Wednesday, December 31, 2008

The 2008 EPJ Awards

There are no statues or television events associated with my EPJ Awards, but feel free, if you are so inclined, to don a tuxedo before reading the remainder of this post, to pour yourself a glass of champagne, and to clap, cheer, hiss or boo when appropriate.

Economist of the Year: Peter Schiff

The award of economist of the year should go either to an economist who has made path breaking new discoveries in the science, or who has advanced the general level of economic understanding on the planet. Schiff falls into the latter category. His consistent and clear presentation of sound economics that proved correct in forecasting events over recent months, in the face of laughter and derision, will raise curiosity across the land about the business cycle theory, specifically, Austrian Business Cycle Theory.

Here's a YouTube video of Schiff battling mainstream nonsense. It puts everything into perspective:

Inside Operator of the Year: Treasury Secretary Henry Paulson

In short order, Pauslon was able to convince Congress to give him $350 billion to buy up distressed mortgages. Paulson managed to disperse the entire $350 billion to his crony buddies without buying one distressed mortgage. In a remarkable disrespect for Congress and the public at large, Paulson also changed, on a near daily basis, the reasons he was distributing the funds in the fashion he was.

Inflationist of the Year (Also known as the Robert Mugabe Award): Ben Bernanke

After nearly halting money printing through out the Summer of 2008, Bernanke has reversed engines and tells us that his monetary policy is now one of "quantitative" money supply control, which apparently is Bernanke's attempt to replace "speed of light" with "speed of money printing" in Einsten's equation E=MC2. Over the last three months, Bernanke has increased money supply, as measured by M2 nsa, at an annualized rate in excess of 20%. Bernanke's effort will result in a change by the end of 2009 from the belief that "cash is king" to the knowledge that cash, in the form of paper dollars, is toilet paper.

My Unrequited Emails of 2008

For ages poets have sought to find the words to explain the pain and sadness of unrequited love, I have no such task before me. However, I must now put fingers to keyboard to explain my 2008 experiences of unrequited emails.

It has happened twice this year, and as the last few hours of 2008 tick down, there is a certain finality to the fact that responses to these emails I will not receive.

I sent the first such email in mid-October to Jackie Wilson, who is Warren Buffett's new media contact. You can read the email, here. In my brief conversation with her, before I sent the email, it was clear that Buffett's folksy charm was not something she specialized in. It was clear Buffett hired her as, well, a buffer. But one has to wonder, how long Wilson will survive at Berkshire Hathaway's worldwide headquarters. Wilson has the concepts buffer and abrasive confused, and, from Alice Schroder's biography of Buffett, it is plenty apparent that Buffett doesn't like abrasive. Wilson may walk on egg shells around Buffett, but some of that abrasiveness must show through. And a little birdie has suggested to me that Wilson is much more interested in how the "Jackie Wilson" name is percieved rather than the name "Warren Buffett". If Buffett figures this all out, then Buffett may well end up giving her the John Gutfreund treatment, before 2009 is over.

My second unrequited email was sent to Austan Goolsbee, an economist and Obama advisor, he proclaimed that Obama likes to hear differing views and wants to bring different views to the table. Since this was the case, according to Goolsbee, I wrote to ask him why this diversity of views did not include any Austrian economists. Goolsbee has failed to respond. Here is the original email to him.

And so, the year closes, with basic questions unanswered by those who should know the answers. Perhaps Goolsbee and Wilson should keep in mind the words of another Wilson, Earl Wilson, when he said,“Snow and adolescence are the only problems that disappear if you ignore them long enough,” and my emails are not about snow or adolescence.

Investors Continue to Bail Out of Hedge Funds

The fear of the markets was clear in November.

Investors pulled a net $32 billion from hedge funds last month, making 2008 the first year in their recorded history that the funds have had significant outflows and ending the industry’s 18 years of asset growth.

To understand how deep the fear was, keep in mind that money has been taken out of funds following every strategy, even those – such as macro funds – which were showing positive returns, according to data from fund trackers Hedge Fund Research.

Further, December redemptions appear to be two to three times the November number.

Conrad Gann, chief operating officer of fund tracker, TrimTabs, says the known December redemption number is already at $57 billion and could go as high as $80 billion.

The funds had outflows of $43 billion for the 10 months to the end of October. TrimTabs’ estimate of further significant redemptions for November and December indicates that the funds will show outflows of more than $100 billion for the full year. In 1994, the only previous time they had outflows, the figure was $1 million.

If you are looking for a reason that Treasury bills are trading near 0%, the hedge fund industry is a good place to start. With these kinds of resumptions coming in, the funds put money in the perceived safest possible instrument, Treasury securities, to meet redemption demands. Investors then get the money and put it right back into T-bills.

Once all the fear subsides, things should turn positive quickly given the enormous amounts of money Bernanke is pumping into the system. December 2008 could very easily be the bottom for markets. January could see huge upside action in the markets.

UCLA Prof Wants Government to Prop Up Stock Indexes

Roger E. A. Farmer, vice chair for graduate studies in the department of economics at the University of California Los Angeles, has penned a column at FT that has me scratching my head. First he correctly writes:

Since world war two, economic policy in most western democracies has been based on Keynesian economics.

But although policy makers still rely on Keynes’ ideas, academics gave up on his theories 40 years ago and went back to classical economics: Keynesian theory could not explain how unemployment and inflation can coincide. The result has been 40 years of disconnect in which policy makers are tinkering with the engine without a manual.
But, then he goes on to state that the problem with the economy is the same one that Keynes promoted:
Classical economists argue that falling wages will restore equilibrium; but this is based on the belief that the labour market works like an auction in which employment is determined by demand and supply.

It ignores the very real frictions involved in searching for a job by both households and firms that can lead to many possible equilibrium employment levels just as Keynes argued in the General Theory.
So where does he really fall on all this? It turns out, he's a Keynesian on steroids. Here is his policy prescription:

So where do we go from here? The only actor large enough to restore confidence in the US market is the US government. The current policy of quantitative easing by the Fed is a move in the right direction but it does not, as yet, go nearly far enough.

It is time for a greatly increased role for monetary policy through direct intervention of central banks in world stock markets to prevent bubbles and crashes. Central banks control interest rates by buying and selling securities on the open market.

A logical extension of this idea is to pick an indexed basket of securities: one candidate in the US might be the S&P 500, and to control its price by buying and selling blocks of shares on the open market.

Even the credible announcement that a policy of this kind was being considered should be enough to boost the markets and restore consumer and investor confidence in the real economy.
Folks, honestly, the Fed is pumping so much money into the economy that Zimbabwe's President Robert Mugabe is getting jealous. The last thing we need is the Fed printing even more money to prop up the S&P 500 Index.

This plan is mad.

Tuesday, December 30, 2008

Hmmm, What Are They Pondering at NYT?

On Sunday afternoon, I replied with comments to Paul Kugman's Hangover Theory rant. It is now 48 hours later and my comments continue to be identified as "YOUR COMMENT IS AWAITING MODERATION.".

My comments were roughly around comment number 30. There are now 50 comments that have been cleared, which means that roughly 20 comments after mine have been moderated and passed inspection. I don't think it took NYT this long to decide to publish the Pentagon Papers.

The gist of my comments I subsequently turned into my own post, which I would imagine most of you have already seen.

Former Goldman Sachs/Merrill Man, What Recession?

Investment banker Peter Kraus, formerly of both Merrill Lynch and Goldman Sachs, has just paid $37 million for a Park Avenue apartment.

Here WSJ reports on Kraus' move to Mother Merrill:

[Because of the Merrill Lynch takeover by Bank America/ Government bailout]former Goldmanite Peter Kraus is getting his $25 million bonus, according to people familiar with the situation, though he has been at Merrill only three months. Kraus left Merrill Friday, shortly after after his rich exit package was triggered by the Merrill sale. In a year when some bankers are being paid with junk, Kraus’s exit payment is a stunner that represents about 0.1% of Bank of America’s $25 billion capital injection from the U.S. government.

New York Magazine has pics, here, of what an American Oligarch gets for $37 million. It's baronial, yet cozy, said the Brown, Harris Stevens real estate brochure hustling the place. Kinda reminds you of the Hooters' slogan, "Delightfully tacky, yet unrefined."

A New Low for Bush-Paulson: Kiting Checks

The Treasury has already allocated all the $350 billion that Congress authorized for the first half of its bailout program, NYT reports. They have no money left. So how exactly is the Treasury going to fund its latest bailout, $ 6 billion to GMAC?

NYT again:
...even though the Treasury Department has not yet requested the second half of the money, officials said they could provide the financing to GMAC because they have not actually used all of the money allocated for recapitalizing banks.
As Henry Blodgett points out :
This sounds equivalent to writing $1,100 of checks on a checking account with $1,000 in it because only $900 of the checks have already been cashed. In the real world, this is called "check kiting," and it's illegal.
And, keep in mind, as Robert Reich detailed, this is all for Bush to save face and keep the Big Three from failing on his watch, so that the problem is passed on to Obama.

Check kiting to save face, this will really help GW with historians.

Ben Bernanke versus the Housing Market

Ben Bernanke continues to print money while home prices continue to drop. According to the S&P/Case-Shiller home-price indexes, As of October, the 10-city index is down 25% from its mid-2006 peak and the 20-city is down 23% with home prices in the Sun Belt continuing to be hit hardest. The drop marks the 10-city index's 13th straight monthly report of a record decline. In 20 major metropolitan areas, home prices dropped 18% from the prior year, also a record, and 2.2% from September.

"The bear market continues; home prices are back to their March 2004 levels," said David M. Blitzer, chairman of S&P's index committee. He added that both composite indexes and 14 of the 20 metropolitan areas are reporting new record declines.

Three of the metro areas have given back, on average, more than 30% of the value of homes since October of last year. Phoenix remains the weakest market, reporting an annual decline of 32.7%, followed by Las Vegas, down 31.7%, and San Francisco down 31.0%. Miami, Los Angeles, and San Diego were close behind with annual declines of 29.0%, 27.9% and 26.7%, respectively.

Bernanke's outrageous money printing will reverse this trend much sooner than most expect, before the end of the first half of 2009.

Paul Krugman Wakes Up Parts of Austrian Economics Nation

It's about time Paul Krugman is called on the nonsense he is writing at NYT. It's getting so out of hand that he has awoken parts of Austrian Economics Nation.

In separate commentaries, Bill Anderson, Steve Horwitz and Bob Murphy have pointed out major flaws in a recent Krugman columns.

Anderson of late has been using Krugman for target practice. He writes:
It's Monday, which means yet another howler from Paul Krugman. (I have given up on kicking the Krugman habit; he throws out one howler after another, and it seems that nearly all of them deserve a response.)
Anderson's entire comment is here.

Murphy took time away from his holiday travels to write:

As always, I am stunned by Krugman's latest blog post.
Find out what stunned Bob, here.

Horwitz weighs in with this comment:

Today's Krugman op-ed blog is a doozy...In my last post, I wondered whether Krugman really read what his opponents have to say, leaving open the question whether he was ignorant or malicious. Today's blog entry leaves much less doubt...
Find out how Horwitz resolves his doubt, here.

And, of course, I'm still wondering why Krugman hasn't given back his Nobel Prize.

Monday, December 29, 2008

Marc Faber Gets It......Go Short Treasury Securities in '09

Marc Faber, editor & publisher of the "Gloom, Boom, and Doom Report" did a call- in to CNBC's Squawk Box this morning, he told Squawk Box:
You want to be in gold, silver, platinum, and also oil. If you believe in a recovery of asset prices as a result of money printing, you should be in hard assets, particularly precious metals...I think the big trade in 2009 will be to go short Treasurys massively -- I really mean massively -- because we may have inflation for one, two, three years ....
Faber is being an optimist here. It's not the length of the inflation, it could be even longer than three years, but the severity. We are looking at double digit rates very quickly.

Things could start to turn very quickly out of the gate in 2009. Any economist, expecting the downturn to last into 2010, doesn't understand business cycle theory.

Keynesian Nonsense from Larry Summers

The Obama's selection for head of the White House National Economic Council, Larry Summers, went on a tear in Sunday's Washington Post.

Sound, spend, spend says Larry. He also wants to cut taxes, which means that the Obama Administration plans to borrow its way to prosperity. Of course, Larry doesn't discuss, at all, the crowding out from the debt markets of the private sector that will occur because of all of Larry's proposed borrowing, borrowing and borrowing.

But, hey, Larry can't cover everything in one column, maybe he'll get to that next week.

Bernanke, Paulson, Bush, the Obama Gang and the Dollar

Given the moves and signalled futures moves of Bernanke, Paulson, Bush, and the Obama gang, it is difficult to see how the dollar and economy will survive. Bob Higgs provides a great overview of the current situation, here.

Sunday, December 28, 2008

Tyler Cowen's "Sector Analysis"

Tyler Cowen has made no secret that he does not believe in Austrian business cycle theory, but, today, he has a long rambling post on fiscal stimulus, supposedly about when it will work and when it won't.

I will leave the majority of the post for others to dissect, but there is one section of the post which I found fascinating. Cowen writes (my emphasis):

Note that under standard theory neither monetary nor fiscal policy will set right the basic problems from negative real shocks and indeed the U.S. economy is undergoing a series of massive sectoral shifts. That includes a move out of construction, a move out of finance, a move out of debt-financed consumption, a move out of luxury goods, the collapse of GM, and a move out of industries which cannot compete with the internet (newspapers, Borders, etc.)
What is fascinating about this is that I think Cowen is really describing Austrian business cycle theory but doesn't realize it.

Now if there are basic things that are understood by all about ABCT, it is that the theory is based on the belief that the business cycle occurs because central banks distort the structure of production by printing money that ends up first in the capital goods sectors (with a very broad definition of capital goods). Further, as Murray Rothbard notes:

An adequate theory of depressions, then, must account for the tendency of the economy to move through successive booms and busts, showing no sign of settling into any sort of smoothly moving, or quietly progressive, approximation of an equilibrium situation. In particular, a theory of depression must account for the mammoth cluster of errors which appears swiftly and suddenly at a moment of economic crisis, and lingers through the depression period until recovery.
Note Rothbard discussing ABCT, he writes of a "mammoth cluster of errors."

Note Cowen, he writes of "series of massive sectoral shifts".

Mammoth cluster? versus Massive series? Cluster of errors? versus Series of sectoral shocks? Cowen may not realize it, but what he sees in the economy is exactly what ABCT theorists would expect to see.

Further look at the sectors he lists as having "real" shocks. He sees:

a move out of construction, a move out of finance, a move out of debt-financed consumption, a move out of luxury goods, the collapse of GM, and a move out of industries which cannot compete with the internet (newspapers, Borders, etc.)
To an ABCT theorist, they pretty much look like a list of problems in the capital goods sector. Out of construction? Check, a capital goods biz. Out of finance? Check-the very heart of capital goods financing. Debt-financed consumption? Notice how careful Cowen is here, and correctly so, it is debt financed consumption where problems exist. Check,this would fall under a sector financed by money printing credit creation. Luxury goods? The people buying luxury goods during the boom times are the ones who are getting the money first, this sector would suffer now, check. GM? Capital goods again, check.

The only area that does not easily fall into the ABCT theory is the newspaper, book sectors which are being hurt by the growth of the internet, but this stuff, new industries growing/old industries dying, happens all the time and falls under another Austrian theory, that of Joseph Schumpeter's creative destruction.

Cowen may try and argue that there are "real" factors behind problems with finance, GM etc. (and there may be some), but that still does not explain why all these failures have become,as he puts it, a "series of massive sectoral shifts" all at the same time.

It's the cluster of errors queston that only ABCT answers. In short, Cowen may not believe ABCT theory, but his observations are ABCT all the way.

Paul Krugman Give Back Your Nobel Prize

Paul Krugman, the 2008 Nobel Prize winner in economics, is still having trouble with business cycle theory. His rude attitude toward what he calls "Hangover Theory", and clear contempt for anyone that pays attention to it, puts him in the awkward position of dissing the Nobel Academy, since the Academy awarded the Nobel Prize to Friedrich Hayek for, and I quote directly from the The Royal Swedish Academy of Sciences statement announcing Hayek's award:

von Hayek's contributions in the field of economic theory are both profound and original. His scientific books and articles in the twenties and thirties aroused widespread and lively debate. Particularly, his theory of business cycles and his conception of the effects of monetary and credit policies attracted attention and evoked animated discussion. He tried to penetrate more deeply into the business cycle mechanism than was usual at that time. Perhaps, partly due to this more profound analysis, he was one of the few economists who gave warning of the possibility of a major economic crisis before the great crash came in the autumn of 1929.

Here's some of Krugman's rudeness:

So the liquidationists are still with us. According to Brad DeLong,
Milton Friedman would recall that at the Chicago where [DeLong] went to graduate school such dangerous nonsense was not taught
Of course, Hayek's photo is proudly featured at University of Chicago's Gleacher Center along with Friedman's, as University of Chicago Nobel Prize winners (and I personally saw both photos up years ago when Friedman was still alive.)

So the only solution I can come up with for Krugman is to turn in his Nobel Medal (and the award money, especially the money). Afterall, how can he possibly be associated with an institution that awards a Nobel Prize to a theory that he tells us is:

...a theory that I regard as being about as worthy of serious study as the phlogiston theory of fire.
He is saying nothing less than that the Nobel Academy is awarding medals for work on theories equal to nonsense. If he has any self respect, he will return the award, or does he have so little self respect that he needs the adulation from a group he believes is handing out the same award to theories that he believes are not worthy of study?

I have posted three separate comments under Krugman's column (waiting moderation they say), and I replied to Krugman's initial attack on ABCT, here.

Saturday, December 27, 2008

Consumers March to the Movies

Re-establshing a pre-money pumping consumpton-savings ratio in favor of consumption was apparently the plan for many on Christmas Day.

From AP (My emphasis):

Twentieth Century Fox says "Marley & Me" has set a Christmas Day record with $14.75 million at the box office.

That breaks the previous mark of $10.2 million, set by "Ali" in 2001, according to Media By Numbers LLC.

And "Marley & Me" may not be alone: "The Curious Case of Benjamin Button" and "Bedtime Stories" were also expected to move past the previous Christmas Day mark, according to some studio estimates.

Even "Valkyrie" had a strong Yuletide opening with more than $8 million, those numbers show.

Will General Patton's Plan for a Domestic Counter-Insurgency "War" During the Great Depression Be Used in Present Day America?

In July 1932, General Geogre S. Patton, the future World War ll star, served under Army Chief of Staff General Douglas MacArthur, as a major leading 600 troops, including the 3rd Armored Cavalry Regiment, in an action to disperse protesting veterans known as the "Bonus Army" in Washington, D.C.. MacArthur ordered the troops to advance on the protesters with tear gas and bayonets. Patton did as ordered. It is not likely he objected for Patton also had broader ideas of how to deal with rowdy Americans.

Little known is the fact that, Patton put together a counter-insurgency plan to deal with the Great Depression, if things got out of hand in the United States.

William Norman Grigg believes that Patton's plan may be used in present day America, if things get out of hand during the current crsis. Here's Grigg's summary of Patton's plan, including snippets from the plan itself :
In administering either Martial Law or Military Government, Patton – predictably enough – prescribed the pitiless application of lethal force. He digested his doctrine of domestic military missions into what he called "The Law and the Prophets of Riot Duty," a canon that includes the following directives:

"Take no orders from civil officials – federal, state, or municipal."

"You may and should cooperate with police or state troops who may be present; but you and not they are the judge of the amount and character of this cooperation."
"Should some orator start haranguing the crowd and inciting them to violence, grab him even if it brings on a local, small fight. Small fights are better than big ones. Words cunningly chosen change crowds into mobs."

"Warn newspapers, theaters, and churches that if they encourage the mob, they are guilty of aiding them and that their leaders will be held personally accountable. Freedom of the press cannot be construed as 'license to encourage’ the armed enemies of the United States of America. An armed mob resisting federal troops is an armed enemy. To aid an enemy is TREASON. This may not be the 'law,’ but it is fact. When blood starts running, the law stops."

"If you have captured a dangerous agitator and some 'misguided’ federal judge issues a writ of Habeas Corpus for him, try to see the judge to find out what he is liable to do…. There’s always the danger that the man might attempt to escape. If he does, see that he at least falls out of ranks before you shoot him. To be soft hearted might mean death to your men. After all, WAR IS WAR."

"As in all military operations, information is vital. By the use of detectives, soldiers in civilian clothes, and friendly citizens, get all possible information about the condition within the city."

"The use of gas is paramount…. While tear gas is effective, it should be backed up with vomiting gas."

"Although white phosphorous is incendiary, it is useful in forming a screen for the attack of barricades and defended houses."

"If you must fire, DO A GOOD JOB. A few casualties become martyrs; a large number becomes an object lesson."

A Message for Economists Who Have Moved to the Dark Side

Robert Higgs writes:

It’s hardly a news flash that many people who are widely regarded as lions of the pro-market side have gone over to the dark side in recent months...

Obamistas’ motives are purely political, as befits a pack of office holders and their lackeys, so it is pointless to indict them – a rattlesnake is not to be blamed if it strikes, because its nature impels it to do so. But why are well-known free-market economists going along with this nonsense?...

Anyone who expects markets to restore a disturbed equilibrium instantaneously will be disappointed. People cannot discover the relevant changes, confirm and assess them, consider alternative arrangements of their affairs, and carry out those changes in an instant. The competent economist appreciates the necessity of patience in evaluating the market’s operation. Simply because the market does not appear to have reconfigured itself fully soon after a shock, we have no warrant to conclude that "the market doesn’t work anymore" or that "the market doesn’t work the way it used to." Such statements manifest an economic crackpot, and economists who talk this way discredit their professional competence...

...the new New Deal idea of the Obama regime’s "creating jobs" by bankrolling infrastructure "investments" might as well come with a written guarantee attached that it will generate nothing but resource waste and the pork-barrel distribution of vast amounts of taxpayer money to satisfy the appetites of congressmen, local politicians, construction unions, and real-estate interests. Even if a road, a bridge, or a sewer system ultimately comes forth as a visible result, the unseen alternatives forgone are almost certain to have greater value for those from whom the grasping hand of the federal state has stripped the wherewithal to pay for the projects. Free-market analysts ought to understand such matters, which are scarcely arcane, and anyone who has watched the government’s responses to previous recessions, from 1929 to the present, ought to understand the present situation without remedial instruction from me...

Yes, unemployment has risen, as it always does during a recession. But the rate of unemployment last month was only 6.7 percent. During the Great Depression, the unemployment rate often exceeded 20 percent, and many workers who had jobs in those days had only part-time employment even when they wanted to work full-time. So, despite the numerous Chicken Littles running about excitedly, the present situation does not bear comparison with the mass unemployment of the 1930s; nor does the ample safety net that now stretches beneath the unemployed – a refuge that did not exist in anything like its present setup during that difficult decade...

The greatest mistake made in previous occasions of this sort has been to add new government burdens to the ones that helped to bring on the troubles in the first place; hence the ratchet effect in the growth of government. If only we had the wisdom to recognize a crisis as the most compelling occasion for getting rid of accumulated government burdens and idiocies, then we could throw the ratchet effect into reverse, with highly beneficial long-run consequences, including greater economic liberty and faster economic growth.

Friday, December 26, 2008

Another Gross Bailout

Pimco, managed by American oligarch Bill Gross, loaded up on Freddie Mae and Fanny Mae debt and was rewarded handsomely when the Treasury bailed out Fannie and Freddie debt holders.

It looks like the government has bailed out Gross again. Barry Ritholz reports:

A friend Andrew, all around big firm Analyst, writes:

“Correct me if I’m wrong, but didn’t PIMCO just win another game of chicken with the authorities when it refused to tender its GMAC debt for restructuring? Didn’t that effectively force the Fed to use clause 13(3) to save GMAC?

As I understand it, a debt restructuring would have smoothed GMAC’s conversion into a bank holding company, but PIMCO balked and didn’t tender because a restructuring also meant big losses for PIMCO. I don’t believe Tarp funds are senior to any existing GMAC debt, so GMAC debt will probably rally now that it got Bank Holding Company status without the restructuring…I’m not a bond guy but I think that’s how it’ll work…meaning PIMCO wins again at the expense of the taxpayer.

Russian Trading Halted After 12% Drop

The Russian economy, heavily dependent on a world economy absorbing huge quantities of raw commodities used in capital goods production, is getting smacked around pretty good.

Russian shares sank sharply on Wednesday before trading was halted.

Russia’s RTS stock exchange index fell 12.5 per cent in the first three hours of the session before trading was suspended for the rest of the day. Trading was halted on the more liquid Micex stock exchange on Tuesday following a steep slide and it remained closed on Wednesday.

The price of insuring Russian debt soared as credit market sentiment turned dramatically against Russia and some of its leading companies. The cost of protecting Russia’s debt against default leapt by 172 bp to 786.2bp on Wednesday, meaning it now costs $172,000 annually to insure $10 million of the country’s bonds over five years.

Bush the Book Reader

WSJ, today, carries an Op-Ed by Karl Rove claiming that GW is a big time book reader.

According to Rove, he and GW even started a book reading contest:

It all started on New Year's Eve in 2005. President Bush asked what my New Year's resolutions were. I told him that as a regular reader who'd gotten out of the habit, my goal was to read a book a week in 2006. Three days later, we were in the Oval Office when he fixed me in his sights and said, "I'm on my second. Where are you?" Mr. Bush had turned my resolution into a contest.

By coincidence, we were both reading Doris Kearns Goodwin's "Team of Rivals." The president jumped to a slim early lead and remained ahead until March, when I moved decisively in front. The competition soon spun out of control. We kept track not just of books read, but also the number of pages and later the combined size of each book's pages -- its "Total Lateral Area."

GW ended up reading 95 books in 2006, 51 books in 2007 and 40 in 2008.

Among the books Rove mentions that GW read are:

In 2006, biographies of Abraham Lincoln, Andrew Carnegie, Mark Twain, Babe Ruth, King Leopold, William Jennings Bryan, Huey Long, LBJ and Genghis Khan to Andrew Roberts's "A History of the English Speaking Peoples Since 1900," James L. Swanson's "Manhunt," and Nathaniel Philbrick's "Mayflower." Eight Travis McGee novels by John D. MacDonald, Michael Crichton's "Next," Vince Flynn's "Executive Power," Stephen Hunter's "Point of Impact," and Albert Camus's "The Stranger".

In 2007, GW's books read included history ("The Great Upheaval" and "Khrushchev's Cold War"), biographical (Dean Acheson and Andrew Mellon), and current affairs (including "Rogue Regime" and "The Shia Revival").

In 2008, David Halberstam's "The Coldest Winter," Rick Atkinson's "Day of Battle," Hugh Thomas's "Spanish Civil War," Stephen W. Sears's "Gettysburg" and David King's "Vienna 1814." Biographies included U.S. Grant's "Personal Memoirs"; Jon Meacham's "American Lion"; James M. McPherson's "Tried by War: Abraham Lincoln as Commander in Chief" and Jacobo Timerman's "Prisoner Without a Name, Cell Without a Number."

Interestingly, Rove doesn't mention any economics books read by Bush.

Amazon Holiday Season "The Best Ever"

Amazon Inc. called its 2008 holiday shopping season "the best ever".

Amazon said that on its peak day, Dec. 15, it received more than 6.3 million orders, at a record pace of 72.9 items per second. During the period from Nov. 15 - Dec. 10, Amazon sold one copy of Microsoft Office Home and Student 2007 every 2.5 minutes.

No bailout needed here.

Shop 'Til You Drop: The Retail Sales Picture

The headline retail sales spending number is down 8% in December according to MasterCard's Spending Pulse. However, taking the number apart, gives a slightly different story.

When gasoline sales (gasoline prices are down 40%, year-over-year) are excluded, the decline through Christmas Eve is only 4%. Since the price of oil is influenced, not only by retail gasoline demand, but also commercial and industrial use, this is a much more complicated number.

Now for the retail picture ex-gasoline. Bad weather on both coasts clearly had a negative impact on sales, but a more important factor is that between Thanksgiving and Christmas this year there were just 27 shopping days versus 32 in 2007, a difference of 16%. Unlike 2007, you have a very strong post-Christmas day shopping window Friday-Saturday-Sunday. Thus the number to watch is the number I posted earlier, January 8, when full December numbers are announced.
All this said, it was still a dismal Christmas season for retailers. The demand for cash is obviously very strong--people are very scared about the economy. However, this doesn't mean that the consumption-savings ratio is not readjusting towards consumption. If capital goods sales plummet faster than retail sales, and they are, the ratio is readjusting in favor of consumption. ABCT lives. What's going on is a downward readjustment of the price level at the same time as the consumption savings ratio is readjusted, with the added demand for cash acting as though the money supply is shrinking.

This is a once in a lifetime phenomena, equivalent to a Total Solar Eclipse. What makes this even more amazing is that you now also have the Fed aggressively printing money at record levels. It's almost as though the "Big One" earthquake hits Southern California on the same day as the Total Eclipse of the sun.

At some point the Fed money printing, what Bernanke is calling "quantitative (I'll say) money management", will overtake the desire to hold cash balances. Things will reverse and there will be a flight from cash. Thus, your money right now is worth more than it probably ever will again.

In other words, there are major discounts at most retailers---you will never see these type prices again, if Bernanke succeeds in his money printing--it's not a day to be reading blogs. It is the ultimate shop 'til you drop day. If there is something you need or want, today is the day to buy it. The price is likely never to be as low again.

Cash is king, probably only for about another week.


Thursday, December 25, 2008

A Capital Goods Sector Crash Landing

NYT reports:

“The jet market stinks,” said Richard Santulli, the chief executive of Netjets, the private jet company owned by Berkshire Hathaway, the holding company led by Warren E. Buffett...Among jets, the large-cabin, long-range segment of the market is suffering the most, said Bill Quinn, director of aircraft sales and acquisitions at Cerretani Aviation, based in Boulder, Colo. That includes planes from Gulfstream, Bombardier and Falcon.

Carrying costs are high. A Gulfstream G550 costs about $47 million. Though expenses can vary by state, one mogul’s business manager estimated that annual costs run about $1.3 million, including $500,000 for property tax and $400,000 for pilots and stewards. Typical operating costs are more than $2,000 an hour in the air, he said...

“I have never seen it like this,” said Mike Silvestri, the chief executive of Flight Options, which sells shares in jets as well as plans that cover a fixed number of hours a year of private jet use. “Customers are just not flying as much.” Some customers are stretching out the hours bought for a single year over a longer period.

Flight Options has laid off 134 people, including 104 pilots, and hopes it will be able to bring them back.

Mr. Santulli said that the jet market usually picks up three months after the stock market has reached a bottom.

Hayek on Keynes

Here's a great audio clip from the old William F. Buckley show, Firing Line, when Buckley had Nobel Prize winning economist Friedrich Hayek as his guest.

In this clip, Hayek discusses Keynes and Keynesianism, and makes the charge that Keynes did not know that much economics outside of the Cambridge school and that Keynes' General Theory was really no such thing, but rather a theory suited only for a very specific time period in England, when prices dropped but wages stayed up.

Hayek sometime after Keynes had written the General Theory said to Keynes, whom he knew well, that Keynes' disciples were getting much too inflationary because of the General Theory and Keynes replied that if things got out of hand he would write another book and change public opinion. It never happened as Keynes died six months Hayek's talk with him about it.

(Via Bob Murphy)

The Fed versus Fear: A Status Report on the Economy

As I have noted in recent posts, any growth in the economy appears to be coming out of the consumer sector, with growth in revenues from live concert appearances and the astounding $805 million in payroll going to four New York Yankee players.

This strength in parts of the consumer sector, in an overall weak economy , falls in line with Austrian Business Cycle Theory. During a readjustment period in the economy, according to ABCT, the consumer-savings ratio readjusts itself to show greater strength in consumption versus savings (which would be reflected in capital goods purchases). But, how does this square with the likelihood that on January 8 when retailers report their sales for the month of December, they are likely to show a decline in sales in total of around 1 to 2%?

It squares because of other factors that occur during a readjustment period, in particular, the fear which leads many to hold on to cash. The spectacular growth in M1 is an indicator of just how much fear there is in the economy, as it has grown in recent months in excess of 30%. The desire to hold larger cash balances (as indicated by the growth in M1)in many ways has the same impact as a decrease in the money supply would have. A general deflation of prices occurs, which ultimately results in a lower overall price level. So what does this have to do with ABCT and the consumption-savings ratio. It means that if there is a strong demand to hold cash balances, which puts downward pressure on all prices, even if some consumer prices are falling, the consumption-savings ratio can still be readjusting in favor of consumption versus capital. It just means that even less spending is occurring in the capital goods sector and that prices are falling by larger amounts in the capital goods sector. And this is what is occurring, the prices of real estate and autos, for example, are dropping by much larger amounts than products in retail stores. This is also why we see dramatic declines in total sales in the housing and auto markets dropping by much larger amounts than the sales declines at retail stores. With this condition, the consumption-savings ratio is adjusting in favor of consumption.

All this being said, over the last two months the Fed as been increasing money supply (measured by M2 nsa) at double digit rates, which will again at some point push the consumption savings ratio in favor of savings (capital goods purchases).

Right now it is a battle between fear by the general public, which is holding on to additional cash, versus the Fed and its pumping of money. The Fed will eventually win this battle. It will mean a "recovery" (a movement towards the capital goods sector, i.e. the stock market, autos etc.) and overall climbing inflation, including that of consumer prices.

Although exact timing is always difficult, the recovery will occur much sooner than most expect. Certainly a lot sooner than those who are forecasting a decline in the economy that will last well into 2010. Indeed, any surprises in the economy will be on the upside. In the stock market, for example, we could very easily start with strong, very strong upside action immediately after January 1. Longer term, the Fed's mad money printing will result in record lows for the dollar, higher interest rates and very strong price inflation.

Another Consumer Sector Business That Won't Be Needing a Bailout Anytime Soon

The New York Yankees have signed free agent Mark Tixiera to an eight year $180 million contract.

Before this signing, the Yankees had already spent $243.5 million on two free agent pitchers, CC Sabathia and A.J. Burnett. The three off-season acquisitions by the Yankees come to $423.5 million.

The Yankees now have four of the highest contracts in all of MLB (Alex Rodriguez has the largest in all of baseball at $275 million over 10 years, while Derek Jeter is second at $189 million over 9 years, on top of the Teixeira deal and Sabathia deals). Those four have combined contract totals of a staggering $805 million, or $205 million more than the cost of the Mets’ Citi Field.

As with the concert industry, there are special considerations for the Yankees in that they are moving into a new stadium next year, which will mean added interest in the team, but again, if the Yankees were facing any type of significant pull back from the economic readjustment period, they would not be able to be paying out the phenomenal salaries they are.

Consumer type businesses simply have an edge in a readjustment period.

Season's Greetings...

I'm getting ready to come right at you in 2009.

Wednesday, December 24, 2008

Message to the New York Times: Call Mark Cuban ASAP

Mark Cuban was a maverick long before he bought the team with that name, the Dallas Mavericks. He is a creative, orginal thinker.

Some of his original ideas, IMHO, should be tried on mars first, others should be shot off in a rocket towards the black hole. But, I think, at his blog today, he has a very fascinating doable idea that will help save newspapers: Get sports teams to pay the salaries of the sports writers.

Entrepreneurship is sometimes about trying new things. Newspapers and sports leagues should take a very close look at Cuban's proposal. It strikes me as a win-win-win. Structured properly, it is a win for newspapers that desperately need to find ways to generate new revenue streams, and it will increase coverage for the benefit of sports teams and fans. (Notice: I emphasise structured properly. Obviously, the teams should have zero editorial control.)

Cuban has clearly spent time thinking about his proposal, his entire post is worth reading

Credit River by the Constantines


A Christmas Present for Paul Krugman

All wrapped in logic, and delivered by Steve "Santa" Horwitz.


Concert Industry Posts Record Year

According to Austrian Business Cycle Theory, a downturn in the economy is a readjustment period, whereby the economy attempts to readjust from a distorted consumption-savings ratio caused by Fed money printing.

The Fed distorts the economy in favor of the capital goods sector, i.e. real estate, construction, the stock market etc., and away from consumer goods. The readjustment period is a period when the old consumption ratio, with a stronger consumer sector, reasserts itself. Guess what? While housing, real estate and the stock market has crashed,the ultimate consumer goods industry is booming, the concert industry.

The concert business grossed just under $4 billion worldwide in 2008, the most ever for a year and up almost 13 percent over last year, according to Billboard magazine.

In North America, the average box office gross was up 18 percent and the average attendance up 6.3 percent.

Last month, concert promoter giant Live Nation reported third-quarter profit more than tripled to $139.9 million.

Switzerland’s Union Bancaire Privé to Hedge Funds: Independent Adminstrators and Custodians, Now!

The private sector begins to adjust to make it more difficult for another Bernie Madoff scam to happen--no SEC required.

The second-biggest investor in hedge funds will demand that some of the largest names in the industry, including Cerberus, Citadel, DE Shaw and SAC Capital, appoint independent administrators or face it pulling its money.

Switzerland’s Union Bancaire Privée, in an internal memo, instructed managers of the $56 billon it has allocated to hedge funds to put in immediate redemptions for any fund that does not have independent administrators and custodians, following its heavy losses from the alleged fraud by Bernard Madoff.

Martin Feldstein: Billions for Defense

Marty Feldstein, chairman of the Council of Economic Advisers under President Reagan, professor at Harvard and a member of The Wall Street Journal's board of contributors, is Keynesian to his core.

He needs to get a little more hip. Even his fellow Harvard colleague, Greg Mankiw, has thrown Keynes under the bus.

Feldstein in today's WSJ writes:
A temporary rise in DOD spending on supplies, equipment and manpower should be a significant part of that increase in overall government outlays...The increase in government spending needs to be a short-term surge with greater outlays in 2009 and 2010 but then tailing off sharply in 2011 when the economy should be almost back to its prerecession level of activity. Buying military supplies and equipment, including a variety of off-the-shelf dual use items, can easily fit this surge pattern.

For the military, the increased spending will require an expanded supplemental budget for 2009 and an increased budget for 2010. A 10% increase in defense outlays for procurement and for research would contribute about $20 billion a year to the overall stimulus budget. A 5% rise in spending on operations and maintenance would add an additional $10 billion. That spending could create about 300,000 additional jobs. And raising the military's annual recruitment goal by 15% would provide jobs for an additional 30,000 young men and women in the first year.
Of course, in typical Keynesian fashion, Feldstein only looks at half the equation, and not for a minute does he discuss where the money for this spending is to come from, what jobs will be lossed becasue of the transfer of wealth, what inflation may be created if the spending is financed by Federal Reserve money printing.

Caroline Kennedy Worth Over $100 Million

Caroline Kennedy, who is seeking to be appointed to the New York senate seat to be vacated by Hillary Clinton, is easily worth more than $100 million.

Joseph Kennedy, family patriarch, bootlegger,stock promoter and Caroline's grandfather, launched a far-reaching financial empire for his children more than 60 years ago, split among President John F. Kennedy, Robert F. Kennedy, Edward Kennedy and their three sisters.

Caroline's mother, Jackie Onassis, upon her death in 1994, handed Kennedy and her brother, John Jr., the gift that keeps on giving: JFK's share of a massive family trust - with never-disclosed millions invested in real estate, gas and oil.

In 1998, Caroline Kennedy received an estimated $38 million from her share of the family's sale of Chicago's Merchandise Mart and other related properties.

The Daily News has all the details.

Disrespect for American Financial Prowess Increases

The slow collapse of the United States as a financial superpower continues.

Japan should write-off its holdings of Treasuries because the U.S. government will struggle to finance increasing debt levels needed to dig the economy out of recession, said Akio Mikuni, president of credit ratings agency Mikuni & Co.

With the amount of money the Fed is printing, world leaders are likely to get much more vocal about the U.S. economy, Treasury securities and the dollar. And, it's not gong to be pretty.

Manhattan Office Vacancy Rate Rises to 10.9%

The overall Manhattan vacancy rate rose to 10.9 percent in the fourth quarter, the highest level in two years and more than three percentage points greater than a year ago, according to the report released by FirstService Williams.

Space available directly from a landlord registered an 8.1 percent vacancy rate in the fourth quarter, while sublease space weighed in at 2.8 percent -- the highest rate in more than three years.

Financial services companies and Wall Street related law firms are at the core of the climbing vacancy rate.

Financial services firms, including Citigroup Inc., Credit Suisse Group AG, Credit Lyonnais, Alliance Bernstein, UBS AG, MetLife Inc, Bear Stearns, and National Financial Partners Cor, placed almost 1.2 million square feet of sublease space on the market in the fourth quarter.

Legal services firms such as Reed Elsevier; Cadwalader, Wickersham & Taft; and Thacher, Proffitt & Wood contributed 230,000 square feet of sublease space. Other law firms, including Orrick, Herrington & Sutcliffe and Thelen Reid Brown vacated almost 450,000 square feet of direct space.

Tuesday, December 23, 2008

10 Municipal Bankruptcies In 2009?

It's a race. On the one hand you have the Fed pumping money into the bank system at near Zimbabwe rates to re-inflate the system, on the other had, Ben Bernanke's 2008 Summer of Monetary Stinginess is having its latest impact on municipalities.

Will Bernanke's money gusher reach the municipal sector in time? If not, it is going to be another mess.

The accountant who predicted the nation’s largest municipal bankruptcy says as many as 10 insolvencies will roil the $2.7 trillion U.S. market for state, county and city debt next year, according to Bloomberg.

John Moorlach said in 1994 that Orange County, California’s leveraged investing strategy could wreck its finances. The county went bankrupt about six months later after losing $1.6 billion.

As many as four cities in California and six others nationwide may seek court protection from creditors next year under Chapter 9 of the bankruptcy code, the section devoted to municipal governments, Moorlach said in an interview.

Moorlach said many California cities are watching Vallejo, a city of 117,000 on San Francisco Bay that filed under Chapter 9 in May. The city hopes to rewrite its labor contracts with police and firefighters.

“If Vallejo is successful in unwinding pension agreements, you could see Chapter 9 become a whole new industry,” Moorlach said.

Of course, the Fed and Treasury will in some fashion come to the rescue of any big cities that get into trouble, but it still is extremely dangerous to hold this paper. For smaller municipalities where a rescue may not occur at all, holding municipal paper is like playing Russian roulette.

Hillary Wants Strong Economic Team for State Department

Hillary Clinton's push for a more vigorous economic team, one of her advisers said, stems from her conviction that the State Department needs to play a part in the recovery from the global financial crisis.

A Hillary Clinton global economic team? Yikes.

For a moment, I thought she lost in the primaries.

Home Sales and Prices Plunge

Given the continued explosion in M1, which I look at as an indicator of fear in the economy, the drop in November home sales should not come as a surprise.

Sales of both new and existing homes fell in November, and did prices.

Sales of existing homes, which include single-family homes and condos, fell 8.6% to a seasonally-adjusted annual rate of 4.49 million units in November, a 10.6% drop from a year ago, the National Association of Realtors reported Tuesday.

Meanwhile, sales of existing single-family homes plunged 8.0% to a seasonally-adjusted annual rate of 4.02 million in November from 4.37 million in October, representing the lowest sales activity since July 1997.

The national median existing home price fell to $181,300, a decline of 13.2% from a year ago, and the largest drop since the trade group began its survey in 1968. Lawrence Yun, the trade group's chief economist, said it was likely the largest decline since the Great Depression.

The total inventory of unsold existing homes rose 0.1% to 4.20 million in November, the highest since the 1980s. This represents a supply of 11.2 months, up from 10.3 months in October.

New-home sales fell for the fourth month in a row during November, and prices remained below year-earlier levels.

Sales of new single-family homes decreased by 2.9% to a seasonally adjusted annual rate of 407,000, according to the Commerce Department.

Year over year, new-home sales were 35.3% lower than the level in November 2007.

The Commerce Department report Tuesday showed there were an estimated 374,000 new homes for sale at the end of November, representing a 11.5 months' supply at the current sales rate. In October, an estimated 402,000 were for sale, an 11.8 months' inventory.

The median price of a new home plunged 11.5% to $220,400 in November from $249,100 in November 2007. The average price decreased 9.2% to $287,500 from $316,800 a year earlier. In October this year, the median price was $214,600 and the average was $279,500.

Regionally last month, new-home sales fell 7.1% in the South and 16.4% in the Midwest. Sales rose 11.0% in the West and 14.3% in the Northeast.

An estimated 28,000 homes were actually sold in November, down from 33,000 in October, based on figures not seasonally adjusted.

Given the amount of money the Fed is pumping into the system will be much, much stronger in 2009, than most expect.

Monday, December 22, 2008

What Exactly Is "Priming the Pump"?

I have always had a rough idea of what the Keynesian use of the metaphor for economic stimulus, "priming the pump", was about, but never exactly, until now.

In a column for, Timothy Carney, figures it all out and shares his discovery with the world:

While it has a bias towards spending, Keynesian thought professes that deficits per se — even if brought about by tax cuts — are good because getting money into the hands of consumers “primes the pump” of the economy.

What the heck is “priming the pump”?

Until this week, every time I heard someone talk about government spending priming the pump,” I envisioned the primer button on my parents’ lawnmower, which I pumped a couple of times to get gasoline into the engine. But that’s “pumping the primer” or “priming the engine,” not “priming the pump.”

“Priming the pump” has to do with pumps — like water pumps. The metaphor is pretty opaque to the modern eye, once you start thinking about it. How does one prime a pump, and why?

I’ve never done it, and neither has my dad, who may be the oldest guy on the planet. I poked around a bit, and came up with this explanation for “priming the pump”:

Think of a pump coming up out of a well. It works by suction. If air gets in the pipe, then it may be nearly impossible to get water out of it.“Priming the pump” appears to be pouring water down the pipe to flush out the air. This makes the pump actually work.

So, returning to the analogy: maybe the economy is weak, and so people’s labors (pumping the handle) aren’t generating wealth (water). Only by taking some wealth (water) that’s sitting around, and injecting it back into the economy (pouring it down the pipes) in the form of government spending, can you make labor (pumping) productive.
Unfortunately for Keynes, the economy is not like a pump.There is no air and no pipe. What is going on is a readjustment period. It is more like water seeking its own level after the government takes its bloated body out of a bathtub, because if it doesn't take its body out and continues to inflate itself, the water is going to flow over the side, causing a loss of water (wealth.)

So we shouldn't be "priming the pump", but, rather, "getting the bloated beast out of the water."

Madoff Family Members Had Exclusive Briefings from Treasury Secretary Paulson on the Financial Crisis

As I have pointed out before, those who try to get close to regulators are generally doing so for a reason. The reason is to get the inside scoop, and to try and influence regulations.

WSJ knows this. They write that Bernie Madoff's niece, Shana Madoff, was an active member of a number of associations."The benefit would be to have close encounters with the regulators to express your opinion," WSJ quotes an unnamed colleague of Shana's as sayng.

So how high up the financial regulation ladder were the Madoffs' "close encounters"? All the way up.

Shana and her father were both a part of Sifma (Securities Industry and Financial Markets Association), the industry's main lobbying group. Shana was on the compliance advisory committee. Her father was a member of the board.

According to WSJ:

Sifma is one of the financial industry's most powerful advocates in Washington. It's members have received exclusive briefings on the nation's financial crisis from Treasury Secretary Henry Paulosn and the architects of the Treasury's $700 billion financial markets rescue plan. The Madoff family and firm has contributed more than $50,000 to Sifma's political action committee, and tens of thousands more to sponsor industry meetings , Ms. Madoff helped organize.
Who knew Paulson was making these "extensive briefings" to anyone outside of Congress? Do you realize how much money could have been made by those who got a drift of the next direction of one of Paulson's ever changing policies?

Bottom line. In many ways Wall Street is a semi-rigged game, and it is rigged as a result of regulatory and other government agencies. In some cases, the government operators know the rigging they are conducting, most likely such is the case, for example, with Paulson, in other cases, government regulators are used as innocent dupes, e.g. most of the SEC. But, either way, the agencies are more a hindrance than a help in creating free flowing unrigged markets.

Regulation Is Killing Silicon Valley

Regulations often are designed to perpetuate a current structure in an economy, and prevent new comers from entering the game---thus dramatically slowing increases in the standard of living. It's happening in Silicon Valley.

Michael S. Malone details the suffocation, at WSJ.

Where the Unemployment Is

It is easy to fall into the trap of over-aggregating trends in the economy. When thinking about unemployment, many consider a downturn as a period when the entire economy is more or less impacted equally. Not so.

The reckless money printing that fuels a boom usually ends up in the capital goods sector first, thus when the Federal Reserve takes its foot off the money printing machine, even for a brief period, it is the capital goods sector that will experience the greatest number of layoffs and lost jobs.

Richard Ebeling has put the numbers together to show that the current readjustment period is no different. The heavy losses are where you would expect them to be, in the capital goods sector. Ebeling's full report is here.

Sunday, December 21, 2008

Madoff Family Connections to Regulatory Bodies

WSJ's Washngton Wire details the many connections between various regulatory agencies and the Madoff family.

Bernie's sons, brother and niece were all over the place providng SEC, NASD, FINRA with advice on how to regulate markets to "protect investors".

Writes the wire:

Those relationships may have allowed Madoff’s company, Bernard L. Madoff Investment Securities, to attract investors and avoid serious scrutiny.
Ya think?

In truth most of the people around regualtory agencies are there to promote regulation that will benefit themselves. As I have said before, there are rules on the books of the SEC that probably as few as 5 people understand (and there is no one among the 5 from the SEC). Those five, however, are minting money by taking advantage of such rules.Those relationships may have allowed Madoff’s company, Bernard L. Madoff Investment Securities, to attract investors and avoid serious scrutiny.

Everything You Always Wanted to Know About Out-of-Control Government Spending and Taxation

A great series of charts put together by Nicola Moore, Stephen Keen, Rea S. Hederman Jr. and Alison Acosta Fraser, all from the Thomas A. Roe Institute for Economic Policy Studies at the Heritage Foundation


Current Federal Tax Receipts Near Historical Average

Federal Government Tax Revenue Has Tripled Since 1965

Corporate Income Tax Cuts Boost Federal Revenues

Social Insurance Taxes Now Account for 34 percent of All Revenues

Taxes per Household Have Risen Dramatically

The Clinton Administration Oversaw the Highest Increase in Taxes per Household

Social Insurance Tax Revenues Have Climbed Steadily


Income Tax Receipts Stay Constant Even as Tax Rates Declined

Corporate Income Tax Receipts Stay Constant Even as Tax Rates Declined

Tax Rates for High-Income Households Have Risen Disproportionately

The Top 10 Percent of Income Earners Paid 70 Percent of Federal Income Tax


Federal Spending Has Increased Steadily Regardless of Congressional Leadership

Since 9/11, Federal Spending Has Increased Much Faster Than Inflation

Federal Government Spending per Household Is Near an All-Time High

Federal Spending per Household Has More Than Doubled Since 1960

Federal Spending Grew Nine Times Faster Than Median Income

Non-Defense Discretionary Spending Increased Steadily While Defense Spending Fluctuated

Despite War Costs, Defense Spending Falls Below Historical Average

Mandatory Spending Has Increased Almost Five Times Faster Than Discretionary Spending

Mandatory Spending Increased 759 Percent

Mandatory Spending per Household Has Increased by Over $9,500 Since 1965

Total Government Spending Has More Than Doubled Since 1965

Medicare and Medicaid Spending Will Rise With Increasing Health Care Costs

Social Security Spending Soon to Rise Rapidly

Retired Workers Receive the Largest Share of Social Security Benefits


Federal Spending Is Growing Faster Than Federal Revenue

Government Spending Grew Faster Than Revenues for Most Administrations

All Recent Administrations Ran Up Budget Deficits

Among Recent Administrations, President Reagan Stands Out as Most Willing to Use Veto

FY 2008 Had the Second-Highest Number of Earmarks in History Despite the Change in Congressional Leadership

Defense Spending Is on the Decline Despite the War on Terrorism

Non-Defense Spending Growth Was Lowest Under the Reagan Administration


Entitlement Spending Will More Than Double by 2050

The Ratio of Elderly to Younger People Is Rapidly Increasing

Mandatory Spending Consumes Growing Share of Total Spending

Entitlements Alone Will Eclipse Historical Tax Levels by 2052

Raising Taxes is Not the Solution to the Entitlement Spending Tsunami

Entitlement Reforms are Needed to Control Spending

Tax Burden Is Rising to Highest Level in History

Public Debt as Share of GDP Is Below Historical Average

Federal Budget Deficit Will Reach Levels Never Seen Before in U.S.

Bernie's Original Inspiration

Robert Reich Breaksdown the Auto Bailout: Loopholes and All

RR is apparently trying to pull a GW and go out the year 2008 on a high note.

He has ditched his Keynesian propoganda campaign for at least one post, and puts together the best analysis of what's behind the George Bush auto bailout that I have come across. It's very much worth reading.

Saturday, December 20, 2008

Another SEC Investigation of Bernie That Went Nowhere

Sixteen years ago two accountants raised $400 million that went undetected by the SEC.

The two accountants from Florida promised investors steady annual returns of 13.5% to 20%. When they finally heard about it, the SEC thought they has a Ponzi scheme on their hands. How were the accountants showing such returns? Turns out, they put the money with a powerful mysterious Wall Streeter that the SEC did not name at the time: Bernard Madoff. The accountants closed down their business. The case was closed.

John Carney found this blockbuster story, possibly 10,786 pages or more deep into a Google search. But find it, he did.

He has all the details, here, including large clips from WSJ which seemed a bit skeptical even back then of Madoff's explanation for how he was making his steady returns. Yet, somehow he passed SEC scrutiny back then, also.

Behind the Fed's Desire to Issue Its Own Debt Obligations

Bob Murphy and I had an excellent discussion via email about the trap the Fed is in, given the huge amount of reserves in the system. Bob explains the trap, here.

The gist of Bob's analysis is that unless Bernanke wants to turn the United States inflation rate into a competitive race with Zimbabwe, the Fed is going to have to sell Fed assets to drain reserves at some point. The problem is that a large chunk of Fed assets are now junk CDO's and the like. Who's going to buy those?

And, then it hit me, the Fed wants to be able to issue debt so that it can drain reserves. Any money the Fed receives via the banking system to pay for newly issued Fed debt will be retired. Viola, extra reserves, poof, pow, gone.

Of course, that's Bernanke's model. Execution will be another story, given the amount of debt the Fed will have to issue to drain enough reserves. Excess reserves are currently over $500 billion.

A word of advice to the intellectually curious, don't die in 2009, it's going to be a very interesting year.

Fear Mongers at Work

The United States economy is going through a readjustment period as a result of past Federal Reserve money printing that distorted the structure of the economy.

Left alone, the readjustment period would likely resolve itself within six months. The Fed, however, is currently flooding the economy with more money, which will result in a return to some form of the old distorted structure (With destruction of the dollar as a byproduct). Under both of these scenarios, though, there is no need for an economic "stimulus" package, which is nothing more than taking money from the politically weak and transferring it to the politically powerful.

The incoming president-elect and vice-president-elect are prepping the politically weak for the upcoming transfer of another near-trillion dollars to the politically powerful. Talk about the economy being in recession for years, or that the economy is "near tanking" is nonsense. The only thing that will prolong the readjustment period is Fed money printing or government intervention in the economy. The transfer of wealth has nothing to do with with the readjustment process. If anything, it will slow the economy as it will take money from the productive elements of society, and thus lower incentives.

When Barack Obama warned today that economic recovery will not be swift that "It will take longer than any of us would like — years, not months," and that a huge stimulus package will be required, it is fear mongering not based on sound economic analysis.

When Joe Biden says that the U.S. economy is in danger of "absolutely tanking" and will need a second stimulus package in the $600-billion to $700-billion range, it is more of the same, fear mongering not based on sound economic analysis.

Wealth transfers never help an economy, indeed, a near-trillion in transfers is going to negatively impact a lot of people, whether it is from higher taxes or inflationary deficit spending.

Money Supply Watch and the Real Story for 2009

M1 nsa continues to grow at remarkable rates.

According to the Fed's latest numbers, three month annualized M1 nsa is growing at 52%. This indicates there is still tremendous fear in the system.

Three month annualized M2 nsa is growing at 20.8%. Growth in M2 is indicative of Fed money printing. 20.8% M2 growth is also remarkable. The readjustment period in the economy is going to end much sooner than most expect, given these money injections by Bernanke. Inflation and a collapsing dollar is going to be the real story in 2009, if Bernanke keeps this up.

Friday, December 19, 2008

The Stripper Enforcement Commission: I Am Beginning to See a Pattern...

...and it kind of explains why Bernie Madoff wasn't caught by the SEC. You see, Bernie wasn't sharing his ill gotten funds with a lap dancing stripper. If he had, the SEC would have nailed him about 49 billion dollars ago.

The SEC seems to be obsessed with "T & A". My case:

From the SEC Office of Inspector General

As a result of prior OIG investigations into several employees’ misuse of SEC resources and official time to view pornography, the OIG had recommended that the Office of the Executive Director (OED), in consultation with the Offices of General Counsel and Information Technology, update, consolidate and clarify the agency’s Internet usage policies...
From NYT

Executive's Affair With Stripper Leads to Insider Trading Charges

Last spring, in the midst of a boom year for companies going public, the respected investment bank Keefe, Bruyette & Woods abruptly scrubbed its plans for a stock offering -- and refused to say why.

Yesterday, the mystery was solved. Federal prosecutors in Manhattan charged the firm's former chairman, James J. McDermott Jr., with insider trading in a bizarre case in which he is accused of leaking information about potential billion-dollar bank deals to an X-rated movie actress he was dating...The prosecutors disclosed in the criminal complaint that Keefe, Bruyette had canceled its offering in May after Mr. McDermott disclosed to its directors that a friend of his -- he did not name Ms. Gannon at the time -- was under investigation by the S.E.C. for trading in stocks he had recommended to her.
From the Times Online

Investment bankers at two of Wall Street's leading firms have been arrested for allegedly participating in a $6.7 million international shares trading scam that involved stolen magazines, a stripper...Monika Vujovic, a stripper in New York, allowed Mr Pajcin to use an account in her name to make stock trades in return for about half the profits, authorities said.

"We've never seen before a case involving so many different attempts to obtain information illegally," said Mark Schonfeld, regional director of the Securities and Exchange Commission
From EPJ:

Former Playboy Playmate Busted

Bouchareb also provided the information to his girlfriend, [Playboy playmate]Maria Checa, who currently resides in Greensboro, N.C. Checa traded in her accounts, Checa International, Inc. and Playmate Capital LLC.
The message is clear. If you are going to run a Ponzi scheme, or trade on inside information, keep the ladies from Scores out of it.

Japan's Central Bank Cuts Key Rate to 0.1 Percent

It's going to be massive global inflation.

The Bank of Japan's policy board voted 7-1 to cut the uncollateralized overnight call rate target from 0.3 percent. It was the second cut in less than two months.

The bank said it plans to start buying commercial paper -- the short-term debt firms use to pay everyday expenses -- in an effort to funnel cash directly to firms and will increase its purchases of government bonds to 1.4 trillion yen ($15.7 billion) per month from 1.2 trillion yen ($13.4 billion).

Bob Murphy Is Going to Flip

On Wednesday, Bob Murphy wrote at his blog:

Paulson Flips Again On Whether He Needs the Remaining $350 Billion In TARP

Now I didn't specify in the title of this post whether it means Paulson wants the money or not; do you remember? I know it's a tough question since I think Paulson has literally flipped twice in the past two weeks. But as of right now, Paulson claims he doesn't need to tap into the other half of the TARP. Now what would be funny is if he comes back and says, "Yeah, of course I want to spend another $350 billion. But I meant I wouldn't be spending it on troubled asset relief."

Guess what?

Paulson, in his statement on the automotive bailout, flips again and says he needs the remaining $350 billion of TARP funds for "financial market stability":

As a result of this decision [to bailout the auto industry], Treasury effectively has allocated the first $350 billion from the TARP...In the very short-term, the allocated but not yet disbursed TARP balances, in conjunction with the powers of the Federal Reserve and the FDIC, give me confidence that we have the necessary resources to address a significant financial market event. It is clear, however, that Congress will need to release the remainder of the TARP to support financial market stability. I will discuss that process with the congressional leadership and the President-elect's transition team in the near future.
I think Murph has Paulson figured out.

Greenspan: Banks Are Going to Need Larger Capital Cushions

Alan Greenspan has written a guest column for The Economist and details what he expects to occur in the banking system.

Writes Greenspan:

For decades, holders of the liabilities of banks in the United States had felt secure with the protection of a modest equity-capital cushion, allowing banks to lend freely. As recently as the summer of 2006, with average book capital at 10%, a federal agency noted that “more than 99% of all insured institutions met or exceeded the requirements of the highest regulatory capital standards.”

Today, fearful investors clearly require a far larger capital cushion to lend, unsecured, to any financial intermediary. When bank book capital finally adjusts to current market imperatives, it may well reach its highest levels in 75 years, at least temporarily.

Much more here.

Thursday, December 18, 2008

Former Playboy Playmate Busted

The SEC missed catching Bernie Madoff, but they were apparently all over former Playboy playmate Maria Checa.

According to the SEC, Matthew Devlin, a former registered representative at Lehman Brothers, Inc. in New York City, traded on and tipped his clients and friends with inside information on 13 impending corporate transactions. Some of Devlin's clients and friends, three of whom worked in the securities or legal professions, tipped others who also traded in the securities of the companies involved in the transactions.

Devlin got the inside information from his wife, a partner in the New York City office of an international public relations firm working on the deals. Because the inside information was valuable, some of the traders referred to Devlin and his wife as the "golden goose." The SEC's complaint reports that Devlin was rewarded with cash and luxury items for providing inside information, including a widescreen TV, a leather jacket, and Porsche driving lessons.

The SEC's complaint alleges that, based on the information provided by Devlin, the defendants variously purchased the common stock or options of the following public companies: InVision Technologies, Inc.; Eon Labs, Inc.; Mylan, Inc.; Abgenix, Inc.; Aztar Corporation; Veritas, DGC, Inc.; Mercantile Bankshares Corporation; Alcan, Inc.; Ventana Medical Systems, Inc.; Pharmion Corporation; Take-Two Interactive Software, Inc.; Anheuser-Busch, Inc.; and Rohm and Haas Company. At the time that Devlin tipped the other defendants about these companies, each company was confidentially engaged in a significant transaction that involved a merger, tender offer, or stock repurchase.

Devlin tipped Jamil Bouchareb, his friend and client at Lehman, about 12 of the deals. Bouchareb, a Miami Beach, Fla.-based trader, traded in his own accounts and tipped his friends and business partners. He also caused his parents to trade.

Bouchareb's tippees include his friend and business partner, Daniel Corbin, who traded in a number of the deals through accounts in the name of his companies, Augustus Management LLC and Corbin Investment Holdings LLC. Corbin, a Miami-based trader, shared some of the profits he made with Bouchareb. Bouchareb and Corbin also shared an interest in a number of accounts that traded in the deals. In turn, Corbin provided the information to his father Lee Corbin, an attorney based in White Plains, N.Y. Lee Corbin traded in his personal accounts in four of the deals and owned an interest in the Corbin Investment Holdings account that Daniel used to trade in the deals. Bouchareb and Corbin introduced Devlin to Lee Corbin, who steered Devlin business from some of his trusts and estates clients. Bouchareb also provided the information to his girlfriend, Maria Checa, who currently resides in Greensboro, N.C. Checa traded in her accounts, Checa International, Inc. and Playmate Capital LLC. Bouchareb shared in some of the profits that Checa made. In total, Bouchareb, Daniel Corbin, Lee Corbin, Maria Checa and Bouchareb's parents reaped illegal profits of more than $4.2 million.

Devlin, Bouchareb, Daniel Corbin, Bowers, Faulhaber, Holzer, Glover, Corbin Investment Holdings, LLC and Augustus Management, LLC are charged with violating Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Exchange Act Rules 10b-5 and 14e-3. The SEC seeks injunctive relief, disgorgement of illicit profits with prejudgment interest, and financial penalties. Checa, Checa International, Inc. and Lee Corbin are charged as relief defendants and the SEC seeks their trading profits.

If Madoff's Accountant High Tailed It to Switzerland, He Made a Big Mistake

John Carney is reporting that Bernie Madoff's accountant, David Friehling, is nowhere to be found.

He hasn't been in his office and doesn't appear to be at his home.

Rockland County District Attorney Thomas Zugibe, who is investigating the firm, said this week he did not know where Friehling was and had not had any contact with him. Zugibe's investigators were at the Friehling office Monday morning, knocking fruitlessly at the locked door, AP reports.

Carney speculates:

We're guessing Friehling has fled to Switzerland, the country that notoriously refused to extradict Marc Rich because his crimes were purely economic.
If Friehling is in Switzerland, it's a big mistake.

Marc Rich wasn't protected by the Swiss because of an "economic crime". Rich committed tax evasion. Tax evasion is not a crime in Switzerland, so they won't turn over tax evaders. Financial fraud is a big time crime in Switzerland. If Friehling is in Switzerland and it can be proved he was in on the scam, the Swiss will arrest Friehling and ship him back to the U.S. faster than the ferry traveling from Lausanne, Switzerland can cross Lake Geneva and reach the shore of Evian, France.

If you absolutely, positively do not want to be turned over to U.S. authorities, you have to go to Iran or, God help you, North Korea.

Eliot Spitzer Speaks About the Incoming Treasury Secretary; Reports Losing Money in Madoff Scam

When your political career is shot candor becomes easier.

Spitzer has begun writing a bi-weekly column for Slate, and he attended Slates' Christmas Party, where a group of journalists were able to throw a few questions at him.

Vanity Fair's Maureen Tkacik asked the question that clearly signaled Spitzer's political life is, for now, over, as he gave a lukewarn endorsement of the incoming Treasury Secretary:
I asked Eliot Spitzer what he made of incoming Treasury Secretary Tim Geithner, and sure enough he gave a reply markedly lacking in discretion: “Tim is a good guy, but he’s not a thinker. He’s the status quo."
At the party, he also spoke to Henry Blodget:

Add the name Eliot Spitzer to the list of prominent people allegedly ripped off by Wall Street trader Bernard L. Madoff. Yesterday at Slate's holiday party Spitzer, who is writing a column for the online publication, confirmed that his family's firm had investments with a Madoff subsidiary.

The former governor said that he never met Madoff and wasn't into "the Palm Beach scene," which he described as stuffier than he prefers, but did confirm that his family real estate firm lost money. He shrugged his shoulders in a "what can you do" way, and seemed in good spirits as he talked and joked with the crowd of mostly journalists.

At one point, On the Media's Brooke Gladstone, who like Spitzer is Jewish, joked that "Bernie Madoff was worse for the Jews than anyone since David Berkowitz" and Spitzer replied, "Well, I was New York's second Jewish governor and look what I did."
FT's John Gapper asked him about his becoming a wordsmith:

I went over afterwards to ask him how he was enjoying life as a columnist. “It sucks,” he said with a grin. “I used to be governor of New York”.