Anger at Wall Street

The Wall street traders who were doing this stuff for constant profits on a day to day basis were on a Sherman’s March through these companies, financed by our 401(k)s, and all their incentives were for short-term profits. They burnt down the house with our money and walked away as rich as hell.

Jon Stewart made this statement during his interview of Jim Cramer. The interview has created a great deal of debate. I do not take either man seriously, because they are both more interested in their performance than the truth. My only comment is that the statement quoted above sums up the anger that many Americans are currently feeling.

Participatory Fascism

Economist Robert Higgs has convincingly argued that the real tendency is not toward pure socialism, but toward a mixed economy and corporate liberalism. This means a corporate state where big business, special interests and the governing elite together rule over an economy of heavily regulated and politically connected crony capitalism. The public also tends to be included in a semi-democratic fashion -- unlike in outright totalitarian regimes of the past, there is wide enfranchisement and encouragement that the people engage in the system.

There is just enough of an opening for business and just enough of an illusion of public involvement that neither economic law nor public opinion will cause the government to fold over, despite its many tyrannical vagaries and encroachments on the liberties of the people. Higgs calls this system "participatory fascism" -- the economics of corporatist central planning coupled with a democratic form of government -- and says it is the dominating tendency in the modern developed world.

Discussion of fascism, like socialism, is often dismissed as hyperbolic, but the fundamental features of fascist central planning can be seen in our economic system. Politically protected big business, cartels, nominal private property rights, a welfare state and socialized risk -- crony capitalism and social interventionism -- mark both systems.

From The Mixed Economy in Crisis Anthony by Gregory at Campaign for Liberty.

They Understood the Danger

During 2004-07 I saw the financial industry stacking up the powder kegs that would eventually blow up. I tried on occasion to warn people. But my warnings fell on deaf ears at Lehman and elsewhere, but not for the reasons you might think.

I recall numerous conversations with senior people at various global financial firms on topics ranging from Fed policy, to the US/UK housing markets, securitisation and its potential pitfalls, the CDS tangle, and so on. One thing that is clear to me is that key people at these firms were aware for the most part what risks they were taking. They knew that it was all going to blow up someday, if not so spectacularly as it now has done. But they all believed that somehow they would be quicker and cleverer than rival firms, that they would effectively hedge themselves and they would get out first, before things got really ugly. As you well know, that sort of collective "greater fool theory" mindset is characteristic of bubbles and, if widely held, almost ensures that liquidity will dry up suddenly as markets turn for the worse.

Believe me, they knew they were playing with fire to a much greater extent than is currently acknowledged.

These words were written by a correspondent with Bill Bonner at the Daily Reckoning. The wide boys new that they were playing with fire, but they did not put the petrol away, because the money was too good. They thought that they would be clever enough to get out before it all blew up in their faces. Well they weren't and now the taxpayers are bailing them out.

Subprime Primer

Subprime primer.

Debt and GDP.

Economic growth is a function of population growth plus improving productivity.

GDP is simply a nation’s output: it must grow if the increasing population is to be fed, and because we are an endlessly inventive and curious species, stuff gets invented all the time and new ways of doing things are found. New technology constantly improves productivity, which means the same number of people can produce more stuff by doing less.

The only problem that occurred over the past ten years – the only one in my view – is that debt grew faster than economic growth.

That is, the present generation borrowed excessively from the future to pay for a better life today. It’s now payback time.

Alan Kohler at the Business Spectator.

Whos Afraid of the Big Bad Wolf

Though there are indeed militant forms of Islam that have a wide following, terrorists number only a handful; and these have by now been largely contained. In the years since 9/11,

Al Qaeda Central — the group led by Osama bin Laden and Ayman Zawahiri — has been unable to launch a major attack anywhere. It was a terrorist organization; it has become a communications company, producing the occasional videotape rather than actual terrorism. (p. 13)

Nowadays, terrorist Muslim groups are confined to the local, with "almost no connection to Al Qaeda Central." The local terrorism of these groups cannot succeed.

[It has] a crippling weakness; it kills locals, thus alienating ordinary Muslims…. Over the last six years [i.e., through 2007], support for bin Laden has fallen steadily throughout the Muslim world. (p. 13)

David Gordon reviewing The Post-American World by Fareed Zakaria.

State Murder

R.J. Rummel of the University of Hawaii calculates that in the twentieth century alone, governments murdered about 162,000,000 million of their own subjects. This figure doesn’t include the tens of millions of foreigners they killed in war.

Cause of the Crisis

The current crisis stems from changes that have been quietly taking root in the west for many years. Half a century ago, banking appeared to be a relatively simple craft. When commercial banks extended loans, they typically kept those on their own books – and they used rudimentary calculations (combined with knowledge of their customers) when deciding whether to lend or not.

From the 1970s onwards, however, two revolutions occurred: banks started to sell their credit risk on to third-party investors in the blossoming capital markets; and they adopted complex computer-based systems for measuring credit risk that were often imported from the hard sciences – and designed by statistical “geeks” such as Mr den Braber at RBS.

Until the summer of 2007, most investors, bankers and policymakers assumed that those revolutions represented real “progress” that was beneficial for the economy as a whole.

Regulators were delighted that banks were shedding credit exposures.....

Bankers were even more thrilled, because when they repackaged loans for sale to outside investors, they garnered fees at almost every stage of the “slicing and dicing” chain.

Moreover, when banks shed credit risk, regulators permitted them to make more loans – enabling more credit to be pumped into the economy, creating even more bank fees.......

When a team at JPMorgan developed credit derivatives in the late 1990s, a favourite buzzword in their market literature was that these derivatives would promote “market completion” – or more perfect free markets. In reality, many of the new products were so specialised that they were never traded in “free” markets at all.

The result was that a set of innovations that were supposed to create freer markets actually produced an opaque world in which risk was being concentrated – and in ways almost nobody understood. By 2006, it could “take a whole weekend” for computers to perform the calculations needed to assess the risks of complex CDOs, admit officials at Standard & Poor’s rating agency.

Most investors were happy to buy products such as CDOs because they trusted the value of credit ratings. ....

In July 2007, this blind faith started to crack....

Gillian Tett in the Business Spectator.

Post War Rationalisations

Each country, each national group, each political party fashioned its own version of the war and , as time went on, burnished remembrance and amnesia into self-serving myth. For some peoples, such as Serbs and Jews, a narrative of victimhood was a potion that came to serve as justification for resurgent nationalism. For the British, the lone struggle of 1940-1, the heroism of the few in the Battle of Britain and the many in the Blitz, reinvigorated national self-consciousness. For the French, the petty day-to-day accommodations that most had made with the occupier were overshadowed by the legend of resistance, that the Vichy regime had been made in France and supported, at least, initially, by the great majority of the French people.

For Germans the chief components of wartime memory were the agonies of the eastern front, the terror of Allied carpet-bombing of German cities, and the flight of civilian population from the path of the Russian army in East Prussia and elsewhere in the east…. From 1947 onwards the Cold War rendered the earlier struggle of the German army against Bolshevism somehow respectable. Military service on the eastern fron became a virtual badge of honour with all responsibility for the attendant atrocities against prisoners of war and civilians shunted onto the shoulders of the disbanded police state apparatus….For many Germans the terrible losses from Allied bombings of German cities somehow canceled out the crimes committed by the Nazis.

From Barbarism & Civilization: A History of Europe in Our Time by Bernard Wasserstein

Barbarism and Civilisation

During the past century Europe was the scene of some of the most savage episodes of collective violence in the recorded history of the human species. Yet the same period has also seen incontestable improvements in many aspects of the life of most inhabitants of the continent: human life has been extended, on average, by more than half; standards of living have increased dramatically; illiteracy has been all but eliminated; women, ethnic minorities, and homosexuals have advanced closer to equality of respect and opportunity.
---------------
The root of European disorder in 1914 was not…class, but ethnicity. Solidarities and antagonisms based on ethnicity, for reasons that lie buried in human hearts, answer to some of the most deeply rooted and instinctive social feelings of our species. European history in our time shows how futile it is to ignore them.

From Barbarism & Civilization: A History of Europe in Our Time by Bernard Wasserstein

Credit is the Lifeblood of the Economy??

Consider the assertion - made almost daily by politicians and monetary policy figures - that all we need to do to end this economic crisis is “kick start” lending and that credit is the “lifeblood of the economy.” These baseless assertions infect news article after news article and are repeated by the vast majority of economists and market pundits over and over again as “self-evident” truths.

The reality is that these assertions are non-sequiturs. I had to laugh the first I heard “Credit is the Lifeblood of the Economy”. After it was repeated 20 times then espoused by Congress, the Treasury, and the Fed, and indeed even President Obama, it became more scary than funny.

This is why: The flip side of credit is debt. Is debt the lifeblood of the economy?

Surely not! It’s not that debt is bad in and of itself. Debt is fine as long as it is going to productive uses or as long as the lending is backed up by savings somewhere. No one can argue that savings should not be lent.

However, the problem is that credit has been extended without savings backing it up to those who had no possible means of paying it back, with leverage, and with “no money down”.

Clearly debt is not the lifeblood of the economy. By extension, credit is not the lifeblood of the economy either. Rather it is savings that is the lifeblood of the economy, because without adequate savings, extending credit is nothing but a pyramid scheme that eventually implodes, which is of course what happened.

Mish Shedlock on Savings and Credit

US Dairy Crisis

Many of the more than 60,000 dairy farms in the United States have been cutting costs, selling off their cows, or leaving the dairy business altogether as milk prices plummet 35 percent in just the past two months while dairy farm operating costs remain uncomfortably high.

Some farms are losing $200 per head every month.

Milk prices are down more than 50 percent from last summer after hitting all-time highs in 2007 and notching the second highest prices on record in 2008.

Analysts expect milk prices to remain depressed through at least the first half of the year, and prices later this year may only be high enough to cover production costs.

Farmers have an opportunity to get paid for culling their herds via the farmer-funded CWT program

Industry analysts say the reason for the steep drop in milk prices is simple-- too much milk and not enough demand for it.

Restaurant traffic is down in the United States as recession jitters have consumers reeling in their spending.

About 40 percent of U.S. milk production is made into cheese and roughly 60 percent of the cheese is used in the restaurant and food-service sectors, according to analysts.

Dairy exports, which helped drive U.S. milk prices to the sky-high levels in 2007 and 2008, are also down sharply.

Importing nations are buying less amid global economic woes and a firmer dollar, which makes dollar-denominated commodities like milk more expensive for buyers holding other currencies.

From Reuters.

Quantative Queasing

The Fed has been buying up corporate bonds for several months, but the Chairman, Ben Bernanke has so far resisted calls to buy US government debt. Does he know something that Mervyn King doesn't?

When asked, Ben Bernanke says he has no ideological objection to buying government debt - he simply thinks that right now, it's more effective to tackle the corporate credit shortage directly.

There are several reasons the Bank can't follow his lead. One is simply that the US corporate bond market is much, much bigger relative to the size of the economy than ours is.

If the Bank of England tried to buy £75bn-worth of corporate bonds it would find itself buying up roughly the entire market. It would then be in the uncomfortable position of being the sole purchaser of the debt of some of Britain's biggest companies...

Our central bank is also concerned about taking too much corporate risk onto its balance sheet. That doesn't seem to be much of a worry to the Fed (though some at Threadneedle Street wonder why not).

Stephanie Flanders explaing why the Bank of England is buying Gilts (government debt).

Private Equity Fades

For a brief moment, as record after record was smashed, it seemed that private equity buyout prices were destined to keep rising.

As the last few weeks have demonstrated, it was a falsehood – and a grossly expensive one at that.

After the boom period saw private equity firms compete among themselves to buy ever bigger companies for even bigger sums, the value of those investments is now tumbling.

Abigail Townsend gives the details at the UK Telegraph.

Recession or Depression

CalculatedRisk puts the current down turn in perspective.

Follow this link for the full explaination.

Hedge Funds Suffer

While hedge funds have performed better than the market-at-large, losing only about half what the markets have lost, they have been embroiled in the crisis themselves and, indeed, have been decimated by it.

A sector that was worth $US1.9 trillion at the start of last year is now expected to be worth $US1 trillion, at best, by the end of this year.

The hedge funds .. are .. victims of their own miscalculations and of the general environment.

During the credit boom, the funds chased growth, with the cheap credit and mis-pricing of risk enabling them to pursue transactions that would have been unachievable in more normal times.

As with all other financial players, credit is no longer cheap and, for leveraged players, virtually unattainable. The economics of existing deals are imploding as borrowings mature and asset values fall and there is no funding, debt or equity, for new deals.

Their plight is, however, worse than a simple return of financial gravity to unsustainable deals entered into at the top of a credit bubble.

Some of the bigger and more experienced funds went into the crisis with significant levels of uninvested funds or other sources liquidity. They should have been very well placed to take opportunistic advantage of the general distress in the financial system and the leveraged impact that has had on asset values.

Instead, they have experienced their own liquidity issues as anxious investors and lenders have retreated to the sidelines, sucking as much available liquidity from any available source that they can. The stronger hedge funds and private equity firms have been hit by a flood of redemptions from instantly risk-averse investors preferring to sit on their own cash.

Many of the funds have had to freeze withdrawals to control the outflows, adding to the general uncertainty about the future of the leveraged funds’ sector. Even those with significant residual cash and liquidity, however, can’t leverage those funds – they can’t get the credit to do sizeable deals.

That’s why the funds haven’t played a role in blunting the impacts of the crisis – they don’t have the free liquidity of their own to supply it to distressed markets and companies.

The leveraged investment sector, when the dust finally settles and the majority of them, by number, have exited the scene, will be a fraction of the size it was at the peak.

Comment by Stephen Bartholomeusz.

Warning Message

An earth-shattering calamity is about to happen. it is going to be so frightening, we are all going to tremble - even the godliest among us.

David Wilkerson speaking in New York on 7 March 2009

Famous Last Words

#4 Ben Bernanke

I expect there will be some failures” of smaller banks. “Among the largest banks, the capital ratios remain good and I don't anticipate any serious problems of that sort among the large, internationally active banks that make up a very substantial part of our banking system.

—Federal Reserve Chairman Ben Bernanke in February 2008.

#3 Erin Callan

Categorically no.

Lehman Brothers CFO Erin Callan responding on March 18, 2008, to the question as to whether the firm would be the next to go out of business.

Callan was ousted from her job in June. In September, Lehman Brothers filed for Chapter 11 bankruptcy protection..

See Mish Shedlock for more.

The Government Can Makes Things Worse

..many governmental actions -- including several pursued by Franklin Roosevelt during the Great Depression -- can make things worse. I wish I could be confident that the array of U.S. policies already in place and those likely forthcoming will be helpful. But I think it more likely that the economy will eventually recover despite these policies, rather than because of them.

Wisdom from Robert Barro at the Wall Street Journnal. Read the full article.

What is Quantitative Easing?

It is economists' jargon for what is more colloquially termed "printing money" – increasing the quantity of money. Nowadays that does not literally mean speeding up the printing presses at the Bank of England's works at Debden in Essex; it means an electronic transfer of money between the Bank of England and the commercial banks, and thence, so the idea runs, to companies and households.

The Bank of England uses "open market operations" – financial transactions in the markets. It buys the banks' assets, such as government securities and commercial bonds and maybe even their devalued mortgage-backed securities. Importantly, it does so without funding that purchase by borrowing money itself; in effect the Bank just creates the money and transfers it to the banks.

Good explanation from Sean O'Grady. Read the whole article.

Josephus

Norman Horn quotes Josephus on Government.

As much as Josephus can be relied upon as a source, his account emphasizes four points:

1. The origin of human government is rebellion against God.
2. The government sets itself up specifically in opposition to the rule of God.
3. The rulers exalt themselves while deceiving the people.
4. Human government drives a wedge between people, pitting them against each other.

Hoorah for Capitalism

The rich hate capitalism because it threatens to take away their money. The poor hate it because they think it keeps them from getting any money in the first place. And everywhere you look, the chiselers are offering bailouts, boondoggles and bamboozles. With so many people trying to improve on capitalism, it’s a wonder they’ve never come up with something better.

When you leave people alone: some people watch TV...some blabber about politics...and some build wealth. The rules are simple: Thou shalt not steal, it saith in the Bible. Do unto others as you would have them do unto you, Jesus added. Everything else - from hedge funds to derivatives - is merely an elaboration. People make deals with their neighbors in order to get what they want. One plants the wheat; the other bakes the bread. As long as they respect each other's deals and each other's property, everything goes tolerably well.

The western, capitalist economies are in the midst of their own perestroika. They are being restructured. But not by the world-improvers. Instead, they are being restructured by capitalism itself... Leave capitalism alone and it will do the job far faster and far better than the meddlers could ever do.

From Hoorah for Capitalism by Bill Bonner

Production makes Consumption Possible

Consumption is made possible by production and that credit is made possible by savings. The size and complexity of modern economies has obscured these simple concepts, but reducing the picture to a small scale can help clear away the fog.

Suppose there is a very small barter-based economy consisting of only three individuals, a butcher, a baker, and a candlestick maker. If the candlestick maker wants bread or steak, he makes candles and trades. The candlestick maker always wants food, but his demand can only be satisfied if he makes candles, without which he goes hungry. The mere fact that he desires bread and steak is meaningless.

Enter the magic wand of credit, which many now assume can take the place of production. Suppose the butcher has managed to produce an excess amount of steak and has more than he needs on a daily basis. Knowing this, the candlestick maker asks to borrow a steak from the butcher to trade to the baker for bread. For this transaction to take place the butcher must first have produced steaks which he did not consume (savings). He then loans his savings to the candlestick maker, who issues the butcher a note promising to repay his debt in candlesticks.

In this instance, it was the butcher’s production of steak that enabled the candlestick maker to buy bread, which also had to be produced. The fact that the candlestick maker had access to credit did not increase demand or bolster the economy. In fact, by using credit to buy instead of candles, the economy now has fewer candles, and the butcher now has fewer steaks with which to buy bread himself. What has happened is that through savings, the butcher has loaned his purchasing power, created by his production, to the candlestick maker, who used it to buy bread.

Similarly, the candlestick maker could have offered “IOU candlesticks” directly to the baker. Again, the transaction could only be successful if the baker actually baked bread that he did not consume himself and was therefore able to loan his savings to the candlestick maker. Since he loaned his bread to the candlestick maker, he no longer has that bread himself to trade for steak.

The existence of credit in no way increases aggregate consumption within this community, it merely temporarily alters the way consumption is distributed. The only way for aggregate consumption to increase is for the production of candlesticks, steak, and bread to increase.

One way credit could be used to grow this economy would be for the candlestick maker to borrow bread and steak for sustenance while he improves the productive capacity of his candlestick-making equipment. If successful, he could repay his loans with interest out of his increased production, and all would benefit from greater productivity. In this case the under-consumption of the butcher and baker led to the accumulation of savings, which were then loaned to the candlestick maker to finance capital investments. Had the butcher and baker consumed all their production, no savings would have been accumulated, and no credit would have been available to the candlestick maker, depriving society of the increased productivity that would have followed.

On the other hand, had the candlestick maker merely borrowed bread and steak to sustain himself while taking a vacation from candlestick making, society would gain nothing, and there would be a good chance the candlestick maker would default on the loan. In this case, the extension of consumer credit squanders savings which are now no longer available to finance other capital investments.

Peter Schiff on Putting the Economic Cart before the Horse

Monetary Policy Error

The current very aggressive easing of policy by the RBNZ has all the hallmarks and an aura of déjà-vu from their very aggressive monetary policy tightening in 2005 to 2007. Both monetary policy actions are extreme and both could prove to be “inappropriate” and serious policy mistakes. Inappropriate, in that neither action has or will do anything to influence the inflation rate, but can (and has) caused substantial collateral damage to the economy.

We stated at the time of the 2005 to 2007 tightening that the “high interest rate/high exchange rate” policy would have no impact on inflation (the inflation was coming from oil/commodity and Government sources that interest rates did not affect) but would only send the NZ$ higher, cause problems for exporters and eventually cause a recession. That proved to be an accurate assessment of what subsequently occurred later in 2007 and 2008.

Today the RBNZ seem to be pressured once again by the short-term and changeable views of bank economists (as they were in 2006) into extreme monetary policy action at the other end of the scale. The bank economists did not predict that the 2005-2007 monetary tightening would cause economic recession in 2008 and goaded the RBNZ to push 90-day rates to over 9.00%. That was a grave policy error and the export and household sectors have been paying the price of that policy mistake ever since.

Moneymarket pricing and bank economist forecasts today are again pressuring the RBNZ to cut interest rates to record low levels of 2.50%. The RBNZ are obliging with 1.5% OCR cuts, but who will pay the price in 2-3 years time if this proves to be another policy error and inflationary pressures are re-ignited through interest rates being too low? ....

At some point, someone independent has to stand back and look at the last five years of monetary policy management and interest rate movements in New Zealand from 4% to 9% and back to 3.5%, and conclude that the extreme changes have done nothing to control inflation, all that they have done is destroy investment in the wealth/growth-creating export sector.

Wisdom from Roger Kerr

Mises on Business

In the Interventionist State it is no longer of crucial importance for the success of an enterprise that the business should be managed in a way that it satisfies the demands of consumers in the best and least costly manner. It is far more important that one has 'good relationships' with the political authorities so that the interventions work to the advantage and not the disadvantage of the enterprise.

Quoted by Richard Ebeling.

Economic Survival Guide

Be a part of a community. Today people are much more alone, much more isolated. We used to be close with our neighbors. If one person had a bigger or better garden or orchard, they shared the vegetables and fruits with others in need. Society has shifted from caring for one another to being dependent upon government aid and welfare. That is why so many today trust in government to deliver them. They've forgotten an America that used to rally around one another in smaller clusters, called neighborhoods and communities. We must rekindle those local communal fires and relearn the power of that age-old commandment, 'Love thy neighbor.'

From An 87-Year-Old's Economic Survival Guide by Chuck Norris