Friday, July 20, 2007

What the Hell are They Doing with Our Money?

If you really want a scare, watch this video over at the Club for Growth.

[Thanks to for the image.]

You may have heard already that they couldn't even confirm the existence of the recipient of this pork project, but the legislators voted it through anyway, over the resistance of some very persistent argumentation by Jeff Flake (R-AZ)

I find this truly mystifying. Have they really gotten so very far away from defending the interests of the Union, and not just their local campaign financiers? How can market economics (nevermind representative democracy) work in such an imbalanced playing field?

The answer, I suppose, is that it will work, come hell or high water; but it will have to flow around impediments along its path. Any damage will be borne by someone, most likely those who don't have the power, money and influence to insure their own protection.

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Thursday, July 19, 2007

Bernanke's Transparent New Clothes

Once again, Doug Noland over at Prudent Bear has hit the nail on this head with this commentary on 7/14/07.

[Thanks to for the image. We may see some of those on the street some day pretty soon, if the dollar keeps falling like this.]

I'll quote him, because he says it as well as anybody:

'I’ll plead once again that the issues of “money”, Credit, and inflation are much too vital to the long-term health of free-market democracies to be left to a select group of policymakers and “ivory tower” dogma. I would instead argue that it is imperative that citizens become sufficiently educated on the perils of Credit inflation, financial excess, and unsound “money.” This would provide our only hope against the inflationary tendencies of politicians, the Fed, and the Financial Sphere – tendencies that turn highly toxic when mixed with high octane contemporary “money.” ...

"Dr. Bernanke states that, “undoubtedly, the state of inflation expectations greatly influences actual inflation and thus the central bank’s ability to achieve price stability.” He then reiterates the commonly accepted view that - because of the Fed’s ongoing commitment and success in fighting inflation - inflation expectations “have become much better anchored over the past thirty years.” Well, this may have been somewhat the case for a period of time, but it is foolhardy to believe it holds true these days. After all, seemingly the entire world prescribes to the view of ongoing asset and commodities inflation. And these expectations - in conjunction with liquidity and Credit abundance – provide one of the more highly charged inflationary backdrops imaginable....

'...the Fed can continue to downplay asset and commodities inflation at our currency’s peril. Both may be exerting only modest pressure on “core” consumer price indices these days, but such a narrow-minded focus completely misses the point....

'...a policy of pegging short-term rates with promises of fixating two eyes on “core” CPI and no eyes on asset prices/Credit/or speculative excess has been fundamental in nurturing history’s greatest Credit Bubble. Or, from another angle, relatively stable consumer prices have ensured runaway Credit inflation and speculative asset Bubbles.'

Right on, Doug.

See my previous post about the present situation, and this one about inflation and the mishandling of the word.

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Tuesday, July 10, 2007

Subprime Update

I'm following the subprime mess closely. Here's a quote from Yahoo Finance:

"Adding to the dour news on Wall Street was a move by Standard & Poor's Ratings Service to place credit ratings on 612 classes of residential mortgage-backed securities backed by U.S. subprime collateral under review for a possible downgrade. Subprime mortgage loans are those made to people with questionable debt repayment records."

Gotta go, but will be back.

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Wednesday, July 04, 2007

Hedge Fund Investors: Read Your Fine Print

Back in September of 2006, the papers were already discussing the fall of hedge fund Amaranth and what hedge fund investors should do to watch their money. This Article at the Wall Street Journal gives good advice for any readers who happen to be so brave as to put their money at such risk. If you thought you could pull your funds out without much problem, think again.

But frankly, who in his right mind would invest in a hedge fund without knowing that he can lose every penny? It is mind-boggling to think that someone with that much money would not know the risks he or she is incurring.

For those who don't know what a hedge fund is, it's a highly risky investment program that escapes from most of the federal restrictions and regulations. Unfortunately, there are many large pools of funds that are invested in hedge funds, and one of them could be your own IRA, pension fund or insurance policy. If you have access to the manager of your retirement funds or your life insurance company, please call them and find out what's being done with your future income. Even some money market funds are invested into hedge funds.

The times are precarious. Amaranth was only the first and most visible recent fund collapse, and it wasn't even involved in mortgages. We've now had two more balloons pop, over at Bear Stearns and another one in London, all three based on subprime loans.

My insider information tells me that those in the know should watch for monthly CDO mark-to-market figure declarations soon after the end of each month. The financial industry must declare certain numbers at that time, and also at their respective financial-year-ends. Unfortunately, however, they can lie, so try to read between the lines.

Keep your eyes and ears peeled during the first week or so of each month, for more crap to hit the fans. This should be a wild ride, and if it's not, I'll eat my hat. (It's made of straw and should go down nicely with a little vinaigrette and a sip of cabernet.)

[Thanks to / and to Travis Werklund for the cute photos. This is before; click on the image to see after.]

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Sunday, July 01, 2007

The Coming Credit Crisis: Common Sense from Some of the Usual--and Some Unusual--Corners

As usual, Doug Noland hits the nerve in this article about the state of our global credit surge. Doug is worried; and so am I. I have posted my concerns here and here, and written articles about them here and here.

And he and I are not alone. We're even getting some common sense from an unusual quarter: an international organization, believe it or not, called the BIS (Bank for International Settlements).

[Thanks to for the photo.]

The history of this group is interesting. They have gone from a Holland-based banking overseer of war debt reparations payments, to a Swiss-based overseeing think tank of the world's central bankers, where they discuss things like their collective macroeconomic policies. (For the uninitiated, "macroeconomic policy" refers here to the efforts of central bankers to stabilize and optimize their country's economy.)

Unlike some other international organizations I can think of, this one seems to be useful. In their latest opus, they give us a perspicacious review of the global economy's present precarious position. Quoting from their press release:

"BIS General Manager Malcolm Knight highlighted the uncertainties currently facing markets and policymakers. They include the possible resurgence of global inflation, the evolution of current account imbalances, and potential vulnerabilities in financial markets and financial institutions. He noted that behind each set of concerns lurks the common factor of highly accommodative financial conditions. A further tightening of monetary policy might then be needed, as well as action to reduce still high government deficits and debt in many countries. Countries that, in principle, have floating exchange rate regimes should allow their currencies to adjust more freely. Regarding financial sector developments, there could perhaps be more scepticism about the purported benefits of having new players, new instruments and new business models searching aggressively for increased yield."
"The consensus economic forecast expects the recent excellent global performance to continue. Yet at least four sets of concerns can be raised, even if our capacity to calculate both their likelihood and possible interdependence remains limited. First, a rise in global inflation pressures cannot be ruled out. Second, the current slowdown in the United States might prove more significant than expected and the global implications greater. Third, global current account imbalances, together with large and volatile capital flows, indicate an exposure to disruptive exchange rate changes with potential implications for financial markets as well as asset prices. And finally, with most asset markets already “priced to perfection”, any unwelcome shock might have unexpected consequences."

Food for thought.

Back to our more typical sources of common sense, we have this recent Wall Street Journal blog post by Grg Ip, referring to my favorite economics school, the Austrians, and suming up the BIS report this way:

'What does the BIS say central bankers should do? Essentially, relax their single-minded focus on price stability, and tighten monetary policy when “a number of indicators — not just asset prices but also credit growth and spending patterns — are simultaneously behaving in a manner that indicates increasing exposures.” In other words, when easy credit is fueling excesses, raise interest rates to end the party, even if inflation is quiescent.'

(I would add, "and refrain from creating non-market-initiated credit to start with", but no one asked me, in spite of my plethora of common sense.)

And then we have George Soros. Now, I hate to say he's even partially right about anything, but I'm going to give credit where credit is due. According to Wikipedia, Soros and other critics of capitalism "argue that there is no will to enforce any significant regulation in the present competitive financial industry, where nations effectively compete to offer less regulation."

I would agree with this, if not with the nature of the problem and the identity of the culprit. It is true that the central bankers have misperceived their real utility. They could be a private watchdog for consumers, helping the banking industry to undo all of the existing counterproductive regulations and install more basic and reasonable ones. Lack of financial-sector regulation is not the problem, although it will be the remedy that government will apply when the current leveraging imbalances tip over. (Again, for the uninitiated, leveraging is borrowing or lending on the basis of little or unverified collateral.)

No, in fact it is not under-regulation that has caused this problem; it is over-regulation that has created this monster we call our federal and state banking systems. No wonder financing has found a way around them and is now running wild.

And why does Soros pounce on capitalism, and not on pure human shortsightedness? How can he carry a torch for the totalitarian centralism he deserted back in his native country? He should know better than to throw out the free-market infant with the bath water. It is not capitalism that is at fault, because under normal conditions, sooner or later, if left alone, capitalist forces would see to it that the unwise actions of bankers will fail. The problems occur when governments decide to intervene to prevent this failure from taking place, through the politicians' natural supervisory instincts and their creation of the moral hazard of Lender-Of-Last Resort. (For the uninitiated, this LOLR principle works on the same idea as the FDIC only widens it to include any large financial institution or other entity whose failure, in the politicians' and central bankers' imperfect opinion, could cause a country's economy to falter.)

If our politicians had never created a centralized banking system, unwise bank lending would be increasingly rare, and would only be undertaken by speculative bankers who were incapable of learning from the difficult experiences of their less-wise colleagues. As it stands today, bank failures for poor management are simply blended into stronger banks, so what penalty is there for failing? And there is so much regulation of viable banks that over the last 30 years financial credit transactions have expanded outside the industry to places where no one has gone before, and where therefore there are no regulators, and of course no predecessors, no precedent failures, and even no naturally-evolved rules of the game.

This is not the fault of the free market; on the contrary, this is the fault of a lethal combination of the over-regimented market and the market's underlying distaste for slavery and talent for freedom. It can be channeled, but it will not be dammed. If you try to stop its flow, it will flow around you, perhaps doing damage along the way. And flow it did, until now we have trillions-worth of unsecured credit leveraging endangering the system, much of it outside the regulated banks.

I am not saying that banks would not profit from a little oversight, i.e. encouragement from outside consumer-based watchdogs to force them to regulate themselves. We could even give those watchdogs the name "Federal Reserve Board." After all, proper free-market functioning is not free-market anarchy. Freedom is not license, and there is a huge difference. But to say that capitalism or the free market needs regulation by politicians is insane. Just look at the mess we're in today.

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