Friday, August 31, 2007

Comic Relief - Bush's Last Stand

Things are really getting intense, so to relieve the pressure I drew this cartoon to illustrate my previous post.

(Click on the image for a larger version.)

Bush's Last Stand

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It's a Bird, It's a Plane, No... It's Helicopter George!

Just when Ben Bernanke was about to throw in the towel and allow banks to have all the credit they want at the discount window, along comes George and his buddies with a better idea.

firefighting helicopter
[thanks to for the image.]

It doesn't matter that our President has lost his marbles (I'm beginning to wonder if he ever had any).

"President George W. Bush today pledged to help people who have fallen behind in their mortgages keep their homes and to tighten safeguards against predatory lending, while rejecting a bailout for 'speculators.' ''

That's right, George to the rescue. He may have missed Katrina, but he's got this one firmly in hand. He says:

"I plan to help homeowners. The government's got a role to play. It's not [sic] the government's job to bail out speculators, or those who made the decision to buy a home they knew they could never afford."

Does that sound like a non sequitur to you? No matter. The article continues:

"Bush said he will let the Federal Housing Administration, which insures mortgages for low- and middle-income borrowers, guarantee loans for delinquent borrowers, allowing them to avoid foreclosure and refinance at more favorable rates.... Under Bush's plan, the FHA during the fiscal year beginning Oct. 1 would help in 80,000 more refinancings than under current programs, FHA Commissioner Brian Montgomery said in a conference call with reporters. The agency plans to help 240,000 homeowners refinance during the period, compared to about 100,000 during the fiscal year ending Sept. 30, he said. FHA intends to increase refinancings to more than 600,000 within the next three years."

This is insanity enough, but there's more, and here's proof:

"Bush 'is starting to sound like a Democrat,' Senator Chuck Schumer of New York, a Democrat, said in a news conference minutes after the president spoke. 'The president has gotten out of his ideological straitjacket and seen that in times of crisis' the federal government should help troubled citizens."

Need I add another word. And yet there is more:

"Schumer said U.S. Treasury Secretary Henry Paulson indicated interest in allowing Fannie Mae and Freddie Mac, the two largest U.S. mortgage finance companies, to exceed federal limits on their combined $1.4 trillion mortgage portfolios so long as they channel the extra financing to help borrowers refinance and avoid foreclosure."

Did I read that right? Fannie and Freddie will take on only those homeowners who are in trouble? That sounds like good, sound financial advice, and just what the doctor ordered for Fannie and Freddie, that both need desperately to balance out their portfolio imbalances before they implode.

Are these people nuts? Don't they know that the FHA, the FDIC, and all the other pension and monetary guarantees of the US government are not backed by sufficient funds to carry this load? Don't they know that the US people will be the only recourse via their taxes?

I think I'll go pound sand. It's probably a more useful endeavor. But before I go, just one last comment: Whatever happened to the Rule of Law? Market players have bought those mortgages under certain conditions of payment of principal and interest. They have calculated the return on investment within a certain time frame. They have contracted for these payments.

Do contracts no longer mean anything? Does no one realize that finance companies and borrowers have entered into a contract, and that changing the terms of that contract is what Henry VIII did with his edicts and his beheadings? Don't they understand that challenging a contract is one of the most serious errors a government can make? Don't they see that if you destroy the Rule of Law, you debark onto the path of the destruction of democracy as we know it?

I know, I know, the Supreme Court has already been doing a good job of that with their eminent domain decisions.

I'm off to the sand pile.

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The State of Tolerance and Freedom of Speech in This Country

Whoa, this is really scary. Sometimes I take a side-trip away from economics when an issue deserves it.

Go to this website, go to the square labeled "deleted scenes" and watch this video.

It will shock you on two fronts:

1. There is at least one dangerous professor employed at Columbia University, a signal that there are probably many more around the country;

2. Columbia University itself practices Soviet-style press control.

More crazy stuff to make your and my day.

[Thanks to for the image.]

This information comes from the Moving Picture Institute, a new documentary movie company that could be described as the antidote to Michael Moore. They have made several to date, most notably one on Romania and how the environmentalists are hurting the Romanian people, and this one on American schools and what really goes on inside.

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Thursday, August 30, 2007

Boaz Whipping up a Storm about Big Government

Cato's David Boaz usually hits home, and he's done it again in this article about the handling of Katrina.

As he points out, "You've got to hand it to the advocates of big government. They're never embarrassed by the failures of government. On the contrary, the state's every malfunction is declared a reason to give government more money and more power."

Hurricane Isabel2
[Thanks to for this photo.]

Isn't that the truth? Hillary, Obama, and Edwards show up to commemorate the catastrophe, and what is their message? It's not the fault of big government; it's the fault of Bush. If "I" had been in control, this wouldn't have happened. More rubbish on the Katrina trash heap.

Bush shows up and the only clip you see on the media is his affectionate gesture towards a stiff Mayor of New Orleans. (I have yet to hear on any MSM new channel what he actually said.)

People: These individuals are just your employees. They act on your behalf. Do you really want them in charge of this kind of job in the future?

Boaz also points out: "Government kept individuals, businesses, and charities from responding as quickly as they wanted.... [The] Department of Homeland Security refused permission for the Red Cross and the Salvation Army to go into the city and deliver water, food, medicine, and other relief supplies to those suffering at the Superdome and convention center. Similarly, [Homeland Security's director] took several days to sign a simple proclamation allowing doctors licensed out of state to help the sick and injured. Several doctors sat around for days waiting to go to work."


"FEMA issued a sternly worded release on August 29, the same day the hurricane made landfall along the Gulf Coast, titled 'First Responders Urged Not to Respond to Hurricane Impact Areas.' [Blogger's Note: Typical big-government employee hubris, no faith in the free market.] FEMA wanted all the responders to be coordinated and to come when they were called. And that was one plan they followed. As the New York Times reported September 5:

" 'When Wal-Mart sent three trailer trucks loaded with water, FEMA officials turned them away, [Jefferson Parish president Aaron Broussard] said. Agency workers prevented the Coast Guard from delivering 1,000 gallons of diesel fuel, and on Saturday they cut the parish's emergency communications line, leading the sheriff to restore it and post armed guards to protect it from FEMA, Mr. Broussard said.'

"Those weren't the only examples. The city declined Amtrak's offer to carry evacuees out of the city before the storm. On September 2, the South Florida Sun-Sentinel reported, 'Up to 500 Florida airboat pilots have volunteered to rescue Hurricane Katrina survivors, transport relief workers and ferry supplies. But they aren't being allowed in.' Hundreds of firefighters responding to a call for help were held in Atlanta by FEMA for several days of training on community relations and sexual harassment."

You gotta be kidding.

And this is nice:

"But it's no accident that governments often fail at their tasks. The incentives are all wrong. Profit-seeking companies are constantly driven to innovate, improve, cut costs, and deliver better service for less money, lest they lose customers to their competitors or even go out of business. Churches and charities are motivated by love and commitment, as well as by the need to satisfy donors or run out of money. Governments can raise taxes or print money. If a government agency fails at its mission, the usual response is to give it more money next year--not a very good incentive for success. Politicians would rather cut a ribbon at a Cowgirl Hall of Fame than fix potholes or levees."

Read the whole article. It's an eye-opener.

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Another Great Explanation of this Mess We're In

A fellow who goes by the name of Mr. Practical and who writes for, among others I assume, the website, has a great piece about the structural problems that we are facing. (Some readers may have to go to the bottom of his page for the article.)

He touches upon two major glitches. First, you have the Fed's loose monetary policy of the last five to ten years. Second, you have the resultant over-confidence that this loose monetary policy spurred within the marketplace.

Mr. Practical advances the hypothesis that, "Government policy, including egregious money market operations for years by the Fed, never allowed the market to stop the increasing leverage and debt at a level sustainable relative to realistic volatility and inherent income levels generated by the economy (all the while exporting our income base to Asia)."

I agree 100 percent. And he also says this, with which I agree, in principle:

"As liquidity, generated almost exclusively by increasing credit, dries up we will hear more and more cries for government to solve the problems they helped create. As we speak I hear that Senator Dodd is meeting with Bernanke and Paulson to 'come up with solutions'. I really hope they don’t find any, for their solutions will at best delay the inevitable and quite possibly make it worse. The real solution, which will be ignored, is to just let the market sort things out."

I would add that it is easy for us, in our commentator's ivory tower, to say what should be done in the abstract. But it would be very difficult to watch misery descend upon millions of relatively innocent people and do nothing, especially when your hide is at stake. Ben and his buddies must already dread the day they will be hung high and dry during the revolution that could follow their non-action, whether this fear is realistic or not.

Hanging around
[Thanks to for the photo.]

Ben must realize that he could repent, say his mea culpas, bite the bullet, and take the heat for all the Feds prior to his; but he won't. We can be sure that the temptation to "do something" will be irresistible, and we can place a pretty safe wager that it is us the taxpayers who will pay for this one--again.

As I have said in the past, perhaps this is justice of a sort, because after all, it is we taxpayers who voted the bums into office who created the Federal Reserve in the first place, and who empowered it to expand credit to the extent they have today. We are ultimately the responsible party. We must pay the piper and reform our government--which of course won't happen either.

What will more likely happen is just the opposite. The Federal Reserve will inflate us out of this crisis and the government will hand them new powers to "crack down" on the banking and financing industries. We are on that slippery-slidey slope and it is very hard to retract uphill, away from centralization.

And that's the bottom line.

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Wednesday, August 29, 2007

The Story Behind The Velib - French Mass-Transit Bicycle

So here is the larger story.

This is only a semi-free-market enterprise story, given the two partners in this affair. On the one hand, you've got the Mayor of Paris, and on the other, you have the guy who owns the company that places most of those ads all over most of the airports, buses, subways, and cities of the world, Jean-Claude Decaux. (He also invented that ubiquitous street toilet you've begun to see around metropolises.)

[Thanks to for the image.]

Here I was, thinking that some little guy had come up with this brilliant idea of renting bikes for one-way trips, gathering up investors, finding commercial space, signing leases, when in reality it is a top down, politically correct, probably money losing venture by two billionaires (albeit one rich only by proxy through the taxpayers). Decaux provided the idea, and the Mayor of Paris provided the parking spaces for free.

There is some debate about what the deal is, i.e. who gets the subscription and rental money, who pays whom what. I will watch this monopoly to see if it works over the long haul. Why not, I suppose, when you've got your points of sale rent-free? (Or paid by the taxpayers, whichever way you prefer to see it.)


French Bike Update

It turns out the Parisian "Mairie" (Town Hall, i.e. the Mayor's Office) has somehow contributed to the Velib operation. I'll try to find out more.

So I guess the French idea of the free market is still up for mocking.

The French Rediscover the Bicycle

I believe it was the French who discovered the original bicycle, and now it's back--and I'm not talking about the Tour de France. I'm talking about Velib.

Almost as if to reprimand myself for joking about the French free market system, I ran into this video (in French) about how the Parisiens are now turning to the bicycle as a means of transport.

Velib's new bike system
[Thanks to Soriano at Le Figaro for the photo.]

This is an exceptionally good idea with a twist, as this article confirms, citing the 1.5 million rentals in one month. The unusual thing about Velib's bike rental system is that it allows you to take a ride one way, and leave your "vehicle" at your destination. And there are 750 stations all around the Parisian capital. That number is soon to be doubled. It works on a variable fee system just like the public transport.

Oh, there are the usual sticks-in-the-mud, e.g. the taxi drivers who don't appreciate the bikers' driving techniques (or perhaps the suspicion that the system crimps on their customer base), or the bus drivers who don't get no respect for their impressive size, or your run-of-the-mill sticklers who don't appreciate a biker on the sidewalk or the crosswalk or even someone pushing his bike the wrong way on a one-way street.

Otherwise, this seems an excellent enterprise, one that we should copy in all of our larger metropolises.

I wonder how long the French government will let this continue, given that it impinges on their own revenue and they're already pretty deeply in the red.

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Calm Waters Masking Rumbling Underwater Volcanoes

Michael Panzner, over at Seeking Alpha, has written this eye-opener about what's going on under the boat.

The LLR (the Lender of Last Resort, otherwise known as the Inventor of Moral Hazard, i.e. the Federal Reserve with its backer the US Government) is actively seeking to bail out large banks, while we all think the situation is not so bad.

Very scary stuff.

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The French Idea of Combatting Inflation

I had a good laugh at this one (in French).

Xavier Darcos
[Thanks to for the photo.]

Xavier Darcos, the French Education Minister, is all smiles as he tells the public that he's reached an agreement with the largest distributers of school supplies to freeze the price of the bare necessities to, at most, the same figures as last year, and in some cases actual cost.

Forget the free market; France's political class feels the need to protect their electorate by deal-making, rather than inflation-fighting.

Obviously, the distributers will make up the difference by increasing the price of other necessities sold in their stores, but that fact is not important to the governing class.

Of course, they announce this today, August 29th, when French schools open on Monday. Most families have already done their shopping for school, so at best, these measures will only help the laggards. Realizing their error, the government has extended the special prices until mid-September. (They were supposed to expire at the end of next week.)

Parent associations had already been complaining that supplies had increased in price about 2.06 percent. And we mustn't forget the Terrible TVA, the Value Added Tax that weighs upon most purchases--including school supplies--to the tune of 19.6 percent.

Ah, Vive la France and what the French are fond of labeling their "Cartesian" mindset. This is a reference to one of their most famous home boys, 17th century mathematician and philosopher Rene Descartes, whose sense of logic brought us "I think, therefore I am", and also afforded us so much food for this chicken-and-egg-style debate thereafter. (For the latest among these, see my reading recommendation in the right column for Antonio Damasio's fantastic work, Descartes' Error.)

I would love to be able to write that new French president Sarkozy has his work cut out for him; but his free-market rhetoric is only skin deep. He has little understanding of economics, by his own admission. What a pity, because if anyone could persuade the public to follow him on a path to freedom, he's the fellow.

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Monday, August 27, 2007

Comic Relief

For a bit of comic relief, read this contribution by ContraHour over at Seeking Alpha.

He makes fun of Ben B and his buddies over at the Fed. Did me some good to see that I'm not alone in my skepticism of their tactics, capabilities, and intentions.

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Who Is At Fault? The Central Banks

Will Hutton, in this article from the Observer of London, appearing at the Gold Anti-Trust Action Committee website, is on a rampage. And I sympathize with his emotions, if not entirely with his recommendations.


"While obeisant governments bail out dodgy plutocrats, it's ordinary people who foot the bill."

"One of the most inequitable and amoral acts in modern times is happening in front of our eyes...."

"The multi-billion dollar bailout of global finance after one of the most reckless periods of lending and deal-making since the late 1920s is extraordinarily one-sided. Little people's taxes are underwriting the mistakes of big people, who in the process have made riches beyond the dreams of avarice. Globalisation, it is now clear, is run in the interests of a global financial class which has Western governments in its thrall. This class does not give a fig for the interests of savers, clients or wider workforces. The rules of the game are set up solely to benefit the financiers whether in London, New York, or Hong Kong."

"Interpol should make arrests in New York, London, Tokyo, Beijing, Frankfurt, and Paris, starting with all the executives in the credit-rating agencies who blithely ranked the debt as creditworthy in exchange for fat fees and freebies from the very banks who were making the absurd loans. Governments should bring suits against the executives involved, the repositories of vast personal wealth, to help repair the hole in private and public balance sheets."

" It is as though Europe and America had announced an amnesty to the world's criminal gangs after they had gone on a killing spree because they feared the killing would get worse."

* * * * *

These are harsh words, and one can't help but identify with his ire. But I believe his call for hanging the culprits is a little over the top, because like Robespierre, he's got the wrong defendants.

Greenspan tatoo
[Thanks to Robolove3000 for this great tatoo.]

Everyone is forgetting the most important element in all of this: The identity of those who allowed all of this to happen. Why does everyone forget that it is Greenspan's Federal Reserve Board that decided to lower the target interest rate from 6.50% to 1.75%, i.e. almost five whole percent, in the space of one year from January 1, 2001 to January 1, 2002? And who continued to lower that rate to 1.00% up to July of 2003? Who is it who didn't start to retract until July 1 of 2004, slowly lifting rates back up to 5.25% in July of 2006?

Housing was already taking off worldwide, but the US Fed chose to ignore it, even publishing papers to the effect that the housing boom was not a monetary phenomenon. (See my previous post and my cartoon on the subject. I wrote an economic analysis of one ridiculous paper, but no one cared to publish it.)

I thoroughly admire the Fed's latest efforts at transparency and their desire to act in a predictable fashion from 2004 to 2006, raising the rates only by .25% at each announcement; but what I deplore is the Fed's conviction that they can produce anything positive by their manipulations, fast or slow.

The Fed is useful in times of panic as a kind of overseeing clearinghouse, i.e. when it can influence the day-to-day machinery of banking operations and issue temporary emergency credit to avoid useless trauma to the system. However beyond that, the Fed is helpless--indeed harmful--when, in addressing its government-appointed mission, it attempts to influence the business cycle, employment, prices, and the general economy.

Why are their attempts so futile? There are several well-known but forgotten reasons.

1. Their methodology is in direct conflict with their mission. They act upon statistics, and statistics by nature are a molasses-in-winter, after-the-fact phenomenon, whereas their idea of management of the economy requires preemptive measures.

2. Their powers of intervention are in direct conflict with the mission of all market players. As Hayek said in The Road to Serfdom, "If the individuals are to be able to use their knowledge effectively in making plans, they must be able to predict actions of the state which may affect their plans." This implies that any arbitrary or unpredictable actions on the part of the Fed throw a wrench into the plans of those whose goal is to succeed within the "invisible hand" marketplace. If everyone has one eye on the profit line and the other on the Fed, obviously they are focusing only half of their attention where it should be; and they must include in their plans sufficient reserves to cover the unpredictability of the Fed's actions. Surely this is an expensive and unnecessary handicap.

3. The Fed's interference in the marketplace creates a whole new profession: That of outguessing the Fed. Every bank and financial institution in the world, and even some whole companies, are devoted to analyzing global markets as they gyrate around central bank intervention.

4. Fed interference creates imbalances in business cycles that encourage otherwise useful market players to become reckless and spendthrift. Hedge funds, credit derivatives, and those bank departments that trade in them have created the problems we are experiencing today, based on the latest ballooning of credit made available by the world's central bankers in 2001. Thus the Fed, with the collaboration of these risk-players, is directly responsible for the euphoria of today's boom/bust situation.

5. Fed interference creates moral hazard. It is reliance upon the Fed's capacity to bail out financial crises--powers well over and above their clearinghouse duties--that encourages risk-takers to assume too much risk at the expense of the taxpayers.

* * * * *

Why has everyone forgotten these self-evident characteristics of centralized monetary control? [Sigh]

So if we're looking for someone to hang, let's look at ourselves. We are the ones responsible for centralizing our government and allowing legislators to create and empower a Federal Reserve in the first place. Let the taxpayers pay for this one; but let them also rise up in anger against the central banks to prevent another such credit cycle.

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Saturday, August 25, 2007

Bill Gross is Either Joking or He's Nuts

So he doesn't understand why the RFC (the Reconstruction Finance Corporation), RTC (the Resolution Trust Corporation), and his RMC (Reconstruction Mortgage Corporation) were/would be a problem. No wonder world finance is in such a mess.

His latest recommendation is for the government to bail out 2,000,000 hamstrung borrowers, just as they bailed out banks and almost bailed out a hedge fund a few years ago.

[Thanks to for the image.]

To bail out 2,000,000 unwise borrowers may sound like no worse an idea; but what he doesn't seem to notice is that it would signal the end of America as we know it. It would risk leading ultimately to an international monetary crisis of proportions that we cannot even imagine.

Instead, he should be yelling at the Federal Reserve and other central bankers who are responsible for this mess in the first place. He should be crying out that mismanagement of our monetary unit is at the source of this whole problem.

And just a detail: He says that "[t]he resultant impact on housing prices [if the government does nothing] is likely to be close to -10%, an asset deflation in the U.S. never seen since the Great Depression." Well, did he notice that housing prices have risen up to 300% in some cases within the last 5 years? Doesn't he realize that bailing out 2,000,000 borrowers will prevent these outrageous prices from deflating?

And what about tomorrow's borrowers, many of whom are responsible people who actually pay their mortgages? Their salaries are not about to rise 300%, so a bailout will just condemn millions of people to renting for years to come. (Maybe Gross has got stock in those companies who'll be supplying the rental housing?)

His shortsightedness is typical of the kind of thinking that got us into this mess in the first place.

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China: Friend or Foe?

Townhall has published a good article by Herb London about the tensions building between China and the US.

He describes America's frustrations with the Chinese refusal to allow their monetary unit to float like most of the others, and China's frustration with the US for menacing to put barriers against Chinese imports.

I would add that the barriers are already rising. According to an article by Sarrah Filus in the LA Business Journal of 8/20/07, "some 3000 companies in LA's apparel industry could be affected by the so-called 'safeguard quotas' ", whatever those are. "The quotas went into effect in 2006 on 34 categories of apparel imported only from China. In 2005, there were no quotas. The quotas were imposed as a result of pressure from U.S. textile manufacturers who were alarmed at the rising imports from China.... For example, the limit of 271 million cotton pants and 261 million pairs of underwear from China are expected to be reached as early as October. Thereafter, no more imports will be allowed on those items until next year."

Who knew.

Add this to the poisonous toothpaste, the lead-painted dolls, the tainted fish and dog food, and all the other scares we've been hearing about recently, and you have a de facto embargo against China that the latter don't appreciate.

david goliath
[Thanks to and Nokia for this photo.]

Only trouble is, as Mr. London points out, this very same China is holding 44 percent of the American national debt.

This would be okay, but given the instability of the US financial markets--indeed world markets--at this time, I'd be careful how I threw names, sticks and stones at them, all the more so in light of the fact that the US Federal Reserve is a partner in crime when it comes to creating the wherewithal for American citizens and their government to spend away their children's future and make it possible for China to hold so much of our debt. (For more on this, see my previous posts, like this one.)

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A Clear Description of This Mess We're In

I like this article by "Average Joe." (See his own blog).

He lays out the scenario pretty much as I have here. The only thing I would add is the credit derivative layer above all this, which adds to the "spooking" effect he mentions. (This is just another layer of complicated financial finagling that is supposed to spread the risk even further, which it may in fact do, but it also adds to everyone's euphoria and ultimate insecurity, just as Average Joe describes.)

I think what is making this all the more spooky, is that some of the most sophisticated number-crunchers in the world (e.g. the Federal Reserve, the BIS, and all those analysts trying to decipher the stats) can't give us an idea of how deep and/or wide this situation is.

Some will answer that the market is handling this just fine, that the players in this game are very aware of the risks in the long run, and they have covered their butts, or if not, they will be allowed to fail. I answer that to believe this is to ignore the potential for disruption of world economic equilibrium and the LLR (Lender of Last Resort) role of the Fed and the US Government, upon which the markets are counting--and probably rightly so.

In other words, the high-rollers know that the US Government will not let the economy tank just because a few players took too much risk. This is what economists refer to as "moral hazard," i.e. a dichotomy whereby a market player's human conscience comes in conflict with his/her human nature.

To spell it out, bankers and financiers know that to take great risk is dangerous; but at the same time, some have the gambler's faith that they will beat the odds and/or that the consequences of their actions only involve themselves--or that they can count on the US Fed or Gov to bail them out, in which case it becomes quasi-criminal, but not prosecutable without a statute to hang it on.

[Thanks to for the image.]

We seem to be at an intermission in this show. Stay tuned. The Fed will probably try to resist action, to stay on course, and to let the system shake itself out of this, but I still believe they will be under pressure from government officials to either lower rates or perhaps inject cash into the system (which some number crunchers say has not happened yet, in spite of all the noise about lowered discount rates and repurchase-agreement cash infiltration).

If they cave to pressure, I would fear for the dollar and would see hope for gold to rise eventually, as speculators make a last-ditch effort to save their purchasing power. Beyond that, who knows what regulators and markets will do.

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Friday, August 24, 2007

Great Collection of Work on Republican Candidates' Economic Record

The Club for Growth, presided over by Patrick J. Toomey, has come out with some interesting research on the Republican candidates and their record when it comes to economic issues. (The link is to the one on Romney, and in the right-hand margin, you'll find the ones that have been done on Giuliani, McCain, Huckabee, and Brownback. I'm sure more will be forthcoming.)

Hmmm, I wonder if Toomey will even bother to do the same for the Democrats....

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More Nonsense from the GW Community

You won't believe this latest, about the moose. Here's an article from a German publication called, which claims that "the poor old Scandinavian moose is now being blamed for climate change". Did you know that a moose produces 4,620 pounds of CO2 in a year? I sure didn't. This is claimed to be the equivalent of that produced by a car after an 8,000 mile journey.

You know, I guess this really needs no further comment. So I've done a drawing that I hope you will enjoy.

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An Economist's Conference on Global Warming

There is going to be a fascinating conference in November, and I hope all interested parties will attend. It will take place in the gorgeous Berkshires of Western Massachusetts on November 2 and 3, 2007.

Please see the flyer, and information about AIER past conferences.

Here are some names to whet your appetite:

Richard S. Lindzen
David Henderson
Ross McKitrick
David S. Chapman
Richard Stroup
Carl Wunsch
Claudia Rosett
Gordon E. Michaels
William R. Cotton
William M. Gray
James Mills
Robert O. Mendelsohn
Gilbert Metcalf
Peter J. Wilcoxen
Kenneth Green
E. Calvin Beisner
Robert H. Nelson
Edward J. Kane

Some of the questions they will address:

Is it happening? Is mankind the principal cause? If so, what can be done about it within reasonable allocations of scarce public resources? Do the proposed solutions make sense from scientific and economic perspectives?

You can also phone (413) 528-1216 for more information. See the American Institute for Economic Research's website.

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Sunday, August 19, 2007

The Folly of Randomness, According to William Poole, President of the Fed Reserve Bank of St. Louis

"I know of no convincing arguments that the Fed could improve productivity and growth by deliberately introducing random disturbances to the economy." (From a Cato article.)

Now there's an interesting statement from someone who belongs to a system (the Federal Reserve) that does nothing but introduce random disturbances to the economy. But if only because he's aware of this, if I had a vote, I'd elect Poole as Fed Chairman. (For the moment, he's Pres and CEO of the St. Louis Fed.)

[Thanks to for the photo.]

Why can't they all see the basic wisdom in this sentence? If only they understood this, we could eliminate much of the instability of world economies.

He goes on thus:

"If that point is accepted, then the converse must also be true—reducing macroeconomic instability improves economic efficiency. Of course, there is an important corollary: If the Fed fails to maintain price stability after achieving it and creating expectations of its permanence, then the disruption to the economy from renewed inflation will be considerable precisely because firms ceased to plan for such an event."

Sound familiar? Like this might be happening as we "speak"?

This is decidedly one of the most important statements I've read in a long time, and it's coming right out of the mouth of one of the members of the very organization I blame for our present difficulties. Amazing.

And he says:

"What should the Fed do when financial instability strikes? In most cases, nothing." Fabulous.

He goes on to defend the Fed's actions with regard to LTCM (see previous post), saying that they intervened just enough--not too much, not too little; and he thinks that the Fed would not have bailed LTCM out, had the private institutions not done so themselves. Hmm. Don't know about that.

Then he says:

"Some observers have viewed the large expansion of hedge funds as a rising danger to financial stability, requiring additional regulation and Fed readiness to intervene. I myself believe the dangers of systemic problems from hedge-fund failures are vastly overrated. The hedge fund industry is indeed large but it is also highly diverse and competitive. Many and perhaps most of the large positions taken by individual firms have other hedge funds on the opposite side of the transactions. I trust normal market mechanisms to handle any problems that might arise."

We'll see, won't we? I hope to goodness he's right.

He also says:

"The Fed has a responsibility above all to maintain price stability and general macroeconomic stability to reduce the likelihood of economic conditions that would be conducive to financial instability. Included in this responsibility is provision of advice to Congress on needed legislative action to deal with possible risks. The largest of these risks on my radar screen arises from the thin capital positions maintained by government sponsored enterprises and the ambiguity of whether Congress would or would not act to bail out a troubled firm. The time to deal with potential financial instability caused by structural weaknesses of the GSEs and their regulatory regime is before instability strikes."

Well, they may have to deal with these issues after the fact. Again, we'll see.

To go back to my original point about macroeconomic stability, I'll quote another, Friedrich A. Hayek, in The Road to Serfdom: "If the individuals are to be able to use their knowledge effectively in making plans, they must be able to predict actions of the state which may affect their plans."

'Nuff said.

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LTCM All Over Again?

[Thanks to for the image.]

In this article at, Michael Shedlock paints a stark picture of our present sticky financial crisis and the computer modeling that created it. (I would go even further than he does and blame it on the Fed and the central banks of this world, who believe that they can wave the interest-rate wand over any problem and make it disappear, when all they really do is gunk up the works with excess liquidity. But I digress.)

If I understand correctly, he believes that we are worse off than in 1998 during the Long-Term Capital Management crisis. I concur, mainly because I perceive this one to involve so many more and larger institutions.

Perhaps some of you don't even know we had a crisis back in 1998, but we did, and here's a pretty succinct description of what happened. To make a long story short, some pretty smart people created some pretty wild mathematical/computer models to make lots of money on some pretty risky bets. Unfortunately, their models failed to take into account (1) the time factor, and (2) the panic factor.

By "time factor" I mean the same thing that Keynes (or someone else, maybe) meant when he said something like, "although markets do tend toward rational positions in the long run, the market can stay irrational longer than you can stay solvent." In other words, you can have the best play in the world, but if you can't put your cards down at the right time, you lose anyway. (Or vice versa: When they force you to show your hand before you've acquired all the right cards, you lose even if you'd have gotten them eventually.)

By "panic factor" I'm referring to the irrationality of investors when they are fearful. They can pull their money at any time (within limits), and those who are using that money have somehow to come up with it or die in the process.

In LTCM's case, their positions were sound (reportedly); but they couldn't withstand the violent gyrations that came about in the situation that consumed them. Such situations require liquidity, which requires collateral, which collateral LTCM didn't have, because of some pretty extreme leveraging (i.e. they allowed themselves to get too far out on a financial limb).

The circumstances behind the problems we're having today are much broader and deeper, according to several writers. These fears are confirmed even by such a staid group as the Bank of International Settlements. Here are a couple of quotes from their most recent annual reports:

"The current [2006] environment places a premium on system-wide risk management. It highlights the importance of making available information about risk as well as the interplay, and need for consistency, between financial reporting standards, risk management practices and the overall prudential framework.... [T]here are considerable uncertainties and associated risks, not least concerning inflationary pressures on the one hand, and a possible unwinding of accumulated economic and financial imbalances on the other. These could lead to financial market turbulence or a long period of relatively slower global growth developments, or both. [Emphasis added] " (From the 2006 report.)

"The implications of past risk-taking related to property investments and to the leveraged financing boom will depend critically on the future path of interest rates and overall economic conditions." (From the 2007 report.) How true. It is indeed interest rates that are causing all ruckus, but they are only the catalyst. The real problem is the original excess liquidity created by the central banks.

Here's the scariest part of Shedlock's piece:

After LTCM, what happened? "What became of Long-Terms founders? Were they jailed or banned from the financial world? No. They went on to start another hedge fund!"

Now that's scary. So they went right out and did it again, and others have now copied them. Good grief. How bad is this going to get?

Oh, and by the way, a pox on computer models.

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Saturday, August 18, 2007

Novak Is Leaking Again

He must be the official liaison with the public for all government and semi-government leakers.

robert novak as munchkin mayor
[Thanks to for the image.]

This time, he tells us in this article at that:

"Prior to the recent global financial crisis, the Federal Reserve Board under Chairman Ben S. Bernanke was ready to take a subtle step toward easier money in order to stave off U.S. recession fears. Ready for approval in the immediate future was a new Federal Open Market Committee (FOMC) statement taking the central bank off neutrality and putting it on a bias for an interest rate cut. But international credit scares changed all that.... [T]he central bankers do not disclose and try not to leak future plans. However, according to Capitol Hill sources, they had secretly decided to issue a statement soon changing the Fed's bias toward easing...."

Then this:

"Even the chairman's critics commend his handling of the first major crisis in 18 months on the job. They say the departed 'Maestro,' Alan Greenspan, would have acted identically -- with a single exception, in the opinion of one Fed watcher. He feels Greenspan would have leaked plans for an interest rate cut in the future to show his overriding concern about the U.S. economy."

Now, does Novak believe that Bernanke didn't actually want this leak to leak? Hmmmm....

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Friday, August 17, 2007

Another Example of English Economic Wisdom

Why is it that we often read more sense coming from across the water than right here in our own "land of the free market"?

[Thanks to for the photo.]

Roger Bootle (how English is that name?) makes great sense in an article I read in The Daily Telegraph of 8/13/07. He says:

"Normally the young men who dominate the money markets pile out squillions to other banks at the drop of a hat, and with scarcely a thought about the borrower's balance sheet. The assumption is that most banks are all right. It is this assumption that ensures the general liquidity of the system. But when things go wrong confidence is fragile. The dealers do not know that a bank is in trouble until it is too late. So rumour and suspicion hold sway. In these conditions, they may become generally unwilling to lend to any but the most topnotch banks and, accordingly, the interst rates facing most banks may rise uncomfortably.

"Dealers would rather buy government bills or simply leave their cash sitting in the account with the central bank. There is then the danger of a real liquidity crisis.

"It was to fend this off, that last week the ECB [and the US Fed, et al.] provided funds, making the markets awash with money, thereby serving to bring interbank rates back down."

He goes on to explain why a credit crisis has affected the stock market and all industries, not just banking. He cites these reasons:

1. Tight credit for banks means tight credit for all companies.
2. Risk is now being reevaluated, and therefore risky investments like stocks are adjusting to their proper level (i.e. down).
3. These disruptions make markets uneasy about the health of the underlying economy, which may mean lower profits.

He forgot this one:

4. Those credit-rich speculators (hedge funds, banks, pension funds, and individuals) who have put everything they own, and then some, into the stock market (especially those on margin accounts) have pumped the markets up to dizzying heights, and now they've getting the bejesus scared out of them as their stop-loss sales and margin calls kick in.

Then Mr. Bootle discusses the role of the central banks in all of this. He makes great sense.

"What should central banks do? The principles are fairly clear, even if the practice is murkier. It is not the job of central banks to protect the shareholders of imprudent or even unlucky lenders from the consequences of their actions. It is, though, part of their job to prevent worries about one institution [in this case, maybe all of the top ones] from causing a general liquidity crisis."

So they did the right thing in pumping liquidity into the system. BUT, he continues, the central bankers should NOT "easily be defected from their course." Right on, Mr. Bootle.

But there's a difference between what they should do and what they will do. "There were rumours swirling around the market that these events made cuts in interest rates by the Fed more likely and rises in rates by the ECH and the Bank of England less likely. This was misjudged." Ah... here we might have a diversion of opinion.

I think the markets are right, the Fed and other central banks' convictions will melt away like a sorbet in a Brazilian sun, as soon as they convince themselves that without action, the global economy will sicken.

I know that "[p]roviding liquidity is the right thing to do if the market is suffering from a liquidity crisis" and that "[c]utting interest rates is only appropriate if this crisis threatens to have serious adverse effects on the economy." But these deleterious effects are impossible to predetermine until it's too late, and the banks will want to act peremptorily, so as to appear as though they have saved us all from ruin.

"In any case, central banks have to be careful about responding too readily. Otherwise the markets will operate on the basis that they are protected on the downside and accordingly take off on even more exaggerated flights of irrational exuberance." Aha, but there is the rub. The markets already KNOW that Bernanke's Fed and the others will indeed respond.

AS INDEED THEY HAVE. Today, they have lowered their discount rate from 6.25% to 5.75%. (Not their target rate, which is still at 5.75%; but this is an important psychological move.)

Mr. Bootle then goes on:

"This was the position that Fed chairman Alan Greenspan got himself into. So sensitive was he to the dangers of a financial collapse causing major economic effects that he established a record of cutting rates in response to financial crises. He did this after the stock market crash of October 1987, the savings and loan crisis in the 1980s and, most importantly, after the dotcom collapse and the terrorist attacks of 2001."

Now we can add that Bernanke and his friends have perpetuated Greenspan's tradition, setting the tone for the future--very bad news for the dollar (indeed all fiat currencies), for the small guy, and for the future of all of us, even though it may feel like a relief at the time.

"Markets came to feel that they were protected by the 'Greenspan put'. I doubt very much that the new Fed chairman, Ben Barnanke, wishes to preserve this particular inheritance from his predecessor."

Well, I think you are mistaken here, Bootle. Bernanke is just as much concerned about his image as Greenspan and will not play party pooper either.

Now here is where Bootle does his finest work:

"Indeed, you can attribute the collapse of risk spreads on almost all instruments (until recently) to the combination of the low interest rates enacted by central banks to offset the effects of the dotcom collapse and 9/11, and the idea that because of central bank interventionism, the risks in the system were now much lower or even non-existent."

He ends the piece with confidence in our central banks' willpower to continue on their present inflation-watchdog course, at least until the situation gets really bad and some big banks have had to bite the bullet. Personally, I don't think our monetary police will have enough guts to wait that long. As I've said in this past post, this post, and this post, they lose either way. Damned if they do, damned if they don't.

We're in for a great ride.

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Thursday, August 16, 2007

Cato's Gerald P. O'Driscoll Hits Another Nail Squarely

Another article that makes good sense from Cato. It puts the blame for our present situation directly on the Federal Reserve and other central banks, exactly where it belongs. Couldn't agree more.

The list of scapegoats:

Mortgage brokers
Debtors in general

The true culprit:

Alan Greenspan and his friends

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Is This the Minsky Moment?

I was reading an article by my father's colleague, Harry Schultz, over at Marketwatch, and I saw his mention of the "Minsky Moment." What is this, I asked myself.

So I Yahooed it and came up with this nice blog about the phenomenon.

This is the crunch moment, the time when push comes to shove, when puts and calls have to put up or shut up, the crucial pay-up-time bottom line when all those speculators using other people's money and/or credit have to prove their worth or get out of the business.

I agree with Harry (gee, I was just in Monaco--I should have looked him up), although he goes a bit overboard in his description of the future (as usual--Harry doesn't like to talk in mundane terms).
[Thanks to for the image.]

Harry says this is 1929-1933 all over again and that we should head for the hills. At, however, we get a more measured and cautious statement of the situation. There are some nice graphs that explain why and perhaps even how much of today's ominous rumblings may be a sign of earthquakes to come. I would tend to agree that the future is unknown, but I've reserved a front-row seat to watch the denouement. Hopefully, I won't get thrown onto my tail end as it unfolds.

(Newcomers: Please check out some of my past posts to see what I'm talking about. I've been predicting a wild ride for many months now, so I'm anxious to see how this all plays out.)

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Wednesday, August 15, 2007


Finally got back from my travels to read this great article by Michael Nystrom over at Kitco. It expresses my observations precisely.

Back in 2005 or so, I corresponded with the president of an economics think tank (who shall remain nameless) about the underlying dangers of securitization, and this article's position is the one I took. My interlocutor, on the other hand, preferred the stand that today's solid "Reagan-Revolution" economic foundation can withstand all of this. I guess only time will tell who is right. (For my explanatory description of securitization, see this previously published article.)

Someone else I know has made the following comment after reading Nystrom's article:

"Worth noting is that the house nonetheless has value, and that the big boys holding the paper get it, and that they are really big boys, capable (one hopes) of surviving the indigestion one gets from eating inked paper."

I respond that, given the nature of the securitization process, there is not enough underlying value of houses to save even a tiny fraction of securitization's investors.

The securitization process allows banks to unlink the creation of credit from its underlying collateral and tie it onto something as volatile and insubstantial as investor confidence--which we all know is infinite and addictive, much like a gambler's doomed optimism.

Securitization could work, but only with strict parameters. I compare it to the fractional reserve system, whereby a bank can create a multiple of purchasing media based on a certain reserve of cash and assets. It only works when everyone plays fair and the system's rules are strictly observed. The only problem is that today's securitization markets have no rules whatsoever (but I bet they will soon).

I believe that sooner or later we are headed for a day of reckoning; and what is putting it off is the naivete of the global banking world and of the public, who pretend to believe (or in the case of the public who actually may believe) that there are houses behind it all. I'm with Nystrom, i.e. that there are nowhere near enough houses, but instead only pyramid-scheme balloons of hot-air credit.

To what extent, no one seems to be able to quantify. That is the main problem. Personally, I believe that the amount of hot-air credit is unbelievably high, but I can't prove it; and this is a great tragedy. My father, economist Edward C. Harwood, tried to come up with a figure with his Index of Inflation, but for reasons I have yet to understand, his parameters are no longer applicable today. (The reason reported is that it is no longer possible to define "money." This seems a lame excuse, especially with the accuracy of the statistics that are now available. For more on E.C. Harwood, see his organization's website. His Index is still maintained and published by AIER, albeit with little fanfare or commitment.]

However, by Harwood's own common sense and by historical experience, it would seem clear that we are in for some more wild ride. It could take many forms. We might get a cyclical downturn, more or less violent; or we might get more asset bubbles first. Who knows?

Personally, I would speculate that the dollar (and perhaps all fiat currencies, i.e. those not based on some commodity like gold) will eventually tank, at least temporarily; but I admit there is a chance that this may not happen for a while yet, because so many people in the world either believe in fiat money more than it deserves, or they have too much of their own wealth tied up in forms of it to want to see it sink. To my eyes, they are just holding onto a lighter cement block, thinking it will not sink to the ocean floor like the heavier ones; but cement is cement, and like all rocks, it must also sink.

As for my friend's "big boys," these large banking institutions like Merrill Lynch, Bear Stearns, Citicorp, et al., are "too big to fail," as the saying goes. The Lender-of-Last-Resort US Gov will pump money (i.e. hot-air credit) into the system to save their butts--in fact, they have already done it, twice as recently as last week. Of course, this pumping just aggravates the eventual outcome as they renege on their promise to withdraw the temporary influx, and they may think they have no choice if things go sour.

The underlying principle is this:

"What goes up must come down."

Be careful; the dollar and/or our economy may not come down in the form of a deflation. The event might just express itself in a more gradual decline of purchasing power as people's savings and merited income-increases evaporate. Our present generation lacks the experience of deflationary times and may just go along with the long-term erosion/inflation of their wealth, rather than give up their reliance on their credit-gambler's illusion.

This is because the speed of our present erosion of purchasing power is like being bled to death by a leech: It's relatively painless.

[Thanks to for the photo.]

It's like having the Gambino family pick up their monthly take, assuaging your justified irritation with promises of "protection."

So I will now invent a new economic term to describe this phenomenon. We already have:


Now we need this one:


I derive it from one of my father's favorite expressions: "Inflation is nothing more than legalized embezzlement." How right he was. And little did he conceive of how cunningly our money managers would later learn how to render it as virtually painless a process as it has become.

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