade deficit is that it is hidden debt, but debt nonetheless, like the “off the books” debt that ruined Enron.
Every dollar of trade deficit is a call on the resources of the USA. Much of it is poured in to buying USA Treasuries, because the size of the US market gives people all over the world long-term confidence in the dollar. But should that confidence waver, all that debt could be called in very rapidly with catastrophic consequences for the US economy.
As for your quotation on deficits in general, it is bad economic theory wrongly applied. In the first half of the twentieth century the USA was running large trade surpluses because of its massive agricultural surplus and because its industrial strength was gaining power. The depression was due to uncontrolled mismanagement of the banking system, very similar to today, leaving otherwise healthy agricultural and industrial sectors high and dry. The New Deal was not, in fact, a financial success, and the US economy did not really recover until WW2, until the massive production and sale of arms put US trade in surplus again. The trade deficits of the last twenty years or so accompany a slow loss of US economic power – or haven’t you noticed?
Re: Peter Lloyd (#988),
Peter, perhaps you should attempt to explain how this “calling in” would work. Let us say that a Chinese concern sells its US treasuries or other debt and receives dollars for them. Now it has dollars to hold or invest. As long as the Chinese have dollars from the trade imbalance they can invest them in US debt or assets or trade the dollars for euros or some other currency or hold them in reserve. They have to find buyers for all these transactions except the last option.
Can the US run into trouble by all of its government deficit spending (such has throwing money into bailouts)? You bet it can. Right now US treasuries are considered a safe haven, but at some point with sufficient debt that confidence could be broken and interest rates for treasuries would have to increase dramatically and put into place a snowballing effect of onerous financing just to maintain the current debt interest payments. That would lead to the temptation to print money leading to high rates of money supply and price inflation with all the very serious that problem entails.
As a practical matter a lack of private investors would signal, very strongly, that these businesses are not viable. Private investors are in much better position them you are or the politicians in Washington to determine whether a viable turnaround is available. The realistic alternative is that Big 3 or Big 2 will receive taxpayer money that the taxpayers do not want to give them and the politicians in an act of covering their collective tailpipes will do something like appointing an auto czar that will make political influenced and biased decisions. I think one cannot ignore that there are worst outcomes than bankruptcy.
I’d say they have been more up and down than a steady loss over that period.
Re: Kenneth Fritsch (#990),
Yes, Kenneth, perhaps I should –
Oh, you’ve done it for me – rather better than I could have done, too.
A holder of US debt is quite capable of selling his holding to someone other than the USA Treasury, and for some other currency or asset. Maybe to some devious national bank with notions of damaging the US economy. It has been known – in the past, even the USA has used a large holding of foreign debt to further its political aims.
Re: Peter Lloyd (#992),
Peter, you are confusing my scenario about potential government debt problems without providing your explanation of how the foreign holders of dollars or dollar dominated debt can “call it in”. The government debt problem occurs regardless of who holds the debt.
The debt held by foreigners that they hold as the result of trade surplus dollars that they have invested in US debt can be sold for dollars, but that means someone else has to purchase the debt and then the foreign seller has to do something else with the dollars. That is not like “calling in” a debt that has failed some contractual payment.
Re: Peter Lloyd (#992),
Peter Lloyd, in my view your reply here exemplifies the problem that we will have discussing the full and net impact of loses in the manufacturing sector of a national economy. One can arm wave about the more visible and immediate impacts, much as the US congress and media supporters are currently doing, but that is the “broken window” fallacy in spades and never gets us to look at the overall effects.
We have gotten our discussion, that you refer to as “calling in debt”, to the stage that our Chinese holder of debt, purchased with dollars from the trade surplus, has sold it to another foreign entity with the purchase settled with the buyer’s currency. Now we have foreigner X holding the debt. X can sell that debt again or hold it to be sold later. It is at this point that you finally have to show how X can conspire to damage the US by holding or selling this debt. If you can complete your argument about “calling in” the debt here we will all have learned something in the process.
Re: Kenneth Fritsch (#996),
Kenneth, good point. I had been mostly letting you respond directly to Peter on your own points, but I have to chime in on this. What exactly is this “calling in debt” that Peter refers to? Are we borrowing money from the mafia? US Treasury securities have a specified payback time at a specified interest rate. So far as I’m aware, there is no “call-in” whereby a treasury holder can simply say pay me my money now or else.
I’m awaiting Peter’s answer to this.
Re: Peter Lloyd (#988),
Not at the point where they are within a couple of months of running out of cash. The time to aggressively restructure the company without going into Chapter 11 is long past.
As to private investors, they are not a requirement for a Chapter 11 bankruptcy. Chapter 11 allows an organization time to try and restructure its existing debt, either through renegotiation, or by finding private financing to pay off existing debt, usually in exchange for preferred stock. It also allows companies to break existing union and pension agreements and attempt to restructure them as well. Now, assuming that private financing can’t be arranged and renegotiation is not possible, then your final alternative is chapter 7 liquidation. So no, public money is not a requirement for them to keep going as they have two other options. Assuming those fail, then the market is saying we don’t believe you can meet your obligations and our capital is best used somewhere else. That’s the way the market works.
It makes no difference whether some profits leave the US or not. That doesn’t change anything. Those profits have to either be reinvested or distributed, some of which will end up right back here. How is that a problem?
I read exactly what you wrote, which in #974 said
Ya said you believe that public funds must be used to prevent the loss of a specific manufacturing segment is madness. And that’s what I responded to.
You most certainly are. A trade deficit has nothing to do with the government. All it means is that in aggregate, US buyers purchase more goods and services from foreign companies than foreign companies purchase from US companies. That has absolutely nothing to do with deficit spending by the US government. It’s not an obligation owed by the US government, past present or future.
No it isn’t. The trade deficit in no way creates any obligation on the part of the United States. The fact that some foreign entities choose to purchase US treasuries has nothing to do with a trade deficit. Should the US have a trade surplus, foreign entities that receive some US dollars may still purchase US treasuries, creating a future obligation. Or, running a trade deficit, foreign entities may decide to spend their dollars on oil reserves, or gold, or anything else and not purchase US treasuries, not creating future US obligations. You are making a false assumption about how foreign entities will spend their dollars.
There’s no point discussing the great depression. It is superfluous to this conversation.
US Trade Deficit
Re: Peter Lloyd (#974),
Too much arm waving and too little facts. The trend in manufacturing jobs, like agricultural jobs before it, is never going to be reversed.
http://www.cato.org/pub_display.php?pub_id=4231
German unemployment rates:
2000/9.8%; 2001/9.5%; 2002/9.9%; 2003/10.5%; 2005/11.7%; 2006/10.5%; 2007/9.0%
UK unemployment rates:
2000/3.6%; 2001/3.2%; 2002/3.1%; 2003/3.0%; 2004/2.7%; 2006/2.9%; 2007/2.7%
Re: Kenneth Fritsch (#976), Re: Kenneth Fritsch (#976),
I don’t see how this is relevant to the discussion. Of course the number of jobs will decrease with time in any modern industry seeking to reduce costs and improve quality.
Losing ten thousand jobs over ten or twenty years gives growth in other sectors time to absorb those who lose their jobs. Losing ten thousand inside six months when a large enterprise collapses is a catastrophe for individuals and whole communities.
You are very quick with statistics, Kenneth, but don’t see behind them… don’t forget, there are lies, damned lies, and statistics!!
In the cases you quote, Germany is still coping with the aftermath of re-unification and the re-industrialisation of the eastern half of the country. In the circumstances, they have done a terrific job, but they are the first to admit that unemployment is too high. Nor do these statistics put in doubt that Germany’s performance in retaining its manufacturing strength (and trade balance) across many market sectors, against fierce competition from low-cost countries, has been outstanding.
In the case of the UK figures, you are deceived by the deviousness of the UK Government -and you are not alone! Since the Thatcher Government, it has been Government policy to classify as many unemployed as possible as disabled, either physically or psychologically, and to give them a ‘sickness benefit’ to live on, substantially funded from North Sea oil income. Since 1997, the Labour Government has added its own brand of smoke and mirrors by getting as many unemployed (and unemployable) school leavers as possible on to ‘retraining courses’ or ‘further education courses’, in both cases marginally effective, but with a substantial weekly benefit payment for as long as they choose to turn up. Furthermore Labour have established a target of sending 50% of all students to University, whether they are suitable or not. They have reduced the necessary qualifications and built many new Universities of doubtful competence to enable that target to be met. All these schemes take people off the unemployment statistics and presents a glowing picture of economic health. There are estimates – obviously not official – that the true number of unemployed is at least 3 million, which would multiply the official statistics you quote by about three.
I can understand a red-blooded American not believing that any Government could possibly get away with being so underhand, so you are completely excused!
Re: Peter Lloyd (#974),
Peter, as you are, I am sure, well aware I can buy stock in the German auto companies and share in their wealth as a US citizen – if I so chose.
I can buy BMW stock that with current low price pays a 5% dividend. April 2007 price = 50; Dec 2008 price = 20.
I can buy Daimler Benz stock with a current low price dividend paying 5%. Oct 2007 price = 110; Dec 2008 price = 29.
I can buy Volkswagen stock (which includes Audi) but without dividends. Oct 2008 price = 220; Dec 2008 price = 72.
I could buy Porsche stock which has been as high as 180 in the past 15 months and has a Dec 2008 price = 45 and is paying a 1.6% dividend.
That is not a proper analogy. Let us compare the US and Japan economies as Japan has a very large trade surplus. Might there be those who are prone to make these simple-minded correlations saying a large trade surplus is not so good either and maybe worse than a negative balance.
With global markets in operation, this talk that my country must maintain an edge here or there sounds almost xenophobic.
Re: Kenneth Fritsch (#983),
Kenneth, that’s not justified and I take serious issue with you. I have been pointing out the madness which has taken over the UK in the last sixty years during which it has allowed its manufacturing industry to die, as a result of which – in spite of reassurances from economic theorists – its economy and standard of living has deteriorated to well below those of its peers in Europe – France and Germany. And I have been urging Americans not to be deceived into going down the same path, but to fight as hard as possible to retain economic power. Because I worked for twenty years in the USA, thoroughly enjoyed the experience and the people and I don’t want it to continue the economic slide which has been evident for some time. Wake up!
I have the highest respect – and some personal friendshps – for engineers I have met from France, Germany, Japan and South Korea. That doesn’t mean I want to hand over the family silver. And that doesn’t make me a xenophobe. I’ll willingly buy their products if they are technically superior – but I’ld rather know how to make better ones myself and sell them mine.
As for your comments on your ability to invest in foreign auto companies, they are quite irrelevant. I’m sure you are aware that the wealth a company generates is not all reflected in its share price or dividends. A large part of its contribution to the community is the money it re-invests in growth, in R&D, and in developing its network of manufacturing suppliers – mostly in its own country.
I’ll give you a concrete example. Some years ago Rolls Royce got in to serious financial trouble, principally because of Government interference in the UK aviation industry – (another unnecessary and deeply wounding loss, by the way)- at a time when RR was investing a lot of its own money in the development of the then experimental RB 111 high-bypass gas turbine. There were many voices like yours urging the Governent to let them go. But by some miracle sense prevailed, some capital injection was provided, RR was re-structured, the dinosaur car division hived off, and the aviation gas turbine division saved to fight another day.
Which it has. It’s a world class operation, very profitable, a great centre in the UK for generating engineering talent, provides plenty of jobs not only in the UK but all over the world.
Now, that would have been a sad loss. Not, of course, to Pratt & Whitney or General Electric, but we have to look after ourselves.
That’s still anecdote, Jeff. The overall sales numbers don’t favor your optimistic opinion.
Mark
Re: Mark T (#979),
Perhaps, but you made a generalization that they “weren’t selling”, I merely pointed out that they are selling. Maybe not in record numbers, but they are selling, enough that Toyota is still making them. If they weren’t successful they wouldn’t waste the time.
Re: Jeff Alberts (#981),
I think any reasonable reading of the statement simply meant there was no significant number of purchases of these vehicles, not that there weren’t any being sold.
If they want to sell cars in certain states, I believe they have to make them. As I recall, CA had a mandate that X percentage of vehicles sold had to be either electric or hybrid. Maine has similar laws, and AZ has passed a law as well. There may be other states as well. So, your statement would be false, because they have to sell a certain pct to sell at all in the state. Since they mfr some due to state requirements, they will of course make them available in all states where there is a market.
Re: Jonathan Schafer (#982), Exactly.
Mark
Re: Jeff Alberts (#981),
Again, you pointed it out using ANECDOTE. Hybrid sales for 2007 (this year as well) were paltry in comparison, and taking an even bigger hit than gas guzzlers during the current situation.
Don’t you mean “if the manufacturers didn’t get huge tax breaks and if the cars didn’t carry such a high profit margin” they wouldn’t waste the time? Keep things in perspective, Jeff. Anecdotal arguments are considered fallacious for a reason.
Mark
Anecdotal, but in Northern Virginia where hybrids were allowed to use the HOV lanes a lot of them were bought for that reason. The fuel economy isn’t any better than a regular economy car if you’re not doing stop and go driving. They’ve since stopped giving new hybrid car owners that benefit. Don’t know how that’s affecting the sales in the area.
Re: BarryW (#980),
There you have a benefit provided by the government in an attempt to unfairly point the market a certain direction. It’s not about “good marketing,” it’s about forced behavior.
A quick google search will reveal that hybrid sales numbers have plummeted. Granted, all cars are selling in lower quantities than usual, but hybrids are taking a bigger hit (the Prius was down 48% from last November, for example). They are expensive but more importantly, gasoline is not.
Mark
This is why the government should stay out of business.
No plan, no matter how well conceived, will ever ensure that we don’t see these or any other similar circumstances again, short of the government being your parent from birth to grave. As much as it stinks to lose a job, and I’ve lost several over my life, you simply have to pick up the pieces and move on. Sometimes literally, as I ended up moving from OH to TX in search of a new job. Someday, I may have to move again and will if necessary.
Peter Lloyd you seem to imply that we should merely defer to your opinions on these matters or at least to seek your insights into the statistics.
I am very much aware of government deceptive practices and how well they learn from one another. That does not mean we can arbitrarily throw out the ones that might counter our point.
http://www.dw-world.de/dw/article/0,1431,1257010,00.html
We have no way of knowing how many more people will be out of work with or without an auto industry bailout, although I have seen much scare mongering using the worst case scenarios. I know that given the cases of large parts of industries shutting down in a geographic area, the worst case situation arises when the residents are given false hopes of survival or regeneration and fail to make timely adjustments and adaptations. And we ignore the broken window fallacy at our peril when we refuse to look at the detrimental effects of taking money that otherwise could have been used by other more efficient enterprises.
You appear to think that a particular line of manufacturing can be willed to stay in a given nation. That you have very strong personal feelings in the matter are quite apparent. I have a few friends with much the same seeming preferences and feelings for manufacturing over any other enterprise alternatives. I have never heard a convincing argument for this preference even though I spent 34 years in manufacturing businesses.
Interesting.
Perhaps it would be better to look at per capita GNP or GDP, along with true unemployment figures; those looking for work but unable to find it that are not on government sponsored programs of any sort. The entire purchasing power parity sort of thing.
Speaking of PPP, IMF figures for 2007 in Geary-Khamis dollars, both Germany (34,212) and the UK (35,634) are fairly close. Canada outdoes them though (38,614) and the US is pretty far (45,725). But Singapore, Brunei, and Norway beat those 4 handily. And none of those 7 come even close to Luxembourg and Qatar though 🙂 Just be glad you aren’t one of the people at the Zimbabwe PPP level.
Perhaps a look at the numbers in the bottom and top quintile and the number of people categorized as at or below the poverty level for that country might be helpful.
The point of all of the above is, of course, to point out how many various metrics can tell you various things. It’s not all that simple….
Now as far as the hybrid (et al) car market, gasoline is simply too inexpensive and prevalent, and those alternative vehicles too expensive and “unwieldy” in many cases, to make a huge dent. Although government action and mandates do factor in economically, basing sales figures on government-related issues gets out of the economics of the situation and into other realms. So it’s more fairly said that alternative fuel and hybrid cars really aren’t selling at a level anywhere comparable to conventional fuel vehicles, but rater at a number so small as to be currently ignorable except on a government mandated basis. Or something like that.
On a related note, after you take the corn grown for livestock and use it to make ethanol, you could always feed the corn to them. I’ve heard it makes them big and strong. Or was that tastier?
One primary factor often forgotten in discussion of the auto bailout and consequences is that the government can do virtually nothing. We are in a credit crisis as much or more then a liquidly crisis. From current sales figures 25 to 35% of the new car industry is going away period, across the board for all manufactures. Job loss will occur in the country for all the companies at about their relative sales ration. The government can do nothing about this. The banks will not now loan to those not qualified. Everyone is more cautious and even those qualified are inclined to keep their current vehicle longer. To not let the weakest company fail is to make it harder on the survivors and postpone a return to health in this industry. This is nothing like the Chrysler bailout.
A company that specializes in second hand parts and rebuilding may be a good investment.
I’m struggling to understand the ramifications of a trade deficit, so I appreciate the comments and references above. Apparently I have a lot of work to do. I can’t believe how much difficulty I’m having understanding something that should be so obvious!
Peter lloyd’s concern regarding purposely damaging the U.S. by “calling in” debt is a concern I’ve heard elsewhere. The above discussion is helpful, and certainly it is true that if you own a treasury, you can’t simply decide you want your money back. You must abide by its terms.
So if you wished to damage the U.S. economy, rather than just wait for us to do it to ourselves, couldn’t you do it by other, related methods? I think this is Peter Lloyd’s point. For instance selling treasurys short relentlessly or doing the same to the currency, i.e. selling dollars short and buying RMBs and/or Rubles relentlessly and excessively? However, taking such action in a world where our economies are so interrelated would seem to be potentially very costly and mutually self-destructive. So instead could a nation purposely damage the U.S. economy by maintaining its own currency (or several nations agreeing to maintain their currencies) at below market levels and fostering a huge U.S. trade deficit? By doing so could you force up interest rates on treasuries to damaging levels? But then what? Doesn’t that in turn lower the value of the dollar in turn making the U.S. more competitive? It seems that such a goal would either be mutually destructive or self-correcting or both. And aren’t I just going in circles?
Re: Barclay E. MacDonald (#1000),
Those are all good questions. George Soros made his fortune shorting currencies, and broke the Bank of England with his trading.
However,
In effect a trade deficit pushes deflation, not inflation, so that’s generally not a concern, as long as there is a place for the investment dollars to go. If there is nothing to invest in, then existing assets will become inflationary instead. Since the yield and price of a bond have an inverse relationship, pushing up the interest rate means a declining face value in the bond principal, so trying to sell it will cost you money and holding it to maturity will also cost you money since a new bond at a higher interest rate could have been purchased for the same price. It’s pretty tough to manipulate enough to cause damage to the US enconomy. The greater danger has always been a lack of oil to meet demand. In the end though, manipulating one’s own currency or another’s is fraught with peril. For every action, there is a reaction, and making your currency too low compared to the US dollar will affect your own economy probably more than the increasing trade deficit would here. But there are a lot smarter people than me who could explain it a whole lot better than I ever could. Maybe someone will chime in here.
Re: Jonathan Schafer (#1001),
Isn’t that what China is doing now, artificially holding their currency to an unrealistically low level against the dollar? Short term gains but long term damage from what I understand.
Mark
http://www.ideachannel.tv/
http://www.cbo.gov/doc.cfm?index=1897&type=0
http://www.dollarsandsense.org/archives/2004/0304dollar.html
I wonder if Adam Smith envisioned real-time currency exchange at just about any street corner any place in the world 24 hours a day 7 days a week. I’d guess not.
——————-
By account balance, the top three trade surpluses are PRC, Germany and Japan. The top three trade deficits are UK, Spain and US. Interestingly enough, there are 4 countries at about zero; Macedonia, Tuvalu, Samoa and Tonga.
Perhaps even more interesting, the country with the largest surplus/deficit is the US, at about a trillion dollars. With whom? Canada, PRC, Mexico, Japan, Germany, UK, S. Korea, France, Brazil, Venezuela.
Now of course, this leaves off the difference between monetary balance (value added materials) versus physical balance (raw materials). And then there’s the eternal questions; can a country like the US sell all its finished products internally, what happens to the trade balance after recession or depression, what does what happens in country X do to country Y or between countries A B C do to Z or vice versa?
Of course, some economists feel trade deficits are harmful, others that they are not significant at all. Comparative advantage versus absolute advantage. Then there’s the discussion over the reality of currencies that are not free floating, savings rates, capital asset pricing. And throw in the fact that oil is priced in dollars or that the US dollar is often used as an international reserve currency.
Fun, isn’t it?
Re #990. That chart shows the fluctuations in the US share of the world’s NOMINAL GDP since 1980, if the GDPs of all other countries are converted into US dollars using the average exchange rate on the currency markets in the year concerned. The large fluctuations in the US proportion reflect the varying fortunes of the $US over the period, not the real output of the US vis-à-vis the rest of the world.
If the GDPs of all countries are converted into a common unit having regard to the real purchasing power of their currencies, the US share of world GDP is found to have fluctuated within a narrow range of between 21% and 24% since 1980. The estimated share of every country in the world’s GDP is shown for all years since 1980 in the IMF’s World Economic Outlook Database (latest edition: October 2008).
This ‘purchasing power parity’ method is recommended in the ‘System of National Accounts’ approved by the world’s statistical authorities, which states explicitly that ‘Exchange rate converted data must not … be interpreted as measures of the relative volume of goods and services concerned.’ For a detailed explanation of the irrelevance of exchange rates to the measurement of real output, see Ian Castles and David Henderson, ‘International Comparisons of GDP: Issues of theory and practice’, ‘World Economics’, Jan. Mar. 2005 (available at http://dspace.anu.edu.au/manakin/bitstream/1885/43016/1/CH.Wld.Economics.2.pdf ).
Re: Ian Castles (#1004),
Ian, thanks for your explanation. The slower changes would make more sense to me and would not change the point I was attempting to show. Perhaps I can show a similar graph with the PPP taken into account.
Further to my #1004, David Henderson, former Head of the Economics and Statistics Department of the OECD, has said that:
‘Exchange rates – whether past, current or prospective, historical, conjectured or model-derived – … are not relevant to the definition or measurement of either output (real GDP) or changes in output over time. Procedures and model constructions that build them in, including those presented in the [IPCC Special Report on Emissions Scenarios] are unsound’ (‘SRES, IPCC and the treatment of economic issues: what has emerged?’, ‘Energy & Environment’ vol. 16, nos. 3&4: 557).
Re #1006. Kenneth, Yes the estimates do broadly confirm your point.
Go to the Fund’s interactive database (World Economic Outlook Database October 2008 edition). Select ‘by country’ and then ‘Major advanced economies (G7)’; ‘Gross domestic product based on purchasing power parity (PPP) share of world total’; and the full date range beginning in 1980.
Re: Ian Castles (#1007),
Gross domestic product based on purchasing-power-parity (PPP) share (percent) of world total.
Re: Kenneth Fritsch (#1008).
Interesting graphs. The shares of all of the larger rich countries in global GDP have declined since 1980, although the US decline was marginal. The large increases in country shares over the same period have been for China – from 2.0% to 11.4%; India – from 2.2% to 4.8%; and the four ‘Newly industrialised Asian countries’ (Korea, Hong Kong, Singapore and the Taiwan Province of China) – from 1.6% to 3.7%.
According to the IMF database numbers, China’s GDP is now nearly twice as great as Japan’s. But most media commentators and many economists still refer to Japan as ‘the world’s second largest economy’ or ‘Asia’s largest economy.
On 18 November I wrote a letter to the Editor of The Sydney Morning Herald, pointing to the error in a statement in a news report that morning that Japan’s economy was ‘the world’s second largest’. They promptly replied that the report had come from Bloomberg, and sent me a link to the author to whom I should write if I thought that he was wrong. I wrote to the journalist in question and explained why he was wrong – but was not surprised that he didn’t reply. Since then the SMH has repeated the same error several times – most recently in a report from Agence France-Presse.
It is a waste of time trying to correct these reports – the SMH is no worse than many other media outlets, and Bloomberg and AFP are no worse than other news agencies. In the meantime, many people who should know better don’t realise how large the leading Asian economies have become.
Re: Ian Castles (#1009),
Ian, that database you linked me to is great for doing queries on historical global economic and financial data. Thanks again. Below are some Asian nations’ growth of GDP (PPP) as percent of world (1980-2007) and some global comparisons of GDP per capita (PPP) for 2007.
Considering that the massive intervention into financial institutions has so far spectacularly failed to unfreeze credit, I wonder, when do we get to call the TARP a failure? What conditions and at which time would be considered as a failure of this program?
Re: Not sure (#1011),
The TARP will never be considered a failure — at least not by the left and those who advocate such interventions. In the short run, they will argue that without TARP, the credit problems would have become even worse. They won’t offer any proof or evidence to support this, but it will nonetheless become the standard rationalization offered by statists and leftist intellectuals and politicians.
In the longer run, TARP will be written out of history completely — written out because it doesn’t fit with the great myth currently being constructed: namely, that Bush and the Republicans “deregulated” us into “laissez-faire” capitalism, which caused the entire problem.
Thus all of Bush’s, Congress’s, and the Fed’s interventions over the last eight years — including the huge budget deficits, the massive expansion of the welfare state, the addition of a huge new entitlement program, the record low interest rates, the use of the CRA, FNMLA and FHLMC to push lenders into ever-riskier loans, the bail-outs, the prop-ups — all of it will be written out of history completely, just as if it never occurred. This is necessary if capitalism, once again, is to be made to take the blame for economic problems caused by intervention.
The historical precedent for this treatment is Herbert Hoover. His massive interventions into the economy between 1929 – 1932 — his jawboning of corporate America to keep wages up even as businesses faced collapsing demand, his Smoot/Hawley tariff, his income and corporate profits tax increases, his expansion of excise taxes, his $2 billion public works program — were also written out of history. For 70+ years, that has permitted leftists to claim that “laissez-faire” Hoover and his Republican-championed capitalism caused the Great Depression.
Fred Thompson has a great sketch:
http://blip.tv/file/1528079
This one could be seen coming from miles and miles away… ( link )
If anyone wants to be flabbergasted about the money supply and how much it has increased, check out this link.
When the economy comes back, and it assuredly will, be ready for inflation like you’ve never seen.
Anecdotal report –
I’ve recently talked with marketing people in several businesses which I’ll term “heavy industry”. These businesses are not directly connected to housing or cars. They sell things to other companies who then sell to consumers globally. What I’m hearing from them is their belief that their product markets have bottomed and are now either stable or turning upwards slightly.
They think that the worst of the decline in their markets was in December and was driven by a combination of panic and attempts at inventory drawdown. The panic has mostly subsided.
David~
Backing your anectdote, as reported at Greg Mankiw’s blog a few weeks back, the TED spread has normalized.
http://gregmankiw.blogspot.com/2009/01/ted-is-more-relaxed.html
Two other anecdotes –
I have an in-law who is a director of a regional bank in the southern US (“flyover country”), covering a market of about three million people. They avoided the bad loans and toxic paper so they have no capitalization problems, unlike the big US banks. They never slowed down lending to their established regional customers though they declined making loans for things they consider speculative in a weak economy, like new housing subdivisions or retail expansions. They see local signs of what he calls an “economic hesitation” but not a recession. The global economic problems have largely been a TV event. Area businesses saw a modest spending retreat in late 2008 but nothing dramatic.
The other is a stock I follow, one of those unglamorous ones in heavy industry, a Fortune 500 company. They recently gave their 2009 earnings forecast. The 2009 forecast is about 10% below their actual 2008 earnings, which in my book it is pretty good. They have debt as part of their capital structure and were able to to do standard refinancing in January via both a bank loan and bonds, though the interest rates of the new money were higher than the old money. Their 4Q2008 earnings were “below street” estimates by $0.02/share, which was about two percent of the earnings. However, despite the fundamentally OK news, the earnings announcement was greeted by total negativity by the financial writers.
I continue to hear from my acquaintances in heavy industry that overall global demand for their products has stabilized. The bottom was November/December, with January and February stable and slightly up from December. They believe there is still some inventory reduction underway, which suppresses demand somewhat and which they expect to end in another month or two.
Re: David Smith (#1022),
The negative side of that is that if the economy recovers as it would in a normal recession the Stimulus package (Porkulus) will be hailed as saving the economy when it had nothing to do with it.
Re #1023 Barry, my prediction is that the US media is about to start pumping sunshine (putting a positive spin on economic news rather than the apocalyptic spin they’ve been doing over the last six months). That will ease the residual panic and that easing should be a boost, at least temporarily, to the US economy.
I imagine the stimulus package will get the credit.
SteveM,
I thought you’d get a good laugh out of this :
Saturday Night Live, Geithner Sucks!
My acquaintances’ global views in #1019 were about right and ahead of public perception.
They recently told me that the demand bottom of the first quarter has become a clear upturn in the second quarter, with growing hints of acceleration going into the NH summer.
SteveM
In the view of an auditor does it seem this woman should have had some answers to these questions in this video?
Is Anyone Minding the Store at the Federal Reserve?
After seeing this video I ask myself again was the bailout for the American economy or for those few large banks?
Congressman Grayson Questions Aid to Large Bad Banks
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