82 Comments

1. Doug:

Obama’s Double Talk
– Robert J. Samuelson The Washington Post

To those who believe that Barack Obama is a different kind of politician — more honest, more courageous — please don’t examine his administration’s budget.

Obama is a great pretender.
He repeatedly says he is doing things that he isn’t, trusting his powerful rhetoric to obscure the difference.

He has made “responsibility” a personal theme;
the budget’s cover line is

“A New Era of Responsibility.”
He says the budget begins
“making the tough choices necessary to restore fiscal discipline.”

It doesn’t.

Mar 9, 2009 - 4:38 pm 2. BT:

I’m not sure what Doug is getting at, the original post was so interesting.

I often muse that the financial markets really did manage to decouple from the larger economy in the last few years, essentially pushing money and instrument around and among themselves in a way that was not terrible related to the underlying economy, as with the mortgage default swaps. The genius of the last few years, if you can call it that, was the decoupling.

But if the meltdown is reflecting anything, I’d vote for the idea that it is reflecting the debt that the USA has racked up over the last 25 years, mostly to finance consumption. Now for the politics: the debt mostly due to tax cut policies of republicans and southerners (more or less the same at this point), who hoped to ‘force the government to shrink’ by starving it of taxes. Great plan that was.

Mar 9, 2009 - 4:53 pm 3. whiskey:

Exactly Wretchard.

The whole international system of post-1945 is broken.

Broken: the ability to depend on cheap oil to fuel trade and prosperity, by lowering costs of everything.

Broken: the ability of America politically to enforce the Pax Americana, providing stability and security and no great wars or invasions.

Broken: the ability of the West to assume that non-state or regional or otherwise marginal actors cannot use weapons of WMD or improvised elements of the same to attack major Western cities. With impunity.

Broken: the ability of Western governments to provide both domestic peace in low crime and low terrorism, and growing economies, to fund Welfare entitlements.

Broken: the ability of Western states to provide a Welfare state that provides equally for all, instead of favored non-White groups, with explicit Anti-White discrimination the rule not the exception.

Broken: The ability of international trade to produce wealth around the globe, instead of making a few middlemen (Nike, Microsoft, Apple) rich along with Chinese crony capitalists. Instead the system impoverishes everyone except the winners.

Mar 9, 2009 - 4:57 pm 4. sigintel:

History seems to be repeating itself. ie; as Yogi would say…de ja vu all over again. Like the 1930’s, the storm clouds of war in North Asia and the Middle East are building, the tremendous loss of personal wealth is almost incalculable, daily bank failures, home foreclosures, personal and business bankruptcy, price deflation, high unemployment. Next the brown shirts will be marching again.

Mar 9, 2009 - 5:12 pm 5. Ashcat:

There is a battle raging to explain causes/attribute blame for the current morass. Whichever argument wins in this battle not only determines which history is written, but more importantly the winning explanation will be the impetus to either back away from the socialist abyss or step into it. Wolf comes close to blaming the free market, as will socialists hoping to justify increasing government “management” of the economy. The contrary argument–that government meddling, not the “free market”, was an important element of the “underlying something” to which Wretchard refers ,and which changed the rules of the game and created undesireable incentives, makes the more sense to me. Greed, the popular and simplistic explanation, didn’t arise first in the 1990’s-2000’s to be a primary cause. Finance became more “creative” around the time, but when in our past would packaging mortgages, CDO’s etc been illegal/prevented by existing regulations?

Government meddling removed the usual consequences to bankers of making loans to people who couldn’t meet their debt obligations. In so doing, any profits were kept private but the costs borne by others. Is there a banker who wouldn’t like that deal?

Mar 9, 2009 - 5:13 pm 6. wretchard:

Jim Cramer is arguing that both sides are making a hash of it. He has always said that the previous administration made a mess of things then, but argues with equal forcefulness than the current administration is driving the bus straight over the precipice.

We are being warned by the markets. The politicians just don’t care.

Mar 9, 2009 - 5:17 pm 7. wildernesscalling:

Its ALL BROKEN! What a laugh! ““in a state of shocked disbelief” over the failure of the “self-interest of lending institutions to protect shareholders’ equity”?” the Old Man doesn’t understand, Loyalty for the Company and customer was booted in the Eighties, the “ME” (insert selfish spoiled oversexed brats) only cared about their career advancement and bonus (not in that order ether) now they voted people in that will make sure the future generations get to pay the Check for their comfortable last days. We need to start over, get rid of the Fat Crooks at the top, throw out all the stupid rules and become clean again, refresh the tree of liberty!

Mar 9, 2009 - 5:22 pm 8. Lifeofthemind:

Six hundred years ago the merchant bankers of Venice sent their representatives around Europe and they duly reported back conditions, both financial and political, to their employers and to the State. Other banking networks, such as the Medici of Florence, quickly followed. The Pope had a built in intelligence network at his disposal. Jewish banking families, such as the later Rothschilds, worked with governments and had representatives across political borders, so the idea that political risk management is something new to consider or that it hasn’t always been seen as tied to financial risk seems forced. Conspiracy theorists may well consume trees or electrons speculating on whether the Bank of England ran the government or vice a versa. If we keep this thread open long enough an Illuminati enthusiast is sure to come in. So what changed in the period just before the First World War that might have been repeated recently that would impair the abilities of financiers and governments to dispassionately collect and act on available information? Perhaps in both cases a certain level of moral enthusiasm was allowed to infect the judgements of a critical segment of people in a position of influence. In the period leading up to WW-I a second episode of Romanticism aroused people of all classes, but especially the upper middle classes. It expressed itself in a reinvigorated drive for Socialism, Nationalism and Pacifism. These movements not only caused the conditions that lead to the explosions of the 20th century but they might have deformed the ability of corporate Directors and government Ministers to act at critical junctures. After all it was there own children who were often entangled in these movements. These forces were not dispersed by the two world wars, in fact they were empowered and now have added to them an ancient resurrected movement in Islam and a newer offspring in Environmentalism. However for a period the apocalyptic threat of the Cold War focused government activity and permitted rational financial considerations to proceed largely uninterrupted. That restraint is now lifted and the energies of both finance and government have been blocked or dissipated in numerous directions that prevented a timely dissemination of the available information or delayed those who should have know better from acting in a more timely manner.

Mar 9, 2009 - 5:26 pm 9. RWE:

This brings to mind an incident during a rocket launch in 1981. The ground guidance computer hiccuped, just once, while running the mission trajectory a couple of weeks before the launch. It did not repeat, and the computer scientists told the rocket scientists that this sort of thing would occur once every two hundred hours of operation. Then days later it hiccuped again. Well this was great, it appeared. Two such errors had occurred in the space of less than a week, so under the original explanation we had at least 400 hours to go before it happened again. The computer failed big time on launch night, spewing data all over the screens as it did a core memory dump, after an entirely successful test run.

The original assessment of “it’s just one of those two hundred hour hiccups” did not apply because the machine was broke. And two such random hiccups in a row does not mean that you are extraordinarily lucky and can expect a long period of flawless operation – it means that the machine is broke, busted, Tango Uniform, or at least soon will be.

Mar 9, 2009 - 5:29 pm 10. blert:

whiskey @3…

Broken: classic media barons with propaganda franchises…

Broken: a generation of Gramscian wind-ups not yet tenured (as endowments are crushed and tuitions tip over to the wrong side of the cost-benefit calculation )…

Broken: a universe of quangos and NGOs…

Broken: first world food/water subsidies to the desert dwellers…

Broken: the open borders economic fantasy…

Broken: the ability of the American polity to throw the rascals out… (gerrymander + data base gaming = tyranny )

Mar 9, 2009 - 5:29 pm 11. outa my league:

Jimmuh.

Period.

Mar 9, 2009 - 5:44 pm 12. Doug:

2. BT:
Spiraling debt was a fundamental driving force in the process that brought us to where we are today.
Samuelson beautifully describes how the candidate of change only changed things for the worse.
Likewise the candidate of hope instead brings despair when he takes office and proceeds to tell one untruth after another wrt what his party and his administration are doing.
Loss of trust is yet another factor in the health of the markets. Lying spawns more distrust.
…I could go on.

“ the debt mostly due to tax cut policies of republicans and southerners (more or less the same at this point),”
Massive increases in SPENDING at the Federal level, and in Blue States across the country (California being example #1) have driven us to near bankruptcy, bequeathing massive debt on subsequent generations.

Mar 9, 2009 - 5:52 pm 13. Doug:

(increases in spending occurred at far higher rates than did decreases in tax rates)

Mar 9, 2009 - 5:55 pm 14. peterike:

To further emphasize Doug’s putdown of BT’s Democratic talking points gibberish. BT wrote:

the debt mostly due to tax cut policies of republicans and southerners (more or less the same at this point), who hoped to ‘force the government to shrink’ by starving it of taxes. Great plan that was.

Except that Bush’s tax cuts, like Reagan’s, made revenues RISE, not shrink, by growing the economy. The problem is on the other side of the equation.

I remember back in the Reagan years when it was pointed out that if the Gubmint just held spending down to the rate of inflation, the budget would be balanced in a couple of years. But spending was never kept down. Reagan tried, and failed. Bush never tried and his Republican go-alongs never questioned. It is the blackest mark on their legacy. It was one chance in a century to derail the gravy train, and all they did was scream for more gravy.

Mar 9, 2009 - 6:03 pm 15. exhelodrvr:

““Governments bad; deregulated markets good”: ”

When did anyone ever say that? Typical argument of the liberals. An accrate statement would “Excessive government involvement bad; as are completely deregulated markets” Of course, that is exactly what the problem was – too much government interference in the loan systems.

Mar 9, 2009 - 6:05 pm 16. Lifeofthemind:

Ugh, fortunately when I copy onto my own blog for a record I can edit and correct obvious typos.

Mar 9, 2009 - 6:05 pm 17. exhelodrvr:

RWE,
Yes – twice is almost never random.

Mar 9, 2009 - 6:05 pm 18. Paul:

Once it was, especially in a wilder America, like as if we were all climbing alone or in small groups a mountain of risk and reward. But with the so called scientific progressives of all stripes, it was decided that it would be safer, and more secure, and we would protect people if we were all roped, chained, together and climb the mountain of progress together.

In the old days, a critical route error, mistake, falling bad luck rock would take out a party, the majority would go on. Now, we are all, the good and the bad, tumbling in a huge mess, with the climbing party leaders yelling pointless instructions.

No doubt the less is that we should be tied even more tighter, together.

Mar 9, 2009 - 6:07 pm 19. Derek:

When you learn to drive on icy roads, you learn very quickly that conditions are treacherous, but your reactions are often worse.

Very often people go off the road on the inside of the corner. In other words, they slide a bit, think they lost control, then drive off the road. What is needed is counter intuitive, learned by practice and feel.

There is a real problem with the financial system. Treacherous and slippery and many are going to lose serious money. At what point has the response to the problem become the problem?

When does the printing of money cause more problems than it solves?

When does the borrowing of vast amounts by the US cause problems?

When does the unpredictable responses of the treasury regarding banks actually cause failures that wouldn’t have happened?

I think the seeds of all those things have been sown. There is hysteresis in the system, and as with a PID controller that responds too quickly or too strongly, expect intensifying gyrations.

Or more likely, such a complex system has aspects that react reverse to each other, at different rates and different hysteresis. With dramatic inputs you get unpredictable results when things are oscillating rapidly, out of tune and opposite. That is when equipment self destructs.

Derek

Mar 9, 2009 - 6:08 pm 20. bogie wheel:

Now for the politics: the debt mostly due to tax cut policies of republicans and southerners (more or less the same at this point), who hoped to ‘force the government to shrink’ by starving it of taxes. Great plan that was.

Yah, and it had nothingI/> whatsoever to do with government spending sprees and bloated budgets. It was just those eeeeevil tax-cutting ways of the small-government conservatives.

Shrinking the government (esp. the federal) IS a great plan. But it only works if you cut taxes AND reduce spending. And the latter involves goring a lot of oxen. The vast majority of politicians, a class of people not generally known for backbone, are not going to say “no” nearly often enough, esp. when “no” can tick off well-connected people who will just go fund the campaign of an opponent who will say yes.

You want to talk about decoupling? How about perhaps the greatest decoupling of all? The disconnect in the mind of the average American between “what the government ‘gives’” to “what the government takes.” That decoupling goes back a lot farther than the last 25 years, and it was nothing but political from its inception.

Entitlement spending is not sustainable. Obscene pension payouts to, early retirements for, and free-health-care-for-life red carpet rides for unionized public employees are not sustainable. The money ain’t there. The spending has to get cut. There will be lots of blood and even more screaming. But the money ain’t there. To pretend it is, to try to cover by raising taxes (even more) or borrowing (even more more), is guaranteed suicide.

Here in Southwestern Pennsylvania, local committees just put in for more than $300 million in federal “stimulus” money — $220 in bridge and highway projects, and $100 million in transit projects. The rush is on, because if we don’t apply for the money, then someone else will. (Free needles at the drug clinic, anyone?)

Why, pray tell, is a pothole in Pittsburgh considered the province of the federal government? If the $320 million is from PA taxpayers, then it would be far more efficient not to process it through the bureaucratic black hole of D.C. Keep Pennsylvania tax dollars in Pennsylvania. And if the $320 million is not from PA taxpayers, then we shouldn’t be spending someone else’s money.

We are, as I said on another thread, in crazyland.

Don’t even get me started on that boondoggle known as the North Shore Connector.

Mar 9, 2009 - 6:10 pm 21. Derek:

>bequeathing massive debt on subsequent generations.

There is too much comfort in that statement.

How long before the first item in the federal budget is $1 trillion interest payment?

That isn’t subsequent.

Derek

Mar 9, 2009 - 6:11 pm 22. wretchard:

If there are underlying risks which are reflecting themselves in the financial markets, it follows that those risks must either be solved or work themselves out. We can’t borrow our way out of this situation. The current way of doing things must change, either in the way things aren’t regulated or in the way they are regulated because political risk cuts both ways.

That in turn implies that we have to see significant political, demographic and economic changes before the current crisis is over, because those are at the roots of things. So it is reasonable to conjecture that this is a fairly long-term problem which short-run measures won’t solve. Now BHO’s long term solution to the problem is “socialism” or a variant thereof, which I don’t think will work. So here’s my fearless forecast. This crisis will consume Obama. In fairness, it would have consumed McCain, had he won, because both the Republicans and the Democrats, to varying degrees, are bound up in the definition of the problem.

But that as it may, the current occupant of the Oval Office will be pressed as never before; and indeed, the system as it is today constituted, will have to undergo a sea-change before it comes out the other side. The role of the President should have been to steer the ship of state past the worst shoals, like a white-water rafter tries to dodge the rocks, even though he can’t fight the current. But that would require modesty, an acceptance that we are dealing with forces we don’t understand. My guess, however, is that BHO will steering straight for the most jagged rocks, on the basis of a threadbare, haphazard, pop ideology which has been discredited anyway.

Interestingly enough, and Ferguson intuits this in his idea that the US will emerge from this better than most, BHO’s actions may leave the US on top anyway. If things go the pieces, it is the chunks with enough food, geographic security, technology, energy and guns that will come out of things best. The countries which rely on exports or international guarantees will be in for, as the British say, “a turn”. But that’s going on general principles. Countries like Israel or the Ukraine, or Taiwan will be sailing into uncharted waters whatever reset buttons Happy Hillary pushes. And that could set off a chain reaction of things. Let’s not forgot Islamic extremism, for whom this Brave New World is tailor made.

Mar 9, 2009 - 6:14 pm 23. Doug:

Good point.
Still, even worse as time goes by.
Problems get compounded, so to speak.

Mar 9, 2009 - 6:17 pm 24. BT:

peterike,

The problem with Reagan is that he did not try very hard to cut spending. He only wanted to cut things that he didn’t politically agree with. And he spent like crazy in the things he did like, such as the military.

The republican party campaigns on fiscal prudence, but they do not govern that way. They love their earmarks and pork (like all the rest), and then pretend that it is the fault of the liberals. They have been having their cake and eating it too, for a long, long time. Most red states are net receivers of federal tax dollars, but you’d never know it from the way they protest about the federal government and its evil ways.

Republicans pretend to be prudent, but they don’t live up to it when they are in charge.

Mar 9, 2009 - 6:17 pm 25. Lifeofthemind:

@bogie wheel,
The secret is to convince the Democrats to do what FDR did, that worked. That does not mean vast armies of Obamajugend in rural CCC work camps, a new WPA, and a new National Recovery Act. Those, despite how nice the Appalachian Trial is, did not work. What did work was quadrupling the armed forces and cutting lots of steel to build hundreds of ships and thousands of tanks and planes. Cutting the domestic agencies down to FDR size and rebuilding the military would stimulate the economy.

Mar 9, 2009 - 6:18 pm 26. bogie wheel:

Sorry. Backslash on the bad side of the I.

Fangers tooh fast, bairn tooh swlo.

Mar 9, 2009 - 6:19 pm 27. Doug:

(should have named Derek)

Mar 9, 2009 - 6:19 pm 28. Lifeofthemind:

@bogie wheel,
Please, tell me about the North Shore Connector. *gets popcorn

Mar 9, 2009 - 6:23 pm 29. Doug:

No matter who you blame BT, the problem remains the same:
Way too much growth in spending.
Emulating the Chi-Com’s ZERO capital gains tax would be an immediate plus for the markets.
Instead we have the HIGHEST CORPORATE TAXES in the developed World.

Mar 9, 2009 - 6:25 pm 30. wretchard:

Derek,

I have been saying this for a while. The fiscal OODA loop, even the monetary and tax ones, often operate on longer scales than the economic system is reacting. We can’t begin to get a “feel” for what works until we sync our OODA loop with the observable behavior of the system. Enough of these five year plans.

Mar 9, 2009 - 6:26 pm 31. blert:

The absolute essence of BHO: he’s a Gonnabee….

“real successful people have to cut corners and manipulate. That’s the way things get done.” John DeLorean

“…the gonnabee is a magnificent shell with nothing inside, a cardboard cutout of the image he sought to project, all style and no substance,…

“When you first look at and listen to a gonnabee, your immediate impression is almost always of a tough, aggressive go-getter, jaunty and confident to the point of arrogance.

“The key to comprehending gonnabees is to perceive that they are “reactive-dependents,” emotionally needy people whose behavior is forever a reaction to that ineradicable dependence. Thus, no matter what their chronological age and no matter how winning-looking or overtly tough they may seem, gonnabees are children trapped in emotional time warps, endlessly wanting to deny their dependence, always seeking and failing to prove themselves serious adults.

“For gonnabees, emotional dependence is a source of constant frustration and anger, which they normally mask with either great charm, a macho pose, or both.

“The problem, however, is that what gonnabees call positive thinking is what psychologists call “magical thinking.” They want, indeed, NEED to believe that their own amazing thought processes in and of themselves can actually cause miracles to happen.

“Because of their inability to live in the real world, gonnabees are inherently unsuited to perform any kind of high-pressure management role, and things usually start to go wrong from the time they receive such an appointment. The reason is that whenever gonnabee “gets to be,” the pampered child immediately takes over, making terrible and often infantile decisions. Then when the off-the-wall directives create or compound problems, the gonnabee angrily or entirely breaksdown.

“HOW to deal with a gonnabee:

“…NEVER give a gonnabee a REAL president’s role, for this will assuredly sink the enterprise.

Gonnabee in Brief

Status-seeking reactive-dependent

Facade: Aggressive, tough, macho, highly confident

Management Style: Angry Autocrat

Weaknesses: Overweening ambition, self-destructive, erratic judgement, entirely self absorbed, emotionally weak, overdependent

Underlying Emotions: Anxious, insecure, fearful, hostile

How to Spot:

Seeks demanding line-management role
Guest appearances on television shows
Appearance and dress immaculate or calculated
Overprotected upbringing [typically only child]

All quotes from John Wareham, published and re-published over the years in his books.

We are in the middle act of a Greek tragedy.

The end game for BHO will be to effectively destroy the Democrat Party and the entire ethos of affirmative action and political correctness.

Mar 9, 2009 - 6:31 pm 32. Lifeofthemind:

@wretchard,
My point is that we can’t do the analysis and get within the other guys OODA loop when the human capital we depend on to do the looping, the members of the managerial class, are damaged goods. Essentially the “Gramscian” bad guys, which Club member am I honoring here?, have gotten inside our OODA loop. We need to fix the educational system and purge the self destructive fantasies from the culture.

Mar 9, 2009 - 6:33 pm 33. Lifeofthemind:

blert,
The end game for BHO will be to effectively destroy the Democrat Party and the entire ethos of affirmative action and political correctness.

Thank you for the first good news I have heard in weeks. Actually we need two functioning parties. My fear is that BHO will set race relations in America back by 3 generations.

Mar 9, 2009 - 6:38 pm 34. blert:

If Acorn morphs into brown-shirts then race relations would simply be terminated, with extreme prejudice.

Mar 9, 2009 - 6:44 pm 35. Lifeofthemind:

blert,
Remember PG Wodehouse? If Iran and Israel start tossing ordnance while the Norks and Chinese are testing the limits those Brown Shirts could quickly become Brown Shorts.

Mar 9, 2009 - 6:48 pm 36. ADE:

My favourite Murphy’s Law: If everything seems to be running smoothly, your control systems have broken down.

ADE

Mar 9, 2009 - 6:53 pm 37. wretchard:

Race relations are really irrelevant here, though I’m sure any number of demagogues are going to raise it and exploit it. The issues are far bigger than the American politics of race. They’re global. But let’s focus on the opportunities for a moment. To some extent the system has worked. This time the markets have warned us. This is good news, almost great news. That provides us with the opportunity to solve them without a physical world crisis.

Moreover, look at the speed with which both GWB and BHO’s responses have been critiqued. Not fast enough, but fast. Unfortunately, and I think Tigerhawk has spoken to this, our political system can’t seem to pick up the signals quickly enough and organize an orderly change in the tempo required. We have the tea parties, etc, but the system as a whole needs to rise to the occasion.

Mar 9, 2009 - 6:56 pm 38. Shivermetimbers:

The average person would probably be surprised that hedge funds at most were only leveraged 2, maybe 3 to 1. The trading desks at major investment banks were leveraged 36 to 1. Why?

In the 1980’s when the CEO of Salomon Bros, John Gutfreund took them public, every other investment bank soon followed. Prior to this, most of them were partnerships.

No partnership would be leveraged with their own money like this. Or, invest in crap like CDO’s the way they did. But they would with your money, the shareholder.

Mar 9, 2009 - 7:04 pm 39. bogie wheel:

BT -

National defense is one of the handful of responsibilities of the federal government named in the Constitution. War, Treasury, State, and Justice were the original four Cabinet departments in the federal government. NOte that what each of them did were things the states could not do singly or even in small combines –issue currency, negotiate treaties with foreign powers, enforce federal laws, and defend the United States in conflicts against foreign states.

Our federal government was never originally intended to do all things for all people. That’s just a nasty habit it has picked up along the way. I daresay if it had stuck to doing the few basic things it was supposed to be doing all along, then we wouldn’t have debacles like American citizens in American cities getting incinerated in their office buildings by terrorists making flying bombs out of jetliners.

I will agree with you for the most part on your latter point about the Republican Party (esp. of late) not practicing what it preaches with regard to fiscal discipline, but I would draw a distinction between party leaders & Congressional forever-termers, and the party grassroots. Want to demoralize Republican voters? Spend like pigs, let the borders leak like sieves, spend some more, give Ted Kennedy a $400 billion (or is it $1.2 trillion? who knows? gee wowee, who cares???) presciption drug bill wrapped in a nice gigantic bow, spend spend spend, nominate a hack who’s also your buddy (buddette?) for SCOTUS, and while you’re at it, what the hey, spend some more.

I have few gripes with Bush with regard to how he deployed our military or what was spent on them 2001-2008. In fact if I could earmark my federal tax dollars (sad that I can’t, but that the greedheads sitting in Congress can), I would send nearly every dime of it to our troops. As it is, about 20 cents of every dollar gets spent on defense. Most of the rest is unconstitutional pork, aka Arlen Specter’s & Jason Altmire’s reelection funds, some retirement plan (far better than mine) of a Dept. of Commerce drone producing pie charts for the Economics and Statistics Administration (what was the price of propane in Bosnia in 2004?), and let’s not forget, Mrs. Migilicuddy’s new hip.

Mar 9, 2009 - 7:07 pm 40. blert:

Merrill Lynch was fleeced by the top dogs in a classic mob “bust-out.”

Such a scam was perfectly portrayed in “Goodfellas,” the movie.

An essential element of getting the bezzle out of the system is to pursue these crooks, bust-outs are a RICO crime, and get the money back.

This pursuit needs to begin yesterday.

Mar 9, 2009 - 7:10 pm 41. blert:

Goldman Sachs is doing the same thing with Buffet’s money. He kicksing $ 5,000,000,000 … the top dogs bonus themselves $ 7,000,000,000 in a year when the US taxpayer is required to keep them solvent !

Much of the AIG losses are merely a conduit straight into Goldman Sachs.

Mar 9, 2009 - 7:15 pm 42. bogie wheel:

LOTM –

You know those scary campfire stories about the homicidal maniac with the hook for a hand?

North Shore Connector is scary like that. Lives below ground. Consumes everything in its path. Nobody can seem to explain its purpose or what laboratory it came out of. But it’s
heeeeerrrreeee!!!

Mar 9, 2009 - 7:16 pm 43. sgi:

More incoherence:

http://blogs.cfr.org/setser/2009/03/08/the-shadow-financial-system-%E2%80%93-as-illustrated-in-three-new-papers-that-cut-through-london%E2%80%99s-fog/#more-4857

Mar 9, 2009 - 7:18 pm 44. bogie wheel:

Blert -

So who’s covering for the Merrill Lynch bust-outers? And why?

I’m not being facetious. Ain’t there a single Patrick Fitgerald in NYC?

Mar 9, 2009 - 7:28 pm 45. Shivermetimbers:

I think to fully understand what happened, analysis will have to take place in three key areas:

1. Market Risk
2. Liquidity Risk
3. Counter Party Risk

Each one of these areas has its own unique sets of challenges; but effect the other. For example, most folks think of Russia defaulting on their debt as the nail in the coffin for Long Term Capital Management (along with Korea and Indonesia). But, this is only partially true. LTCM really did not have much exposure in Russian Debt.

But when Russia defaulted, other asset managers who did have high exposure began getting their margin calls. And when that happened, they began liquidating other assets to meet these calls. One asset was Danish Bonds. As this market began to tank, due to the sell off, it began to impact LTCM who did have tremendous exposure in these bonds. And then they got margin calls, and things began to unravel.

The correlation between assets in times of sell offs is hard to predict. When the Hunt Bros. tried cornering the silver markets, and things unraveled, they had to sell of Cattle. Who would have figured?

Counter Party Risk ties into this in a big way – especially with CDS’ – look at AIG. When Bear Stearns was going under, JPM came to the rescue at the urging of the fed. Or did it?

JP Morgan had a $10 Billion exposure in Bear’s CDS. If I were an asset manager with a $50 million note to Bear, and my investors were getting nervous, I would say “Hey, no worried, we are covered by this $50 Million CDS on Bear with JPM. Their gonna bail us out, all $10 Billion…

That would have been a $10 Billion run on JPM. Could they have withstood it? And JPM had a total $50 Billion in CDS with other firms. If they tanked, who would they have brought down?

So, who was the Fed really saving? Likewise with AIG

Mar 9, 2009 - 7:29 pm 46. Lifeofthemind:

wretchard,
The American political system as become more centralized, less flexible and more fragile over time. What was intended in the 18th century would have been far safer under the circumstances. The idea was that people would be organized into communities of up to 50,000 citizens each, that would be about the size of the ideal Aristotelian polis, with maybe 5,000 qualified tax paying or property owning voters. In that community each voter would know and select the following office holders:
1) Mayor or Selectman, in a Council type government
2) Sheriff or Marshal
3) Prosecutor, who was the communities intermediary to the State administrative authority
4) Judge, one for matters criminal, civil and probate.
5) Coroner, essential for determining inheritance claims and other legal issues
6) State Representative
Those offices were all selected annually and represent the span of control for effective local Democracy.

In addition there were biennial elections for Congress and Governor and some provision for an Upper House in the State Legislature. The State Legislatures selected the United States Senators and the Presidential Electors. Everybody was supposed to know who they were voting for. A failure at one location, even at the Federal level, would not bring down the system.

The problems are global and interconnectedness is a good thing on many levels. We need to both trade and bring in immigrants and collect intelligence on a global scale. The vulnerability comes not from the links but from the concentration of wealth and power at a few critical nodes. Our antique 18th century heritage could provide some robustness to respond to failures by a 0 in the Oval Office. The modern technology of the internet should make a more broadly and local based polity more feasible now than it was one hundred to seventy-five years ago when this centralization of authority accelerated.

Mar 9, 2009 - 7:30 pm 47. Derek:

lifeofthemind: it’s not a matter of getting into anyone’s loop. The loop is all of us. Extraordinarily complicated, impossible to comprehend, and probably a quantum physics type situation where looking creates it’s own effect.

In oscillating systems, especially interdependent oscillating systems, control is extraordinarily difficult, and failures typically catastrophic. Anything done to change one system creates cascading effects that are often times unpredictable.

The economy is a system like that. Socialism and communism try to control the system by taking over large parts of it, without recognizing the interdependent nature, or more importantly the human factor. Remove one motivation, and the results spin out of control; 5 year plans that look great but fail utterly and catastrophically because they don’t account for simple human motivation.

With a failure of the magnitude that we are experiencing, it is utterly impossible to be ‘inside the OODA loop’ because it is too large and chaotic. Any action taken in response to a perceived issue creates it’s own loop and oscillation.

That is why recessions are inevitable in free market systems. Almost like a system that is self destructing with harmonic forces. You have to shut it off and start from some basepoint. When government is intricately tied into the operation of the system these events cause political systemic failure. Fall of the Soviet Union. When the governments are participants, observers and arbiters, we have great depressions or 1970’s stagflation, but no systemic collapse.

What the Obama administration has done is tied it’s lifeboat to a sinking ship. It’s going to go down no matter what they do about it, but they are intent on throwing any available resources into the lifeboat. I don’t think they realize how dangerous it will become.

I picked up Apollo 13, the movie today. I’ve read at least a dozen times the chapter in Gene Kranz’ book. They had cascading failures. But they had the sense to not use any resources until they understood precisely what the problem was. They used them when needed to solve problems. They had few options and very limited resources.

I don’t think anyone has figured out in this mess that we have few options and limited resources. Unfortunately reality will intrude. Even more than it has.

Derek

Mar 9, 2009 - 7:33 pm 48. bogie wheel:

Danish Bonds! Aha! I knew some nefarious European was behind it all!

And how does Danish Bonds like his martini? Shaken, not stirred, with a fish?

Mar 9, 2009 - 7:37 pm 49. Lifeofthemind:

bogie wheel,
Sounds like the 2nd Avenue Subway. Planned 80 years ago, started 60 years ago. Budgeted for 5 times and still just random holes in the ground. There are ads in the subways boasting it should show up in 2015. Care to make a wager?

Mar 9, 2009 - 7:42 pm 50. outa my league:

@LIFO- “What did work was quadrupling the armed forces and cutting lots of steel to build hundreds of ships and thousands of tanks and planes.”

Also, WW2 horrifically clobbered the infrastructure of Europe, while the US came out beefed up and intact, leaving the US with tremendous economic advantage globally.

But then, of course, LBJ, Jimmuh and WJC (the great social tinkerers) had a crack at it.

Mar 9, 2009 - 7:54 pm 51. rumcrook:

zero is turning out to be such an incompetent socialist that his interpretation of you got to break a few eggs to make an omlette, has turned into your allways gonna have a few broken eggs when your looting the store.

Mar 9, 2009 - 8:06 pm 52. Walt:

blert @31: Great post on the Gonnabee. If Obama results in the destruction of the Democrat party as it exists today, as well as ending affirmative action and political correctness, then I would say we will come out of this a better country.

Mar 9, 2009 - 8:17 pm 53. Leo Linbeck III:

I’ve continued to reflect on the underlying drivers of the mortgage meltdown. Disruptions of this scale, it seems to me, can only be the result of society-wide disconnects between perception and reality. If the problem were limited to a group – be it by industry, geography, or income level – the damage would be modest. Instead, this was a problem that was global in scale, indicating that there must have been some sort of mass delusion at work.

Here are my two candidates for such a delusion.

Mistaken Causality

Our policy makers mistook the direction of the causality arrow between home ownership and its social benefits. They (and we) said the following:

When people own homes, they are more likely to be stable, productive citizens. They earn more, have lower unemployment, are more active in their communities, attend church more often, vote more often, give more to charity, have lower rates of divorce and illegitimacy, and so on. Consequently, if we can just increase home ownership we will take big strides toward creating a better citizenry and solving many of our most challenging social problems.

The problem, of course, is that we got the causality reversed. The truth is that people who possess all of these positive attributes are more likely to own homes, not the other way around. But confusion on causality caused widespread support of a policy of increasing home ownership. Having accepted this “consensus” position, it was easy for politicians to pass legislation which had, as its primary focus, lowering the barriers to buying a house. (Corruption accelerated the lowering of these barriers, but what’s new?)

You can see the result of this meta-policy in two statistics:

1. The percentage of people who owned a home. This percentage rose from about 62% in 1960 to a peak of 69% in 3Q2006. This is a very large increase, which is more easily seen when we look at its complement, the percentage of renters (which fell from 38% to 31%, a drop of 18%). Interestingly, this percentage has since fallen to 67.5% in 4Q2008, and it may fall further still (although not to its previous lows, for other reasons). It is also worth noting that most of this increase occurred after 1994: the rate was 64% for 10 years before that, before rising to about 69% in 2003. For most of this period, we had a D in the White House and R control of Congress. This was a bipartisan effort.

2. The ratio of the imputed rent on homes to actual rates on rental property. This number indicates the premium people are willing to pay to own their home vs. rent on equivalent space. This ratio hovered in a range between 0.8 (meaning it was cheaper to own) and 1.1 (meaning it was cheaper to buy) from 1987 to 2002. This ratio then went on a tear, peaking at 1.86 in (you guessed it) 2006. At this point, people were paying an 86% premium to own their home. (More on this below.)

So, the upshot of this quick analysis is that we all decided it was better to own a home, so our politicians made it easier to buy a home, so we all went off and bought homes. This preference for home ownership was not limited to the political classes; it is a cup from which we all partook. (Almost all, anyway.)

This is the stuff of what bubbles are made: popular delusions and the madness of crowds.

Confusion Between Home Ownership and Housing Consumption

This confusion is rampant. Very few folks seem to get that there is a fundamental difference between owning an asset and using an asset (what an economist refers to as “consumption”).

You don’t have to own an asset to use it: that is what what tenants do. You don’t have to use an asset to own it: that is what landlords to. Of course, you can both own and use an asset: that is what owner-occupied housing means.

But too often people conflate ownership and consumption. We all need to consume housing: we need a place to sleep, to raise children, to watch TV, to eat food we prepare, to relax, to enjoy hot, steamy s, er, showers, etc. How much house we choose to consume is a function of our income and lifestyle preferences. Some people have lavish lifestyles and big incomes and they choose to consume a lot of house; others have more modest incomes, and (regardless of their lifestyle aspirations) have to make do with consuming less house. This is true of all economic goods: we might prefer to eat out every meal at Tavern on the Green, but if we don’t have the income of a hedge fund manager, we’ll have to make other arrangements. Say, Grey’s Papaya. Same with travel. Same with schools for our children. Same with, well, everything.

Owning a house, however, is simply an investment. We should only invest in an asset that makes economic sense. This means, at the end of the day, the asset must earn a return. If we own the house ourselves, we essentially are paying ourselves rent, and that rent is our cost of consuming the house. If we can’t afford the rent, we need to find someone who can (and will pay us cash to do so). Otherwise, we are earning no return on our investment in that housing asset – in other words, we made a bad investment.

You see this confusion most clearly in the situation where someone has purchased a home that they cannot afford to live in (too much consumption), but also is “underwater,” meaning that the value of the house has fallen below the debt they owe (bad investment).

The value of the house is basically the present value of future rent payments, of what someone is willing to pay to consume the house (regardless whether that person owns the house or not). From an investment standpoint, the fact that the house is “underwater” should have no impact on the decision whether or not to sell: it is sunk cost. If this sounds weird, stay with me for a bit.

Let’s say Harry and Nancy paid $600,000 for their 5,000 square foot home, or $120 per square foot. To do this, they borrowed $450,000 from a mortgage broker named Joe. For a while, the market went up, and they thought they were really smart, and had lots of parties. Then the market plummeted, and real estate prices fell to $80/SF, meaning their regal estate is now worth $400,000. They lost $150,000 in equity and are underwater $50,000, and feeling really pissed off at the world.

Now, for simplicity, let’s say that a renter will pay 8% of the value of a home in rent. This means that when Harry and Nancy bought their home, they were effectively paying themselves $40,000 a year in rent ($500,000 * 8%). But if they actually put the house on the rental market, the most rent they can get is only $32,000. This means the “true” value of the investment is $400,000 ($32,000 / 8%). This is what determines the value of any asset: the rents you can earn for its use.

Now Harry and Nancy look at their income, and it’s only $100,000 per year. The reality is that they cannot afford to consume $40,000 worth of house. Maybe they planned to flip the house for a big profit, but that is an investment strategy, and has nothing to do with their consumption decision. They need to move to a smaller house, something they can afford at, say, the $240,000 level. The good news is that with housing prices depressed, they can buy a lot more house for that money now than in the go-go days (3,000 vs. 2,000 SF). So long, McMansion; hello bungalow. Sad, but that’s all they can afford.

But they don’t want to sell, because they’re “underwater”; they want to hang on until home prices come back. But this is nonsense. They’ve lost $200,000, and they need to get over it. It was a bad investment, sunk cost. However, they are compounding this bad investment, again, by over-consuming.

Consider this: let’s say they sold the house for $400,000 (the current market value). Their equity is flushed, and they owe $50,000 of debt. But now they’re able to rent a 3,000 SF home for $1,400 per month. They’ve cut their annual expenses by $23,200 per year, and can pay off the $50,000 of investment losses in about two years.

Or they could buy the house for $240,000 (they may have to rent for a year to save the $24,000 down payment). They now owe $266,000 (the $216,000 mortgage plus the $50,000 from the other house), but they’re still paying less imputed rent. Note that the investment is still a good one: 8% gross return on investment, or what residential real estate should yield.

You see, their fundamental problem was that they were consuming too much house, but this realization was clouded by the investment performance of the house. By decoupling these two decisions, they can start to behave more rationally. The investment performance was poor, to be sure, but that is sunk cost; there is nothing they can do about that now, and if the market goes back up (probably sometime in 2020), they’ll still benefit from that by owning a smaller house (albeit to a lesser degree).

Anyway, what this means in the macro-economic level is that things are probably not as bad as they may seem. Rent equivalents (test #2 above) have almost returned to normal (latest numbers are about 1.2); there is maybe 5-10% more to go, if that (although there is a lot of variance by region). People are adjusting their spending levels, which means that they’re increasing their ability to pay the imputed rent on their homes – this means they’ve chosen, for the most part, to stick with their house consumption level at the expense of other stuff. This also means that foreclosures are not likely to go much higher, as people will simply continue to service their debt, pay it down, again spending less on other stuff.

Finally, if we really wanted to create a policy that would help this situation stabilize, we’d make it easier to “trade down” to a smaller house, perhaps by rolling some of their “underwater” residual debt (Harry and Nancy’s $50,000) into a new mortgage, so long as the house is smaller and they otherwise qualify. This keeps them in the same net investment position ($50,000 underwater), but gives them longer to pay (mortgages being long-term), thus softening the impact on their consumption rate of other goods. Just a thought.

FWIW. Sorry if this is overly long, confusing, or OT. But it’s something I’ve been giving some cycles to lately, and seemed somewhat germane.

L3

Mar 9, 2009 - 8:22 pm 54. Leo Linbeck III:

Oops, typos:

“they were effectively paying themselves $48,000 a year in rent ($600,000 * 8%)”

“they cannot afford to consume $48,000 worth of house”

“They’ve cut their annual expenses by $31,200 per year, and can pay off the $50,000 of investment losses in less than two years”

Sorry.

L3

Mar 9, 2009 - 8:30 pm 55. rickl:

I found the site market-ticker.org from a comment here last week. I don’t remember who posted it. But I’ve been reading that site and it is very sobering. Here is today’s installment.

Bottom line: There has been too much fraud, lying, scamming, and deceit across the board for far too long. Markets depend ultimately on trust and openness, and that is wearing very thin. The reckoning is almost upon us and it won’t be pretty.

Mar 9, 2009 - 8:35 pm 56. Leo Linbeck III:

Now that that’s off my chest, let’s finish up with a L3merick.

— —

Its start was a home mortgage bubble
Which triggered some terrible trouble

Then along came Barack
And the rest of his flock

Who turned the whole nation to rubble.

— —

When Harry met Nancy to speak
Of the ways they could make us more chic

They decided to burn
All the cash we could earn

So the smoke would disguise Murtha’s reek.

— —

L3

Mar 9, 2009 - 8:51 pm 57. Unsk:

With so many of the mainsteam media financial personalities like Mad Money Cramer and his friend herbie so completely tied to the Democrat propaganda machine, and also apparently some nefariously fraudulent trading practices, is it any wonder that so many maroons like BT spout the ignorant nonsense that the Reagan and Bush tax cuts actually lowered revenue and caused the deficits?

A quick reading of the Deep Capture blog story illustrates all too clearly that our financial system has accumulated some serious mile wide flaws over the last couple decades. When one adds the Fannie/Freddie con to the Investment Banking relaxation of reserve ratios con, to the naked short selling con, to all sorts of other minor cons along the way, you’ve got one hell of a mess. Of course, we the American taxpayer have bailed out some of the those very same way over leveraged investment banks that naked shorted out a whole bunch of small and mid cap firms into oblivion.

The issue is no longer the free market versus regulation. The Big City Democrat pay to play ethos in tandem with the craven left’s monkeywrenching , has completely corrupted our financial regulatory system, unfortunately all too often with a willing assist from Blue Blood Rinos. It will be very hard to get to the bottom of this mess without a strong conservataive majority in both houses. Barney Frank’s promised new investigation of our financial system will be designed to create a new official historical record of the financial collapse wiped clean of any Democrat wrongdoing.

The only positive sign I can see out there – is what ever made a connected made man of the Democratic financial mafia like Mad Money Cramer to turn on the Messiah? There may be cracks below the surface in the carefully constructed facade that are spooking the real Masters.

Mar 9, 2009 - 9:27 pm 58. Robohobo:

I am not so sure the OODA loop is apropos here. The economy seems to be more of a chaotic system. Now chaotic does not mean unorganized, just that the organization is hard to observe without having many, many iterations. The problem is that local behavior on one node can have an effect in another that is not predictable. There will be local attractors that mimic stable behavior until the small nudge is applied then the behavior goes nonlinear.

(Yeah, I am a math geek.)

The thing is behavior of a chaotic system cannot be predicted in the short term, only on very long time scales. All that we could do is make a small change here and wait to see that we did not cause the entire system to ‘escape’. So, when things go awry, I think, there is good reason to believe that the best course of action would be to KEEP YOUR FRAKKIN’ HANDS OFF OF THE SYSTEM! Let things settle down back to quasi-stable states.

Mar 9, 2009 - 9:35 pm 59. Mike Sylwester:

Leo Linbeck @53:
This percentage rose from about 62% in 1960 to a peak of 69% in 3Q2006. This is a very large increase, which is more easily seen when we look at its complement, the percentage of renters (which fell from 38% to 31%, a drop of 18%).

A rise of home ownership from 62% to 69% from 1960 to 2006 does not seem “very large” to me.

What grew “very large” from 1960 to 2006 was the size and quality of the homes.

Investing in home ownership is generally a good investment, and society generally does improve as more and more people invest in their homes. The people preaching those lessons were generally right, in my opinion. The lesson was mislearned, however, because too many people tried to buy larger, more expensive homes than they could afford.

Since the government did decide to encourage home ownership — and I would say that the government should not have involved itself in such efforts — then the government made a big mistake by trying to compel banks to loosen lending requirements. Rather, the government should have have re-examined its own government policies that prevent the construction and sale of tiny, cheap, starter homes.

For example, have government zoning restrictions and construction requirements played significant roles in compelling the growth of size and cost of homes? Did the government make it impossible for any home-construction business in 2006 to build and sell homes of the small size and cheap construction that people could buy in 1960?

Mar 9, 2009 - 9:53 pm 60. Mike Sylwester:

We recently finished a long Presidential election campaign that lasted through all of 2007 into November 2008. Until mid-September 2008 there was practically no discussion about the large economic problems that were converging to the current financial crisis. The only reason that some discussion did begin at that point was that, completely unexpectedly and suddenly, the Bush Administration had to throw $800 billion at some mysterious liquidity problem that practically nobody — including Obama and McCain — understood.

As a Republican, I blame the Bush Administration and McCain as a candidate for failing to point out and compel discussion of our economy’s major economic problems. The Presidential campaign is a time when the entire public will devote thoughtful attention to such discussions, but the opportunity was squandered by the Republicans.

Mar 9, 2009 - 10:10 pm 61. Mike Sylwester:

I think most of us feel intellectually inadquate when we read Leo Linbeck’s essays. I sure do.

So, I always am glad to read his poems. Then I don’t feel so dumb.

Mar 9, 2009 - 10:19 pm 62. Brian Macker:

The Austrians knew.

Mar 9, 2009 - 10:51 pm 63. Dave:

L3: Las Vegas is a classic example. At the peak, LV needed no more than 25000 housing units per year. In the two peak years, 33000
and 38000 were built. In spite of having too much supply and not enough demand, prices more than doubled. Now comes the payoff.

I bought at 372M. Owe $220M House just like it right down the street got foreclosed. It is on the market for $147,000.

Now I will be able to keep a roof over my head, never fear. (Not too much anyway.) But being upside down by $70M does not give one comforting thoughts.

And I had planned on establishing a home equity line of credit and coupling with a computer program to get out of debt pronto.
Problem? WHAT equity?

I’m a-pulling leather. This ain’t no rodeo ride. Deflation is most necessary, but it sure is not a lot of fun.

Mar 9, 2009 - 10:57 pm 64. Leo Linbeck III:

Mike,

Fair comment about the use of “very large,” especially over such a long time period (46 years). Lemme expand a bit on this – but just a bit – it’s getting late .

It would have been better to think about this at the margin.

From 1960-1994, homeownership rates hovered consistently between 63% and 64%, more or less. This is a long period of significant stability, even as the population was growing from 180 million to 260 million. Think of this is the sort of home ownership baseline. So in 1994, 166 million Americans lived in homes they own (this is approximate, since the rate is based on households, not population).

Then from from 1995-2006, the percentage grew to 69% as population grew to about 300 million. This means the number of people living in their own homes rose to 207 million, an increase of 41 million. But during this time, we only added 40 million people to the population, so the marginal home ownership rate was greater than 100%!

So, for decades 64% of population growth ended up in homes; that number grew to over 100% in one decade.

Now, of course, this is highly aggregated information at the top level, but it gives one a sense of just what a sea-change began in 1995.

FWIW: President Clinton substantially expanded the Community Reinvestment Act in 1995 with the specific goal of increasing home ownership rates by making it easier to get a mortgage. Not necessary a cause-and-effect, I’m just sayin’…

Cheers.

L3

Mar 9, 2009 - 10:59 pm 65. Dave:

@LOTM: If politicos are bound and determined to try and overcome deflationary forces by government spending, then IMHO military spending is the only thing that will work.

That is because is requires the government to go everywhere and contract to pay for anything and everything that can be put to military use. This gets lenders to lending
and then all the ancillary activity kicks in. The approach has to be “If you make it, we will buy it.” Anything else is digging holes then filling them in.

Did you see the Fehrenbach piece at mysa.com?
This planet needs a bigger posse than what it now has. Looks like we are elected, like it or not. We are talking about 5 to 6 million man Army (1/3 active 2/3s reserves) and proportionate increases in the other branches of service as well.

Put all this together and we got a program to advocate and aim for. And right in BHOs face to boot.

BTW: I also imagine that some other countries can be “persuaded” to ease the strain on our wallets for all this military adventurism.
It is an offer they cannot refuse.

Mar 9, 2009 - 11:09 pm 66. Dave:

@Mike and L3: Again using Vegas as the example: Much has been said about madcap speculators getting on the hook for multiple
houses and then trying to “flip” them for a profit. Got away with it for a while, then it all hit the fan.

But had it not been for speculators, nobody would have bought those additional houses to start with. This is ” a margin of over 100%”
in action.

Mar 9, 2009 - 11:14 pm 67. Leo Linbeck III:

Dave,

The crazy thing about your foreclosure story is that your own actions imply you’re not underwater.

Ignore your equity for a minute, and just assume that your debt service is your imputed rent. If you’re pay 6% with a 30-year amort, you’re probably looking at a monthly payment of $1,300. I’m guessing this is a pretty reasonable long-term fixed rent in LV in your ‘hood. And if even if you can rent for less, you might prefer paying a little more for your place. Not everyone wants to get the absolute cheapest rent; there are other factors at play.

If all that is true, your home’s investment value is $220K, and you’re not underwater. And, if you’re OK paying $1,800 per month, you have a 4% return on your equity investment, which is better than 30-year Treasuries, assuming $147,000 is the “market value” today and it appreciates 3% per year during that time period. Doesn’t sound all that bad, unless LV implodes. (Not likely – shrink, maybe; implode, no.) But LV does need to quit developing so many houses – too much supply; let demand catch up. It will, and when it does, prices will move up quickly (no appreciation for 10 years, followed by a big run).

Anyway, this points out the danger of mark-to-market when there is a deep recession. The bank has it on the market when there are no buyers because everyone is a-pulling leather. So prices get depressed due to lack of trading, which leads to more write-downs, etc.

Temporarily suspending M2M will give everyone a chance to catch up on the information, rather than getting locked in a death spiral.

Cheers.

L3

Mar 9, 2009 - 11:27 pm 68. buddy larsen:

unsk –somewhere i read (was it in the deep capture?) the phantom shares –the naked trades which can never clear because they never existed except as racket mcguffins–stuck in the DTCC logs are numbered in the billions of shares. The DTCC is a sort of Marina Oswald –stay away from her, shut up, don’t ask her any damfool questions, what are you, crazy?

Mary, a young housing consumer
had a mortgage on her like a tumor

for gone upside down
it made Mary a net clown

on the strings of Dodd Frank & Chuck Schumer

BT, Bush’s check on Bush deficits as percentages of GDP. Compare & contrast with historical averages. Check out unemployment, growth, the usual performance metrics. Context against the massive dot com bust, the massive corporate scandals mushroomed under Clinton and outed under Bush –Enron, Worldcomm & others, and the very sharp recession resulting, and the WTC attack, and the launch of war in response, and several natural disasters including Katrina, and eight years of tightly-scripted & almost unbelievably nasty Cloward-Piven (AKA “BDS”) shoveled 24/7 into the face of America’s war effort and economic animal spirits. Now enter this –and see if you can’t raise the hood on that old credibility jalopy and, you know, change the oil, lube job, adjust points & plugs, change the air filter, blow out the fuel line, air up the tires, and maybe next time you take ‘er for a spin it won’t keep backfiring and bothering the neighbors.

Mar 9, 2009 - 11:27 pm 69. buddy larsen:

L3, there’s a congressional M2M meeting this Thursday (finally! what took so many hundred billion dollar lost days to call it?). dunno details, if it’s plenary or the quickly normalizing dissemble show. we’ll see. if they suspend, we’ll rally like a tsunami. Dougie Kass is good at risk premiums and today he said SP is trading at 6% inflation discount, twice too high, and on valuations about 125 points too low. Kass is worth listening to, traders listen to him at turns.

also coming right up, OPEC meeting in Vienna. hold onto yer hat.

In trying to understand this market crash, don’t underestimate rithmetic –the new budget does a set of things that will for example drop cash flows fro domestic oil & gas producers by whopping 40%, and a like number on top of utilities. Arch Coal just bought out Rio’s wyoming holdings at liquidation prices. Coal & energy in general is scared of these people –they show few signs of rationality where carbon and climate change issues are concerned –and rightly so, since titanic frauds must be worshipped with great vigor and brandished fury, lest a giggle start up in the peanut gallery and spread out amongst the hayseeds looking on in slack-jawed astonishment at this neon spandexed strobe light snake oil show.

Mar 9, 2009 - 11:57 pm 70. Dave:

L3: Would you kindly stop being so cheerful whilst I am indulging in catastrophic fantasies?

Now what I am tempted to do is go qualify
for that $147M job—-100% financing of course—move into it and then present my current lender with a “deed in lieu of foreclosure”.

I daresay I could quiet any unwanted attacks of conscience in doing so. However I currently cohabitate in the Dream Home of
She Who Must Be Obeyed and my opinions seem a bit irrelevant at times.

Mar 10, 2009 - 12:07 am 71. Dave:

Buddy: Who is Rio? Is that Rio Tinto?

Also: what does “fro” mean? As in “cash flow fro”.

I’ve little doubt that the destruction of
domestic oil, gas and coal producers would
tingle the middle legs of Obamaroids, but is there actually a coordinated effort to do so?
Seems a bit far-fetched. And if true there would almost have to be a chief conspirator
pulling the levers. Cannot identify such
so will estimate that all this is basically self-indulgence from what amounts to a collection of juveniles.

Mar 10, 2009 - 12:14 am 72. buddy larsen:

yeh, Rio Tinto –pulling outta Wyoming. Nice, eh? Brazil has beaucoup socialists in gov’t (including the prez, tho he talk left and govern right) –i guess Rio knows how tenuous access to socialist courts is liable to be for coal-mimin’ furriners in this brave new world where the deer and the antelope and the feral packs of slobbering lawyers roam, green and hungry for cashing, at all energy forms a-gnashing, and (chorus)renewable low carbon butterfly farts are approved aaaall the daaayy.

Mar 10, 2009 - 12:38 am 73. Pseudo-Polymath » Blog Archive » Tuesday Highlights:

[...] Collapse and war … or the reverse. [...]

Mar 10, 2009 - 6:09 am 74. Stones Cry Out - If they keep silent… » Things Heard: e58v2:

[...] Collapse and war … or the reverse. [...]

Mar 10, 2009 - 6:10 am 75. LarryD:

Lifeofthemind – what worked was the price and wage controls FDR instituted at the beginning of the war, which kept them frozen while productivity caught up.

In short, unwinding FDR’s anti-competition policies, which deliberately jacked up prices and wages. Law of Unintended Consequences, the Great Depression would have been just another recession, if it hadn’t been for governments trying to cure it.

Mar 10, 2009 - 7:49 am 76. Dave:

@Larry D #75: Negatory, negatory, negatory
on those FDR and John Kenneth Gailbraith wage and price controls.

They were downright counterproductive. At best they led to creative dodges to get around them. At worst, some needed work simply did not get done.

In fact, had Governor Coke Stevenson of Texas
not sabotaged them in the Lone Star State,
there would have been critical shortages in both the ETO and PTO.

For an example of how to do it right, take a look at Salmon P. Chase, Abe Lincoln’s Secretary of Treasury. As a result of his
creative non-intervention, the North actually had civilian economic growth from 1861-65.

In fact, towards the end, Jeff Davis got himself a new SecTreas who copied Chase
reversed things in the South and even stabilized the Confederate Dollar——until the unfortunate events at Appamattox Courthouse ruined everything.

The faith in WWII wage and price controls and rationing seems to be the result of an orchestrated postwar disinformation campaign. Please re-examine your premises.

Mar 10, 2009 - 9:30 am 77. JMH:

Over the last 40 years, we’ve seen the computerization of much of our (e.g. the West’s) productive economy. By productive, I mean that part that actually produces something of value – a good or a real service (say, health care or plumbing as opposed to diversity consulting). Manufacturing is phenomenally more productive that it was 50 years ago. Computerized milling machines, CAD/CAM design, vastly more efficient supply chains, faster communication, better access to data. All these have boosted the underlying “real” productivity. But the majority of that productivity increase has been absorbed by a massive growth in unproductive occupations. We’ve had an explosion of clerks and bureaucrats, functionaries, regulators, consultants, lawyers, layabouts, money jugglers, pretend-professors of pseudo-studies, paid activists, professional speculators and a host of others who consume without really producing anything. You can lump Countrywide execs in with Ward Churchill and the Octomom. All of them belong to the parasite class.

The initial wave of productivity gains from computerization is probably coming to an end. There may be another round of gains in the future, but for now I think real productivity has hit at least a temporary plateau. Unfortunately, the topsy-like growth of the parasite economy has continued and without supporting gains among the few remaining producers it threatens to topple everything. Plus the looming retirement of the Baby Boomers threatens to accelerate the growth of the unproductive sector. And producers have noticed that most of the gains they made have ended up somewhere else besides their own pockets and are reacting to that. Our real productivity may be shrinking as people give up. I think that’s the underlying event that the financial markets are signaling. All the other systemic problems, such as what Shivermetimbers and Blert mentioned, were to a degree masked and their impact minimized by the ability of the productive sector to absorb the shocks and keep on chugging. But enough body blows and even Atlas will finally crumple. Not shrug, but collapse and fall to the mat.

The parasites have reached critical mass and some HIV-like viruses(Political Correctness, cronyism between Wall Street and K Street, Bureaucratic Socialism in the EU, a corrupted and coopted media, and frankly high levels of taxation) are inhibiting society’s immune system from fighting back. We need antidotes, fast.

Mar 10, 2009 - 10:56 am 78. Mutt77:

If companies are allowed to go bankrupt, then the onerous contractual arrangements that crippled them, would be frustrated, and performance obligations ceased. Bankruptcy trustees then have a leaner product for the numerous American companies with large T-Bill holdings who are hungry to takeover failed businesses.

If GM went bankrupt the $70 per hour that UAW workers get, would be rationalized by a new owner.

Sirius Satellite radio is facing post-bankruptcy prep with 2 companies buying up their debt, for the sole purpose of setting the company up for a trustee sale. Sirius is viable without there $55 million per year contracts to Oprah, and more to the NFL and NBA (which have low listener ratings). Anything that props the status quo, only postpones the inevitable.

Market solutions will work.

Mar 10, 2009 - 11:32 am 79. terry_freeman:

Today’s crisis can’t be blamed on either the GOP or the Democrats, either Bush or Obama. It almost doesn’t matter who is elected; the fundamental problem is much deeper. When the money supply itself is governed by politics, it loses stability. The British pound used to be literally a pound of silver. A a bag of pre-1965 90% silver US quarters, with a face value of $1000, sells for over $10,000 today. Our governments have inflated the money supply, simultaneously cooking the books to understate inflation’s effects. This monetary excess was prompted by wild-eyed expansion of federal spending. Regardless of whether they were Republican or Democratic, Congress voted to ratchet up spending to over $3 trillion per year. This is unsustainable. Today’s so-called “bailout” and “stimulus” programs will be as effective as medieval leeches draining more and more blood from their unfortunate patients.

There are good reasons why Thomas Wood’s Bailout is on the best-seller list at the NY Times, and Atlas Shrugged is at its greatest level of popularity.

Mar 10, 2009 - 12:15 pm 80. sigintel:

Phantom Shares….6 billion in failed stock trades…who’s doing it?

http://video.google.com/videoplay?docid=4490541725797746038

Mar 10, 2009 - 3:11 pm 81. Leo Linbeck III:

Dave,

Not a bad idea, your gambit. Probably looks even better after a couple of glasses of Chateau Thames Embankment.

BTW: John Mortimer, creator of Rumpole, died in January. Great stuff he created.

Cheers.

L3

Mar 10, 2009 - 5:11 pm 82. buddy larsen:

sigintel/80; according the three investigative reporters at deepcapture.com, the perps are organized crime foreign & domestic, and they are enabled by “incompetent” regulators in “captured” regulatory agencies.

Cramer is interested in the September blow-out, the half dozen trading days wherein short volumes spiked to ten times normal in apparently coordinated waves from the dark pools, driving down the big banks’ stocks as much as 70% in those several days. Cramer thinks people inside the banks were shorting their own institutions (while conducting the normal client trade of course) while running whisper campaigns (which natch flared into open rumors) against their own outfits. That’s why he wants a special prosecuter, and perp walks on tv, in order to rebuild the public trust in Wall Street. There’s a youtube out there of the spiel –try [ cramer special prosecuter ] –

a LOT of clinton retreads are in the O financial team. If you want to understand even the outlines, you have to start with the fin de Clinton seicle; an efficient place is the year 2000 reg reforms. Take a quick glance at this resource:

http://www.trinity.edu/rjensen/fraudrotten.htm

Prepare your hair to stand on end as shapes shift in the dark whilst running down who, of O’s new PERAB, cabinet, and staff, was where doing what with whom in that late 90s financial engineering which burned like a slow fuse for a near decade before blowing subprime dynamite and making this here new pair o dime.

Wall Street and Washington, London and Zurich host some sort of permanent and gigantic financial gray area, call it the crime-ish zone, legal-ish enough that connected paladins systematically ride in, load up, and ride out on elections cycles, that is, always as if by design, before marshals can marshall anything martial against them. Elections bring in reformers, who are as mosquitoes alighting momentarily on the surface of the waters, to be slurped from below or to skitter away never to be noticed again.

Mar 10, 2009 - 9:30 pm

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