How much of the risk to the financial system came from well-regulated Europe? Not intentionally, but lurking within the hidden parts of the system, from interactions that nobody understood. Brad Setser from the Council of Foreign Relations describes a shadow financial system domiciled in London, a shadow system which posed hidden risks which are only now fully coming to light.
Gordon Brown wants to shine a bit more light on the shadow financial system (hat tip IPEZone). One plank of his G-20 action plan is:
“reform of international regulation to close regulatory gaps so shadow banking systems have nowhere to hide”
It isn’t exactly clear though why Brown needs the cooperation of the other members of the G-20 to do increase transparency here: an awful lot of the shadow financial system is based in the UK. If the UK collected the kind of detailed data that the US collects in the TIC, a large part of the shadow financial system would either emerge from the shadows or a lot of banks – and bankers – would need to migrate. And given how much trouble has emerged from the shadows, a bit more transparency about what goes on in the UK might have helped the world’s regulators (and the IMF) do a better job of providing a bit more “early warning” of budding problems.
Think of the various less-than-transparent actors that have set up shop in London
– Many sovereign wealth funds.
– A lot of the SIVs set up by US (and European) banks were legally domiciled in the UK
– Some credit hedge funds
- And most importantly, a host of European banks with large dollar books (think of them as badly regulated credit hedge funds) ran a large part of the dollar exposure through London.There was a reason, after all, why residents in the UK were the largest purchaser of US corporate debt over the past few years. Corporate debt – in the US balance of payments data – includes asset-backed securities. Foreign purchases of such debt soared – especially from 2004 to 2007 – before falling off a cliff during the crisis.
Three recent papers – one from the Bank of Spain and two in the latest BIS quarterly – have shed a bit of light on the true nature of the all the flows through the UK over the past few years. Had there been an international “early warning” system that was on the ball – and had the UK been willing to collect the data on flows through the UK in the face of inevitable complaints that such efforts would drive business abroad – it might well have picked up on some of these flows as a sign of brewing trouble in global financial market
The absence of easily accessible information concealed the scale of two things. The first was the extent to which US credit originated from abroad. Second, the degree to which overseas financial institutions were dependent on access to US dollars. To some extent one was simply the dual of the other. Setser writes:
It is notable, at least to me, that the regulators focused on the risk Lehman’s failure posed to the CDS market but not – at least from what has been reported – on the risk that Lehman’s failure posed to the money markets, and thus to all the institutions that relied on the money markets for financing. This suggests to me that the regulators didn’t fully understand the role European banks were playing in US credit markets – or how exactly they funded their positions – until the crisis made their funding needs acute. I suspect that it took the crisis for the researchers at the BIS to be able to figure out how to use the BIS data to estimate European banks need for wholesale dollar funding.
It might be argued that if more information had been available then markets might have spotted the problem sooner. I’m not sure that more bureaucracy will necessary put greater amounts of it in view. After all, the Europeans didn’t see it coming either so making the US like Europe may be a good idea, but on a case-to-case basis, not on general principles. The proposals have to stand on their merit. Information is different from data. The market is the biggest self-regulator of all, if it has the information to hand. The investors have a self-interest in not losing their shirts. If they see danger coming they will be the first to avoid it. If they see it. Because there’s all kinds of information out there that is unreachable they don’t always see it. Consider an analogous information structure: the Deep Web. It is the case that most of the information that is theoretically available is in practice, out of reach. The bulk of the information that is potentially available over networks is either dynamically generated, behind security walls or is unindexed. Google only scrapes the surface. Indeed, much information is beyond the reach of indexing spiders. There are vast streams of information out there which we don’t even know we have. We possess more data than we can grasp and as a result, there are surprises beneath the dark current of bits. The financial systems reached the limits of its information span last year by walking off a cliff they didn’t see. And the trick is to see the next cliff. What steps will create more information out of the data instead of more walls, more partitions, more black boxes?
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83 Comments
1. wretchard:The Washington Post describes the perils of unacknowledged connections; the dangers of being in “uncharted waters”. Because what you don’t know can hurt you.
“Uncharted waters”? Then find out. Bring it into the OODA loop. Question for the Washington Post. What does all this have to do with Acorn, carbon trading, cats and dogs programs and stimulus spending in the fiscal package? What does all this have to do with Green Jobs and Grand Global Bargains? What does all this have to do with “profit to earnings ratios”? We’ve been acting on long time scales that are out of sync with the problems being thrown up by the system.
Mar 9, 2009 - 8:13 pm 2. nullification?:Can you imagine the blank stare on the face of the first Kenyon president when someone tries to explain this to him. However a quick call to Soros should clear things up.
Mar 9, 2009 - 8:16 pm 3. Instapundit » Blog Archive » EUROPE’S EXTENSIVE REGULATIONS didn’t prevent financial disaster. (Via NewsAlert)….:[...] EXTENSIVE REGULATIONS didn’t prevent financial disaster. (Via [...]
Mar 9, 2009 - 8:29 pm 4. Habu:Europe is going to unmask a sub rosa banking system? Neat.
I bet they have all the success that we’ve had in the USA since 1972 when Richard Nixon declared THE WAR ON DRUGS.
No doubt they’ll put their best man on the case, Chief Inspector Jacques Clouseau.
Mar 9, 2009 - 9:03 pm 5. Brian Macker:Come on, any good economist knows this was due to a fractional reserve monetary inflation spurred on by central banks holding interest rates below market worldwide. It’s a simple case of a price ceiling on interest rates. Price ceilings cause producers (savers) to produce less and consumers(borrowers) to consume more.
No other explanation needed. The rest is all secondary effects. Stock and banking schemes have historically always followed monetary expansion.
It’s amazing that so many still don’t understand this. Trying to adjust the money supply upwards to keep track with productivity driven deflation will naturally cause asset prices to inflate first. Assets are the first to benefit from loans. The Reagan/Thatcher revolution supplied the productivity growth and the central banks used inflation targeted monetary increases.
Not only that but they overshot more by underestimating the inflation they were causing. They did so by substituting owner equivalent rent and using hedonic pricing.
Trying to adjust the money supply via inflation is already analogous to a moth using a flame to guide it’s flight. Monetarism doesn’t work, as Keynesianism doesn’t work.
Same exact sort of thing happened before the Great Depression.
Bailing out every failure also didn’t help as it set up a moral hazard.
Mar 9, 2009 - 9:17 pm 6. ADE:Q: How to get data without regulation?
Market self-interest? I doubt it, when part of the market is incentivised to conceal.
So there must be some regulation that mandates exposure, not the regulation that mandates land rights for gay whales.
Q: How to get information?
Now there’s the rub. My view is that the phrase “in the beginning was the Word” is not too far off the mark. We must generate the concepts, the vocabulary, to recognise the information contained in the data that we have collected in the previous step.
Part of this concept generation is happening on this blog.
ADE
Mar 9, 2009 - 9:19 pm 7. Andrew X:Obama’s true problem may be both far easier to grasp and far more intractible (for him) than he and many others realize.
Simply put, the problem here is finance and credit (i.e. money, in general) It is NOT health care or education or energy, fer criminy sakes, it is the financial system. If he abandoned ALL other issues to focus on that (hedgehog style) he’d be a third of the way home.
But his two fold problem is a) like defense, the entire ideology of “community activists” and the Democratic Party finds even discussing money, much less studying it and becoming expert on it, odious and immoral, and shys away from it as if from a bad smell. Profits are for other, less moral people to produce, theirs is to take their profits and use them “wisely”. So he is trapped and surrounded by the clueless, and has probably never even been exposed for any period of time to the non-clueless.
and b) The ONLY things Obama can do in focusing on and facing the financial problem fly in the face of his entire ideology (cutting spending, freeing up companies, minimizing regulation at least for non-banking businesses, etc). It’s like trying to get a radical Muslim to start “istening to the Jews” about solving a problem because they are in fact more knowledgable about the problem than the radical Muslim is. He should listen, but he cannot, he just cannot. There are too many of his lifetime foundational beliefs across the board that would crumble into dust if he did.
So it might be easier for Obama than he realizes to at least give us the confidence that he is on the attack against economic disaster. He could do it…. but he cannot do it…. so he won’t. And he, and we, will flounder.
Mar 9, 2009 - 9:32 pm 8. Jamie Irons:wretchard,
You wrote:
To some extent one was simply the dual of the other.
Spoken like a mathematician. I like that.
Jamie Irons
Mar 9, 2009 - 9:39 pm 9. Marie Claude:well, I already read and heard that the City of London was the center of all traffics
uh, here the guy says that we/you are all f** up, and it was planned by a plutocraty of richest greedy bankers that ruled the world policies since… Mathusalem
http://news.goldseek.com/GoldSeek/1236665100.php
Mar 9, 2009 - 9:48 pm 10. Alexis:If the Obama administration didn’t want risk, it shouldn’t have promised CHANGE. If Barack Obama didn’t want to assume the responsibility for solving this financial crisis, he should not have run for the Presidency. The fact is, it’s his turn in the presidency, and he must take responsibility for the decisions he makes.
The big problem Barack Obama faces is that he ran with himself decked out in a halo in his campaign posters. And you know what? Some people actually believed nonverbal depictions of him as a messiah, a saint, or a demigod. Well, President Obama, now that you have won the Presidency with that halo painted around your head, you had better not make any mistakes or else your followers will feel betrayed by you. Horribly betrayed.
You see, President Obama, you are safer with me. I don’t beleive in you. I didn’t vote for you. I don’t think you are some savior coming out from the heavens (or Hawaii) to save humanity. So, I won’t feel betrayed by you. If you want to win my respect, you will need to govern well. You will need to do the best job you can. And you will need to make the right decisions.
President Obama, if you don’t make the right decisions during your tenure, you have only yourself to blame.
Mar 9, 2009 - 9:48 pm 11. wretchard:I think we are past the “magic” phase in our treatment of the current crisis. Happily, we are starting to focus on specifics and leaving the treacherous quicksands of “confidence” and “hope”. That will come, but as a byproduct of dealing with specific problems. Now as we start unboxing the specific problems we’ll find others. That’s good, not bad news, because that raises the possibility that we’re starting to converge on what’s broken.
Think about any moderately complicated problem, like fixing a stalled car. There will always be false diagnosis at the outset. Maybe at first you’ll try to push the car downhill and get it going that way. Then, by and by, you’ll begin to focus on the starter motor, carburator, electrical harness, fuel line, etc. But you’ll converge if you are going about it in a logical way. We need to be on that learning curve, like a doctor trying to find out why a patient is ailing. The worst possible thing is to have no analytical debate because it’s become all too politicized to say anything.
Mar 9, 2009 - 9:57 pm 12. Leo Linbeck III:The WaPo article is unconvincing to me.
He says the market value of toxic assets is between 5 and 30 cents on the dollar. Says who? If the market is so opaque, where does this number come from? What is it based upon?
Moreover, these assets are long-term assets (mortgages). The total market value of all US mortgages was $11.2 trillion in 3Q2008, and is trending down. US national income in 4Q2008 was $9.9T, down from $10.2T in 3Q. But personal outlays for housing has stayed very steady at about $1.5T. This is consistent with the hypothesis that people cut back on other expenditures, but kept consuming the same amount of housing.
So what does this mean?
About 67.5% of Americans own a home, so we can make a rough estimate of the total amount of personal outlays that are available to service mortgages: 67.5% * $1.5T = $1T.
Or put another way, Americans pay themselves $1T a year in rent to live in their homes, and that money can be used to pay their mortgage. Is it enough?
Let’s assume that the average mortgage has an interest rate of 6% (about where it has been for 10 years, more or less), and an average of 22.5 year amortization (a mix of 15 and 30 year). This means that their debt service (interest and principal) is about 8.2% of the principal amount. If the total amount of mortgage debt is $11.2T, so the annual debt service comes out to $920B.
So, in aggregate, there’s enough. Will Americans continue to be able to pay this? Most will, some won’t. The big trigger is unemployment – you can’t pay your mortgage if you don’t have a job (or enough savings until you get a job). But even if unemployment hits 10% (which seems likely), I would expect this to have only a modest impact on aggregate housing outlays (I’ll confirm this instinct with historical data when I get a chance). Delinquencies will rise, but there is a big difference between delinquency and foreclosure (delinquency rates range from 3.6% [prime fixed] to 22.1% [subprime ARM]; foreclosure rates are less than 2%). Just because you miss some payments doesn’t mean you’ll lose your house.
Anyhoo, the point here is that the claims that these “toxic assets” will sink the banks may be true, but without additional data to support this claim, I’m skeptical. There are losses, but I don’t see where $2T comes from. That would imply all mortgages would lose, on average, 20% of their value. I don’t see it.
This, incidentally, is the reason that we need a suspension of mark-to-market. There is a ton of data to process, and without some time to do that, the market (and therefore bank balance sheets) will continue to decline, even if it shouldn’t.
And, finally, WRT CDS: as discussed a while back, CDSs don’t increase the total losses, just their distribution. It’s a red herring.
Tasty, perhaps, but useless for cutting down a tree.
L3
Mar 9, 2009 - 10:31 pm 13. Nomenklatura:“Think about any moderately complicated problem, like fixing a stalled car.”
Actually that’s a pretty good analogy. You used to be able to fix a carburetor with a screwdriver and a basic knowledge of how carburetors in general work. Now cars are more efficient while they work, but their system operating characteristics are embedded in sophisticated electronics and you have no hope of diagnosing without both a computer and a lot of very detailed knowledge about the programmed error codes, etc. In other words they work great until suddenly they don’t work at all, and as soon as they don’t work you have a hard problem on your hands instead of an easy one.
This is what we have done to our financial systems, in the name of efficiency. They have more sophisticated electronics, but our politicians are not more sophisticated mechanics.
The appropriate solution is to roll back the sophistication level of our regulatory frameworks, accepting a little degradation in efficiency in return for a more dependable system overall. Volcker is right: a return to Glass-Steagall for example would do just fine.
Mar 9, 2009 - 10:46 pm 14. wildernesscalling:LLIII (#12) Not a home owner in Cal, Arz, Mich or Fla, but another state closer to the middle I can tell you that My Home has lost 19% value already, I bought in Aug 2007, the neighbor behind me paid 20.1% more for the same house in the beginning of 2006 then I paid in 2007, he “was” close to retirement (surprised he hasn’t had a stroke yet) I believe they are planning on the home values to lose that “20%” because we are approaching it now, I think it will be worse yet because the commercial real-estate has not yet tumbled to match the economy and that my friend will be the boot that drops next, too many homes and buildings for too few a people.
Mar 10, 2009 - 1:14 am 15. ADE:L3,
Thanks for the numbers.
Could you just clarify this: About 67.5% of Americans own a home, so we can make a rough estimate of the total amount of personal outlays that are available to service mortgages: 67.5% * $1.5T = $1T.
Or put another way, Americans pay themselves $1T a year in rent to live in their homes, and that money can be used to pay their mortgage. Is it enough?
Does:
“own a home” = in the process of buying or own outright?
what about renters? are they paying off other people’s mortgages?
I’m happy to see that you are drawing the distinction between sum assured (or sum at risk) versus the risk premium by drawing attention to the fact that not all mortgages will default.
I like your final sentences.
My view is that we are looking at a failure of concept – sort of thinking the world is flat and then to be utterly bewildered when you find that it is curved.
Mark-to-market is an example of an incomplete concept – it is looking at half the equation. If your income = outgo, the market value of your assets are irrelevant.
ADE
Mar 10, 2009 - 1:54 am 16. ADE:and I would add that “Mark to Market” is an example of sloganeering (“the market is always right”) versus application in context.
I blame ‘degrees’ in journalism.
ADE
Mar 10, 2009 - 2:01 am 17. RCH:Brian Macker, that post of yours is really brilliant. I haven’t seen anyone else make that point. In the 1920’s there was apparently a large increase in productivity, perhaps they also overcompensated for this deflation as well.
Mar 10, 2009 - 2:31 am 18. ADE:RCH,
Thanks for making me re-read Brian’s post. You’re right, it’s brilliant. This is the first time I’ve seen productivity effects factored into any economic discussion.
ADE
Mar 10, 2009 - 2:43 am 19. wretchard:Someone has sent me a link to Quadrant Magazine, an online publication in Australia, which has a feature on the Weathermen. In the middle of the article is a section on Weatherman economics, which holds that most of America’s wealth was stolen from the Vietnamese, the Angolans and the Bolivians. The funniest part is an anecdote about how they devised new lyrics to Westside Story’s Maria, to extol the virtues of Kim Il Sung (the Dear Leader’s deceased dad):
It struck me that the Weathermen never really understood where anything came from, outside the screeds they read in their books; that they were in many ways really bloodthirsty children playing at revolution. But really, the joke is on us. Ayers and Dohrn may be among the most influential “thinkers” in America today.
Mar 10, 2009 - 3:12 am 20. ADE:Ayers and Dohrn may be among the most influential “thinkers” in America today
“Thinkers”, perhaps.
But after Hope and Change fails, nobody thinks.
Now, O’Mighty, got those loaves and fishes handy?
ADE
Mar 10, 2009 - 3:24 am 21. ledger:0bama and other politicians are exacerbating the situation being political animals with little to zero business knowledge. Government bailouts are not the answer. The more Obama intervenes in the markets the worse it gets.
Sure more disclosure is need. But, massive bailouts of companies like AIG just worsen the situation. Although brutal, the markets will right themselves without out government intervention.
Mar 10, 2009 - 3:33 am 22. ajacksonian:What is seen in the banking system is an over-dependent system upon regulation of large institutions. It is far easier to control a 10 banks holding $1 trillion than it is to control 10,000 banks holding that exact, same sum. While the overhead cost of running a large institution has its advantages, the disadvantages are that they are inflexible to market based changes. Thus, for duplicated overhead per bank you get flexibility to address different markets, change outlook to local circumstances and, generally, remove the idea tha ‘one-size fits all’ regulation is a good idea.
A smaller scale based system has greater transparency as there is competition amongst many institutions: they must demonstrate that they have sound financial interests, are able to manage money and can innovate at the margins while still holding themselves accountable to investors and stock holders. The argument that government regulation causes transparency flies in the face of many non-financial industries (say industrial metal working) that don’t have such reporting requirements and yet have very high standards to meet for their customers. Of course those institutions looking to ‘cook the books’ are a problem, and they do not go away with regulation, they just cook them in different areas to escape regulatory notice. The emphasis on sound monetary accounting, keeping operations open to scrutiny by investors and share holders (as well as depositers) is in the best interest of any institution in a competative environment.
What is the best way to ensure that you have a flexible, adaptable banking system? Remove the regulations that encourage large institutions to form and, indeed, permits them to fail. Whenever a country or government that finds itself with an private institution that is ‘too big to fail’ and can siphon off the funds of the citizenry to keep it afloat, that institution is not only not ‘too big to fail’ it is now dictating its continued operations to a country. At that point it *must* fail and be dismantled for the future safety of liberty within that nation.
It should be noted that the regulations encouraging loans to those with No Job, No Income or Assets (NINJA loans) are *still* on the books. While that is not the source of the wider problem of encouraging ’streamlining’ in the banking industry, it is an immediate cause of the mortgage problem, as well as the two government financial institutions that backed those horrific and unsound loan packages. And as no one trusts the regulations, government or the institutions seeking bail outs, they will not be solvent any time soon: why should anyone invest in them when the ill practices being pushed that got them to where they are have not been changed?
We could, of course, do something different: tell the government to hand out shares in institutions to each US Citizen. The scale problem of scrutiny can now be addressed by thousands, tens of thousands of financial analysts laid off by the financial industry. Who better to scrutinize the books, in-depth, than those who once depended on them for jobs. And since that would be a broad-based group of people who would have some amount of duplicate effort, we would get different perspectives on these corporations and, via trading, set a value on them. ‘Toxic assets’ get valuation based on that analysis, and some banks might want to form companies to use these places that were ‘overbuilt’ as rental property. That, alone, would steady valuation in the market and set a floor to it. And once that value was reset, then standard taxation of property gets re-adjusted for *everyone* in neighborhoods, counties and cities. Let these financial groups fail, and let them be acquired by the US citizenry to hear how best to use those assets when the companies go under.
Break-up would be an excellent option… far better than this Titanic concept we have today of big institutions somehow being better just because they are big. They do look so wonderful, right up to that iceberg hitting below the waterline. Then they go down so quickly…
Mar 10, 2009 - 3:50 am 23. RWE:“It struck me that the Weathermen never really understood where anything came from…”
Note that today a major part of the Obama Mantra is “The rich today are rich because of the Bush tax cuts…”
I would guess that sounds wonderful to the ideologues, but rarely have I ever heard something more absurd said out loud, and over and over to boot.
Mar 10, 2009 - 5:24 am 24. buddy larsen:Be William Ayres.
Revolt, on the propaganda of a military invader of a treaty ally.
Set some bombs, which once you’re safely away, explode and kill some people, some young cops with families.
Hide awhile, then get bored, then start hungering for some comfort and some ‘’stuff”.
Call mommy and daddy, manipulate their parental instincts to have them use their prominence to arrange for you a safe & ultra-easy fix.
Come in from the never-very-cold, take the wrist slap.
Settle into the big fix, the soft, easy, high paying, high status, zero competition, zero required performnance career as an entertainer of pampered children sent to you at great parental expense, that you cmay curse their parents and the system that cascades such lofty ease on an unworthy but tickled pink rodent.
Move into the demi-manse in Hyde Park.
Begin consuming within the top 2% volume-throughput level.
When not consuming and/or lounging about the Hyde Park manse, possibly porking fellow murderer wife now and then, do a little charitable foundation political subversion, remembering to undermine the oppressive system and all, and remembering to pop off a revolutionary slogan now and then when the press is about (unless it’s Fox, in which case call the police, no, not the ones you killed, dummy, the other ones, who will come and protect you, and your rights, and your mood, and your revolutionary spirit, from this Fox reporter who might ask you something that is not allowable to mention in your revolutionary presence there manning the barricades of your imagination, some rude tidbit that might sting the New Man in his great gritty realism, some sort of bummer question from “the Man” out there in the corrupted capitalist world beyond the fleets of Mercedes and BMWs gliding dark-windowed about the sylvan Hyde Park boulevards, some rude bark from this peasant who should be whipped and hung for having raised his low class face to your presence, whose death would show the rest of them, would teach them never never never to question the revolutionary realism of your really really real revolutionary realness.
Mar 10, 2009 - 6:47 am 25. Lifeofthemind:Obama was nurtured by the Ayers SDS Weatherman wing of American Marxism and was supported in his campaign by the Netroots A.N.S.W.E.R. coalition. The later are a spin off of the Workers World Party fringe group of Marxists who straddle the line between Trotskyism and Stalinism. The strongest influence on him was “Uncle” Frank Davis. who’s formal links were more to the official CPUSA. I am not aware of any links between Davis and the WWP. It occurs to me that no one has asked if there was ever any contact between Obama and Angela Davis when he lived in California. I have heard of links between the WWP and the North Korean regime but can’t find the reference. We can speculate on whether Obama’s reaction to provocations in East Asia could be effected by a desire to either destroy evidence or over compensate or protect those he sympathizes with. Whichever way he jumps his motives will be questioned.
Mar 10, 2009 - 6:53 am 26. programmer:Look, a rhinoceros!
Why I don’t like progressives
In essence, Cafferty says:
NEW YORK (CNN) — The Republican Party is becoming a cartoon.
Where to start?
Bobby Jindal: “I’m certainly not nearly as good of a speaker as Obama.” Good OF a speaker? How about not as good at eighth-grade grammar either. It’s embarrassing.
programmer says:
Is this condescension on the part of some one who has done nothing but be snide for a living as annoying to any one else as it is to me?
Mar 10, 2009 - 6:56 am 27. Alexis:The worst possible thing is to have no analytical debate because it’s become all too politicized to say anything.
You have a point.
There is a pattern in some quarters to politicize a debate to such an extent that people don’t feel they can say anything, and then once people clam up they are accused of being “cowards” if they don’t parrot the latest platitudes. There are times when political factions don’t want problems to be solved, but rather want them to fester because festering problems (and especially the same festering problems which can be recycled without bothering to think) can ensure reelection at the ballot box.
It is important to understand what is going on and how to solve the problem. However, it is also important to know when those in power don’t actually want the problem to be solved.
Before hiring an auto mechanic, it helps to know his (or his employer’s) reputation for honesty. Otherwise, one can pay a lot of money for a misdiagnosis.
Mar 10, 2009 - 7:01 am 28. Lifeofthemind:@nomenklatura and ajacksonian,
Mar 10, 2009 - 7:05 am 29. Alexis:What you are doing is making the link that I failed to draw between the fragility of our political system and the fragility of our financial system caused by excessive centralization and unification of authority, despite the concurrent bewildering multiplication of subcomponents, in my encomium to the original Republican concepts on the last thread.
What does one do when the auto mechanic looks at the car and looks at the car (and thus racks up the hours), and then decides to replace several parts that were doing just fine, but fails to notice what was really going wrong? And, let’s say that this auto mechanic is notorious for incompetence and overcharging, but continues to get land office business because he is so charming and his advertising appeals so well to children. And let’s say that after paying a large bill (put on the charge card) for not getting the car fixed, one is still required to hire this guy because he looks like a purple dinosaur.
What does one do in such a circumstance?
Mar 10, 2009 - 7:14 am 30. buddy larsen:a view of the piled up corruption
Mar 10, 2009 - 7:17 am 31. Lifeofthemind:@programmer,
Mar 10, 2009 - 7:25 am 32. michael hoskins:Yes. What Cafferty is doing is throwing poo and yelling that anyone who is like Jindal won’t get invited to the party. If you persist in soiling the doorstep with your presence then we will send Charlie Gibson out to stare down his nose at you. What Jindal should do is respond by pointing out that he is just a poor country boy who is offended by the rank bigotry and snobbery of Cafferty (ideally he should wear a plaid shirt and whittle a stick during an “impromptu” press moment) but that he sure hopes that the education reforms he is pushing for will raise all the children of Louisiana up to the level of the many famous musicians, actors and journalists who come from his fair state. The key is to lay it on thick and let staff aids whisper that the Yankee is attacking Jindal both because he is a Person of Color and because he comes from a place with a non-English speaking (Cajun) culture. Then have a good laugh.
Re:LLIII@12.
Leo, thanks, great post.
Sometimes, while the answer is simple, the devil is in the execution. (Today CitiBank reported ongoing operations as positive and profitable.)
Refering to leo’s work, questions become, who pays the shortfall? What is the net worth of the big banks in question?
All the banks in question are generating profits on thier ongoing commericial and retail operations. If they consume ongoing profits and equity (what is the net worth of banks in extremis?) they can probably cover the losses. The troubled banks may not be able to continue certain business activities (New loans are limited by net worth) they can continue profitable operations, at the very least retail banking and income on performing loans of all type. In the meantime a lot of cost cutting to maximize the rate of recovery. Maybe to point of dumping entire staffs.
In the interim the many, many regional federal and state banks that remained conservative will see an increase in market share providing the services no longer available from the big NY guys. That loss of market to the responsible rubes in the heartland is part of the price to be paid.
Finally, in dealing with existing mortgages, no one should get lost in property valuation, the issue is debt service. The home buyer made the decision that the “rent” was suitable for the use of the roof. It should still be. That he cannot flip is part of the risk taken. No tears of pity here.
Finally, the solution will require unbundling mortgages, then dealing with the portfolio the old fashion way, one at a time. This is work. Hard work. Work not done by the high flyers…who need to try it for a while. I will hazard when looked at in detail rather than in aggregate, a mortgage banker might find many ways to assist individuals with debt service, in a manner that is a least a stop loss position.
Entropy=the basics, the details. Enthalpy=Aggregates, heated averages, global view.
Mar 10, 2009 - 7:37 am 33. Charles:13. Nomenklatura:
Volcker is right: a return to Glass-Steagall for example would do just fine.
agreed. Also a return to redlining would be helpful too. That way mortgage application examiners don’t have to be geniuses.
Mar 10, 2009 - 7:43 am 34. Lifeofthemind:Charles,
Mar 10, 2009 - 7:56 am 35. buddy larsen:“Redlining” for conventional mortgages, if used as a trigger for significantly reduced taxation, accelerated foreclosure and eviction of delinquent residents (the opposite of what ACORN advocates) and incentives for new residents to move in and contribute sweat equity (here school vouchers could prove key) could be part of a program for community revitalization. That is what the race hucksters and subsidy leeches (think Rezko) that back Obama condemn as “Gentrification.” The choice is between a natural cycle of capital reallocation and renewal and the politically entrenched effort to preserve pools of poverty as voting blocs attached to an unending stream of subsidies.
–that ‘of’ is common down thisaway –and it’s not incorrect. It’s a preposition locating the noun phrase “a speaker” as the object being compared to the speaker, by the speaker.
It’s not hick, it’s an archaic embellished form often heard around the Atchafalaya basin in the Baton Rouge/New Orleans corridor, where a cross-fertilized Archaic Canadian French, Old British, Cajun, Caribe Patois, Creole Tex Mex, and Modern Southern all obtain. That Caffertity is a provincial of a person; a snob of a person who wouldn’t understand of exotic if he tripped over it.
Mar 10, 2009 - 8:13 am 36. Unsk:L3 , Good Post.
Employment is key to the economy, and to the recovery.
If we had a President who understood the economy and wanted to improve it we’d have a fighting chance for a recovery. Unfortunately, our first Kenyan President’s knowledge and priorities are elsewhere. Everything Obama has done so far will only increase unemployment and drive our economy into the ditch.
Wildernesscalling: Those home price surveys being thrown about are only a snapshot of today’s market, where in most markets, only the distressed are selling. Many of the houses on the market are real stinkers. So those surveys tend to present a depressed viewpoint. People with a job and equity are not selling. The long term value of your home will depend on when and if the economy comes back. When there are better employment prospects, reasonable and available lending terms, and demand for homes improves, prices will come back.
Mar 10, 2009 - 8:19 am 37. Lifeofthemind:If “Mark to Market” can be used to reduce the paper value of held assets to the point where investors are insolvent why can’t the same rule be used to reduce the declared property value for taxation of residences occupied by the same people who saw their retirement portfolios shredded by that government rule? Why can’t homeowners get property tax relief and remortgage to declare a capital loss? In other words can they sell the house to themselves?
Mar 10, 2009 - 8:32 am 38. Mark:Brian Macker writes:
“. . . hedonic pricing.” Had to go to the dictionary for that one, thinking it was a technical economics term.
Jacksonian writes:
“It should be noted that the regulations encouraging loans to those with No Job, No Income or Assets (NINJA loans) are *still* on the books.”
“American Thinker”had an article (February 8, 2008) on three trends in illegal immigration. I’ll quote it at some length, since it’s interesting to see some of the influences that resulted in the hedonic pricing:
[From 'American Thinker'] “One particular sentence in the latest Pew Research Center population rings my alarm bell.
‘Demographic change has major implications for government spending in key areas such as schools, health programs, community services, infrastructure and Social Security.’
“But that warning only lists implications for key areas of ‘government spending.’ What about the consequences related to unemployment, poverty, crime, housing, and public health? Big decisions in the lives of individuals and nations often bring unintended consequences – some good, some not. The full scope of negative consequences takes time to surface.
“Future historians will ask, “What were the nation’s leaders thinking when they tacitly adopted an open borders policy that, in a relatively short period of time, dramatically altered the national demographics?” Among answers offered will be these:
“Politically, Democrats sought to gain a fresh pool of voters to strengthen their power base, while Republicans were serving the business interests of their supporters. Economically, employers sought cheap labor to cut the costs of compliance with employment laws. Consumers desired the lower prices for goods and services brought by cheap labor. In short, a joint effort with varying, intersecting motives drove immigration policy.
“Sociologists will suggest that an open border policy in the late 20th – early 21st Centuries was influenced by those who believed that firm borders represent a nationalism that promotes war, and perpetuates the international gaps between haves and havenots.
“An economist may say that unhindered movement across borders promotes free competition among labor sources, and aids the spread of global economic prosperity.
“Anthropologists will explain how the U.S. demographic shift was a small portion of the huge, global migratory movements of peoples begun in the 20th Century.
“One well-known American politician addressed the illegal immigration challenge in his book entitled A Colony of the World: The United States Today.
“‘The United States cannot regain its competitive standing in the world by importing low wage workers from other countries. On the one hand, it engenders conditions this country cannot and should not tolerate…On the other hand, in the modern age a nation’s wealth and prosperity is secured by high worker productivity and capital investment, not by the availability of low-wage labor.’ (p.71)
“Think that was written by Pat Buchanan?
“No, the author was former Minnesota Senator and once presidential candidate Eugene McCarthy, copyrighted 1992.”
Mar 10, 2009 - 8:40 am 39. buddy larsen:i think they just suspended m2m –
Mar 10, 2009 - 9:02 am 40. hdgreene:This is basic stoner economics. In stoner economics, lenders owe borrowers.
Say you are in a bar and a friend borrows twenty dollars. No sooner does he borrow the bucks than he acts like you owed him the money. Say you put in the effort to get the twenty back. Now he’s shown he’s “good for it,” so you owe him forty — the twenty you always owed him and the twenty he just gave you. So later on you “lend” him the forty. Only now you are short on cash, so naturally you borrow twenty from another friend so you can have someone who owes you. But he was a little short so he borrowed twenty off the guy you just lent the forty to. Meanwhile, you’ve opened up a tab at the bar and bought everyone drinks.
I’ve got a mathematical formula that shows how this all relates to the subprime crisis, but I forget where I put it.
Mar 10, 2009 - 9:12 am 41. joe buzz:So…something we were on the verge of nationalizing last week is now claiming a profit, therefore, lots of folks are buying stock today….hdgreene can I have a hit?
Mar 10, 2009 - 9:35 am 42. Charles:38. Mark:
“Future historians will ask, “What were the nation’s leaders thinking when they tacitly adopted an open borders policy that, in a relatively short period of time, dramatically altered the national demographics?” Among answers offered will be these:
There was and is a North American Union crowd in both parties who viewed/view the EU as their model.
While they lost power in the last years of Bush — they are likely back in the driver’s seat under the Obama admin. However, the real world may not allow them to proceed.
Are You Ready For War? Words from a Border Patrol Agent
Mar 10, 2009 - 10:01 am 43. joe buzz:From
Dinocrat.com
Creditworthy loans are now “misuses of U.S. funds”
Bloomberg discusses the marvelous interaction between the $2 trillion in assets Citigroup Inc., the similarly sized JPMorgan Chase and Bank of America Corp. and the US government:
Democrats on the House Oversight and Government Reform Committee today cited the three banks, which got a combined $120 billion in Troubled Asset Relief Program funds, in a memo outlining Treasury Department “failures” in overseeing the aid. Neel Kashkari, the Treasury official who administers TARP, will testify March 11 at a committee hearing on the program. “Under existing agreements between Treasury and TARP recipient financial institutions, Treasury has broad contractual authority to scour company books in search of, among other things, waste and abuse by TARP recipients. But in practice, Treasury is not doing so,” the memo said.
Lawmakers criticized former Treasury Secretary Henry Paulson and the Bush administration for failing to ensure the initial $350 billion of rescue funds was used to spur lending to U.S. consumers as the nation’s economy sank into the worst financial crisis since the Great Depression. Citigroup’s $8 billion loan to Dubai’s government, a JPMorgan $1 billion investment in India and Bank of America’s $7 billion investment in China Construction Bank Corp. were called misuses of U.S. funds in today’s memo.
Regulation and government control are great, aren’t they? The DMV and Post Office are efficient. Why can’t banking be as good? Now it can be! The degree of micromanagement is swell too. In our opinion, 25 year old Congressional staffers should approve all loans from now on. Right on!
Mar 10, 2009 - 10:13 am 44. Alvin:When I try to explain this mess to friends and relatives who get all their information from cbsnbccnnpbs I always am stopped by their question “but where did the money go?” I can’t explain it. Didn’t these tens of trillions get spent for wires and cement and wood and labor that went into houses? If a scamster bought a house for $100,000 and sold it for $600,000 and the bad debt ended up (through Fannie Mae) in bad CDO paper, what did the scamster do with the $500,000 he made? Every middle man along the route took money out but the money didn’t cease to exist, did it? I learned in school about the laws of thermodynamics. I suppose that such laws do not apply here but, please excuse my ignorance, the money must be somewhere, it seems to me. Can somebody explain this to me?
Mar 10, 2009 - 10:21 am 45. buddy larsen:green & buzz are on it –debt IS equity if you don’t have to pay it back. They even have a word for that state of goverment-to-private, permanent in all but name, money. can’t think of it right now. it’s not the related term “four bear aunts” which i think is like the bear market is in all four directions and you have to holler “uncle”
Mar 10, 2009 - 10:23 am 46. buddy larsen:alvin, key word ois ‘transaction’ –ya need one to make it ‘money’. otherwise it’s ‘credit’, believe it r not. say the last transaction on the house was 200k, thjat;s money. say the appraisal rose to 500k but it didn’t trade –the extra 300k is ‘credit’ because it is on the balance sheets on owner and lender. if ya borrow against it, you’ve ‘monetized’ it. and it ain’t credit anymore. but it can create credit. which can create money if there’s a transaction. make sense? if so, send $5
Mar 10, 2009 - 10:32 am 47. Stan:re: Obama’s unserious approach to the problem as related by the Oracle of Omaha:
http://slate.com/blogs/blogs/kausfiles/archive/2009/03/09/obama-buffetted.aspx
Buffett asserts that if Obama was serious about the “war” to fix the economy he would enlist bi-partisan support by focussing on the solution rather than “using” the crisis because it’s a shame to waste.
Interesting that this comment is not mainstream news… when Buffett was critical of Bush re: handling the economy it was front page news… now, not so much… “crickets” is all I “hear”…
Mar 10, 2009 - 10:43 am 48. Triton'sPolarTIger:@27 Alexis:
“It is important to understand what is going on and how to solve the problem. However, it is also important to know when those in power don’t actually want the problem to be solved.
Before hiring an auto mechanic, it helps to know his (or his employer’s) reputation for honesty. Otherwise, one can pay a lot of money for a misdiagnosis.”
Or one can be simply rooked out of a pile of cash by an unscrupulous garage…
Back in the day when I was geeky-looking nightmare, it dawned on me that I stood a much better chance of finding an honest auto mechanic if I gave the appearance of being someone who, despite my geekiness, was (believe it or not) a motorhead.
Being that each POS that I owned back then afforded me ample opportunities for shadetree-mechanicing, I took the opportunity to do some reading (God bless those folks @ Chilton, etc), do my own small tool repairs, and even offered to help out a buddy who was a genuine motorhead.
Over the course of several months, I became intimately acquainted with a number of obscure engine and transmission problems, from terminology, to diagnosis, to successful repair.
The day eventually came where I could see a problem on the horizon that was beyond my skill level (and tool collection), so I went mechanic-shopping. Got up one Saturday morning – EARLY – went out back, popped the hood, and rubbed my hands all over the valve covers – got a nice, black, greasy coating on both hands – wiped most of it off, while ensuring that enough got worked into my palms and under my fingernails that I looked the part – applied a few smudges on my pants & shirt, along with a couple of nice patches on the sides of my face – I finished off the look by sprinkling a tiny patch of cloth in gasoline and tucking it into my shirt pocket – I called it auto cologne.
Look complete, I piled into the other car (had two – neither very reliable), and was standing on the doorstep of a nearby Goodyear when the manager showed up to open the place. A conversation ensues – I ask his advice on a phantom problem, walking him completely through the appearance of the problem, my diagnosis, and my intended repair plan, using the correct terminology… knowing ahead of time of course that it’s absolutely correct. The manager asks a question or two, but agrees that I’m on the right track. I thank him and leave.
Lather, rinse, repeat a couple more times… and in less than a month the entire Goodyear was convinced that I was an uber motorhead.
When I finally took the car in, explaining that I was traveling and didn’t have time to take care of the problem, they took complete care of me. And continued to do so from that day forward. Never a surprise adder because of some hidden nasty that they “found”. Always a complete explanation of what they did and why. I went there for years, even through a couple of management changes, and never had a problem.
It’s amazing what people will disclose when they believe you know as much (and possibly more) about a particular topic.
The best part of it, though, is that looking back, while I really have no idea whether or not they were actually an honest group, it didn’t matter, since the “urban legend” that I’d built up in their minds with respect to my knowledge of auto repair was so solid that even if they’d been inclined to cheat someone, they’d never dare pull any crap on me…
(The best part, though, was that after several years, I actually got pretty good at it… I’ve stripped and rebuilt engines, rebuilt three or four ac systems, etc…
There’s a lesson in here regarding this whole financial mess… but I’ve gotten too high on the recalled smell of gasoline to articulate it…
Mar 10, 2009 - 10:53 am 49. Alvin:Buddy, you have answered correctly. Suppose I were sitting at a table with four friends. We each start with $100 in our pockets. I also have a tulip bulb and offer it for sale for $2. If Buddy buys it from me I now have $2 and Buddy has $98 and a tulip bulb. If we go around the table a few times we might end up with somebody with $200 in their pocket, others with less. And one tulip bulb. If one of the friends did not have any money to start but instead paid with paper that he said he’d make good on but never did, wouldn’t we end up with $400 and one tulip bulb and a pile of worthless paper? Exactly where we started.
In this present mess we have very large piles of worthless paper but we still have houses, cars, etc., that were produced, don’t we? These are still real and useful things. The problem I see is that some poor suckers are holding the worthless paper, while others have all the houses and cars. The money didn’t disappear at all– it never existed.
But wait! The government can creat more money! No problemo! So, I will wait a few years and then send you the $5 when it’s been inflated, I mean created, down to $0.000005.
Mar 10, 2009 - 10:53 am 50. buddy larsen:crap. there goes my whataburger.
Mar 10, 2009 - 11:00 am 51. Aether:44. Alvin:
““but where did the money go?” I can’t explain it. …
If a scamster bought a house for $100,000 and sold it for $600,000 and the bad debt ended up (through Fannie Mae) in bad CDO paper, what did the scamster do with the $500,000 he made? ”
My guess is that they:
A) bought an overpriced $800k+ McMansion
B) bought a $60,000+ Mercedes or Range Rover
C) Invested the remainder in the Stock Market and/or Real Estate.
point being that all of those “Assets” have now all gone POOF! “Up in Smoke”.
Mar 10, 2009 - 11:04 am 52. buddy larsen:triton –good story –but what if that gasoline patch had caught fire and blistered your chest –would you have had to go buy a stethoscope before you could go to the ER?
Mar 10, 2009 - 11:05 am 53. Alvin:But Aether, somebody still has the McMansion, Mercedes or Range Rover. I’m upset it’s not me. I do have some stock, however…..
Mar 10, 2009 - 11:17 am 54. Jrod:Buddy your concerns on the last thread re: the phantom shares stuck in the netherworld of DTCC-land are well-founded. Continuous net settlement means that prime broker A will never issue a “buy in” to prime broker B for the 1.2mil shares of ZZYZX that have been in a failure to deliver state for the past 72 days as long as prime broker B promises not to either. Reminds me of that moment when Wiley Coyote runs off the cliff but doesn’t fall. Now freeze the frame.
L3–love your comments. You’re right about the CDS market. It’s not exactly the villain in the room. All a CDS really is is a bond option. We don’t refer to the equities options or futures markets as being “disruptive”–unless you’re a politician talking about “Greedy Big Oil” making “outsized profits” anyhow. Really the same thing, except the CDS guys play with different rules. If you are a seller of open‐ended risk (i.e. the person selling the insurance against default), you have been able to do so with zero initial collateral required if you were a dealer or say a huge insurance company with a pristine credit rating (AIG). So, the returns and the leverage were infinite to these players as long as the contract
Mar 10, 2009 - 11:20 am 55. Triton'sPolarTIger:never moved against them. They would simply collect premiums without ever posting collateral or putting money up for the risk they were taking. Firms like Bear Stearns, Lehman, and AIG all took complete advantage of this and levered themselves more than ever. If there were to be a rule in the future that required all participants to play by the same collateral rules, the market
would shrink significantly and there will not likely be another systemic issue surrounding them. Anyhow, looks to me like the $62tril notional value of CDS contracts outstanding we keep hearing about is down to about $28tril now. And put the entire CDS market on an exchange, which is happening.
Seriously, I don’t think it dawned on me that I might catch fire… I didn’t get the thing sopping wet, just enough to smell like I’d been underneath an old, drippy car since the crack’o'dawn.
I get a bit nostalgic thinking back on those days… don’t miss the cars, though.
Mar 10, 2009 - 11:29 am 56. buddy larsen:jrod, one can almost feel that overhang lightening. Or maybe it’s those B12 tabs, but anyway. Do you have any idea why, in the yr 2000 legislation, Mr Gensler’s engineering, the CDS alone, were left with no clearing mechanism?
Mar 10, 2009 - 11:35 am 57. JMH:“but where did the money go?” I can’t explain it. Didn’t these tens of trillions get spent for wires and cement and wood and labor that went into houses?
Alvin, yes someone still has the house, but the actual cost of building the house was far higher than the real value of it. I don’t just mean paper increases in asset value, but real monetary costs.
Much of the price paid to build the house went into workers comp, taxes, insurance premiums, city and county fees, the environmental compliance bureacracy, etc. The value represented by that price was consumed by the army of parasites that attended everything.
So yes, while a house does exist, the real value that was consumed in building the house was very nearly as great, or prehaps greater, than the real value of having a house. We didn’t necessarily increase the overal wealth of our society.
Think of it this way. Some farmer’s tractor broke down growing the food to feed everybody (including the bureacrats and hangers-on) involved in building the house. Some lumberjack’s chainsaw broke cutting the timber. A smelter burned a bunch of oil, gas or electricity producing the copper wires. Some truck driver drove the tires off his rig delivering everything. All that sutff, the tractor, the chainsaw, the energy, the tires, all that has to be replaced to build a new house, or even to maintain the existing one. So we’re plus one house, but minus a bunch of other stuff.
Mar 10, 2009 - 11:57 am 58. Jrod:Buddy,
Not being conspiracy-minded by nature, I will simply chalk it up as, “it worked great, until it didn’t.” Really. Must. Leave. It. At. That.
Separately, I recently came across this snippet from Alan Greenspan’s 1996 Gold and economic freedom:
The abandonment of the gold standard made it possible for the welfare statists to use
the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which – through a complex series of steps – the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets. The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy’s books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.
In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government‐created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.
This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the “hidden” confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights.
I wonder if he remembers writing that?
Mar 10, 2009 - 12:02 pm 59. Jrod:make that 1966. Big difference!
Mar 10, 2009 - 12:04 pm 60. veracious:Wr et al,
Folks that I listen to, have been saying for a long time, that virtually all UK investment in USA is really just OPEC. Add this to obvious OPEC and you have something about the same size as China’s invest USA program.
Barkley’s and I’m convinced surely other UK banks transferring money, secretly, for Iran and other OPEC, maybe some Russian mob. Just a guesstimate would put the total sum of these at many hundred billions.
Finally, the game without limits that was dreamed up to solve politicalized financing was derivatives. This un-regulated insurance beast became a huge new hypothification tool. Adding a whole new layer at the top of the credit money inverted pyramid; all setting upon a relatively small tip. This was and is the root of the problem, unless you actually realize the fundamental problem with debt based money; it depends on creating more debt, or it collapses. Does our gov. understands this; becoming the last borrower standing?
Mar 10, 2009 - 12:21 pm 61. Aether:53. Alvin:
“But Aether, somebody still has the McMansion, Mercedes or Range Rover. I’m upset it’s not me. I do have some stock, however…”
Yep, thats why it’s called a “Bubble”, they still have a 700k loan on a home that is now worth 500K, at best. which is the bubble caused Oversupply and resulting Deflation at work…
of course, given all the money being created out of thin air, and assuming the scammer can hold out until (hyper)inflation kicks in, he’ll have a 700k loan on a $1.6 million McMansion.
Apparently thts “The Plan”. ie. Yet Another Bubble!
based on Zero’s budget plan and Cap & Trade, I forsee Alternate Energy as the main sector of our next Bubble economy.
Mar 10, 2009 - 12:23 pm 62. hdgreene:“but where did the money go?” I can’t explain it. Didn’t these tens of trillions get spent for wires and cement and wood and labor that went into houses?
Let attempt to answer this question using stoner economics. In stoner economics the sum of all transactions is always less than zero.
Say you have some dope, and you have some money, and you want to get high. So you smoke the dope and you get high. Later, you want to get high, you don’t have any dope but you have some money. So you buy some dope and you get high. Later, you want to get high but you don’t have any dope and you don’t have any money. So you borrow some money, you buy some dope, and you get high. Later, you want to get high, but you don’t have dope, you don’t have money and you are in debt. So you don’t pay your rent and you buy some dope and you get high. Later, you want to get high. But you don’t have dope, you don’t have money, you owe money, and you haven’t paid your rent. So you hit up your grandmother, who is a little forgetful but can still sign a check.
We have now reached the final stage, but we cannot hit up our grandma for her past thrift (we kinda maybe already spent that) but we can hit up our grandkids — trade on their future labor, you might say.
But why were the sums in the example less than zero? After all, the dope was always bought. But the stoner is not doing what the squares used to call “useful work.” He is hustling to get high. And the money goes into the drug market, where maybe it hires mules and stuff, but is generally not productive for the entire economy. So it all adds up to less than Zero. Not only is the money misspent, but so is a lot of the time and effort connected to it.
An economic bubble also encourages a lot of misspent time and effort. When the bubble deflates, it all goes up in smoke.
Basically, an investment should produce a return and in a bubble the returns are imaginary.
Mar 10, 2009 - 12:34 pm 63. JMH:While the overhead cost of running a large institution has its advantages, the disadvantages are that they are inflexible to market based changes
I no longer believe in economies of scale for management overhead. I think it’s actually diseconomies of scale. Let’s compare 10 large banks holding a trillion dollars to 1000 small banks holding the same amount. The large banks are on average 100 times the size of the small banks. The large banks will have 10 CEOs making perhaps $10 million each with bonuses etc (and that may be a low estimate) compared with the small banks having 1000 CEOs making, maybe $500 grand a piece. Now, on that equation, the big banks seem more efficient, since their aggregate CEO pay is $100 million compared to $500 million aggregate for the small banks.
But the large banks will each have a handful of Presidents, a dozen Corporate VPs, and a couple dozen Senior VPs who all make more than the small bank CEOs. Throw in the Junior VPs who probably make a salary comparable to the small bank CEOs and you have a management layer beneath the big bank CEOs that by itself probably costs more than the small bank CEOs and their lieutenant managers before you even pay the salary and bonuses of the big CEOs. I think large institutions, with out of control growth in the executive suite, have added higher aggregate overhead costs to slower reaction times. Big business is less productive but more politically connected (and thus protected).
But the other points about it being easier to control a handful of large institution is absolutely right. The only value of my observation here is that we can abandon the large institutions and rid ourselves of their centralized magnification of risk and corruption without losing any efficiency. In fact, we can gain efficiency. It’s a win-win for everyone except the politicians and their dependants.
Mar 10, 2009 - 12:40 pm 64. Alvin:Thank you all for this insight. I believe I will stick to the mules I know about, that make good, useful manure, and can pull a plow.
Mar 10, 2009 - 12:48 pm 65. buddy larsen:jrod, thanks –i got your message. keepin mind tho that the guy is O’s new chair at the CFTC –and CFTC was just in the news the other day, its portfilio is bing widened and deepened with oversight duties taken away from other bodies.
Mar 10, 2009 - 12:48 pm 66. Jrod:hdgreen,
In other words, dope will get you through the times of no money, better than money will get you through the times of no dope…!
Mar 10, 2009 - 1:00 pm 67. Aether:62. hdgreene:
Which brings us to the central premise of American socialism :
–snip—
Chorus
Don’t bogart that joint my friend
Pass it over to me
Don’t bogart that joint my friend
Pass it over to me
Roll another one
Just like the other one
You’ve been holding on to it
And I sure will like a hit
[chorus]
Roll another one
Just like the other one
That one’s burned to the end
Come on and be a real friend
[chorus]
- Grateful Dead -
Mar 10, 2009 - 1:03 pm 68. Aether:—————————-
an Ode to Obama:
“Mr. High & Mighty”
Mr. High and Mighty standing with your back against the wall
They better jump when you say jump, they better crawl when you say crawl
Buildings crumble and peasants cower at the sound of your name
But was it God that gave you that power or is it merely fame
Mr. High and Mighty who are your sights set on now with your fair-weather fortune and your gold sacred cow
You reunite with your long lost brothers on an old abandoned ship
There was a time when you brought joy to others
Guess you got caught up in the trip
Mr High and Mighty remember when you were low
On the sunny streets of “New York” (Georgia) but that was a long time ago
Mr. High and Mighty will you ever join us again
Will we dance and sing together, will we all join hands
Can’t you hear the voices calling or is it just time for another show
Once again the great have fallen
Did you really have that far to go ?
- Goverment Mule -
——————–
Mules are fine, just remember I ain’t your Government Mule
Mar 10, 2009 - 1:07 pm 69. M. Simon:Wretchard,
The biggest source of “free capital” in the world is the illegal drug trade. No way are the bankers going to make those flows transparent.
And the worst part of it is that the drug money does not care a bit about 50% losses. It is hot money any way. All that means is that 50% of the cash is legalized not 100%.
BTW Silicon Valley was founded on drug money. It does have its uses because it is “high risk” money. The problem is that we used to have a smarter class of drug dealers.
Mar 10, 2009 - 1:07 pm 70. buddy larsen:Cali pot is all that keeps Cali going –some tv special recently claimed that 60% of Californians benefit directly in some way. Odd stat –that would mean 100%, since it allows that tax base to stick around. Something else i read several years ago, that dope money circulating off books is equal to a year’s USA GDP.
Be nice if the crime families would call off the government’s war on drugs, but they never will.
Speaking of which, what are we to make of this border war –who are these people? Something ain’t adding up. Why on earth would drug armies be in open warfare in numbers, in daylight, taking losses like this?
Mar 10, 2009 - 1:49 pm 71. always right:Wretchard,
You are scaring the daylight out of me daily with your reporting.
Great work, keep it up.
Mar 10, 2009 - 1:57 pm 72. Jrod:Buddy,
Mar 10, 2009 - 2:22 pm 73. dan:Oaksterdam University claims to have paid $5mil in state taxes last year. No reason not to believe them. My one “hope” for the Obama administration is that they’ll revisit our nation’s drug laws. Should be a lay up, right? On account of his admitted youthful experimentations…
In other Oakland news, Councilwomen clash over empty parking space.
“Why on earth would drug armies be in open warfare in numbers, in daylight, taking losses like this?”
Interesting, ain’t it? Guess all that drug money buys a lot of cheap life.
Mar 10, 2009 - 2:29 pm 74. hdgreene:I hope some of the other commenters have straightened their lives out (you know who you are).
One of my pet peeves about Obama is his use of the word “investing” to replace “spending.” So we invest in giving his voters raises and what not.
But I now realize he is using basic Stoner Economics. In Stoner Economics:
-Spending that makes you feel good is an investment.
-That in which you invest, you quickly consume.
-The bigger the investment, the quicker the consumption.
-The “Investors” who provide the “Capital to feel good” were often unwilling providers of funds (they was robbed).
-Those involved in the investment can take a hit (share the joy).
-Everyone is responsible for their own bad trip.
I’m still looking for the mathematical model I developed for Stoner Economics. I got it around here somewhere. I don’t think I could repeat the intellectual exercise (hell, I might not even survive it).
Mar 10, 2009 - 2:42 pm 75. Leo Linbeck III:hdgreene,
Re: Stoner Economics
Great stuff, dude.
Cheers.
L3
Mar 10, 2009 - 5:18 pm 76. buddy larsen:That Oakland parking lot clash is rich –after much sturm und drang on the peasant’s –oops i mean people’s –time, they kick their briefs upstairs where Executive sends it sideways to Legal, from whence comes back in doo time a Five Page Opinion –an administrative order instructing the contending forces of the parking space to execute a tie.
Oakland needs to solve this festering disgrace. The community needs to come together and invest in more administrators.
Mar 10, 2009 - 8:18 pm 77. Derek:buddy: my area lives on the cultivation of pot. Just around the corner there is a manufacturer of carbon air filter cartridges used to remove the smell from exhaust of grow operations. Wages for real jobs are low, but the number of expensive SUV’s and pickups driven by unmarketable people is remarkable.
That is why all these attempts at trying to ‘fix’ or manage the economy make me laugh. No one has a clue, no one has the ability to control.
The only thing anyone has the ability to do is destroy.
Derek
Mar 10, 2009 - 8:32 pm 78. buddy larsen:that’s a bitch of an insight, derek.
Mar 10, 2009 - 9:40 pm 79. RCH:ADE,
Brian’s post was indeed brilliant. I read on another blog recently (can’t find the link) where someone alleged there has been no real productivity in the US for over 10 years. It was a powerpoint display. Instead of productivity we could substitute the term “destructive innovation” where each innovation destroys the value of something else. This happens all the time and creates unemployment, lost capital, etc and too much of it can make an economy sick. So what happens if this “productivity” is in “innovations” that turn out to be not so useful, substituting flimsy cheap products that break, fads and fashions that destroyed more useful traditional products, financial wizardry that turns out be poorly understood derivatives and scams, etc?
As Brian pointed out (or I think this is what he means) to compensate for this the government stimulates the economy but this doesn’t go directly to those whose jobs are destroyed by increased productivity or dubious innovation, it can go into speculation. So then we have the common spectacle of programmers and manufacturing workers becoming real estate agents and financial advisors. Eventually the stimulus cannot continue to support this kind of unemployment benefits for speculators and there is a deep recession. Then people have to go back to real productivity, and maybe keep the old products that work well enough rather than tossing them for the next dubious destructive innovation.
So unemployment is the natural outcome of destructive innovation, and needs to occur for productive emplyment to replace it. It also slows productivity to a more sustainable level.
Mar 10, 2009 - 10:05 pm 80. Dave:Buddy, et al: If you think those two in Oakland are juvenile, go over to Michelle Malkin and read what she has to say about
Mar 10, 2009 - 11:38 pm 81. buddy larsen:Fancy Nancy Pelosi’s travel habits.
Dave, Pelosi’s another reason to repeal the drug laws –if Pelosi wasn’t on orders to support FARC’s export service to the USA mob, she’d quit stonewalling Colombia Free Trade –which in turn might let Uribe hold off Chavez, which in turn would support hard-pressed freedom lovers all over Latin America. Of course the mob likes the drug laws as they are –keeps prices up. Starting to get a little concerned about El Paso, Reynosa, Matamoros, San Antonio, Austin, here lately. Boy that’s a switch, we have to throw the Dems out so the Pubs can kill the drug laws.
Mar 11, 2009 - 4:11 am 82. Charles:38. Mark:
“Future historians will ask, “What were the nation’s leaders thinking when they tacitly adopted an open borders policy that, in a relatively short period of time, dramatically altered the national demographics?” Among answers offered will be these:
New center revives North America agenda
Mar 11, 2009 - 6:34 am 83. Bill Carson:5. Brian Macker: Come on, any good economist knows this was due to a fractional reserve monetary inflation spurred on by central banks holding interest rates below market worldwide. It’s a simple case of a price ceiling on interest rates. Price ceilings cause producers (savers) to produce less and consumers(borrowers) to consume more.
I don’t understand this. What does Brian mean equating produces with savers? Why do we need savers in order to borrow (produce) anyway? We need investors in order to produce. Isn’t that accomplished with either saved or borrowed money? What’s the value of investing savings over investing borrowed money? I don’t’ see how that caused the financial crisis.
Mar 14, 2009 - 7:02 am