Friday, October 31, 2008

Paul Huebl on the Bailouts

Back in 1990, the Government seized the Mustang Ranch brothel in Nevada for tax evasion and, as required by law, tried to run it. They failed and it closed.

Now we are trusting the economy of our country to a pack of dumb asses who couldn't make money running a whore house and selling booze?-Paul Huebl

The Worst of All Possible Worlds: Obama Is a Marxist and a Twisted- Keynesian

I don't see how this can get any worse, or any clearer. Call him socialist, call him whatever, but Barack Obama has somehow manged to incorporate into his stump speech of recent days the worst of Karl Marx and John Maynard Keynes.

Karl Marx, of course, is responsible for the redistributionisit words, "From each according to his abilities, to each according to his needs. "

Clearly, Obama believes in this. ABC's Jack Tapper reports that yesterday in Sarasota, Florida Obama said:

The reason that we want to do this, change our tax code, is not because I have anything against the rich...The point is, though, that -- and it’s not just charity, it’s not just that I want to help the middle class and working people who are trying to get in the middle class -- it’s that when we actually make sure that everybody’s got a shot – when young people can all go to college, when everybody’s got decent health care, when everybody’s got a little more money at the end of the month...
Here he is not denying he wants to redistribute from each according to his abilities to each according to his needs, but he is rather trying to justify his redistribution beliefs. But wait, it gets worse. He then tries to further justify this Marxist ideology on something close to Keynesian grounds. Keynes held that spending was the key to growth in an economy. Somehow, though, he failed to take into account that unless there is production, there will be nothing to spend money on. But Keynes focus was on spending and involved government deficit spending to boost spending during slow economic times. Obama's twist on this is that it will be the poor and middle class that will do the spending once it is taxed away from the rich. A kind of take from the rich and let it trickle back up to the rich economics.

Here's Obama, in Sarasota again, in his own words:

Everybody starts spending that money [the money that is taxed away from the "rich"], they [the recipients of the money]decide maybe I can afford a new car, maybe I can afford a computer for my child. They can buy the products and services that businesses are selling and everybody is better off. All boats rise... And that’s what I’m gonna do as president of the United States of America.
Production never enters his theory. The disincentives of taxing the producers, is never discussed. But it is, indeed, a tax on the top producers. To understand how nutty an idea this is, think of the Los Angeles Lakers going to their top producer Kobe Bryant and saying, "Hey Kobe, we are going to cut your salary and give the money to the fans. But, the fans will now have more money so it will trickle up to you." Is anyone surprised that superstar basketball players are not standing in line for such trickle up, cut my salary contracts? Yet, Obama doesn't want to do this for a basketball team, he wants to do it for an entire country!

Bottom line: Barack Obama is a perfect example of the poor education that most Americans receive in economics. It is a national tragedy that may very well put this country on the road to oblivion, especially when the country has a president who has never completely thought through the implications of a Marxist, Twisted-Keynesian economic philosophy.

-Robert Wenzel

Bailout Mania and the Moral Hazard Connection

Richard Ebeling warns:

In the mania for a portion of the bailout billions, no one is realizing that a serious and dangerous precedent is being established that may reverberate for years or decades to come.

and explains the danger, here.


Mankiw Madness: Putting A Decider Between You and Your Money

Super best selling economic text book author and Harvard economist, Greg Mankiw, is suggesting a new method for a second "stimulus" package. He is putting a decider between you and your money:

Congress could pass a fiscal stimulus of a certain amount per person but offer two ways to have it paid out. Each state governor could be allowed to determine whether to take the money as state aid or have it paid directly to his or her state's citizens

This, by the way, from a guy who has already figured out he, personally, is going to work less under Obama tax hikes. And, also suggested ,Harvard should move part of its operations out of Massachusetts, when WSJ published a report about Mass. legislators considering a tax on endowment founds in excess of $1 billion. "Eventually, make Harvard South the main campus, and Harvard North the satellite. If Massachusetts state lawmakers remain hostile, close Harvard North down entirely."

-Robert Wenzel

Russia Stops Taking Credit Cards

Charlotte Bailey at reports:

Several Moscow city centre restaurants are now refusing to accept cards in a move not seen since Russia's last financial crisis almost a decade ago.

Some automated teller machines at Sberbank, the country's biggest state-owned bank, have also stopped accepting cards from other banks.

Several electronics and mobile phone stores said they no longer accepted credit card purchases.Over the weekend, Aeroflot, the biggest Russian airline, announced it had stopped taking credit cards payments for flights except from a handful of banks

I'm not sure what is behind this move, perhaps a fear by Russian firms that they will not receive payment on charges put through on the cards?

I don't expect anything like this to happen in the United States, but if it did, the demand to hold cash balances would soar, M1 would soar, and we would have deflation.

-Robert Wenzel

About the Huge Obama Crowds

Fouad Ajami has seen them before:

In recent days, those vast Obama crowds, though, have recalled for me the politics of charisma that wrecked Arab and Muslim societies.

McCain Takes Unusual Tack With Transition Team

From WSJ:

Republican presidential candidate John McCain has set up an unconventional transition process to take over the White House in the event of an Election Day victory.

And his choice to lead the effort, veteran Republican warhorse and confidant John Lehman Jr., is weighed down by some negative political baggage from weapons-buying scandals dating back to the Cold War era.

Previous presidential transition efforts focused on vetting would-be appointees, assembling hefty policy briefing books and making sure politically reliable operatives were assigned as liaisons to departments and agencies. That's largely the path Democratic candidate Barack Obama has chosen, assigning dozens of advisers to working groups. The participants have strictly delineated responsibilities and must abide by specific conflict-of-interest rules.

But aides say Sen. McCain's transition team, headed by former Navy Secretary Lehman, has a different, less-structured approach. Mr. Lehman and a small group of aides are concentrating on the logistics of swiftly taking control of the U.S. national security apparatus.

ENPR: Obama Likely To Win, But No Blowout

Written before the Phillies won the World Series, Timothy Carney for the Evans Novak Political Report advises:

As in 2000 and 2004, the presidential focus is on Ohio and Florida in the final days, along with Pennsylvania, McCain's Hail Mary Plan B.

McCain has a good shot of winning one or two of these three states, but he is in the same position as the Tampa Bay Rays, currently in the World Series: He has to win all three, or he is done.
Carney's full report is here and has great blow by blow national election coverage.

(Via Drudge Report)

2005 Change In Bankruptcy Regs Created Catalyst For Collapse of Bear Stearns, Lehman and AIG

I have long contended that the voluminous regulations in the United States create pitfalls and opportunities that few understand. A simple sentence or paragraph added to some regulation may be truly understood by fewer than 10 people on the entire planet, but one of those 10 is probably making millions on that added sentence or paragraph. FT is reporting on some 2005 bankruptcy rule changes introduced to protect, among others, investment banks. The added rules backfired and was a key element in the collapse of Bear, Lehman and AG:

Wall Street unwittingly created one of the catalysts for the collapse of Bear Stearns, Lehman Brothers and American International Group by backing new bankruptcy rules that were aimed at insulating banks from the failure of a big client, lawyers and bankers say.

The changes in the code expanded the scope and definition of financial transactions not covered by bankruptcy rules to include credit default swaps and mortgage repurchase agreements – products used widely by Lehman, Bear and AIG.

Lawyers said under the old rules, creditors of companies facing financial difficulties were wary of settling trades or seeking extra collateral because they knew such demands could precipitate a bankruptcy filing and potentially freeze their claims.

However, when the financial health of Bear, Lehman and AIG took a sharp turn for the worse this year, their trading counterparties – mainly hedge funds and other banks – were not deterred from seeking to settle their trades or forcing the three companies to put up more collateral, [because of the change in code].

Bank of Japan Cuts Rates; First Time in 7 Years

The global inflation march continues.

The Bank of Japan cut interest rates for the first time in seven years, lowering its key rate to 0.30% from 0.50%.

Cuts at Conde Nast May Impact Felix Salmon

NYT is reporting that, as part of Conde Nast's cutbacks, it will dismiss most of Portfolio’s Web site staff.

Let's hope that the powers that be recognize they have an emerging superstar talent in Felix, and that he is somebody you don't want to let go.

Thursday, October 30, 2008

48% of Nevada Homes Underwater

First American CoreLogic, a real-estate data firm, estimates that 48% of owners of single-family homes with mortgages in Nevada are under water. That compares with 18% nationwide.

Roubini Expects A Deflationary Recession

Nouriel Roubini in today's Forbes details his argument for why the United States is heading towards a deflationary recession.

He writes:

Deflation and stag-deflation will, in six months, become the main concern of policy authorities.

My view is that it is pretty much impossible for anyone to forecast six months out in the current environment. There are simply too many variables, from what other "crisis" type situations may be lurking around the corner to what Ben Bernanke will do with money growth over the next six months.

Roubini correctly points out that the economy has been in a deflationary spiral over recent weeks, but then makes the jump that Bernanke fears inflation too much to start the printing presses. He writes:

The costs of raising expected inflation will be much higher than the benefits of using the inflation tax to pay for the fiscal costs of cleaning up the mess that this most severe financial crisis has created.
This is a very dangerous assumption to make as to what is going on in Ben Bernanke's brain, and on which to then make a forecast on the future trend in the economy.

I agree that an inflation tax is a high cost to pay. But governments for centuries have given little notice to this cost until inflation is generally much higher. Further, to claim that a central banker is going to be concerned about inflation when there is deflation around him is also a bit of a stretch.

Then there is the tiny little fact that Bernanke appears to have actually been flying his money dispersing helicopter in recent weeks.

In summary, Roubini's forecast of a deflationary recession is very bold, and likely very wrong.

Money Numbers Out: The Fear Is Going

The Fed's money supply numbers are out today for the week of Oct. 20.

They show a drop in M1nsa for two out of the last three weeks. It appears that M1nsa growth may have peaked at the 19.5% annualzed growth at the end of September. As we have pointed out, growth in M1nsa is to us an indicator of fear in the system. The fear appears to be subsiding, i.e., the desire to hold extraordinary cash balances appears to be subsiding.

At the same time, M2nsa continues to increase. Over the last 4 weeks, it has climbed by approximately 15% on an annualized basis. It is dangerous to read too much in to just 4 weeks worth of data, especially given that it can be revised, but our best guess is that Bernanke has his helicopter flying.

The decline in fear (drop in M1nsa) and the double-digit growth in M2nsa indicates that the current phase of the financial crisis is probably over. This of course doesn't mean that there is no bank or other firm lurking out there that may be in trouble, but for the most part things should be calmer. Now, we will have to see how long the very quirky Bernanke keeps his helicopter in the air.

On The Issue of Economics

There Are Believers, Lots of Them

More than 100,000 people gathered in Civics Center Park in downtown Denver to attend a Barack Obama rally, reports Michael Jee.

The throng of people who showed up were extremely enthusiastic about the prospect of seeing and hearing their candidate of choice live. People traveled from all over Colorado, near and far. The cold temperature and incessant wind could not deter their zeal, says Jee.

I wonder, will these people be the price checkers, when the price controls come?

Sheldon Richman on the Wall Street Bailout

is at The Amercan Conservative.

Carlyle Seen Bidding for Lehman Money Management

Imagine my surprise.

Details here.

Robert Frank More Right Than He Realizes About Government Redistribution

Cornell economist Robert Frank attempts to defend Barrack Obama, against charges that he is a socialist, by pointing out that The National Council on Economic Education’s curriculum standards for the teaching of essential principles of economics states, in part, that

Most government policies also redistribute income.

which is correct. But it doesn't necessarily logically follow that Obama is not a socialist, it could, and does, mean that most government programs are socialistic.

(Via Economists for Obama)

Martin Feldstein Is Against Affordable Housing and in Favor of Keyenesian Type Deficit Spending

From micromanager Feldstein's Op-Ed today at WaPo:

Although home prices must get back to pre-bubble levels, Congress should enact policies to reduce defaults that could drive prices down much further...

The only way to prevent a deepening recession will be a temporary program of increased government spending...A fiscal package of $100 billion is not likely to be large enough to revive the economy. The fall in household wealth resulting from the collapse of the stock market and the decline of home prices may cut aggregate spending by $300 billion a year or more... Any plan to finance this spending by raising taxes, even if postponed, as Sen. Barack Obama has suggested, would hurt the recovery by causing affected taxpayers to cut their spending now.

With the government borrowing $800 billion in recent weeks and the private sector having trouble borrowing, Feldstein wants to crowd out private sector borrowing even more. It is real difficult to understand how any person could think this is a good idea.

The Myth of Japan’s Famous Ministry of International Trade and Industry

From Karen Selick's commentary on Terence Kealey, new book, Sex, Science and Profits:

Kealey debunks the myth that MITI, Japan’s famous Ministry of International Trade and Industry, was behind that country’s meteoric post-war rise to prosperity, noting that “MITI had opposed the development of the very areas where Japan has been most successful: cars, electronics and cameras."

Apparently SF Fed President Janet Yellen Doesn't Believe in Stagflation

From a speech she delivered today to the UCLA Symposium at UC Berkeley in Berkeley, California:

Indeed, recent data on the economy have been deeply worrisome. Data released this morning reveal that the economy contracted slightly in the third quarter. For the fourth quarter, it appears likely that the economy is contracting significantly. Mainly for this reason, inflationary risks have diminished greatly.
With the Fed pumping money again, but the economy still re-adjusting from the previous money printing boom, I wouldn't rule out stagflation sometime in the next two to six months.

Note: I must again mention that Yellen's new speechwriter of recent months is a major improvement, the old hedging sluggish Yellen speeches of the past are gone. At least, you can understand what Yellen is saying, and now there is a strong analytical touch to the speeches. Even in Yellen's speech today, there is a pretty solid comment on the failure of econometric models.

"Do you even know who I am, f**king idiot?...Google me, you dumb f**k."

TMZ reports:

A security guard at Caesars Palace in Las Vegas is suing the daughter of former Yahoo honcho Terry Semel for allegedly pummeling him in a drunken stupor.

In a lawsuit filed yesterday in L.A. County Superior Court, Jaroslaw Jarczok claims he was working security last August at 4:00 AM at PURE Nightclub when Courtenay was "quite intoxicated due to alcohol and/or chemical or other substances." He claims she got all foul-mouthed on him.

One thing led to another and he eventually handcuffed Semel, the GF of Tila Tequila. That's when she allegedly struck Jarczok in the face and uttered these soon-to-be immortal words, which deserve a separate line in bold type:

"Do you even know who I am, f**king idiot?...Google me, you dumb f**k."

Jarczok says he's been humiliated and "anxious about receiving harassing comments by friends..." He wants unspecified damages.

Maybe if she had said "Yahoo me", then at least Dad would have been proud.

Is Barack Obama A Socialist?

Richard Ebeling considers the question.

Paul Huebl's Plan To Stop An Election Night Insurrection in Chicago's Grant Park


IMF Creates a $100 Billion Fund to Aid the "Crisis" Fight

Reports WSJ:
The new three-month loans, aimed at economies the IMF judges to be troubled but basically sound, wouldn't require countries to make the often severe changes in their policies that the IMF has demanded for decades... "Exceptional times call for an exceptional response," said IMF Managing Director Dominique Strauss-Kahn...

But the new plan also puts the IMF in the position of deciding who can have money with few strings attached, and who can't.

Bureaucrats obviously love the Paulson "Decider" formula of being in a position to determine who lives and who dies.

10% Cuts At The New Yorker, Vanity Fair, Wired, Glamour, and down the line.

NYO reports:

The plan is not just a five percent overall spending reduction but rather two distinct five-percent cuts for each title, guaranteeing that titles cannot meet the goal without cutting staff.

First, each book will have to cut five percent of its payroll. They can do this through laying off staff or eliminating open and unfilled positions or a combination of the two.

Second, each book will have to cut five percent from its non-payroll budget lines: travel and expenses, meals, freelancers, etc.

The Government's Favorite Piece of Economic Data, GDP, Is Out

...since it serves to provide cover for government manipulations of the economy.

In fact, it is one of my least favorite data points.

The GDP contracted in the third quarter at a 0.3% annualized rate, we are told.

Final sales to domestic purchasers fell 1.8%, the largest decline in 17 years. Consumer spending dropped 3.1%, the first decline in 17 years and the biggest drop in 28 years, while business investment fell 1%. Investments in homes fell for the 11th straight quarter.

Among the multitude of problems with this data is that during a crisis period, such as we have now, the data are not correctly adjusted for the desire by many to hold cash balances. A house worth $400,000 in 2006, may bring the same psychic reward in 2008 when the house is worth $300,000. And, the house has just become affordable to many more! Yet,ten houses sold in 2006 at $400,000 would show income of $4,000,000. Eleven purchases of the same type house in 2008 at $300,000 would show income of $3,330,000. Thus, this would have a negative impact on GDP, when more people are now enjoying the luxuries of such a house!

Further, a considerable amount of what is labeled as "consumer spending", I would label as "capital goods investments."

Oscar Morgenstern did some early work (see his great book, On The Accuracy of Economic Observations)on the problems of the parent to GDP, GNP, but the full critique has yet to be written.

The only use I can find for declining GDP numbers is that they give the Federal Reserve a reason to inflate and regulate. An accurate report on the economy would show the economy in recovery from a period of central bank induced mal-investment. Such a report would show details of the readjustment process going on, not just a report on a declining aggregate.

Hong Kong Up 12%, Seoul Up 12%, Tokyo Up 10%

Nothing like a lot of global monetary inflation to send buyers with new paper money in hand to buy stocks.

The Hang Seng Index ended 12.8% up to 14,329.85. Earlier in the day, the Hong Kong Monetary Authority reduced its benchmark interest rate by a half-point to 1.5%.

The Nikkei 225 Average reclaimed the 9,000-point level in Tokyo, ending up 10% at 9,029.76. The Bank of Japan could cut interest rates by a quarter-point to 0.25% Friday.

In Seoul, the Kospi soared 12% to 1,084.72. A South Korea rate cut is expected.

GMAC As Bank Holding Company

Former Bush Secretary of the Treasury John Snow wants to get in on the action his successor has created. Snow is now chairman of Cerberus which is majority owner of General Motors and Chrysler.

According to WSJ, Snow wants to make GMAC a bank holding company, which will mean that GMAC could receive equity injections from the Treasury Department's capital purchase program and have its debt temporarily guaranteed by the Federal Deposit Insurance Corp.

Further, as a federally chartered bank, it could access the Fed's discount window for inexpensive, short-term emergency loans.

Obama Transition Team

According to the New York Observer, Barack Obama has quietly put together a transition team that is operating under John Podesta, the former White House chief of staff under Bill Clinton, to come up with personnel in areas like the economy, health, climate change, foreign policy and national security. Some reports have the team already creating "shortlists".

NYO lists the following as potential players in an Obama Administration:

Timothy Geithner, the president of the Federal Reserve Bank of New York

Former Treasury secretaries Robert Rubin and Lawrence Summers

Jamie Dimon, chairman and CEO of JPMorgan Chase & Co

Governor Jon Corzine of New Jersey, former CEO of Goldman Sachs

Michael Froman, a top executive at Citigroup, who served as Mr. Rubin's chief of staff at Treasury

Jamie Rubin, the son of the former Treasury secretary.

Josh Steiner, the founder and managing principal of New York City-based private investment firm Quadrangle Group and a onetime chief of staff at Treasury

Josh Gotbaum, the former chief executive of the September 11 Fund who has worked for the Carter and Clinton administrations and Lazard Freres

Seth Harris, a faculty member of the New York Law School and a former counselor to the secretary of Labor in the Clinton administration

Kevin Thurm, an executive at Citigroup, former Rhodes scholar and a former deputy secretary and chief operation officer of the U.S. Department of Health and Human Services.

Orin Kramer, a financier at Boston Provident, a former aide in Jimmy Carter's administration and a prodigious fund-raiser

Robert Wolf, an investment banker and CEO of UBS Americas

Mark Gallogly, a private-equity expert who used to work for Blackstone

Jim Torrey, Hedge fund manager Jim Torrey

Bran Mathis, Provident Group managing director

Frank Brosens, who runs Taconic Capital Advisors and is seen as very close to Bob Rubin

(HT2 The Business Sheet)

To Each According to His Ability to Default

Officials with the Treasury and the Federal Deposit Insurance Corp. are crafting a plan under which the government would guarantee the mortgages of as many as 3 million homeowners now struggling to avoid foreclosure.

There is nothing wrong with bankruptcy, it was designed for situations like this. Another guaranty/bailout though is adding further potential increases in the national debt and creating incredible stress points in the entire government financial system.

The National Debt has increased $880 billion since the beginning of September. It now stands at $10.53 trillion.

Wednesday, October 29, 2008

The Myth of Financial Deregulation

Pierre Lemieux has ripped apart, from every angle possible, the notion that there has been financial deregulation in the United States in recent years.

His article is the antidote to use when dealing with those who claim that deregulation has been the cause of the current financial crisis.

Real Ugly Insider Trading

I have always contended that real ugly insider trading can only be done by government officials who are in a position to influence government escapades, and also take positions to profit from such.

Many years ago, before I knew to take such information seriously, a very beautiful senorita tipped me off to a Mexican devaluation of the peso, a week in advance. She knew because she worked in the Mexican Misson to the United Nations and got wind of the short-sales being put on the peso by various Mexican officials.

Devaluations,though, are minor league compared to some of the other stuff that is pulled off. In the United States of the 1950's the Cabots and Dulleses had a series of top-secret meetings in which they decided that Guatemalan President Jacobo Árbenz Gúzmanhad had to go and sponsored a coup that drove Árbenz from office in 1954.

Economists Arindrajit Dube, Ethan Kaplan, and Suresh Naidu have discovered that those in on the planning process also profited from the overthrow.

Dube, Kaplan, and Naidu pulled trading data on the Guatemalan episode, and others, and discovered that stocks sensitive to overthrows climbed, for no apparent public reason, in the months leading up to CIA-staged coups in Guatemala, Chile, Cuba, and Iran.

The researchers provide evidence that someone—perhaps one of the Dulleses, Cabots, or others in the know—was trading the stocks based on classified information of these coups-in-the-making.

There is a new science developing around the study of such trading patterns. It is called forensic economics. This is important research that will help the public understand the dirty deeds surrounding many government doings.

Ray Fisman has a great story on the research to date.

(HT2 Bob Murphy)

Fed Blows A Bit of Smoke and "Lowers" Fed Funds Rate 50 Basis Points to 1%

The Federal Open Market Committee said today that it lowered its target for the federal funds rate 50 basis points to 1 percent.

In a Keynesian twist to their statement, the Fed said that, '"the pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures. "

In addition the Fed said that, "business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit."

The Fed also said that, "in light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters to levels consistent with price stability."

They did not mention the concern of many including yours truly and Warren Buffett that "the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts. "

Further, the Fed did not mention that they are basically blowing smoke with this announcement, since Fed Funds have been trading below 1% since October 16, and the Funds rate has a greatly dimnished and different role as a result of the Fed's paying interest on deposits at the Fed.

The Email Warren Buffett Has Not Responded To

A week ago, I called Jackie Wilson, media representative for Warren Buffett's Berkshire Hathaway. I had a question regarding a public statement Buffett made regarding his personal holdings. She asked me to send the question in an email, and she gave me her email address. Below is the email I sent, to date, I have received no response:

from: Robert Wenzel
to:Jackie Wilson
date:Wed, Oct 22, 2008 at 1:33 PM
subject: Question for Mr. Buffett

Dear Ms. Wilson,

In Mr. Buffett's New York Times article he states:

I've been buying American stocks. This is my personal account I'm talking about, in which I previously owned nothing but United States government bonds.

Could he please clarify this statement, since it appears that previously he has owned other items besides United States government bonds. I reference, for example, this Los Angeles Times article:

Buffett–who controls Berkshire Hathaway Inc., an Omaha, Neb.-based holding company for his investments and operating companies–once again bought the Bell stock with his own money, not Hathaway's. And as investors learned the last time, that's an important distinction for anyone evaluating Buffett's interest in Bell.

The Times article goes on to say:

Despite Berkshire Hathaway's record of patiently holding stocks, Buffett himself often makes small, quick purchases of stocks with his own money to generate income, according to people familiar with his investment habits. That's especially true if he's confident of generating a low-risk, sizable return in short order, they said.

I thank you for your help on this matter.

Sincerely yours,

Robert Wenzel
Editor & Publisher

Buffett's original Op-Ed piece is here.

Richard Ebeling Takes A Step Too Far

By Robert Wenzel

In a comment to Peter Boettke, Richard Ebeling discusses the dangers of economic forecasting and of using statistical models to forecast the future.

He writes:

In fact, neither Austrian Economists nor our Neoclassical and Chicago and Rational Expectations "colleagues" know what is happening in the economy -- nor exactly how and why it hit right now or where the present "crisis" is taking us.
The problem with this comment is that it goes too far in denying what we can and can not know about about an economy.

He is correct when he next writes:

The "deadly sin" of hubris clearly has been greater with our economist colleagues. So using all available information (i.e., statistical patterns of past events) and inserting it in the "correct" model of how the macroeconomic "really" works . . .
Econometric models simply don't work in economics where all factors are variables and there are no constants. Indeed, part of the mortgage crisis, as I have written, was a result of the use of faulty econometric equations:

The problem consists in the fact that econometricians can't design equations without at least one constant. Since there are no constants in the world of human action, econometricians take a variable that has held fairly constant over some period of time and assume it is a constant. This works fine, and can for long periods of time, until Wenzel's Observation #1 comes into play: Any variable has the potential to eventually start to dance. A dancing variable is one that no longer acts like a constant and moves considerably outside its previous assumed range of movement.

In the case of the mortgage crisis, econometricians assumed a very narrow range of movement for default rates on sub-prime mortgages. What they failed to take into consideration was that in the new world of securitization, many originators of mortgages did not have incentive to carefully analyse the ability of a borrower to pay a mortgage, since the originators sold off the mortgages and simply earned an origination fee, without exposure to default risk. This resulted in originators creating mortgages with the potential for much higher default rates. Thus, the default rates on subprime mortgages started to dance in a dance style not scene since Michael Jackson's moonwalk dance.
Ebeling goes on:

...Austrians have long insisted that the laws of economics are essentially logical relationships, not empirical ones; that economics can "predict" but only in qualitative terms, not quantitative ones; that economics can only make "pattern" predictions.

Austrians (true to their theory of the logic of the interconnections between credit expansion, market rates of interest, the term structure of investment, and relative price and allocation effects caused by the non-neutrality of money) have often warned of the inflationary and destabilizing consequences from Fed policy over te last decade.
All this is very true. But then he writes: Austrian could (or did) claim to know when the cycle would turn, or what would set it off, and how the downturn would or could play itself out, i.e., in what in historical retrospect we will see from the vantage point of some future moment as the actual patterns and also unique time-sequence of the "micro" steps by which this will play out.

...We know how the Great Depression of the 1930s played out because it is now history....But instead of reading histories of the Great Depression, suppose we went into the archives of the newspapers of the time -- the "Wall Street Journal," the "New York Times" -- and, say, from 1929 to 1935 read the stories, day-by-day, the analysis and the commentaries and interpretations of what was happening and where it was leading.

I would suggest that virtually no one knew where the process was leading. Because it depended upon the "complex phenomena" of individual decisions, political policy choices, ideological influences, and everyday actions based on the expectations held at each moment in time....We will know all the answers [about the current crisis]-- when some future economic historian (maybe even an "Austrian") writes the history of our times, and tries to tell those future readers how it all happened and why.
What Ebeling is doing here (Curiously, for an Austrian, in empirical fashion.) is pointing to the facts of the Great Depression and arguing that only in hindsight can we know what occurred, and that no correct forecasts can be made in real time, and equates this empirical situation to the current crisis. But there is one difference between the Great Depression and now, I wasn't around for the Great Depression.

Ebeling is correct in his assertion that exact quantitative forecasts can not be made. But to state that "virtually no one knew where the process was leading" is close to implying that it can not be done at all, to any degree..."Because it depended upon the 'complex phenomena' of individual decisions, political policy choices, ideological influences, and everyday actions based on the expectations held at each moment in time....We will know all the answers -- when some future economic historian (maybe even an "Austrian") writes the history of our times, and tries to tell those future readers how it all happened and why"

That enough of these details can't be known to get a very good sense of the direction of trends in an economy is simply untrue for all cases.

For example, the current crisis began with problems in the housing market and mortgage markets.

In 2004, New York Federal Reserve economists Jonathan McCarthy and Richard W. Peach wrote a paper Is There A Bubble in The Housing Market Now? Their answer was decidedly, "No.

I issued a reply to their paper, at that time writing under a pen name because of other business commitments:

...the record climb in housing prices is, indeed, a bubble... the Federal Reserve study fails to consider past declining interest rates as a cause of the bubble. The faulty conclusions reached by Federal Reserve economists Jonathan McCarthy and Richard W. Peach may make many potential new home buyers comfortable about a purchase, when, in fact, we are very near the top of a housing market that will experience substantial declines in prices...

They reach the conclusion that because of ....[the] "fundamental factor" of low nominal interest rates, higher housing prices are justified.

But does this mean real estate prices will not drop? Our answer is decidedly no. Indeed, McCarthy-Peach report that "since 1995, real home prices have increased about 36 percent, roughly double the increase of previous home price booms in the late 1970's and late 1980''s." We view this increase as largely the result of the Federal Reserve's lowering of interest rates and the pumping of liquidity into the banking system, thus producing the byproduct of higher housing prices. But by incorporating falling nominal interest rates as a "fundamental factor" that can not be a cause of a bubble, McCarthy-Peach have literally defined the cause of the current bubble from being taken into consideration....

Further, the current structure of many mortgage loans whereby no money down is acceptable and/or adjustable rate mortgages are popular, sets up the possibility that many may walk away from current mortgage commitments down the road as interest rates begin to climb. Indeed, as ARM's rates become more and more burdensome and as housing prices begin to decline, walk away situations are likely to become quite prevalent, thus adding even more downward pressure to the housing market.

It is our conclusion, then, that by defining nominal interest rates as a fundamental factor and not as the Fed induced causal factor of the real estate boom, and by completely ignoring the structural features of current mortgage loans, McCarthy and Peach have blinded themselves to the real estate bubble that does exist. They have set themselves up for perhaps making the worst economic prediction since Irving Fisher declared in 1929, just prior to the stock market crash, that "stocks prices have reached what looks to be a permanently high plateau."
Like, I said, you can certainly get a good sense for trends, if you really understand theory. There were no predictions on my part as to date or degree of any collapse (as Ebeling would appreciate), but certainly the trend was accurate and would have protected anyone taking my analysis to heart from jumping into the housing market.

The recent downtrend in the stock market also didn't take me by surprise. Here are my real time posts using nothing but Austrian theory:

See here,here, here, here, here, here, here and here.

It is impossible to point to exact dates, degrees of market movements, but to say,"...neither Austrian Economists nor our Neoclassical and Chicago and Rational Expectations 'colleagues' know what is happening in the economy..." is going too far. It pays to be humble when making forecasts even of qualitative trends, because of the complexity of an economy, but it does not mean that they can not be made with appropriate caveats.

To give another example, if price controls are placed on an economy during a raging price inflation, it would not be too bold a situation for an economist to say that shortages are very likely to arise, without going into the specifics of when and where such shortages will occur.

Economics is not a science that can only be used by historians. It is very valuable in making sense out of current goings on. It is the econometricians who take it to absurd levels in the impossible exactness of their forecasts using faulty mathematical techniques. Thus, we shouldn't throw the forecast baby out with the econometricians bathwater, they are two very seperate and distinct matters.

Robert Wenzel is an economic consultant and Editor & Publisher of He can be reached at

Boone "Bailout My Windmill Losses, In Advance" Pickens Has Huge Energy Trading Losses

A member of the oligarchy is taking a big hit in his energy trading fund.

About half of the investors in Boone Pickens's energy-oriented equity hedge fund have asked to withdraw their money on the heels of losses of about 60% this year, according to WSJ.

Tuesday, October 28, 2008

Wall Street Knows A Gift Horse When It Sees One

Today's climb of 889.35 points, or 10.9%, in the Dow Jones Industrial Average to 9065.12, included gains in all 30 of its components.

The catalyst for the move: News that sales of longer-term commercial paper soared 10-fold after the Federal Reserve began buying the corporate paper.

Companies yesterday sold 1,511 issues totaling a record $67.1 billion of the debt due in more than 80 days, compared with a daily average of 340 issues valued at $6.7 billion last week, according to Fed data. The Fed began buying commercial paper from companies yesterday.The central bank probably absorbed about $60 billion of the total, said Adolfo Laurenti, a senior economist at Mesirow Financial Inc, according to Bloomberg.

It's possible the Fed sterilized this buying, but if they didn't money supply is gong to rocket.

A New Kind of Patriotism

Grab billions from taxpayers, all for the good of the country, of course.

SunTrust is getting $3.5 billion and said:

“Our participation in the Capital Purchase Program enhances SunTrust’s already solid capital position and will permit us to further expand our business and take advantage of growth opportunities,” said James M. Wells III, Chairman, President and CEO. “In addition, we are pleased to support the Treasury in its ongoing effort to address dislocations in financial markets and spur the market stabilization that is in the public interest.”
NorthernTrust put out a press release yesterday to announce its $1.5 billion infusion because it “fully supports the U.S. government’s efforts to strengthen our nation’s financial system.”

Valley National reports: “Although Valley is a well-capitalized organization, we believe such a program provides an excellent opportunity for healthy strong banks like Valley to participate in and support the recovery of the U.S. economy”.

First Niagara said in its press release yesterday, “We are supportive of the Treasury Department’s efforts and remain strongly committed to supporting the economy in Upstate New York.”


I Get The Sense That Paul Huebl...

...will not be celebrating in Chicago's Grant Park on election night.

German Economic Policy Under Hitler

"The most serious financial problem for the Nazi State is not the danger of a breakdown of the currency and banking system, but the growing illiquidity of banks, insurance companies, saving institutions, etc. . . . Germany's financial organizations are again in a situation where their assets which should be kept liquid have become 'frozen'. . . . But the totalitarian State can tighten its control over the whole financial system and appropriate for itself all private funds which are essential for the further existence of a private economy. Yet the institutions which still exist as private enterprises are not allowed to go bankrupt. For an artificial belief in credits and financial obligations has to be maintained in open conflict with realities."

From Gunter Reimann, The Vampire Economy: Doing Business Under Fascism (1939)p174


Timing An October Surprise

We have already had one mini-October Surprise, is a big one on the way?

Justin Raimondo identifies possible sources of an October Surprise that would attempt to derail the Barack Obama election juggernaut. He lists as flash points, Iraq, and notes the curious incursion into Syria, The Caucasus and Al-Qaeda, as points from where an October Surprise could emerge, internationally.

On the domestic front, he lists rumors about an Obama friendship with one, Vera Baker, that had Michelle Obama boiling, and thus has the potential for boiling over wide at any point.

Whatever the October Surprise, if such is planned by those who plan such things, my bet is that it will occur within 24 hours of Obama's paid-for 30 minute network speech scheduled for tomorrow night. You do not want additional traction from such an Obama speech, so why not dominate the news with the October Surprise?

Calculate Changes To Your Taxes Under McCain and Obama Proposals


Note: Actual tax hikes will vary, and will likely be much higher. HT2GM

Home Prices Post Record Decline

The housing market continues to adjust from the bubble days.

The S&P/Case-Shiller home-price indexes showed home prices in 10 major metropolitan areas fell a record 17.7% in August from a year earlier and 1.1% from July.

Falling prices will help the market clear the supply overhang and, as a bonus,will make housing much more affordable. Given the likely inflation ahead, it's probably a very good time to start looking for your dream house.

The Coming Collapse Of Treasury Security Prices

FT has a solid article this morning on the huge Treasury offerings that will be required because of the "bailouts".

Among the points made:

Before the recent upheavals, the US budget deficit for the fiscal 2009 financial year starting this month was estimated between $400bn and $450bn. Some economists now expect that figure to reach $1,000bn, which would be a record. That will push Treasury debt sales sharply higher...

“It is pretty conservative to say that the cost of the bail-out will be $1,000bn and by the time all the programmes have been tallied, it could be $2,500bn,” says Jamie Jackson, portfolio manager at RiverSource Investments...

This is all going to mean greater frequency of issuance and a return of previously discontinued issues such as the three-year note and possibly the seven. At a minimum, dealers expect the return of the three-year note, which was suspended in May 2007. The sale of 10-year notes is expected to move to a monthly schedule from being sold twice every quarter at present. New sales of 30-year bonds are seen occurring every three months...

From a logistical standpoint, the quarterly sale of debt in November and this week’s sales are a major test for the thinning ranks of primary dealers. These are the banks and securities broker-dealers that participate in Treasury auctions.

From 20 primary dealers at the end of 2007, Bear Stearns, Lehman Brothers and Countrywide have fallen by the wayside this year. The list will shrink to 16 once Merrill Lynch is absorbed by Bank of America.

Fewer dealers at a time when banks are preserving their balance sheets before the end of the year has contributed to an erosion in liquidity for buying and selling current and older Treasury securities. That backdrop could lead to poorly received auction sales, with yields for new notes being awarded at much higher levels, driving up the cost for the Treasury and taxpayers...

Tom di Galoma, head of trading at Jefferies & Co says: “No one has any balance sheet room and supply is a concern for the rest of the quarter.”..

Treasury in recent weeks has been selling securities in a buyers market as the flight to quality has caused enormous demand of Treasury securities. This will all change when the market stabilizes. Not only will there be less demand for Treasury securities, but there is likely to be major liquidation of currently held Treasury positions. A flight from Treasury securities is a very real possibility. This will also have negative ramifications for the dollar.

The only way to stem the collapse of the Treasury market would be for the Fed to step in and become an aggressive buyer of Treasury securities. This would be an exceptionally inflationary move. Bernanke has been running an erratic money supply operation since he has taken over, so it is impossible to guess how inflationary he is willing to get to protect Treasury rates. It is likely to result in a combination of some Fed buying coupled with a climb in rates.

The noose on government money operations is tightening again. For savvy traders, it will be a huge money making opportunity. For the average Joe, plumber or not, it will be a lower standard of living as rates climb, inflation climbs and Treasury borrowing crowds out private sector borrowing.

A Plausible Explanation Behind Recent Downside Action In The Markets

...from Robert Peston:

As for this most recent phase of the withdrawal of credit, which has caused financial crises for a series of emerging economies in eastern Europe, Asia and South America (see "Now there are runs on countries") and also global falls in share prices, it was in a way wholly foreseeable.

It was caused, to a large extent, by an exceptional and unprecedented shrinkage in the prime brokerage industry, which in turn led to a serious reduction in the volume of credit extended to hedge funds, which in turn forced hedge funds to sell assets, especially those perceived as higher risk.

This contraction in loans provide through prime brokers was the inevitable consequence of the collapse of Lehman, but also - far more importantly - of the recent conversion into banks of Morgan Stanley and Goldman Sachs.

Morgan Stanley and Goldman are - by far - the biggest prime brokers, with Morgan Stanley the number one.

But as banks, they're prevented by regulators from lending as much relative to their capital resources as they had been as securities firms.

So the US authorities should have known - and presumably did know - that by allowing Morgan Stanley and Goldman to become banks they were in effect forcing a serious contraction in the hedge-fund industry, which in turn would lead to sales of all manner of assets held by hedge funds and precipitate turmoil throughout the financial economy.


Monday, October 27, 2008

Obama's Core Belief System

The soundbites off the release of the Obama Chicago Public Radio interview, do not surprise U.S. News and World Report's James Pethokoukis:

This should be a Saturday Night Live sketch. Use the court to redistribute wealth? Really? The Warren court was not radical? Really? Anyone could craft a theoretical justification to use the court to spread the wealth? Really? This all strikes me as highly weird...Keep in mind, now, that every Obama economic adviser I can think of—Warren Buffett, Austan Goolsbee, Jason Furman, Robert Rubin, Lawrence Summers, Jared Bernstein—thinks that we need higher income and investment taxes to deal with income inequality and that tax rates would pretty much have to double before they would hurt the economy. So Obama's comments reflect a core belief system that he's apparently held for years and continues to hold.

Will we yearn for the days gone by when only the banks were nationalized and Paulson stuffed billions into the pockets of his crony buddies?

David Warsh with Big Questions and Big Stories

David Warsh has just published the silver anniversary issue of Economic Principals. I have been reading him from the start, when his column was at the Boston Globe. Twenty-five years ago, his column was the first item I turned to, in the big, thick Sunday Globe. The memories come back, as if it were only yesterday. He is not an Austrian, but he is a damned honest, sincere, interesting and informative writer. We definitely need more people like him (or at least hope, he carries on for another 25 years!)

His silver anniversary issues comes out with rockets blaring and asks these important questions:
How deep has been the opposition between the Federal Reserve Board and the US Treasury Department these last fifteen months? Fed chairman Ben Bernanke and Treasury Secretary Henry Paulson have presented a generally united front. But what goes on behind the scenes? What of their staffs? The sheer opacity of Paulson’s initial plan to buy and hold troubled securities, and the clumsiness with which it was presented, has yet to be explained. What was the process by which it was developed and internally reviewed?

Warsh is on to something here. In early Congressional testimony, Bernanke's view of how the mortgage bail out would proceed was decidedly different from Paulson's. Bernanke testified that the bailout would result in mortgages being bought at "value at maturity". Paulson said they would be bought at discounted market value. The next day in further testimony, Bernanke fell in line with Paulson. Paulson's plan proved a non-starter. Indeed, WSJ reported that it is a dirty little secret that Paulson's Plan to buy up mortgages would not work and indeed would cause more problems for banks, and that is why Treasury shifted to infusing capital directly into banks. And, then, of course, there is the fact that Goldman Sachs and Morgan Stanley become bank holding companies, and each receive a $10 billion infusion from Treasury. What Just Happened? is the title to Warsh's column, yes indeed.

Warsh also broke wide open Harvard University’s Russia scandal of the 1990s.

Warsh writes:

No column I ever wrote cost more than “The Thing’s a Mess,” the first installment, in 2002, of many columns over the last six years about the collapse in 1997 amid charges of corruption of Harvard University’s USAID-sponsored mission to advise the government of Boris Yeltsin. I knew I was damaging several longstanding relationships with economists whom I admired by calling attention to the details of the US Justice Department’s ultimately successful attempt to recover damages in Boston’s Federal District Court.

Since then I have gotten used to it, and in more than twenty pieces, I have given a pretty good account of how Harvard professor Andrei Shleifer was found to be investing in Russia, along with his wife, deputy, and deputy’s family, in violation of his contractual obligation to provide disinterested advice, and how his close friend and mentor Lawrence Summers sought unsuccessfully to distance himself from the lawsuit, but not from Shleifer, first as Treasury Secretary and then as president of Harvard, as the matter plowed on to its ignominious conclusion. The episode was widely covered in Russia, and became part of the rich lore of Russian resentment
of US policy in the aftermath of the Cold War.

Warsh also writes of the reception he received from the usual suspects about his breakthrough story:

But you would never have a clue that any of this [the Russia episode] had happened from three of the most widely-read economists’ blogs, the Freakonomics site, J. Bradford Delong’s Semi-Daily Journal, or N. Gregory Mankiw’s blog. Why? Because they are economists, and not committed to “without fear or favor” news, though they deliver plenty of interesting tidbits over the course of a week. Besides, Shleifer is on the board of directors of the Becker Center on Price, where Freakonomics’ Steven Levitt teaches. DeLong, who worked under Summers at the Treasury Department, has been Shleifer’s friend since the two were college roommates. Mankiw regularly touts his colleague for a Nobel Prize.
The online edition is free, but the $50 Bulldog edition puts bread, not likely steak, on Warsh's table, and is available by subscripton.

The Guns and Ammo Economy

There's an unintended consequence to Barack Obama's strong showing in the polls. Gun and ammo sales are soaring.

Purchases of firearms and ammunition have risen 8 to 10 percent this year, according to state and federal data, reports WaPo.

Gun purchases have been climbing because of the worsening economy, which fuels fears of crime and civil disorder, but Obama is another reason.

WaPo again:

"Even though [Obama] has a lot going for him, he's not very pro-gun," said Paul Pluff, a spokesman for Massachusetts-based Smith & Wesson, which has reported higher sales. Gun enthusiasts are "going to go out and get [firearms] while they still can."

October Surprise #1: Obama In His Own Words On Redistributing Wealth

A 2001 Chicago Public Radio audiotape of Barack Obama surfaced and in it the Presidential candidate laments that the Supreme Court under former Chief Justice Earl Warren did not go far enough in its civil rights rulings.

Obama said that the Supreme Court should have decided that government should have redistributed the wealth to African-Americans...


G7 Disses Climb In Yen

Below is a statement issued by the G7 Finance Ministers and Central Bank Governors:

We reaffirm our shared interest in a strong and stable international financial system. We are concerned about the recent excessive volatility in the exchange rate of the yen and its possible adverse implications for economic and financial stability. We continue to monitor markets closely, and cooperate as appropriate.

The strength in the yen is likely the result of two factors 1. the unwinding of carry-trade positions by some hedge funds and 2. it could very well be a sign of major new diversification away from the dollar. The dollar has been strong of late, as mis-guided investors consider a move into the dollar a flight to quality, but as Warren Buffet warns:

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

When the deprecation becomes obvious the yen strength is likely to only intensify.

Any attempts by the G7 to slow the yen's ascent will be short-term in impact. Indeed, the trade to be made is to go long the yen on any moves by the G7 to push it down.


Bob Murphy generally does a good job of rebutting the regular nonsense blogged by Tyler Cowen. However, today, I have to step into the fray, since Cowen touches on topic near and dear to my heart, the business cycle.

In a post titled, Assorted Links, Cowen lists Greg Mankiw's recent column. About the column, he writes,"My favorite Greg Mankiw column so far."

I have a decidedly different take, since in his column Mankiw discusses the current downturn and the Great Depression, yet fails to even mention the possibility of a business cycle theory that could explain the two declines.

Cowen also links to a column by Jeffrey Rogers Hummel. About this column, Cowen writes, "Jeff Hummel blames Bernanke and Paulson for what has happened. I don't agree but we are committed to passing along many different points of view."

Say what?

Hummel writes a detailed blow by blow of Fed money manipulations over recent months. He details what I have been pointing out in real time all summer, that the Fed only started expanding the money supply in late September.

Hummel also does an excellent job of explaining what the recent explosion in the monetary base and Fed credit is all about. (

Although, there are several points of Hummel's that I disagree with, for example, he fails to note that M1 is climbing because of the fear factor, and that the explosion in the monetary base may not, in itself, cause a money supply explosion since the huge Treasury deposit is just sitting there and not entering the system, it is one of the best columns I have read that describes the current monetary situation. Cowen disagrees. He prefers the Mankiw puff piece.

Read the two columns for yourself, and decide who is writing a detailed explanation of the current situation and who is writing puff. Cowen's choice between these two columns is the kind of off center stuff that he regularly posts, which makes it easy to understand how Murphy is able to plant brutal knockout blow after knockout blow on Cowen.

Mankiw's column is here. Hummel's is here.

Another Reason To Be Afraid

There is some speculation that Larry Summers, Charles W. Eliot university professor at Harvard, may be the Barack Obama's choice for Treasury Secretary. In a column he writes for FT, Summers yesterday displayed his total lack of understanding of how a free market economy works. Given Obama's interventionist tendencies, this is the last man you want giving Obama advice.

Here's micromanager, interventionist Summers:

Even with the best conceivable fiscal, monetary, financial and regulatory policies, economic performance depends on deeper and more structural policy choices. Nations cannot fine tune their way to delivering a prosperity that is more broadly based. In important ways, then, the crisis creates space to address longer standing problems. Just as patients hear advice regarding diet and exercise differently after a heart attack, so recent events should make it possible for the next US administration to accomplish more than might previously have been thought possible....

...there is a need to ensure that the pressure to increase spending is directed at areas where it will have the most transformational impact. We need to identify those investments that stimulate demand in the short run and have a positive impact on productivity...

The wealth and income gains from the easy availability of credit were highly concentrated in the hands of a fortunate few... More fundamentally, short and longer-term imperatives come together with respect to policies that seek to ensure that any future prosperity is inclusive. The policies that are most effective in helping to support demand are those that help households struggling either because of low incomes or because they have recently lost part of their income...

All of these considerations suggest that the pendulum will swing – and should swing – towards an enhanced role for government in saving the market system from its excesses and inadequacies.

Oh yeah, Larry Summers knows how to run the economy better than millions of people toiling every day to make the world better. F. A. Hayek called it a fatal conceit.

What can be said other than that Summers has no understanding of the free market system and is the type of economic tinkerer that will ignore supply and demand curves, and replace them with policies designed in a manner that will obfuscate the fact that the policies fly in the face of reality--and yet build big egos at the same time. Ultimately, these bizarre economic structures are doomed to failure. Thus, leading to one of two options, they are either abandoned or government attempts to enforce them at gunpoint. Be very afraid.

Goldman Approached Citigroup About Reverse Merger

FT has the details:

Lloyd Blankfein, Goldman Sachs’ chief executive, called Vikram Pandit, his Citigroup counterpart, last month to discuss a merger, in a dramatic example of the secret manoeuvring that preceded the government bail-out of the financial sector.

The call, which was made at the tentative suggestion of the regulatory authorities or at least with their blessing, was made shortly after Goldman had won surprise approval to convert itself from a securities firm into a commercial bank on September 21, according to several people familiar with the events.

They added that the conversation was brief as Mr Pandit rejected the proposal at once.

[Technically, for regulatory reasons]a deal would have been structured as a Citi takeover of Goldman.

Made at the suggestion of regulatory authorities? Hmmm, that would be former Goldman man Hank Paulson.

Sunday, October 26, 2008

Victor Niederhoffer's Take On Alan Greenspan's Testimony

One can't help but think that Alan Greenspan's confession that his belief in free markets was wrong is an example of the "Old Man Syndrome" a la Cyril Burt wanting to have the most identical twins in his study, combined with George Zachar's "your own man said you were out." -Niederhoffer

In a lot of people's eyes, Old Man Syndrome, is an easy way to let Greenspan off the hook for a long career as a government apparatchik.

Greenspan's one time girlfriend, Barbara Walters, in her autobiography, Audition, even pointed out that she contentiously debated with Greenspan over the fact that he took the position of Fed chairman. She wrote: "How Alan Greenspan, a man who believes in the philosophy of little government...could end up becoming chairman of the greatest regulatory agency in the country is beyond me..."

President Obama Will Crush Greg Mankiw's Incentive To Do Additional Work

Mankiw does the numbers, here.

Note: Although he details well the heavy additional tax burden he will face during an Obama Administration and that he is thus less likely to work additional hours, he fails to note that this will also impact the standard of living of others, who will fail to benefit from his work. (Or perhaps, deep down, this is a Freudian slip, where he realizes an economist who doesn't have a business cycle theory isn't much of an economist.)

Saturday, October 25, 2008

How to Create Question-Order Effects in Surveys

Via The Monkey Cage

Obama Tries To Lock It Down

Barack Obama is running as many as seven ads for every one of John McCain's, in certain key states. Overall, he s spending $4.00 to every $1.00 spent by Mccain.

Obama reported spending $82 million on advertising during the first two weeks of October -- more than half of what Sen. John F. Kerry spent on television commercials for the entire 2004 presidential campaign, according to WaPo.

Reports filed with the Federal Election Commission late Thursday show that Obama and the Democratic Party committees that are supporting his effort spent nearly $105 million from Oct. 1 to Oct. 15. McCain and Republican Party entities, by contrast, spent approximately $25 million.

I Think Sarah Palin Is Against Another Stimulus Package...

...but, I'll let you decide:

"I say, you know, when is enough enough of taxpayer dollars being thrown into this bill out there?" she asked. "This next one of the Democrats being proposed should be very, very concerning to all Americans because to me it sends a message that $700 billion bailout, maybe that was just the tip of the iceberg. No, you know, we were told when we've got to be believing if we have enough elected officials who are going to be standing strong on fiscal conservative principles and free enterprise and we have to believe that there are enough of those elected officials to say, 'No, OK, that's enough.'"

Hitler Gets A Margin Call

There Was A Plunge In Volvo Truck Sales By....


Who says markets can't adjust to recession and volatile oil prices?

"...truckmaker Volvo admitted demand across the Continent has crashed by 99.7% as it took orders for just 115 new lorries in the last three month. That compares to orders totalling 41,970 in the third quarter of 2007," reports

Global orders for Volvo slumped 55%.

Chinese Sovereign Wealth Fund Has Cash Frozen In US Money Market

This is not making officials back at the home office happy, and can only mean one more straw on the camel's back that will cause China to continue to distance itself from the dollar.

Sovereign wealth fund, China Investment Corp (CIC), has funds frozen in Reserve Primary Fund (RPF).

RPF suspended redemptions last month when it became the first money market mutual fund to 'break the buck'.

CIC said Wednesday that it had asked RPF to return CIC's funds in full, prior to the US fund's move to freeze redemptions, claiming that the US fund also had sent a written confirmation that it will return CIC's principal in full along with interest.

CIC also claimed to be a creditor of RPF, suggesting it will be among the first in line to be repaid, but an RPF statement indicates it classifies CIC as an investor.

Neither CIC nor RPF have stated how much CIC invested with the fund.

CIC was established by the Chinese government in late 2007 with 200 bln usd in capital. Its mission is to obtain better returns on China's foreign exchange reserve holdings.

Foreign Central Banks Do Not Trust The US Government

There's some very interesting cross trends in central bank investing, which clearly indicate foreign central banks do not accept the word of the Treasury that they will back-up agency paper, such as Fannie Mae and Freddie Mac paper.

As Brad Setser points out:

In the first three weeks of October, the latest New York Fed custodial data indicates Central banks have added $53.9b to their Treasury holdings while reducing their Agency holdings by $51.4b. Since September 3 – roughly the time when the Treasury announced it would recapitalize the Agencies as needed – central banks have added $130.2b to their Treasury holdings while reducing their Agency holdings by $40.7 billion.
This has to be some type of cultural "lost in translation" problem, since my guess is that it would be hard to find a US money manager who does not believe that the Treasury doesn't stand ready to buy every single piece of agency paper, if it has to.

This, of course, is a positive for US investors looking for a safe, higher yielding alternative to Treasury securities. Agencies are all paying at least 100 basis points higher.

There is also a BIG question: What else is lot in translation with foreign central banks and what are the possible financial implications down the road, if any? A scary question in the current environment.

What Greg Mankiw Is Teaching Our Kids

Harvard economist, and super best selling author of economic texts, Greg Mankiw writes in his NYT column this week about the Great Depression and the possibilities of such occurring now.

Curiously, although he is writing about the Great Depression, he does not once mention the business cycle.

This is as close as he gets:

The Depression began, to a large extent, as a garden-variety downturn.

His reason for the start of the Great Depression:

The 1920s were a boom decade, and as it came to a close the Federal Reserve tried to rein in what might have been called the irrational exuberance of the era.

That's it, a playful use of words first used by the now discredited Alan "I have found a flaw" Greenspan. And, this man, thorough his texts, is teaching our kids!

Of course, there is a business cycle theory and it teaches that the business cycle is caused by money being misdirected by central banks into the capital goods sector during the boom period and then readjusting during the bust part of the cycle.

Indeed, Mankiw describes the facts of this shift away from the capital goods sector during the depression, but somehow does not point out that this is what business cycle theory teaches would occur:

In 1928, the Fed maneuvered to drive up interest rates. So interest-sensitive sectors like construction slowed.

Maybe Mankiw has been reading too much of Paul Krugman's wacky theory that the business cycle is a religion.

From there, Mankiw's article disintegrates even furthee, he writes:

Less successful were various market interventions. According to a study by the economists Harold L. Cole and Lee E. Ohanian, both of the University of California, Los Angeles, and the Federal Reserve Bank of Minneapolis, President Roosevelt made things worse when he encouraged the formation of cartels through the National Industrial Recovery Act of 1933. Similarly, they argue, the National Labor Relations Act of 1935 strengthened organized labor but weakened the recovery by impeding market forces.

This is all very true, but should have been explained in much greater detail, since it is at the heart of understanding how to keep us from experiencing another Great Depression.

Cole and Ohanian contend that without the FDR's economic programs, such as the National Industrial Recovery Act (NIRA) the National Labor Relations Board, the Depression would have ended in 1936 instead of the year when they believe the slump actually ended: 1943!

NIRA's labor provisions were strengthened in the National Relations Act, signed into law in 1935. As union membership doubled, so did labor's bargaining power, rising from 14 million strike days in 1936 to about 28 million in 1937. LABOR STRIKES IN THE MIDDLE OF A DEPRESSION! By 1939 wages in protected industries remained 24 percent to 33 percent above where they should have been, based on 1929 figures, Cole and Ohanian calculate. Unemployment persisted because of these artificially high wages. By 1939 the U.S. unemployment rate was 17.2 percent, down somewhat from its 1933 peak of 24.9 percent but still very high.

"The fact that the Depression dragged on for years convinced generations of economists and policy-makers that capitalism could not be trusted to recover from depressions and that significant government intervention was required to achieve good outcomes," Cole said. "Ironically, our work shows that the recovery would have been very rapid had the government not intervened."

Mankiw after failing to make clear the details of the Cole and Ohanian research, in other than the most superficial fashion, then goes on with nonsense talk about the failures of the economic profession:

In other words, even if another Depression were around the corner, you shouldn’t expect much advance warning from the economics profession.

Well, I guess this is true if you don't understand the business cycle. But, if you do understand the business cycle and watch money supply, the problems in the economy are not that difficult to spot. See here, here, here, here, here, here, here and here. Or to get the full picture years in advance, see here.

As for the future, David Sirota sounds the warning, without realizing it :

..if Obama wins, he will have as powerful an economic mandate as FDR received in the 1932 landslide election, because the voting public will be expecting - no, demanding - far-reaching economic change.

Economist Paul H. Rubin explains what this means:

Unlike FDR, Mr. Obama will not have to create the mechanisms government uses to interfere with the economy before imposing his policies. FDR had to get the Supreme Court to overturn a century's worth of precedents limiting the power of government before he could use the Constitution's commerce clause, among other things, to increase government control of the economy. Mr. Obama will have no such problem.

FDR also had to create agencies to implement regulations. Today, the Securities and Exchange Commission and the National Labor Relations Board (both created in the 1930s) as well as the Environmental Protection Agency and others created later are in place. Increasing their power will be easier than creating them from scratch...

Democrats draw their political power from trial lawyers, unions, government bureaucrats, environmentalists, and, perhaps, my liberal colleagues in academia. All of these voting blocs seem to favor a larger, more intrusive government. If things proceed as they now appear likely to, we can expect major changes in policies that benefit these groups.

And, Mankiw, plays subtle with this danger, at best, in his NYT column. He does not mention an Obama presidency instituting "economic change" that could very well cause the next Great Depression.

The next time I run into a college student, or college graduate that tells me economics was boring in class, I'm going to tell them that the professor that writes those college texts can't even predict a recession or depression, and any professor that uses his textbooks is drinking mainstream kool aid that hides the true facts of what is going on. They want to keep you bored and uninformed, and Mankiw is the best at doing it, I'm going to tell them. And then, I am going to direct them to EPJ which does discuss the business cycle and is obviously not boring.

David Letterman on the Depth of the Financial Crisis

Times Square hookers are now worried they'll have to work beyond their retirement age of 65.

Friday, October 24, 2008

Treasury Reports On Where Your $700 Billion Is Going

The Treasury Department has hired two big accounting firms to help keep tabs on the government's financial-industry rescue program.

The Pricewaterhouse Coopers contract (below) released by the Treasury Department on Tuesday has blacked-out text in the area covering the firm's bid, and also conceals the name of the PricewaterhouseCoopers partner who signed the deal.

The Ernst & Young contract has no blacked-out sections, just notes saying that two parts of the agreement were redacted. Those were the firm's price quotation and technical quote.

The Treasury Department put out an announcement about a major bailout-related contract with Bank Of New York Mellon. The copy of the agreement (below) that was made public had blacked-out paragraphs in the section covering Bank of New York Mellon's compensation.


Alert: Paulson Speaks Tuesday in NYC


Tuesday, October 28, 2008, 10:45 a.m. EDT
Secretary Henry M. Paulson, Jr.
Remarks on Markets and the Economy
Securities Industry and Financial Markets Association Annual Meeting
Marriott Marquis
1535 Broadway
New York, N.Y.

On The Huge Spike In The Fed's Balance Sheet

Bob Murphy emailed me to ask me my thoughts on the huge spike in the Federal Reserve balance sheet. This is an important enough topic that I will outline my thoughts in this post.

There has been huge coverage in the econ/blog world with regard to this spike--a lot of the commentary being confused or just plain wrong. Anyone, for example, calling the spike a major inflationary injection is way off.

The best coverage I have seen has come from James Hamilton at Econbrowser.

Here's one of the charts that everyone is getting worked up about.

Here's Hamilton's take on what is going on:

...the real action began last month...the Fed expanded its total asset holdings by $600 billion over the last 30 days, with less than a third of this going directly into reserve balances...

Reserves ballooned [immediately after 9-11] to $67 billion, as excess reserves simply piled up in some banks while others remained in need. Last week's spike of $171 billion was 2-1/2 times as big-- the breakdown of interbank lending last week proved more profound than that caused by the physical disruptions in New York in 2001.

Anyone who suggests that last week's ballooning reserve deposits represent inflationary pressure or the Fed monetizing the deficit simply doesn't know what they're talking about. Banks are sitting on the reserves, not withdrawing them as cash. When markets settle down, the Fed can and will absorb those reserves back in with sterilizing sales of Treasury securities, just as it did in 2001 or after the more modest spike in August 2007....

...we see that creating new reserves, as dramatic as it was, was dwarfed in magnitude by some of the other actions the Fed took over the last month...

I gather that the Treasury auctioned off some extra T-bills to the public, in addition to their usual weekly auction, and simply kept the receipts as deposits in an account with the Fed. If that were the end of the story and the Fed kept its total liabilities constant, it would result in a huge (completely infeasible technically) drain on reserve balances and currency in circulation, as banks sought to deliver reserves to the Treasury's account to honor their customers' purchases of the T-bills. So the Fed offset the supplemental Treasury auction with a matching purchase of private assets, such as the PDCF and AMLF, thereby temporarily delivering reserves to banks which the banks in turn could hand over to the Treasury supplementary account. The net result of such dual Treasury/Fed operations is that the newly created "reserves" would just sit there in the Treasury supplementary account doing nothing other than standing as an accounting entry. In other words, the device allowed for a huge expansion of the Fed's balance sheet without causing any change in currency in circulation or reserve deposits.

So there you have it. The flight to quality is resulting in the Treasury being able to raise huge amounts in the T-Bill market. By treasury depositing the proceeds at the Fed, it is the same as the Fed drawing these huge reserves out of the economy. Thus the Fed re-injects the funds by its its purchases through currency swaps, primary dealer credit facility operations and the like. Resulting in a non-event, from a money supply perspective, in spite of the huge increase in assets on the Fed's balance sheet.

The theory then is that when the flight to quality reverses itself, the entire operation will reverse itself. The T-bill owners will demand payment for their T-bills, the Treasury will draw down on its reserves at the Fed to pay off the T-bills, and the Fed will drain money from the system to offset the new money coming into the system from payments to T-bill holders by the Treasury. But, here's the rub, to drain reserves the Fed will have to sell off the securities it has purchased. It may be able to sell off its commercial paper, but who is going to buy the junk mortgage backed securities it has purchased? Thus, this could all turn out very inflationary once the Treasury needs to pull its deposit with the Fed.

Bottom line: Changes in M2 nsa money supply remains the best indicator of how much net-new money the Fed is adding to the system.

The Ultimate Sin

They'll lie and say they have a degree in economics, when they don't.

Congressional candidate Darcy Burner has touted her Harvard University degree in economics during her campaign in the state of Washington for the 8th Congressional District seat against Rep. Dave Reichert. But while Burner took some economics classes at Harvard, her degree is in computer science and not economics, reports the Seattle Times.

At two debates this month, she brought up her academic background in her opening statement.

"I loved economics so much that I got a degree in it from Harvard," she said at an Oct. 10 debate at KCTS-TV. "Now everywhere I go in this district, the only thing people want to talk to me about is the economy."

Don't Wait By The Mailbox For Your Check From The Proposed New Stimulus Package

These checks will go only to politically correct groups and politically connected. Your role in the stimulus package will be to pay for it.

WSJ has the ugly details:

The latest plan is even worse than the spring round of $100 billion or so in tax rebate checks. At least rebates allowed taxpayers to spend their own money. Under this stimulus the government will tax or borrow $150 billion to $300 billion in order to spend the money on social and pork-barrel programs. The latest draft would direct dollars to food stamps, another expansion in unemployment insurance, some heating subsidies, more aid to states and cities, and "infrastructure" like roads, bridges and public transit. Because of Davis-Bacon wage requirements on these brick and mortar projects, a portion of the dollars would coincidentally flow to the Democrats' biggest campaign contributors: unions. Call it a political "rebate" check.

What's Obama's take on this boondoggle:

On Tuesday Senator Obama said this spending would create millions of new jobs by closing a federal "investment deficit."

Trading Frozen On U.S. Futures Markets

Overnight, New York December Dow Jones futures were down 6.3 percent, Standard & Poor's 500 futures were off 6.6 percent and Nasdaq 100 futures were down 6.8 percent.

All three contracts lost the maximum amount permissible before the start of regular futures trading in the United States and are frozen from any further downsde tradng..

Both the New York Stock Exchange and Nasdaq said trading would open as normal at 9:30 a.m. EDT.

Nikkei Closes Down 9.6%

In Japan, the Nikkei 225 index plunged 9.6 percent, hitting its lowest level since May 2003. The Kospi in South Korea plummeted 10.6 percent, falling 1,000 points and heading for a total decline this year of more than 50 percent.