The General Economy Sucks Thread

[rabbitproof]

In the spirit of keeping discussions around the economy, the #1 issue for this election, somewhat consolidated (energy is all over the forum) and somewhat flowing (Palin pick thread is all over the map and has progressed past discussion of the pick for most parts), I've started this.

Some starters:
Fannie/Freddie
Stocks down
Home foreclosures
Dollar down
High unemployment rates
High energy prices
Falling median wages
And now the Lehman Brothers..

It's like a buffet of bad news! I know my personal life has been hit by this. I'm working and fine, though not saving or investing at a rate I'd like to be, but my father and others have been bit in a significant way (digging into 401k early, trouble finding quality renters/buyers, not finding jobs out of school). By any metric, we are sucking:



Some articles:

Wall Street mauled by Lehman bankruptcy, AIG fears

http://www.reuters.com/article/busin...e=businessNews

NEW YORK (Reuters) - Wall Street had its worst day since markets reopened after the September 11 attacks as fears about the U.S. financial system's stability surged on Monday after Lehman Brothers filed for bankruptcy and insurer AIG struggled for survival.

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Greenspan Says Crisis May Be `Once in Century' Event (Update1)

http://www.bloomberg.com/apps/news?p...BQs&refer=home

Sept. 14 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan said the financial crisis that began with the collapse of the subprime-mortgage market last year ``is probably a once in a century event'' that will lead to the failure of more firms.

``There's no question that this is in the process of outstripping anything I've seen, and it is still not resolved,'' Greenspan said in an interview today on ABC's ``This Week with George Stephanopoulos.''

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Unemployment rate doesn't count key groups

http://www.chicagotribune.com/busine...,6948459.story

Actually, the jobless situation is even worse than it looks. By some measures, think more than 10 percent.

When the Labor Department measures unemployment, it doesn't include people who have grown discouraged and quit looking for work, nor those who say they're still looking but haven't sought a job in the past four weeks. That group of people, which the department refers to as "marginally attached" to the workforce, totaled 1.6 million people in August, up roughly 20 percent from a year earlier.

The government's unemployment survey also doesn't include people who desire a full-time job but have only been able to land part-time work. That group, known as the "part-time for economic reasons" segment, totaled 5.64 million in August.

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Greenspan Says McCain Tax Cuts Need Budget Reductions (Update1)

http://www.bloomberg.com/apps/news?p...8CM&refer=home

Sept. 13 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan said the U.S. can't afford $3.3 trillion of tax cuts proposed by Republican presidential nominee John McCain without similar reductions in the federal budget.

Greenspan, a lifelong Republican and longtime friend of McCain, said on Bloomberg Television's ``Political Capital With Al Hunt'' that ``I'm not in favor of financing tax cuts with borrowed money.''

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Falling wages: http://www.bls.gov/news.release/pdf/eci.pdf and http://inflationdata.com/inflation/I...Inflation.aspx

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And of course, a closing comic.

[Arne]

To sum the debate between the two candidates up:

September 15, 2008

Funny Day on the Campaign Trail

Posted by James Ostrowski at September 15, 2008 06:48 PM
Obama accused McCain of supporting the free market. McCain replied, hell no, I'm for more government regulation to restrain corporate "greed."

Two clueless demagogues.

[Arne]

Here's a nice take on the situation. By the way, if you have a trillion dollar empire running, lose monetary policy encouraging reckless lending practices, government intervention to encourage reckless lending and prescription drug programs that kill the last living piece in the social security mess, then a tax reduction for some wealthy people is in no way worth to balme for the situation. - It's nothing more than a clueless talking point for Obama.

The Social Imperative of Sound Money

Daily Article by Llewellyn H. Rockwell, Jr. | Posted on 9/15/2008
[This talk was delivered on September 13, 2008, at the Vancouver Mises Circle.]
This past week, the government announced that it would take Freddie Mac and Fannie Mae, the mortgage giants, under conservatorship, which is a nice way of saying that they will be nationalized.
We don't use the word nationalize any more. We can try an experiment and read the new term "conservatorship" back into history. In fact, we might say that Stalin and Lenin put Russia's industries under a kind of conservatorship. Or we might say that Mao pushed a kind of land conservatorship, or that Hitler's policy was one of national conservatorship. Marx's little book could be retitled The Conservatorship Manifesto.



You see, the government keeps having to make up new names for these things because the old policies, which were not that different in content, failed so miserably. The old terms become discredited and new terms become necessary, in an effort to fool the public.

It's as if a restaurant served a shrimp dish that gave all the customers food poisoning, and so now each night it serves the same shrimp but names the dish something new: crangon cocktail, prawn pasta, scampi salad, or what have you. No matter what they call it, it is still poison.

Such a restaurant would be out of business in a matter of days. People would not be fooled. But the government gets away with it mainly because we have no real choice about the matter, and because people are predisposed to believe the government far more than they should. It doesn't help that the media are willing to echo the government line on this, adopting every new phrase as if it were the gospel.

Hence the same is true of the word bailout, which you might consider unexceptionally descriptive of this move by the government to protect Freddie and Fannie from further losses. No, that word is not allowed either. President Bush told Fox the other day, "I wouldn't call it a bailout. I'd call it a stabilization."

We will soon put out a new edition of Mises's 1922 book Socialism. Maybe to keep up with the time we should call it Stabilizing Conservatorship.
What I also find striking is the way in which this move was announced. Let me read to you from the New York Times:

"The Bush administration seized control of the nation's two largest mortgage finance companies on Sunday…. It could become one of the most expensive financial bailouts in American history.

Even the most sophisticated observers of our present scene had to blink their eyes in reading such words. Without debate, without votes, without anything other than an executive fiat, the White House just decided, on its own, to seize the mortgage market. Harry Truman, who seized the steel industry, would be proud. Actually, this is an action to excuse dictators the world over, past, present, and future.

This sort of thing makes a mockery of the Constitution and the very idea of freedom and the free market, to say nothing of the idea that we have a limited government. What's more, if we can believe press reports, President Bush had very little to do with the decision. It was the work of Henry Paulson, the secretary of the Treasury and former head of Goldman Sachs, working on behalf of the nation's most well-connected financial elites. Nobody elected this guy. Most Americans don't even know his name.

And look at how he throws around trillions of our money. The New York Times says that this is expensive. That's one way to put it. It makes the S&L bailout look like the warmup.

Freddie and Fannie carry about $5.3 trillion in mortgage commitments and another $2.4 trillion in financial exposure. The total cost of this operation is unknown; it could reach to $2 trillion, with untold amounts of future exposure.

These two New Deal institutions were founded to speed up the home ownership process for people that banks would otherwise consider unqualified. In time, under LBJ and Nixon, they were given legal permission to expand without limit — in the name of privatization, of all things.

The motive was a classic bipartisan effort: universal home ownership. The Left favored the redistribution. The Right favored the supposed moral virtue associated with the nuclear family and its suburban abode. Thus was born the greatest wealth transfer in American history outside Social Security and the warfare state.
In a free market with sound money, borrowing is connected with the ability to pay. At first, this is only available to the rich. As prosperity spreads, so does creditworthiness. Any government intervention designed to inject steroids in this process is going to end in what Rothbard called a cluster of errors.

It is completely disingenuous that so many people are today decrying the banking system's failure to discriminate between those who should and should not be carrying a mortgage. The banking system in a free market handles this just fine. Ferreting out the difference between those who can handle loans and those who cannot is a main job of the competitive system. The market precisely calibrates this. If one lender fails in its assessments of borrowers, another is there to correct the problem.
If you rush the process of prosperity, and insist that everyone who wants a loan should get one, you set up a situation in which there will be problems down the line. That is precisely what the regime has done. It created Freddie and Fannie to subsidize loans. It engaged in a phony privatization that secretly socialized losses. The legal status of these privately owned, publicly traded, and government-protected agencies was always unclear, but the markets had long assumed that they would be bailed out.
There was a moral hazard at the heart of this policy. But the real point is that the free market judgment about who should get what was being overridden. Surely, that is not a problem when it comes to promoting the alleged American dream! In fact, we are paying for this mistake a half century after the policy became a national priority. As the evangelical ministers like to say, the wheels of justice grind slowly, but they grind mighty fine.

There is only one problem with applying the principle to this case. There will be no justice. If justice prevailed, the losses would be borne directly by those responsible.

If we pursued a free-market policy from here on, the answer would not be complicated. The assets and liabilities of Freddie Mac and Fannie Mae would be auctioned today in the free market. It's true that many loans would be defaulted on.

What level of crisis would be precipitated by such a genuine privatization policy? It's true that the press would be screaming bloody murder, and the big players in finance would suffer. But in time, the markets would revalue the resources and an important lesson would be learned. Sound loans would be picked up by financially responsible firms and carried to term. Home values would fall and many people would have to move to cheaper homes. We would then be back on sound footing again.

From an administration that purports to favor free markets, this possible solution was not even considered. Instead, they proclaimed their regrets that they would have to spread the costs of this error over the entire population. Instead of fixing the problem, however, they only worsen it, underscoring the principle that America will not tolerate failure in business, and the bigger the failure, the more likely it is to be bailed out.

Note that this socialistic bailout and nationalization — to use two forbidden words — were enacted by a Republican administration. Isn't it ironic that when you look back at the big upticks in government intervention over the economy, you often find Republicans at the helm.

As for McCain and Palin, they wrote in the Wall Street Journal that this bailout is "sadly necessarily" even as they promise reforms that will "require the highest standards of accounting, reporting and transparency ever demanded in government." Well, here's the thing: no one demands higher standards than the market itself, but you have to turn these institutions over to the market in order to elicit such standards.

Congress's role has been and will be to yammer. Only Ron Paul of Texas will have anything sensible to say about this fiasco. In fact, it was more than five years ago that Ron said the following:

"If Fannie and Freddie were not underwritten by the federal government, investors would demand Fannie and Freddie provide assurance that they follow accepted management and accounting practices…. By transferring the risk of a widespread mortgage default, the government increases the likelihood of a painful crash in the housing market. This is because the special privileges granted to Fannie and Freddie have distorted the housing market by allowing them to attract capital they could not attract under pure market conditions. As a result, capital is diverted from its most productive use into housing. This reduces the efficacy of the entire market and thus reduces the standard of living of all Americans."

It's remarkable to observe that hardly anyone dares be against this policy. On the day following the nationalization — a day that will live in infamy — the Wall Street Journal editorialized against the Democrats and their reform efforts, but didn't actually oppose the bailout. The New York Times called it "a reasonable and reassuring move." The Los Angeles Times wrote that the bailout was "inevitable." Steve Forbes in his magazine wrote that "drastic action" had to be taken because a default would "have triggered the worst financial meltdown since the Great Depression."

It's interesting, isn't it, that all these people believe that waving the magic money wand can make reality just go away. That incredible superstition seems to be the official position of the entire US establishment. And we like to flatter ourselves into believing that we live in an age without illusions!

" The Great Depression only became the Great Depression because the government followed exactly the same policies that the Bush administration is following now…"

As for those who should know better, Greg Mankiw, author of the leading economics textbook, writes that because "it was likely to happen eventually" it is "better to get on with it." The supposedly free-market economics blog Marginal Revolution warns that without the bailout, "most of the U.S. banking system would be insolvent," failing to point out that a system that needs a bailout with fiat money is already insolvent. Econlog had lots of good thoughts, but didn't actually oppose the bailout.

The Cato Institute agrees that the Treasury had to bail out the mortgage industry because it "was forced to do so," and that Fannie and Freddie are indeed "too big to fail." The Heritage Foundation agrees that it was a "necessary step" and a "vital move toward reform."

Sure, these people have plenty of recommendations about what should have been done in the past, and lots of ideas about what should be done in the future. As for the present, they are ready to propagandize for the largest socialist operation in American history. In all of these latter cases, we are looking not at a problem of economic education but rather the courage to stand up to the state when it is needed most. They didn't do so after 9/11. And now they have caved again.

Part of the problem is the belief in the great myth propagated by Milton Friedman. As good as he was on many issues, he was not correct on his specialty of American monetary history. His view was that the Depression was caused by a Fed that failed to fully bail out the banking system. Ben Bernanke and many others are pleased to accept this view of history, and they are determined not to let it happen again. In fact, the Fed did attempt to bail out the banks, and was far too successful. This is the basis of the problem.

In the end, we are talking about a price system that has rendered a verdict on the housing market. Prices don't lie and there is nothing we can do to reverse them. Even the most powerful government in the world cannot do so. The attempt causes calamity. The Austrians understand this; it seems as if hardly anyone else does.
Pretty much alone in both predicting the calamity and actually opposing the bailout are those who have learned from the Misesian tradition, who have said plainly and clearly that this is a dreadful error, one that makes the United States more socialistic than China.

Let us address this claim that not bailing out the system, and not nationalizing the mortgage market, would lead to a financial meltdown on the level of the Great Depression. People talk as if the Depression were some sort of natural disaster that the government had to fight. In fact, it was the very fighting of the Depression that deepened it and caused it to last all the way through World War II. We have to understand that if we are to understand the real lesson of the Depression. Instead of letting prices fall and letting the bad investments wash out of the system, the government tried for years and years to keep prices high, employ people in make-work programs, and generally centrally plan the economy.

" What is regrettable is not the readjustment process, but that the process was ever made necessary by the preceding central-bank and other interventions."
In 1920 through 1922, we had a financial meltdown just as bracing and systematic as the one in 1929. The difference was that the government didn't do anything to try to fix it. As a result, it solved itself and it is a forgotten event. Hoover and FDR, in contrast, attempted to use their power over the economy and monetary system to try to keep prices floating high and to keep liquidity in the banking system — precisely as everyone is attempting now. The result was to forestall the inevitable readjustment process.

They believed that the low prices were the cause and not the effect of the recession. Does that error sound familiar? In other words, the Great Depression only became the Great Depression because the government followed exactly the same policies that the Bush administration is following now with regard to the mortgage market.

It makes no sense to warn that we will repeat the past if we do the same things that actually made the past as bad as it was. To avoid another Depression-sized downturn, we need to avoid the mistakes of the past, among which were the policies that attempted to keep failing firms and industries afloat in difficult economic times.

What should have happened in 1929 is precisely what should happen now. The government should completely remove itself and let the market reevaluate resource values. That means bankruptcies, yes. That means bank closures, yes. But these are part of the capitalistic system. They are part of the free-market economy. What is regrettable is not the readjustment process, but that the process was ever made necessary by the preceding central-bank and other interventions.

Let me state this very plainly: I do not believe for one second that if the government fails to nationalize Freddie and Fannie that the world as we know it will come to an end. Those who are saying that are trying to scare the population, the same as with every other major demand by the regime. It was the same with NAFTA, the WTO, the war on terror, the war on bird flu, the nationalization of airport security, and everything else.

If the government did nothing but sell off the assets of the mortgage giants, we do not know for sure what would happen, but the market has a way of finding value and readjusting. I would expect about 18 months of difficulties. Banks would fail just as many businesses in the free market fail every day. Housing prices would fall more, just as all market prices are subject to change. But the process of readjustment would be smooth and rational. And we would all stop living a lie and believing an illusion.

Contrary to what the blogging heads say, there is nothing that makes this nationalization inevitable. If we had leaders who had courage, who understood economics, who could think about the long run, we would let the market handle the entire process, come what may. I guarantee that this solution is a better one than creating another trillion or so to bail out failing enterprises.

" We need a system that would make it impossible for government to do these things even if it wants to. That system is called sound money."
And yet this is not just another longing for courageous leaders. We can't hope for that. We need a guarantee. We need a system that would make it impossible for government to do these things even if it wants to. That system is called sound money. Think about the preconditions that made it possible for the Bush administration to decide one evening to dump a trillion plus to guarantee three-quarters of the home mortgages in this country. It is a system that is premised on the government's capacity to print unlimited amounts of money.

If it could not do that, no one would be talking about conservatorship. No one would be talking about guaranteeing the liabilities of the automotive industry either. War on Afghanistan, on Iraq, on Russia, and troops in another 100 plus countries, would be out of the question. These wouldn't be issues. If government had to tax people directly for all its spending priorities, we would see Washington's ambitions in every area scaled back dramatically. Every suggestion of a new program would be met with the demand as to how it would be funded.

Fiat money with central banking, on the other hand, tempts corrupt politicians and bureaucrats, and it also further corrupts them. It is the great occasion of sin of our public life. The tragedy is that their use of the printing press not only corrupts them; it imposes dreadful and intolerable costs on the rest of society, in the form of price inflation and business cycles.

We've seen the corruption grow worse over time. We are living now in the 37th year of fully fiat money with central banking. The politicians of the past were a bit reticent to use all the power they had. They are becoming ever more brazen. The sense of shame seems to be gone forever, their consciousness completely papered over by the ominous power they possess. The pundit class is following them, believing that there are no limits.

In truth, all these bills must be paid. To realize that is to realize the necessity of radical reform. It can be overwhelming to contemplate the glorious results of a full gold-standard reform. Inflation would stop eating away our purchasing power. The business cycle would be tamed. International trade would not be disrupted by wild swings in currency values. But of all the benefits, this one is the greatest: it would stop arbitrary rule, dead in its tracks. It would force the government to curb its ways. It would shore up our freedoms.

For this reason, the policy of sound money is very much linked with morality. The Hebrew scriptures, in the nineteenth chapter of the book of Leviticus, warn: "you shall have just balances, just weights…"
The twenty-fifth chapter of Deuteronomy issues a similar warning: "You shall not have in your bag differing weights, a large and a small."
Proverbs says the same: "A false balance is abomination to the LORD: but a just weight is his delight."
Another passage says, "Diverse weights, and diverse measures, both of them are alike abomination to the LORD."
All of these relate in some degree to the need for sound money and condemn the act of fraud and monetary debasement. The consequences of monetary sin cannot be contained to the sinners only. They are spread out all over the whole of society, destroying its economic basis and corrupting its morals. They foster crazed illusions that we can magically generate wealth through the act of printing money, and the attempt to do so has catastrophic consequences. As Mises wrote, "Inflation is the fiscal complement of statism and arbitrary government. It is a cog in the complex of policies and institutions which gradually lead toward totalitarianism."

I find it sickening that there are so few voices outside the Austrian School that will stand up to this policy. And I fear that the consequences of this policy will be felt for many decades into the future. There is still time to reverse course. There is nothing inevitable about despotism. We are not being forced down this road. We can embrace freedom. If we understand that freedom is inseparable from sound money, we can embrace that too. Until then, we will continue to place our trust in the political establishment to do what is right. Call me a gold bug if you will, but I trust hard money far more than our rulers. And that, ultimately, is the choice we must make.

Llewellyn H. Rockwell, Jr. is president of the Ludwig von Mises Institute in Auburn, Alabama, editor of LewRockwell.com, and author of Speaking of Liberty. See his Mises.org archive. Send him mail. Comment on the blog.
This talk was delivered on September 13, 2008, at the Vancouver Mises Circle.

http://mises.org/story/3108#

[92bDad]

I agree in that it is about the economy and the economy is directly tied to Energy.

Fix the energy crisis, by drilling for U.S. based resources and thus cutting off our dependance on Foreign energy, would help to stabalize and lower energy costs.

Basically putting more money in the pockets of consumers.

Investments would pick up within the energy sector as companies would further engage in alternate sources of energy. Personally I'm in favor of Wind to generate electricity, and the technology behind electric cars. We are on the verge of having consumer friendly electric cars that can provide over 200 miles of drive time on one charge...the key is finind a way to quickly re-charge these cars.

So again, here are some pretty strong things to invest all that new cash that we hold onto from saving money by drilling for our own oil.

With those investments, we will have more income and thus be able to pay off these bad mortgage debts.

In turn, we will have more money and be able to continue to pour more money into our economy.

So really this economy is quite simple...it's all about Energy, which by the way the Republicans lead in terms of how to manage and in turn take action on this issue.

Meanwhile the Democrats are completely confused and appear to have no understanding whatsoever about how Energy is the catalyst to the U.S. Economy...instead they want to pour more money into the symptoms, by pulling more money from the people...

I learned a long time ago...focus on the problem and fix the problem...don't try to fix the symptoms. When the problem is taken care of, then the symptoms will begin to heal.

The problem is Energy and how the Democrats have NOT allowed America to be independant of foreign sources.

[Arne]

Originally Posted by 92bDad

I learned a long time ago...focus on the problem and fix the problem...don't try to fix the symptoms. When the problem is taken care of, then the symptoms will begin to heal.

Did the housing boom start, because energy prices rose? If you do't think so, then housing is not a symptom of energy. It's a symptom of other things. Find out what the cause for the housing system is and come back then. - Because until that moment, assuming you agree that housing prices are not a symptom of the energy problem, you don'T live up to your own procaimed ideology or method of fixing the economy.

[Mavdog]

the housing crisis grew out a lack of regulatory oversight, a "free market" of securitization by businesses that were not governed.

the whining about the fed is off target. the fed didn't approve the mortgage underwriting that left investment houses such as bear stearns and lehman with assets that were inflated in their values, and leaving them insolvent.

look at the regulated banks- chase, b of a. they are the ones who don't have the problems.

the problem our economy faces today is one of capital liquidity. the calls for "hard money" won't help that situation, in fact it would make the situation more dire.

[Arne]

Originally Posted by Mavdog

the housing crisis grew out a lack of regulatory oversight, a "free market" of securitization by businesses that were not governed.

the whining about the fed is off target. the fed didn't approve the mortgage underwriting that left investment houses such as bear stearns and lehman with assets that were inflated in their values, and leaving them insolvent.

look at the regulated banks- chase, b of a. they are the ones who don't have the problems.

the problem our economy faces today is one of capital liquidity. the calls for "hard money" won't help that situation, in fact it would make the situation more dire.

If someone gives out pure vodka at a highschool party and everybody starts acting like drunk people, whom do you blame, the highschool kids?

The market would regulate itself if we had an honest banking system that would put a hold to inflation and make these people stand up for what they do, face the risks. No one would pay their managers huge sums of money in order to further unconservative lending if the consequence would be for them to go bankrupt in the long run. If there were no lender of last resort, if the goal wasn't to keep the loans going (see the loans to governments, does anyone expect these governments to pay them back? No everyone expects them to pay the interest on them as long as possibly), but to make loans that could actually be repaid. So that they could make new loans to other people who have a good business idea.

Regulation is only needed because of the totally unethical, corrupt and government sponsored banking system. Why could the US go for centuries without more money poured into the system and actually have a deflationary environment (deflationary in terms of prices) for decades? The old deflation monster only comes from having artificial booms created by this monetary system, when the bubbles burst, no capital infusion will make businesses apply for more loans, so deflation comes about and is seen as the problem, while it's only a symptom.

[92bDad]

As far as housing goes...what's the problem?

Companies loaned money out...thus taking a risk, to people who perhaps could not afford the loan. So now, that risk is biting them hard and peopel are defaulting on loans...let these loan companies deal with the consequences. If they fail and go out of business, it's their own free market problem.

The Government should NOT bail any private companies out...loan sharks or airlines for that matter.

If I screw up on my finances and make poor investments...is the government going to come rescue me so that my portfolio looks strong? NO

So why should the Government have anything to do with rescueing these companies...or the individuals who made the bad decisions to get in over their heads?

As for individuals, I would refer them to Dave Ramsey and encourage them to buckle down and make some good decisions. "Live like no one else today, so that you can live like nobody else tomorrow"

Live Debt Free!!!

I was a debter and have been practicing to become debt free. I only have 3 debts left.

$15K to IRS
$5K to one car loan - I have a total of 4 auto's (3 paid for free and clear)
$116K home Morgage

My car loan will be clear by the end of the year.

IRS will be clear between next summer and the end of next year.

The Mortgage, I have set up a target of having cleared within the next 10 years...or less.

The key is for me to not have a bunch of needless debt...I don't live above my means and it's a personal choice and responsibility.

I don't want the government to have any 'Power' over me...so if I want to live in freedom, it's up to me to get and live debt free.

I believe the same thing applies to corporations. If they want to live in freedom, then they need to not owe anyone...thus they don't need Government help or handouts.

On the same note, they should not HAVE to support the government...but rather I would like to see a society that is independent and able to support one another because they choose to.

It's called charity. Taxes are a must do, they are the law and they create negative bitter emotions that ultimately bring about depression and desparity in the society. However a society that freely gives does so out of loving generosity, because the WANT to.

It's not about what can I GET from so and so, but rather what can I do to be engaged and give of myself freely.

Honestly, both parties and our government in general is more concerned with what it can GET from people, rather than how it can serve the people.

You might say that in general, people are the same way...they are more focused on what the Government can do and give them, than what they can give or do for the Government.

It's as if, almost all of us have this entire concept backwards.

Yes, this attitude effects our Economy.

[Arne]

Originally Posted by 92bDad

As far as housing goes...what's the problem?

The problem is that a large portion of the resources available was put into a section of the economy where it was not needed. If resources are misalocated the market needs time to readjust and you call that a slowdown, recession, depression or whatever. - Simply put: Living conditions do not improve, because people have to be fired, businesses have to go broke for the market to return to its propper function. Now government steps in and tries to save those companies, tries to keep home prices up, etc. - When that happens, markets will not be able to adjust. You do seem to agree that nobody should be bailed out. But still you need to look at where the housing boom and the misalocation of resources came from in order to solve the economic problem. Simply getting "energy independence" won't do it.

[Mavdog]

arne, housing creation is "a section of the economy [that] is not needed"? the usa has an expanding population that needs housing. housing has a useful life, older structures need to be replaced with newer structures.

the federal government isn't stepping in to save lehman, it didn't step in to save the mortgage cos. that have failed or been bought (such as countrywide or indymac).

and the federal government isn't trying "to keep home prices up", it is letting the market decide what houses are worth. look at the homes in vegas, or phoenix, or bakersfield who have seen home values cut by 25%.

not sure your vision is that good from across the pond.

[Arne]

Originally Posted by Mavdog

arne, housing creation is "a section of the economy [that] is not needed"? the usa has an expanding population that needs housing. housing has a useful life, older structures need to be replaced with newer structures.

the federal government isn't stepping in to save lehman, it didn't step in to save the mortgage cos. that have failed or been bought (such as countrywide or indymac).

and the federal government isn't trying "to keep home prices up", it is letting the market decide what houses are worth. look at the homes in vegas, or phoenix, or bakersfield who have seen home values cut by 25%.

not sure your vision is that good from across the pond.

Then look at how astronomical prices rose. The people who actually warned about the housing boom are mostly saying prices will need to go down even more. How should demand for houses go back up in the near future if savings are virtually non-existing and people are struggling with their mortgadges and have over-paid for the houses they already bought. Heck, there were some houses in California that were never ever lived in during the boom. Just pure and simpel "investments"...

Now as to government intervention. Ofcourse nobody is bailed out... except those firms who have bought mortgadge backed securities from Fanny and Freddy. And the Fanny and Freddy conservatorship is in fact keeping housing prices up. Why do you think it's not? How can you deny that? Ofcourse the market is powerfull and it's not working like they wished it would, but still prices don't go down as fast as the market would like them to go down.

As to Lehmann Brothers not getting bailed out. The Fed is keeping their gun powder dry. You act as if the worst is over, but it ain't so.

Ofcourse small banks like coutry wide and indymac were allowed to fail. That's what the banking cartell called the federal reserve was all about. Ensure that the big banks can lend recklessly without having to suffer the consequences, while the smaller banks have two choices. Don't lend recklessly and lose market share and thereby fail, or join the reckless spending and hope you don't fail or the big banks are gonna save you.

As to "not needed": I should've said that resources went into a market were there was artificial demand. The resources could've also gone into factories and enterprises or other places where they would've been far more needed for the well-being of the country.

Onc again, the worst is far from over, I think. But you can listen to the people who told us that housing prices would never ever go down, or that dotcom stocks were the place to be in 2000/2001. I rather listen to people who have made correct projections and people who are able to explain the business cycle and market symptoms with rational arguements.

[Mavdog]

prices of homes have actually risen in a few markets. seattle, austin, charlotte to name a few.

the loans that had fannie and freddie guarantees continue to have those guarantees. those loans were what is called a "qualified" loan, which means the borrower had equity in the loan, and it was less than $375K (or so, not sure of the exact #). not sure who you see as being "bailed out" on that.

the conservatorship of fannie and freddie is keeping home prices stable, because if those institutions collapsed the entire country would go thru economic convulsions. that is not keeping home prices at any artifical levels however, the market is dictating the values.

countrywide and indymac weren't banks, although they did have bank subsidiaries. the banks were sold to other banks. these cos were unregulated mortgage companies. the government did nothing to stop their demise.

if you were foolish to believe that housing prices "never go down", and "stocks never go down", you deserve what you get. history tells us that home prices DO go down, and stocks go down too.

and they have, and the government is NOT steppping in to stop this natural cycle from happening.

there is a reason we have the sec and other regulatory agencies, and that is to stop the market from getting hysterical. nothing wrong with that imo.

[Arne]

Originally Posted by Mavdog

prices of homes have actually risen in a few markets. seattle, austin, charlotte to name a few.

the loans that had fannie and freddie guarantees continue to have those guarantees. those loans were what is called a "qualified" loan, which means the borrower had equity in the loan, and it was less than $375K (or so, not sure of the exact #). not sure who you see as being "bailed out" on that.

the conservatorship of fannie and freddie is keeping home prices stable, because if those institutions collapsed the entire country would go thru economic convulsions. that is not keeping home prices at any artifical levels however, the market is dictating the values.

countrywide and indymac weren't banks, although they did have bank subsidiaries. the banks were sold to other banks. these cos were unregulated mortgage companies. the government did nothing to stop their demise.

if you were foolish to believe that housing prices "never go down", and "stocks never go down", you deserve what you get. history tells us that home prices DO go down, and stocks go down too.

and they have, and the government is NOT steppping in to stop this natural cycle from happening.

there is a reason we have the sec and other regulatory agencies, and that is to stop the market from getting hysterical. nothing wrong with that imo.

First of all, the bolded statement sums up your theory of the business cycle, I think. You chose to perfectly ignore all the arguments made about Fed having interest rates too low and Fanny and Freddy only being able to pull that shit off with the implied government guarantee.

You said the "banks were sold to other banks". Hmm, to which banks. May I say bigger banks? Ofcourse. Once again, that's the way the system is supposed to work. Restrict the competition of the member banks of the Fed and whoever is in their circles and give the bigger banks the lender of last resort that will help them socialize their loses. You completely ignored my point and showed that when educating me that the government did nothing to stop their demise. I knew that, and I told you it's part of the system.

Government intervention into Fanny Mae and Freddy Mac is keeping prices from falling faster. Am I or am I not correct?

[Mavdog]

Originally Posted by Arne

First of all, the bolded statement sums up your theory of the business cycle, I think. You chose to perfectly ignore all the arguments made about Fed having interest rates too low and Fanny and Freddy only being able to pull that shit off with the implied government guarantee.

are "interest rates too low"? you seen to state that as truth, when in fact they may be where they should be. it looks like they are going even lower, so perhaps you are wrong, they may not be low enough.

just what "shit" did freddie and fannie "pull off"? the mortgage crisis is not of these agencies doing, it is the result of poor underwriting, and fannie and freddie aren't culpable in that regard.

You said the "banks were sold to other banks". Hmm, to which banks. May I say bigger banks? Ofcourse. Once again, that's the way the system is supposed to work. Restrict the competition of the member banks of the Fed and whoever is in their circles and give the bigger banks the lender of last resort that will help them socialize their loses. You completely ignored my point and showed that when educating me that the government did nothing to stop their demise. I knew that, and I told you it's part of the system.

actually I misspoke, indymac was not sold it's in receivership.
countrywide was merged into b of a. the stockholders of countrywide approved that merger btw, not the regulators.

if you believe there is a lack of competition among banks in america, you are grossly misinformed. there are hundreds of independent banks in just dallas fort worth. many of them are single branch banks, some with less than a dozen branchs. some intersections in dallas have as many as six different bank branchs located there.

when a bank fails, they are typically sold to other solvent banks. these acquirers may be larger, they may be smaller than the insolvent bank. the key is the acquirer is solvent, not their size.

Government intervention into Fanny Mae and Freddy Mac is keeping prices from falling faster. Am I or am I not correct?

as a very simplistic statement, sure. but that is also saying that avoiding an economic collapse resulting in a depression is keeping prices from falling faster....the intervention allowed the capital markets to function, and allowed for the free market of buyers and sellers of houses to establish the current value of those houses.

[Arne]

Originally Posted by Mavdog

are "interest rates too low"? you seen to state that as truth, when in fact they may be where they should be. it looks like they are going even lower, so perhaps you are wrong, they may not be low enough.

just what "shit" did freddie and fannie "pull off"? the mortgage crisis is not of these agencies doing, it is the result of poor underwriting, and fannie and freddie aren't culpable in that regard.

The shit they were pulling off was being the buyer of last resort in the mortgadge business. They couldn't have done that if the Chinese, the big banks, etc, etc. wouldn't have bought all these mortgage backed securities, BECAUSE of the implicit government guarantee behind it. Why do you think China has invested 10% of its reserves (they do have a couple of bucks to invest, you nkow...) in Fanny and Freddy mortgage backed securities?

Interest rates do have a reason to exist:

"The natural rate of interest is the rate that equates saving and investment. The bank rate diverges from the natural rate as a result of credit expansion. When new money is injected into credit markets, the injection effects, which the Austrian theorists emphasize over price-level effects, take the form of too much investment. And actual investment in excess of desired saving, CB, constitutes what Austrian theorists call forced saving."

If you think that interest rates are too high, then I ask you where the hell should more money be invested? In mortgage backed securities? And who the hell would do that even if you put interest rates at 0% right now?

actually I misspoke, indymac was not sold it's in receivership.
countrywide was merged into b of a. the stockholders of countrywide approved that merger btw, not the regulators.

Did I ever mention government intervention into their failure? No. I already said, it's great for the system to have these guys fail, because other banks can absorb them and restrict competition even further. Again, these banks failed because they were forced to compete with the improved Fed sponsored conditions of the big banks.

if you believe there is a lack of competition among banks in america, you are grossly misinformed. there are hundreds of independent banks in just dallas fort worth. many of them are single branch banks, some with less than a dozen branchs. some intersections in dallas have as many as six different bank branchs located there.

It's the number of clients or banks they have that is important. It's the marketshare. The Fortune 500 all have their money handled by big banks that hopefully are member banks of the Federal Reserve, so that they are sure that there money is secure even if the banks screw up.

when a bank fails, they are typically sold to other solvent banks. these acquirers may be larger, they may be smaller than the insolvent bank. the key is the acquirer is solvent, not their size.

If a smaller bank manages to have enough market share and is solvent, without having joined the reckless lending, yes. But the chances are very low for that to happen.

as a very simplistic statement, sure.

Thank you for finally agreeing.

[Mavdog]

Originally Posted by Arne

The shit they were pulling off was being the buyer of last resort in the mortgadge business. They couldn't have done that if the Chinese, the big banks, etc, etc. wouldn't have bought all these mortgage backed securities, BECAUSE of the implicit government guarantee behind it. Why do you think China has invested 10% of its reserves (they do have a couple of bucks to invest, you nkow...) in Fanny and Freddy mortgage backed securities?

"buyer of last resort"? your framing is inaccurate, as if these mortgages were somehow undesirable, which is far from the truth.

they didn't buy the securities because of the implicit government guarantee, they bought them at less of a discount to other investment vehicles because of the implicit guarantee. that's a discount of 25 to 50 basis points. these securities would have sold regardless of the implicit guarantee, they just would have been priced higher.

Interest rates do have a reason to exist:

"The natural rate of interest is the rate that equates saving and investment. The bank rate diverges from the natural rate as a result of credit expansion. When new money is injected into credit markets, the injection effects, which the Austrian theorists emphasize over price-level effects, take the form of too much investment. And actual investment in excess of desired saving, CB, constitutes what Austrian theorists call forced saving."

If you think that interest rates are too high, then I ask you where the hell should more money be invested? In mortgage backed securities? And who the hell would do that even if you put interest rates at 0% right now?

reread what I said. you'll see that I never said "interest rates are too high", I said the rates look like "they may be where they should be", and then said "they may not be low enough". the fed said that today that in their opinion they are where they should be, and the market seems to agree with them.

Did I ever mention government intervention into their failure? No. I already said, it's great for the system to have these guys fail, because other banks can absorb them and restrict competition even further. Again, these banks failed because they were forced to compete with the improved Fed sponsored conditions of the big banks.

"restrict competition even further"???? you do not have a good grasp of american banking at all.
these banks failed because they made poor decisions on who they lent to and what collateral they received for those loans. that's called the free market. guess what? it's alive and well.

It's the number of clients or banks they have that is important. It's the marketshare. The Fortune 500 all have their money handled by big banks that hopefully are member banks of the Federal Reserve, so that they are sure that there money is secure even if the banks screw up.

ALL national banks in america are members of the federal reserve, and many of these fortune 500 cos have their own bank charters to handle their accounts. yes, the feds insure deposits up to $100K, an insurance policy paid for by the member banks.

as for if all the fortune 500 have ties to "big banks", there's no way to prove or disprove that statement. it's not public records.

If a smaller bank manages to have enough market share and is solvent, without having joined the reckless lending, yes. But the chances are very low for that to happen.

these smaller banks number in the many hundreds, and in fact those banks are the healthiest today BECAUSE they paid attention to the types of loans, the borrowers and the collateral for which they gave out loans. they didn't rely on a 3rd party rating agency to tell them what the collateral and risk were, they knew it themselves thru their own due diligence.

Thank you for finally agreeing.

well hell, I can say that the world is ending, and you would have to agree to that simplistic statement, as someday the world WILL end.....

[Arne]

Originally Posted by Mavdog

"buyer of last resort"? your framing is inaccurate, as if these mortgages were somehow undesirable, which is far from the truth.

they didn't buy the securities because of the implicit government guarantee, they bought them at less of a discount to other investment vehicles because of the implicit guarantee. that's a discount of 25 to 50 basis points. these securities would have sold regardless of the implicit guarantee, they just would have been priced higher.

The great thing about Fanny Mae and Freddy Mac mortgage backed securities was that they had the implicit guarantee that government would pay for them if they are actually worthess. That did encourage banks to make risky loans, because Fanny Freddy would always buy them with the money they got from China, etc., because they had this implicit guarantee.

How do you see these loans would bought up if not by Fanny and Freddy, if it wasn't for Fanny and Freddy buying them up and selling their MBS to these big institutions at practically zero risk?

these smaller banks number in the many hundreds, and in fact those banks are the healthiest today BECAUSE they paid attention to the types of loans, the borrowers and the collateral for which they gave out loans. they didn't rely on a 3rd party rating agency to tell them what the collateral and risk were, they knew it themselves thru their own due diligence.

Those banks are healthy, but did they have the market share and capital to buy Indymac? No. Bank of America has the right on them, as far as I know. It's not only about being solvent.

And yes, small banks can be solvent when they don't join the reckless spending. BUT they will lose market share and will never gain market share. So what's a competitor who has very little market share to gigantic Wall Street banks? - Not a real competitor.

Then again, these small banks didn't buy things rated by 3rd parties, because they knew they'd go bankrupt and nobody would bail them out but they did it knowing that they'd lose market share. The big banks, however, knew or assumed that they'd be bailed out and knew that the MBS that they bough from Fanny and Freddy were backed by the government.

[Arne]

P.S.: Why did Bank of America buy Meryll Lynch? I heard a pretty good idea. - They want to be too big to fail.

It gets interesting after Beck's introduction:

http://www.youtube.com/watch?v=9cLJVXuQttk

[Mavdog]

Originally Posted by Arne

The great thing about Fanny Mae and Freddy Mac mortgage backed securities was that they had the implicit guarantee that government would pay for them if they are actually worthess. That did encourage banks to make risky loans, because Fanny Freddy would always buy them with the money they got from China, etc., because they had this implicit guarantee.

the fha loans have strict guidelines..so in reality fha loans have less risk due to this limitation, and..

How do you see these loans would bought up if not by Fanny and Freddy, if it wasn't for Fanny and Freddy buying them up and selling their MBS to these big institutions at practically zero risk?

there were hundreds of $billions of non-fha loans sold as mbs, they just sold at a greater discount.

what do you think comprised all these mbs that were on the books of bear stearns and lehman, needing to be devalued, ultimately wiping out their capital and causing their demise? not fha guaranteed loans, those wouldn't need to be written down. remember, those fha loans have a guarantee to their performance.

[Arne]

1. You're basically saying that Fanny and Freddy if at all only had a minor effect on housing?
2. You're also saying that interest rates as fixed by the Fed had nothing to do with the housing mess, since it's a natural cycle to have booms and busts, right?

[Mavdog]

Originally Posted by Arne

P.S.: Why did Bank of America buy Meryll Lynch? I heard a pretty good idea. - They want to be too big to fail.

It gets interesting after Beck's introduction:

I couldn't keep up with all the inaccurate and ridiculous comments by peter schiff.

why did b of a want merrill? a retail brokerage network of 16,000 professionals, a top 5 investment banking franchise and a top tier wealth management group, all bought for about 50 cents on the dollar.

and it was done as a stock swap, so b of a was able to keep its cash.

"too big to fail"???? b of a was ALREADY the largest bank in the world!

[Arne]

Originally Posted by Mavdog

I couldn't keep up with all the inaccurate and ridiculous comments by peter schiff.

why did b of a want merrill? a retail brokerage network of 16,000 professionals, a top 5 investment banking franchise and a top tier wealth management group, all bought for about 50 cents on the dollar.

and it was done as a stock swap, so b of a was able to keep its cash.

"too big to fail"???? b of a was ALREADY the largest bank in the world!

You can claim they are ridiculous. You don't know though. Maybe time will prove him once again to be correct. Just like with a 100 dollar oil when it was 20 dollar, just like with the stock market at the end of the last millenium, just like when he told mortgage brokers that home prices would collapse. You don't know what their portfolio is worth, we can only assume. It is impossibe, however, to prove a projection inaccurate when it's made. Only time can tell.

P.S.: I read that BoA paid a 70% premium on the Merrill stock. How's that 50 cents on the dollar?

[Mavdog]

Originally Posted by Arne

1. You're basically saying that Fanny and Freddy if at all only had a minor effect on housing?

no, they have a huge affect on housing, that is why the government needed to do what they did.

they had a minimal affect on the shockwaves being felt by these financial houses, the loans in their portfolios that are the problems aren't fha loans.

2. You're also saying that interest rates as fixed by the Fed had nothing to do with the housing mess, since it's a natural cycle to have booms and busts, right?

cheap money contributed, as lower rates allows more less qualified borrowers, and also more highly leveraged borrowers, to meet the loan thresholds.

imo it was the lax lending standards and poor underwriting that allowed the mess to result.

[Arne]

Originally Posted by Mavdog

no, they have a huge affect on housing, that is why the government needed to do what they did.

they had a minimal affect on the shockwaves being felt by these financial houses, the loans in their portfolios that are the problems aren't fha loans.

Okay so the 50% of the outstanding mortgages that are secured by Fanny and Freddie are not a problem? It's parts of the other 50%

cheap money contributed, as lower rates allows more less qualified borrowers, and also more highly leveraged borrowers, to meet the loan thresholds.

imo it was the lax lending standards and poor underwriting that allowed the mess to result.

Hmm... so cheap money did allow more less qualified borrowers, but the lending standards (which are ofcourse not the same as having more less qualified borrowers) were the real problem. It seems you're confusing cause and effect here.

[92bDad]

It's great chatting with everyone...even though I know I have some Knee Jerk reaction/opinions.

Well, I am checking out for a few days...headed out to LA and San Jose on business. I will not have any Message Board time on my hands.

I'm looking forward to catching up next week.

[Arne]

AIG May Get $85 Billion U.S. Loan in Return for Majority Stake

By Hugh Son, Craig Torres and Erik Holm



Sept. 16 (Bloomberg) -- American International Group Inc., the biggest U.S. insurer by assets, has been offered an $85 billion U.S. loan in return for an 80 percent stake in the company, according to a person familiar with the situation.

The Federal Reserve was persuaded to offer the loan because of the risk that an AIG failure would threaten the stability of world financial markets, according to the person, who declined to be identified because negotiations were confidential. Efforts to find a private-sector solution failed because the company is too big and a long-term fix was needed, the person said.

The proposal would keep New York-based AIG in business, averting a collapse that could have threatened more financial companies and cost them $180 billion in losses, according to RBC Capital Markets. AIG needed the rescue to stave off a collapse after its credit ratings were cut and shares plunged 79 percent since Sept. 11.

``There's a systemic risk if AIG isn't saved,'' Benoit de Broissia, an equity analyst at Richelieu Finance in Paris, said in a Bloomberg Television interview. Richelieu has about $6.2 billion under management.

Fed spokeswoman Michelle Smith declined to comment. Peter Tulupman, a spokesman for AIG, also declined to comment. Terms of the plan were reported earlier by the New York Times.

AIG's fight to stay afloat was the latest tremor to shake the global financial industry, a day after Lehman Brothers Holdings Inc. filed for Chapter 11 bankruptcy protection and Merrill Lynch & Co. sold itself to Bank of America Corp.

``To the extent that a bridge loan or some type of liquidity provision allows AIG time to sell some assets on its balance sheet and time to maintain its investment-grade rating at A or higher, I think it's a good move,'' Bill Gross, co-chief investment officer of Newport Beach, California-based Pacific Investment Management Co., said in a Bloomberg TV interview before the announcement.

Potential Loss

Gross, the manager of the world's largest bond fund, may lose money if AIG defaults on its debts. His Pimco Total Return Fund guaranteed $760 million of debt issued by AIG as of June 30, according to a regulatory filing.

While debt holders and financial markets may be helped by the U.S. plan, AIG shareholders will lose most of their stake in the company.

Former CEO Maurice ``Hank'' Greenberg, who remains one of the company's biggest stakeholders, said the company needed a bridge loan instead of a plan that put the company under government control.

``Why would you want to wipe out shareholders when you just need a bridge loan?'' Greenberg said in an interview before the announcement. ``It doesn't make any sense.''

Greenberg, 83, is leading investors considering a proxy fight or buyout to take control of AIG. The group is also considering acquiring subsidiaries or making loans to AIG, the investors said today in a regulatory filing.

Overwhelmed

The insurer faced being overwhelmed by protection it sold investors on $441 billion of fixed-income investments, including $57.8 billion in securities tied to subprime mortgages. So- called credit-default swaps already forced $25 billion in writedowns over nine months, and cuts in AIG's credit ratings could have triggered more than $13 billion in collateral calls from debt investors who bought the coverage, according to an Aug. 6 filing from AIG, intensifying pressure on CEO Robert Willumstad to raise cash.

The swaps provided profits when the housing market prospered ``for what has now turned out to be a much greater amount of risk than anybody anticipated,'' Willumstad, 63, said during an Aug. 7 conference call.

AIG piled up net losses totaling $18.5 billion in the past three quarters on writedowns tied to the collapse of the U.S. subprime mortgage market. The insurer has units that originate, guarantee and invest in home loans.

``AIG poses a systemic risk because it's a large counterparty in the financial system,'' said Prasad Patkar, who helps manage the equivalent of $1.8 billion at Platypus Asset Management in Sydney. ``It's too big to be allowed to fail.''

-- With reporting by Kathleen Hays, Andrew Frye, Josh Fineman, Linda Sandler, Caroline Salas, Carol Massar, Linda Shen, Christine Harper and Ellzabeth Hester in New York, Rebecca Christie in Washington, Bei Hu in Hong Kong, Shani Raja in Syndey, Charlotte Kan in London and Adria Cimino in Paris. Editors: Dan Kraut, Rick Green

To contact the reporter on this story: Erik Holm in New York at eholm2@bloomberg.net; Hugh Son in New York at hson1@bloomberg.net.

Last Updated: September 16, 2008 20:19 EDT

Greatness...

[Arne]

The Fed’s Failure

by Michael S. Rozeff

The first and most important rule of speculation is to cut your losses quickly, while they are still small. In poker, this means folding when you don’t have good cards. In research and development, it means halting investment when the initial results are unpromising. In stock speculation, it means selling a purchase when it falls by 7–8 percent below a well-chosen entry level.

The first loss is the smallest, the saying goes. The Fed is violating that rule, and it is encouraging banks to violate that rule. It is doubling down on a bad hand. It is buying more stock as it falls, instead of selling out. How is it doing this? The Fed is lending more and more of its liquid government securities to client banks. In return, it is accepting their questionable and risky collateral.

The Fed is making three kinds of bad loans. First, the Fed is lending to banks that are in bad shape and need the funds badly. They are simply bad risks. If the Fed were a profit-maximizing banker, it would not make such loans, throwing good money after bad. The Fed is simply gambling (not wisely speculating) that in time these banks will recover. The gamble is huge; the amounts it is lending are a huge portion of its assets.

Second, the Fed is lending to banks that have agreed to take over some other failing financial institution, like JP Morgan Chase taking over Bear Stearns and Bank of America taking over Merrill Lynch. These buyouts and these loans are hastily arranged affairs. The buying bank doesn’t really know what liabilities it is absorbing, and neither does the Fed. More often than not, mergers do not work out at all well. The costs of bringing two organizations together often are far greater than the buyers imagined.

These mergers will end up weakening the stronger bank as it absorbs the corpse of the weaker bank. No prudent banker would make such large loans on such short notice. The Fed is not a prudent banker.

Third, the Fed is lending to banks that have themselves agreed (under Fed pressure) to make loans to such failing giants as AIG. The Fed then has an indirect stake in making loans to a very risky enterprise like AIG. Again, both the lending banks and the Fed weaken themselves by making these loans that are supposed to shore up and save a failing institution.

We have a series of Titanics in these failing financial businesses, and their rescuers are not in much better off condition. They all employed too much leverage. They all made unsound investments. They are all sinking. Now, the Fed attempts to keep them going and/or prevent their outright bankruptcy by lending out its own high-grade securities. And the banks it is lending to have problems all their own to boot!

The losses do not disappear by these maneuvers. Perhaps they are submerged for a time within watered down balance sheets, but they will bob up and surface later.

The Fed is prolonging the credit bust. It is also weakening itself by making such questionable loans to risky deals upon collateral whose value is probably only a fraction of par.

What is going through the minds of the Fed’s governors? Fed Chairman Bernanke says of recent steps that they "are intended to mitigate the potential risks and disruptions to markets."

In other words, the Fed is trying to lessen the price declines in asset markets. And its preferred method is itself to make loans and have its client banks make loans to failing banks and other financial institutions.

There are a number of cogent reasons why the Fed will fail in this attempt to stem price declines in such markets as stock markets, preferred stock markets, and corporate bond markets.

First off, the Fed is speculating against the market. If Merrill Lynch stock is worth $10 a share and not $60, it is because the cash flows of Merrill that come from its assets can only produce a cash return that justifies a $10 price. The assets are able to produce a cash flow such that, after paying a return to the bondholders, the stock’s price is only worth $10 in view of that net cash flow.

Lending Merrill more money will not create value for the stockholders unless that money can be put to use by buying assets that earn returns in excess of the required return on Merrill’s capital. But if Merrill actually possessed such good investment projects, it would be able to borrow money or issue stock and get capital based on the merits of those investments. The fact that the stock has sold off drastically is because it does not have such projects. It is a sign that investors do not want to provide Merrill with more capital.

In making its loans, the Fed is basically pitting its judgments of value against the market’s. The evidence of such past attempts, such as in currency markets, is one-sided. Central bankers do not know more about valuation than markets know. If that is so, then no matter how much the Fed lends to a Merrill or a bank whose stock has declined greatly, the loans cannot shore up the stock price. They can only keep the patient alive and substitute the Fed’s ownership for the ownership of investors in the market.

Secondly, the Fed is only one player in the market. The markets are in the aggregate much larger than any single player, including a large one like the Fed.

There was a time when J.P. Morgan could place a bid under U.S. Steel and stem a stock market decline. At that time, people knew that Morgan was risking his own capital, and so they interpreted his buying as a positive signal. But even then, speculators understood that perhaps Mr. Morgan was liquidating other issues under cover of strength in Steel.

The Fed has no such credibility when it makes loans. The Fed governors are not risking their own money, and they have a backup which is an open checkbook to create high-powered money.

When the Fed steps up to bail out a failing bank, it is taken, not as a sign that the bank is worth more than what the market thinks, but as a sign that the Fed is afraid that prices will fall further; for that is exactly what Bernanke has himself said. Indeed, one institutional investor said of the Fed’s moves: "There is little doubt that the Fed believes systemic risk is coming closer to really landing on shore."

Each time that the Fed makes a move to shore up the system or keep it "orderly," it has the opposite effect of what a Morgan could do. It is interpreted as a sign of the Fed’s negative expectations.

Each time that the Fed raises the ante, it communicates more and more desperation. In this latest Lehman episode, the Fed will for the first time in its history accept stocks as collateral. The Fed in all likelihood has already accepted a good deal of very low-grade mortgage collateral. From that viewpoint, accepting stock collateral is not a big stretch. But there is an important difference. The stock collateral has quoted markets. Will the Fed now follow the rules and require maintenance margins and issue margin calls if the stocks decline in price?

In past bear markets, institutions that are pressed often sell stocks to raise liquid capital. If stocks are held off the market, will this stem their price declines? They will not, because the stock prices are determined by the cash returns that the assets can produce. If the stocks are locked up in the Fed vaults rather than traded, the main effect may be to make markets less liquid.

The day is coming closer when the Fed is out of securities to lend. At that point, its only tool will be to print money if it wants to bet against the financial markets. Helicopter Ben will have to gas up and learn how to fly. But since the Fed’s paper is not real capital, this will do nothing to augment value in the capital markets.

Value creation induces the creation of credit when lenders believe that a value-creator has or can create assets that have returns that warrant loans, but credit creation itself does not create value. The Fed cannot create value. Causation runs from sound assets to sound credit. Causation does not run from credit creation to sound assets.

Judging from price declines that have already occurred, many more bank failures lie ahead. More large banks and important regional banks will fail. The Federal Deposit Insurance Fund will quickly be depleted. The Fed will be helpless to address the problems. Its moves to date already show how ineffectual it is.

As with Fannie Mae and Freddie Mac, so with the rising tide of failures to come. The Congress and the Treasury will be directly involved in their resolution. This prospect is a fearful one. There is no telling what schemes legislators will propose and pass in the face of widespread bank and financial institution failures.

September 17, 2008

Michael S. Rozeff [send him mail] is a retired Professor of Finance living in East Amherst, New York

http://www.lewrockwell.com/rozeff/rozeff220.html

[Arne]

Nightmare on Wall Street
by Gary North


These words appeared at the bottom of the screen for the entire morning segment on the stock market in the opening few minutes of The Today Show on Monday morning, September 15. This was the message conveyed to millions of housewives 80 minutes before the New York Stock Exchange was scheduled to open. The words were entirely appropriate. By the end of the day, the Dow was down by over 500, and the S&P 500 was down by over 50.
At long last, the media are scared. I watched CNBC in the afternoon. I tuned in to see the looks on their perma-bull faces. They were visibly scared. I don't blame them.
Anyone who has read what I have been writing since last November knew this was coming. On November 5, 2007, I told subscribers to my Website to short the stock market: the Standard & Poor's 500. The index was at 1500, down from 1550 a month earlier. It is now under 1200. It lost over 50 points in one day. Those subscribers who took my advice have done very well, and I think they are going to do a lot better as the markets continue to fall.
But the experts did not know. The Today Show brought on the usual in-house experts from CNBC. These experts were Money Honey (Maria Bartiromo) and Mad Money (Jim Cramer). Both of them assured viewers that this is all temporary, that there is no major problem, that it will soon be a buying opportunity, the stock market will recover, yada yada yada.
This is what they have been saying, month after month, all year, as the nightmare on Wall Street has unfolded. This has been a nightmare ever since last October. Down, down, down have gone the stock indexes, but especially the financial stocks.
WEEKEND BAILOUTS
Lehman Brothers Holdings has gone bankrupt. Here is a firm that was founded in 1850. It survived the Civil War and the Great Depression. It did not survive the current breakdown.
Anyone who thinks this crisis is some minor affair is not paying attention.
On Sunday night, September 14, the attempted bailout by ten major financial firms and banks fell apart when Barclays Bank said "no deal" to the request by Treasury Secretary Paulson that they each pony up $7 billion to bail out Lehman. That decision certainly showed wisdom on the part of Barclays.
Less wisdom was shown by Bank of America, which agreed to buy Merrill Lynch. On Monday morning, Standard & Poor's, the credit rating agency, downgraded Bank of America's bond rating to AA–, down from AA. This means that Bank of America will have to pay higher interest to creditors. S&P announced that there may be another downgrading. Why did S&P do this? Because of doubts about Merrill.
Merrill was one of the ten firms called together over the weekend by Secretary Paulson. As to how Merrill was going to pony up the $7 billion on Monday morning, when it did not even survive as a separate firm on Monday morning, will be one of those questions that curious historians of 2008's nightmare on Wall Street may want to chat about.
What the weekend showed is that the Treasury Secretary has declining influence. He spent the whole weekend trying to get a deal put together to save Lehman, and it fell apart at the last minute.
On The Today Show, there were scenes of Lehman employees walking out the door, carrying boxes of possessions or pulling boxes behind them on what appeared to be luggage carts.
Lehman is in the hole $613 billion. It has assets of $639 billion. It will have to sell these assets to pay creditors. This will put downward pressure on the prices of these assets. Some of them are illiquid.
What do I mean by liquidity? This:
1. You can sell rapidly.
2. You can sell without a discount.
3. You can sell without advertising costs.
4. You can sell with low transaction fees.
The problem is this: the investing world does not know how many of Lehman's assets are illiquid. When Lehman sells in order to pay creditors, this will put downward pressure on all the markets, but especially the illiquid markets.
When it does, the dominoes will continue to fall. There will be more bankruptcies, as Money Honey said on The Today Show.
In March, Bear Stearns was saved only by the weekend pressure of the Federal Reserve System on J.P. Morgan, which bought the shares at pennies on the dollar.
On Sunday, September 7, the Federal government, in the person of Secretary Paulson, announced that the Federal government was taking over the mortgage market in the United States. Over the past year, Fannie Mae and Freddie Mac have packaged 75% of all mortgage loans in the United States. The so-called "conservatorship" is in fact nationalization.
Congress did not protest on Monday, September 8. The public did not protest. This was a unilateral announcement by a lame-duck Treasury Secretary, and everybody in authority accepted it.
We have lost the free market in mortgages in the United States, and nobody blinked.
It's falling apart. The entire capital structure is being hit, just as Austrian economic theory said it would.

"EVERTHING IS JES' FINE"
One of The Today Show reporters said that Lehman's employees were disappointed because they had been told by senior management everything was all right.
Of course that is what senior management said. All senior managements lie in a crisis. Everyone knows senior managements lie – except their employees. This is the Enron factor. Senior managements lie about imminent bankruptcy in the same way that politicians lie about virtually everything. If they did not lie about the imminent bankruptcy of their firms, shareholders would immediately sell the stock, which would immediately bankrupt the firms. Senior managers hope for the best. They hope for a miracle. They hope against hope.
Here were highly sophisticated employees who had spent a year watching the financial markets disintegrate, and these old hands sat in their offices, selling people investments that were doomed to go down, on the assumption that nobody was lying to them at the top. Talk about naïve!
There are people who take seriously the recommendations of brokers whose jobs are so close to oblivion that they are unlikely to have a career in the industry in a month or two. Yet the poor saps listen to these people, take their advice, and lose money.
Why would anybody believe a stock broker today? Merrill Lynch, which was bullish on America, no longer exists as an independent organization today. It took a bailout by Bank of America to keep the organization alive. Presumably, you know better if you have been reading my warnings for over a year. Presumably, you are completely out of the stock market. If you are wise, you shorted the market no later than last November. But if you are still in the stock market, then you are in it because you have been listening to the mainstream media.
Now, finally, the mainstream media are frightened. This fear will spread to the general public.
Think of the 24,000 ex-workers at ex-Lehman. They work in New York City. They are in debt up to their ears. They are now unemployed. They will probably lose their homes, if they own their homes. They will not find a job in financial services.
The entire financial sector in New York City is in contraction mode. In 2007, 140,000 jobs were lost in the nation's financial sector in the first ten months. Over 40,000 of these were in New York City. In a report last November, we read the following.
Broker-dealers have been active in reducing their workforces. Morgan Stanley (900), Bear Stearns (310), Lehman Brothers (1,200), and Credit Suisse (320) announced cuts in residential mortgages, banking and leveraged finance. Those institutions with significant losses, particularly UBS (1,500), Citigroup (15,000), and Bank of America (3,000), are trimming their workforces even further and issuing warnings that more layoffs may be ahead. On October 26, Reuters reported that Merrill Lynch is expected to issue pink slips after a third-quarter net loss fueled by mortgage and leverage loan losses.
Yet on Friday afternoon, September 12, there were 24,000 workers at Lehman who were still on the job, still hoping for the best. They believed senior management. These people were slow learners.
In late March, just after the Bear Stearns fiasco, London's Guardian reported on the estimate that 20,000 jobs on Wall Street would disappear over the next two years.
In short, the experts in the financial industry were blind to the magnitude of what was about to happen. They could not see that the financial sector was about to get smashed.
People hope for the best. They hate to face unpleasant reality. They stay on the job when it is clear that the job is terminal. This is human nature. This is why people who own stocks and mutual funds still hold them, and still take Jim Cramer seriously.

BERNANKE TO THE RESCUE!
The Federal Reserve is in panic mode. On Sunday, it announced another lowering of its standards for making loans. It used the usual bankers' jargon. The following means "the markets are falling apart. The collateral on loans is declining in value. We are taking steps to loan money on sows' ears at silk purse interest rates."
"In close collaboration with the Treasury and the Securities and Exchange Commission, we have been in ongoing discussions with market participants, including through the weekend, to identify potential market vulnerabilities in the wake of an unwinding of a major financial institution and to consider appropriate official sector and private sector responses," said Federal Reserve Board Chairman Ben S. Bernanke. "The steps we are announcing today, along with significant commitments from the private sector, are intended to mitigate the potential risks and disruptions to markets."
I like this phrase: "potential market vulnerabilities." It means "capital market collapse."
"We have been and remain in close contact with other U.S. and international regulators, supervisory authorities, and central banks to monitor and share information on conditions in financial markets and firms around the world," Chairman Bernanke said.
This means: "Things are unraveling so fast that the government's entire regulatory structure is trying to figure out what is happening. So far, nobody has a clue. But we're working on it."
The collateral eligible to be pledged at the Primary Dealer Credit Facility (PDCF) has been broadened to closely match the types of collateral that can be pledged in the tri-party repo systems of the two major clearing banks. Previously, PDCF collateral had been limited to investment-grade debt securities.
The collateral for the Term Securities Lending Facility (TSLF) also has been expanded; eligible collateral for Schedule 2 auctions will now include all investment-grade debt securities. Previously, only Treasury securities, agency securities, and AAA-rated mortgage-backed and asset-backed securities could be pledged.
Translation: "We are willing to loan freshly created money to buy just about anything the cat brings in."
These changes represent a significant broadening in the collateral accepted under both programs and should enhance the effectiveness of these facilities in supporting the liquidity of primary dealers and financial markets more generally.


AIG ON THEIR FACES
AIG is the largest insurance company in America. Most Wall Street companies are connected to AIG in one way or another.
AIG has the signs of a company in its terminal stage.
Jim Cramer made one point that I agree with entirely. He said that the real threat to the economy now is AIG. This giant insurance company needed an infusion of capital something in the range of $40 billion. That's what Cramer said.
Before the market closed, AIG needed $75 billion.
If it goes under, who is large enough to bail it out? If the Treasury Secretary could not put together a deal to save Lehman, how could he reasonably expect to put together a deal to save anything as big as AIG?
Cramer mentioned the possibility that the Federal Reserve would have to intervene. He was not alone. By late afternoon, when the Dow Jones Industrial Average had fallen over 400 points, CNBC interviewed two experts. One looked grim. He spoke of the need to preserve confidence in trying times like now. The other one agreed, but said the FED may not intervene.
When the stock market opened on September 15, AIG's share price was down 41%, at $7. Last October, it was at $70. In early August, it was at $30. It was under $6 by the afternoon.
This is a collapse. When a stock falls 90%, a financial company is as good as finished. Potential clients will not become clients. Old clients will flee.
By the end of the day, the Federal government had asked the last two surviving investment banks, J. P. Morgan and Goldman Sachs, to intervene and put together a $75 billion package to bail out AIG.
Money Honey by 3:30 p.m. announced that AIG had lost $19 billion in capital in less than one trading day. The market value of the stock was $14 billion. In less than one day, it lost over half its value. The share price declined from $12 to under $6.
The guy she was interviewing, Win Smith, said AIG is too important to fail. "AIG has to survive." When some harried looking guy on camera who looks bleak says that an outfit "really has to survive," it's as good as gone. He said, "It must go forward." Don't bank on it. Who is Mr. Smith? He is the former chairman of Merrill Lynch International. He said everything is fine at Merrill. The merger with Bank of America is great.
His former employer is gone. This is great, he says. Up is down. Black is white. There is good news ahead.
The government is grasping at straws. There will be no bailout for private firms without government guarantees against losses. AIG is a huge pile of liabilities. Who wants them?
The experts did not see this coming. But they want us to believe them when they tell us that the worst is behind us, so don't sell your shares, don't panic, yada yada yada.
An insurance company holds lots of long-term debt. This means bonds and mortgages. Lots and lots of mortgages. These are liquid in normal times, but in a panic sell-off, they are not.
What happens if AIG declares bankruptcy and is forced to unload its portfolio rapidly? Who will buy the toxic waste that has led to the company's precarious position?

CONCLUSION
The experts are scared. I could see it as they faced the cameras. They are seeing a meltdown. Two icons of the industry died over the weekend. A third is about to die.
Then there is Washington Mutual. It is close to the end. Its stock went under $2 yesterday. It is almost a penny stock: below $1. The 8th largest bank in the nation! It's going to get much, much worse.
Stay tuned.
September 17, 2008
Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible

http://www.lewrockwell.com/north/north653.html

[Arne]

Great piece on the candidates understanding of the economy:

McCain and the Markets

It's easy to see how a 21-year member of the U.S. Senate like John McCain, or even a Senate rookie, could regard Wall Street as a mysterious and distant planet. Indeed, on the evidence of the past few days, Senators McCain and Obama would appear to know more about Mars than they do about financial markets.

On Monday as these markets and the broader world tried to absorb the news about Lehman, Merrill Lynch and AIG, our two Presidential candidates spent the day trading punches over the meaning of the "fundamentals." After Senator McCain suggested that the "fundamentals of the economy are strong," Senator Obama mocked Mr. McCain's view of "the fundamentals."

We'll leave it to the debates to elicit just what each Senator regards as the "economic fundamentals" in a $13 trillion economy, but for our money the notable thing about the exchange was how fast John McCain let his opponent's sarcasm push him off message, such as it is.

One whiff from Barack Obama about "the mountain in Sedona where he lives," and by day's end Senator McCain was ranting about "corruption" and how he was going to "reform the way that Wall Street does business." Yesterday Senator McCain's inner populist had cooled enough to admit the existence of "honest people on Wall Street," but it still sounded as if this week's version of the McCain Presidency would be more about restructuring private financial markets he doesn't understand than fixing the Washington he knows.

Flip-flopping between assertions that the economy is fundamentally strong and populist promises to rip apart its financial plumbing creates confusion about what exactly Mr. McCain really thinks. His opponent, meanwhile, stayed on message, explaining Monday's events with the sort of dogged persistence reflected in the headline across the front page of yesterday's New York Times: "Wall St. in Worst Loss Since '01 Despite Reassurances by Bush."

Likening Monday's events to "the Great Depression," Senator Obama explained them by restating his campaign's core economic idea -- that what he calls the McCain-Bush "economic philosophy" is behind all these problems. His solution, laid out in detail in the Denver acceptance speech, is higher taxes on what he said Monday were "those with the most" and a return to the paternalist economic policies of the 1960s. In short, we become France, but with a higher corporate tax rate.

The problem with Senator McCain's blustery Wall Street broadsides is that they don't offer an explanation for what is happening. How is it supposed to reassure people to hear Mr. McCain intone, as he did yesterday, the words "derivatives" and "credit default swaps" as if it's the first time he'd ever heard of them?

Agree with it or not, Senator Obama is identifying a problem and a path toward solution. Mr. McCain needs his own narrative for how we arrived at this point. If he wants to run as the populist protector of the middle class, he has ample targets.

He could start with the perils of "easy money." The Federal Reserve's low interest-rate policies -- virtually free money -- created excesses in credit expansion that led to what all now call a credit bubble. That bubble has been bursting, from Main Street to Wall Street.

As well, it eroded the value of the "greenback," as Rudy Giuliani noted in his barn-burner convention speech. Every American knows something's gone wrong when the dollar's value drops way below currencies in Europe or Canada. True to his campaign theme, Senator McCain might ask since when has dollar "weakness" become an American virtue? Barack Obama won't do it, so Senator McCain has a chance to step forward and defend the purchasing power of middle-class budgets against inflation in the prices they pay every trip to the supermarket or gas station.

We'd also bet that most voters have a better understanding of the excesses that forced Washington to take over Fannie Mae and Freddie Mac than what happened to Lehman and AIG. Greed is a big subject, and Senator McCain should train his message on the variety he understands best, in Washington.

Finally, Senator McCain should bring his worthy tax-cut plan out of hiding, and if anything refine it for immediate impact with an across-the-board income tax reduction. He then should ask, since when, as Senator Obama's proposals suggest, have we been able to tax our way out of economic trouble? If the U.S. economy is teetering on the edge of a recession or downturn, how has it become bad economics to propose a broad-based tax cut to revive the economy?

Wall Street right now is passing through a searing dose of market discipline and correction for its mistakes. After Monday's 504-point plummet in the Dow Jones index, it gained back 141 points yesterday. Barack Obama thinks he can win by explaining all this in terms of the Bush "philosophy." Mr. McCain is going to need a better reply than agreeing with his opponent about "greed" and Wall Street.

[Arne]

Are Fannie and Freddie Too Big to Fail?

Daily Article by Frank Shostak | Posted on 9/17/2008

On Sunday, September 7, 2008, the US government seized control of mortgage finance companies Fannie Mae and Freddie Mac. According to the government's statement, the financial health of both Fannie and Freddie (FF) had deteriorated to such an extent that it could have posed a serious threat to the US economy.
Congress established the FF in order to provide support for the housing market by keeping money flowing in the mortgage market. (Fannie Mae was established in 1938 as part of Franklin Delano Roosevelt's New Deal; Freddie Mac was established in 1970.)
The FF market share of all new mortgages reached over 80% early this year. From this one can infer that a deterioration in FF financial health, which undermines their ability to keep the flow of money going to the mortgage market, is likely to hurt the housing market and the economy. Hence most experts have concluded that the seizure of the FF by the government was a responsible act, one which could restart the flow of money to the mortgage market, reviving the housing market and in turn the rest of the economy.

How Fannie and Freddie Keep the Mortgage Market Going

The key to FF operations is the buying of home loans from mortgage originators such as banks. The FF then bundle the loans they purchase into mortgage-backed securities (MBS), which are sold, with a guarantee of payment to investors. (The FF guarantee that the principal and interest on the underlying loan will be paid back regardless of whether the borrower actually repays.) The FF makes money by charging a guarantee fee on loans that it has purchased and securitized into MBS. By buying mortgages and repackaging the loans for resale via MBS, or by owning mortgages outright, the FF have provided banks and other financial institutions with fresh money to make new home loans.
Due to an implied government guarantee, the FF were able to raise funds relatively cheaply by selling their debt to investors. This in turn enabled them to pay higher prices to the originators of mortgages than potential competitors could pay. On average, between January 2000 and August 2008, the yield on the 10-year Fannie Mae debt was 0.589% above the yield on the 10-year Treasury debt. In contrast, the yield spread between AAA corporate debt and the 10-year Treasury debt stood at 1.446%. This means that on average, from January 2000 to August 2008, the Fannie cost of funding was below the AAA corporate by 0.857%.
Given the fact that the debt issued by FF was considered almost as good as Treasury debt, they could attract money from around the world. In 2007, foreign holdings of US Government Sponsored Enterprise debt (the FF are part of the GSE) stood at $1.304 trillion — an increase of 33% from the previous year and an increase of 165% from 2002. (Note that in 2007, China's investment in the GSE debt comprised 29%, Japan's 17.5% and Russia's 5.8%.)
As a result, the FF have become the dominant force in the housing market. The combined assets of the FF jumped from $160.2 billion in Q1 1990 to $1.77 trillion by Q2 2008. The two companies own or guarantee $5.4 trillion in outstanding home-mortgage debt.
The Real-Estate-Market Crisis and the Demise of Fannie and Freddie
In response to a fall in home prices, coupled with a growing number of home foreclosures, the FF have been required to write off some of the MBS held on their balance sheets. They also had to pay out on guaranteed mortgages that defaulted. As a result the FF have reported nearly $14 billion in losses in the last four quarters. The yearly rate of growth of the FF net worth fell to negative 17.3% in Q2 from negative 23.2% in the previous quarter. Net worth as percentage of assets fell to 3.1% in Q2 from 3.4% in Q1.
As the housing market continued to deteriorate, it started to put pressure on FF stock prices. After increasing to 35.8% in June 2007, the yearly rate of growth of the Fannie stock price fell to negative 89.6% by the end of August this year. Year on year, the price of Freddie's stock fell by 92.7% in August after falling by 85.7% in July. (Note that in May last year, the yearly rate of growth stood at 11.2%.) This made it difficult for the FF to raise capital. The deterioration in their solvency raised the risk that the FF would not be able to secure funding through selling their debt to large buyers such as various central banks. As a result, the prospects for the FF to buy mortgages from lenders and supply fresh funds to the mortgage market were severely hampered.

Will the US Treasury Plan Cause Banks to Lift Mortgage Lending?

So how then can the government seizure of FF fix the problem? According to the plan, the government will inject up to $200 billion over time into the FF and it will also engage in the active buying of MBS from various financial institutions that are currently trying to get rid of these assets. By buying MBS, the Treasury aims at pushing their prices higher and arresting the asset-price deflation.
Also, by injecting money into the FF, government officials hope to restart the flow of money to the mortgage market and bring things to normality. By "normality," they mean that the FF can start buying mortgages from the banks and, after bundling them into the MBS, sell them to the market as before. Treasury officials and various experts are hoping that this will lift home prices and, in turn, lay the foundation for the improvement in consumers' wealth. Subsequently, this will revive the pace of economic activity, so it is held. (Remember that the increase in mortgage lending results in more money being directed to the housing market. This means more money per house, i.e., higher house prices.)
But why should banks consider lifting the pace of mortgage lending? According to a Federal Reserve July survey of loan officers, in excess of 80% of banks have reported that they have tightened their lending standards on residential mortgages. In the previous survey, this figure stood at 72%. Observe that in the July survey last year, the figure stood at 37%. In August, the yearly rate of growth of commercial bank home loans stood at negative 2.2% after being negative at 1.6% in July. This was the third consecutive monthly decline in home loans by commercial banks.
At present, the major concern of most US banks is to improve their net worth, i.e., to strengthen their solvency. This means that the volume of lending is not going to increase if the quality of borrowers does not meet the more stringent standards. According to the Federal Deposit Insurance Corporation (FDIC), commercial banks' and savings institutions' net worth fell by $10 billion from Q1 to Q2. This was the first decline since the data were made available in Q2 2000.
Also, it is questionable that various investors who are at present trying to dispose of MBS would all of a sudden welcome them back into their investment portfolios. We suggest that the FF will have difficulty finding willing buyers of MBS. However, one could argue here that, since the US government guarantees MBS, investors might find them attractive — after all, it is held, the US government cannot default on their debts. From this perspective, one may conclude that the US government plan to take over Fannie and Freddie is a great idea and might work. (Most experts, including the Fed Chairman, are of the view that this is a great plan.)
Confusing Capital with Money
It seems that most experts are confusing capital with money. Treasury officials and Fed policy makers give the impression that they have a hidden pool of resources that can be employed in emergency cases. This is not the case. Neither the Treasury nor the Fed has any real resources as such. All that they can do is redistribute the existent wealth by means of taxes or by means of printing money. (Remember that it is real savings that makes real economic growth possible and not money.)
The act of real wealth redistribution can only weaken wealth generators and make things much worse. Pushing more money into the FF cannot set in motion an increase in lending if the pool of real savings is under pressure. After all, the essence of credit is not lending money as such but lending real stuff. Lending amounts to a transfer of real savings from a lender to a borrower by means of the medium of exchange, i.e., money.
The existence of banks enhances the use of real savings. By fulfilling the role of middleman, banks make it easier for a lender to find a borrower. When a bank lends money, it in fact provides the borrower with the medium of exchange that can be employed to secure real stuff that is required to maintain people's lives and well-being. It is therefore futile to urge banks to lend more if real savings are not there. Likewise, it doesn't make much sense to suggest that the Treasury or the Fed could somehow replace nonexistent real savings. Again all that such actions will produce is the depletion of the existent pool of real savings.
The guarantee that the Treasury is going to assume for the mortgages could be very costly to the taxpayer if the housing-market slump continues. We suggest that if the pool of real savings is declining, then the real economy will follow suit irrespective of various plans by the Treasury and the Fed. In these conditions, even if banks follow the Treasury plan and renew lending, this would be an exercise in futility. A falling economy and decreasing real incomes will reduce individuals' ability to service their debt. Consequently, the government (i.e., the taxpayer) will have to foot the bill.
However, we suggest that, if the pool of real savings is falling, the banks are likely to curtail their lending as a result of a diminished number of viable borrowers. Now, if the pool of real savings is still OK then there is no need for the Treasury plan. The growing pool of real savings will fix the problem.

The Fallacy of "Too Big to Fail"

Most experts are in total agreement that the government seizure of the FF was a necessary act since it has most likely averted a massive economic disaster not only in the United States but worldwide. It is held that, if the FF were allowed to go belly up, this could have inflicted heavy losses on foreign investors in FF debt, which, it is held, could also have eroded foreigners' willingness to invest in US government debt.
The view that some institutions are far too big to be allowed to go under is another fallacy. According to the popular way of thinking, if a large institution is allowed to go under, this could cause severe damage to the economy, since the failure of a large institution would generate large disruptive shocks. Since everything in an economy is interrelated, this means that a major shock could end up in a massive disaster.
In a market economy, a business that reaches the state of bankruptcy is most likely pursuing activities that do not contribute to real wealth but rather squander wealth, i.e., activities that make losses. Since such activities cannot support themselves, it means that real savings must be taken away from activities that do generate real wealth.
The longer a losing activity is allowed to stay alive, the more damage is being inflicted on real wealth generators. So, on the contrary, the liquidation of a losing activity cannot cause more damage; rather, it is going to arrest the damage inflicted on wealth generators. Once the losing activity is gone, the wealth generators with more real savings at their disposal can start expanding wealth-generating activities and lay the foundation for healthy economic growth.
The proponents of the "too large to fail" argument maintain that allowing a large institution to fail will lead to a sharp increase in unemployment and unacceptable human suffering. This is true. However, the reason for the hardship is not a loss of jobs as such but the erosion of the pool of real savings. The erosion of the pool means that there is not enough funding to support various economically nonviable activities. Allowing such activities to stay alive only weakens the pool of real savings further and leads to the further erosion of people's real incomes and makes things much worse. Furthermore, activities of a large entity absorb in absolute terms more scarce savings than a smaller entity, both directly and indirectly. We can infer from this that a large misallocated business is too big to be kept alive rather than too big to be allowed to fail, as the popular thinking has it.
The argument that the government seizure of the FF prevented the downgrading of US Treasury debt by foreigners is suspect. The key factor that has been providing the high rating to US government debt is the perception that the US economy is still very wealthy. Every investor implicitly or explicitly holds that, without support from private-sector wealth, US Treasury debt would have been worthless.
As long as the economy still generates wealth, the government debt will be considered safe. Once the pool of wealth starts to shrink, foreign buyers of US government debt are likely to abandon the sinking ship, irrespective of government "rescue" plans. If the US pool of real savings is falling and the housing market remains depressed, then this will result in the US Treasury incurring large losses in order to maintain so-called credibility, i.e., by not allowing the FF to go under. Needless to say, this is likely to further undermine the pool of real savings and the process of wealth formation. We suggest that a less wealthy US economy is going to hurt all other economies through the channel of international trade.

Allow the Market to Fix the Current Credit-Market Crisis

An alternative solution is to allow the FF to go belly up and allow the market to allocate in the best way scarce real savings. The free market will eliminate nonproductive, wealth-consuming activities and promote wealth-generating activities. The fact that Fannie and Freddie have reached the stage of bankruptcy is the manifestation of a severe misallocation of scarce savings. (In addition to being able to secure cheap money, the FF was given a boost by the extreme loose-interest-rate stance of the Fed between January 2001 and June 2004.)
Allowing the FF access to cheap money has resulted in far too many houses being built, relative to peoples' ability to fund them. This misallocation has robbed the wealth producers of real savings and has impaired their ability to generate real wealth and promote true real economic growth (please don't confuse it with the GDP rate of growth).
Again, allowing various misallocated structures to go under will stop the bleeding of wealth generators. (Note again that the misallocated structures must be funded all the time. This means that wealth generators will have less real funding than they could have had at their disposal as long as these structures are allowed to exist.)
The US government and the Fed could learn from the Japanese experience: schemes to fix the economy don't work if the pool of real savings is not there. In order to lift banks' lending between 2001 and 2003, the Bank of Japan (BOJ) had been aggressively pumping money into the financial system. The average rate of growth of monetary pumping, as depicted by the bank holdings of balances at the BOJ, had increased by 93% during that period. In April 2002, the yearly rate of growth stood at 293%. Yet bank loans had continued to fall. The average yearly rate of growth of loans from 2001 to 2003 stood at negative 4.5%.

Conclusion

We suggest that the seizure of Fannie Mae and Freddie Mac (FF) by the government cannot help the housing market or the economy. Most people hold the mistaken view that the government has extra real resources that can be used in emergencies. This is erroneous. The government is not a wealth generator; it can only consume and redistribute real wealth. What is needed to revive the economy is a growing pool of real savings.
Neither the US Treasury nor the US central bank can create real savings. In order to keep the failing FF going, the taxpayers will be forced to foot the bill. This means a further squandering of the already depleted pool of real savings. Only wealth generators can revive the economy by accumulating enough real capital. In this regard, no government or central-bank policies can replace wealth generators.
The only way wealth generators can act effectively is when they are not disturbed, i.e., in a free-market environment. The sooner the government allows them to move ahead, the sooner we will have economic improvement. Any government or central-bank policies that are intended to improve on the free market — in particular during difficult economic times — are likely to make things much worse and prolong the economic crisis.

Frank Shostak is an adjunct scholar of the Mises Institute and a frequent contributor to Mises.org. He is chief economist of M.F. Global.

http://mises.org/story/3110

[Arne]

The Fed obliterates the Constitution

Posted by Michael S. Rozeff at September 17, 2008 07:38 AM

The Fed with AIG has bypassed bankruptcy proceedings and made itself the presider over liquidations, plus it has taken control of the company with the loan. In essence, the Fed is doing the Paulson Plan and then some. It is replacing even the Resolution Trust type of workout. The Fed is gaining the power and control that the Paulson Plan envisaged and then some!

Where is Congress, I have been asked by Gary North. Excellent question. Congress is actually the elected government.

We now have UNELECTED government in action. The Fed's actions are as serious a blow to the Constitution as any other serious blow in the past. They rank up there with the NRA and with the Supreme Court making a farmer's wheat crop into interstate commerce.

When Washington Mutual goes, it absorbs almost all of the FDIC insurance fund. Then Congress may awake because certainly the Fed and/or the Treasury will have to enter the lists again.

http://www.lewrockwell.com/blog/lewr...es/022915.html

[Arne]

Haha, Jon Steward about Hank Paulson:

http://www.thedailyshow.com/video/in...-of-the-Titans

On Palin, Biden, Obama, McCain:

http://www.thedailyshow.com/video/in...es-generic-off

[aquaadverse]

While someone was probably interviewing travel agents for a campaign run:

http://hotair.com/archives/2008/09/1...e-mac-in-2005/

[Arne]

Comrade Bernanke Does it Again


By nationalizing nearly 80% of AIG for $85 billion, the Fed is doing a lot more than simply flushing taxpayer money down the toilet. The greater wrong is allowing the agency that has the power to print money to take control of a private enterprise, especially without the approval of the company’s shareholders. The move represents the largest lurch toward socialism that this country has ever seen, and signals the end of the vibrancy of America’s once vaunted free market economy. Since there is no limit to the amount of money the Fed can create, there is no limit to the number of assets they can acquire.

The “line in the sand” that the Government seemed to draw by refusing to bail out Lehman Brothers was erased in just two days by the very next wave of financial panic.

While Fannie and Freddie were arguably quasi-government agencies that deserved special protection, no such status exists with AIG. Where does the Fed get the authority to use the money it prints to take over private companies? Congress never gave such authority and, even if it had, it would be unconstitutional, as Congress itself has no such authority to delegate. What about the shareholders? Why didn’t they get to vote on this acquisition? Whatever happened to private property rights?

Where does this stop? What other troubled companies will the Fed nationalize, and how much will it cost? Why stop at troubled companies? If the Fed can buy into a sick company, why not a healthy one? Now that we have allowed the Fed to take over any asset it wants, private property rights are meaningless. When oil prices get really high, why bother with a windfall profits tax when the Fed can simply nationalize Exxon-Mobil with a few cranks on its printing press. Who needs Bolsheviks when you have the Fed?

AIG is not a bank; it is not even an investment bank. The “lender of last resort” power was supposed to apply only to banks, to prevent runs. It was not meant to apply to any company that had been declared “too big to fail”.

I suppose the Fed is trying to get around some of the more obvious illegalities by having the new AIG shares issued on behalf of the Treasury. What happened to the concept of an independent Fed? Here you have the Fed seizing a private company and ceding control to the U.S. Treasury. Rather then acting independently, the Fed and the Government are merely partners in crime.

On the economic side, the Fed expects us to believe this is a smart investment. Does anyone really think that officials at the Fed and Treasury are suddenly private equity experts? These are the guys who missed both the tech and housing bubbles, and who assured us that subprime problems were contained. I would not trust them to run a lemonade stand, let alone one of the largest insurance companies in the world.

The idea that this bailout was necessary given that the alternative would be worse should by now be fully discredited. All of today’s financial problems are the direct consequence of Fed policy that was designed to weaken the recession that followed the bursting of the tech bubble and the shock of September 11th. Of course, the tech bubble itself resulted from the Fed’s actions to sooth the pain following the collapse of LTCM, the Russian debt default, the Asian crisis, and Y2K.

I suppose the precedent for all of these actions was established back in 1979 when the government guaranteed Chrysler’s debt. It sure would have been a lot better and a whole lot cheaper if we had simply let Chrysler fail. The road to financial hell, or in this case socialism, is certainly paved with “good” intentions. Today's historic surge in the price of gold shows that at least a few investors are refusing to march in the parade

http://www.eropac.net

[rabbitproof]

Haha, Jon Stewart is a savant.

[Arne]

More socialism to come:

Dodd Says the Fed Has Authority to Set Up Debt Fund (Update1)

By Viola Gienger

Sept. 17 (Bloomberg) -- Senate Banking Committee Chairman Christopher Dodd said the Federal Reserve has the authority to act as an ``effective Resolution Trust Fund'' to buy up and dispose of bad debt stemming from the subprime mortgage crisis.

``The Fed has the authority to move in this area,'' Dodd told reporters in Washington today.

Creating a separate agency to take on bad debt, akin to the Resolution Trust Corp. set up in 1989 to absorb losses from savings and loan associations, would take about a year, he said. Instead, the Fed should use its own authority to act.

``Debating whether or not you're going to set up some new agency or bureaucracy in government is a nice point but I don't think we have the luxury of waiting another year,'' Dodd said.

Establishing a new government bureaucracy might distract officials from addressing housing as the underlying cause of the financial crisis, Dodd said. Congress in July enacted legislation creating a Federal Housing Administration program to insure as much as $300 billion in refinanced mortgages for 400,000 borrowers at risk of losing their homes.

Implementing regulations based on that legislation will help, as will lower mortgage rates and the government's takeover of Fannie Mae and Freddie Mac earlier this month, Dodd said.

``But candidly, I want to do a lot more than 400,000 units,'' he said. ``And we have the opportunity to do more than that.''

Dodd met yesterday with Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson and said Bernanke agreed that the subprime mortgage collapse remains the core of the broader crisis.

For the longer term, Dodd said he's ``willing to entertain'' the idea of a separate agency.

To contact the reporter on this story: Viola Gienger in Washington at vgienger@bloomberg.net.

http://www.bloomberg.com/apps/news?p...rgE&refer=home

[Arne]

More inflationary policies:

Central Banks Offer Extra Funds to Calm Money Markets (Update5)

By John Fraher and Simon Kennedy



Sept. 18 (Bloomberg) -- The Federal Reserve almost quadrupled the amount of dollars central banks can auction around the world to $247 billion in a coordinated bid to ease the worst crisis facing financial markets since the 1920s.

The Fed increased the amount of dollars that the European Central Bank, the Bank of Japan and other counterparts can offer from $67 billion ``to address the continued elevated pressures in U.S. dollar short-term funding markets.'' The Bank of England, the Bank of Canada and the Swiss National Bank also participated.

Finance officials have struggled to restore confidence in markets this week as investors stockpiled money amid mounting concern more banks will follow Lehman Brothers Holdings Inc. into bankruptcy. The cost to hedge against losses on U.S. government debt climbed to a record yesterday, the U.K. government was forced to sponsor a rescue of mortgage lender HBOS Plc and Russia poured money into its banks.

``There's a complete lack of faith in the markets,'' said Jim O'Neill, chief economist at Goldman Sachs Group Inc. in London. ``There's a lot of cash hoarding and people losing trust in banks, so the central banks are acting to relieve that. This might not be the last time they have to act.''

Financial markets welcomed the announcement by pushing the cost of borrowing in dollars overnight to 3.84 percent from 5.03 percent yesterday. It was 2.15 percent last week and reached its highest since 2001 on Sept. 15.

Limit Doubled

The Fed will spray the dollars around the world via swap lines with other central banks who can then auction them in their own markets. The ECB, Bank of England and Swiss National Bank allotted a total of $64 billion for one day today.

Under the new arrangements, the ECB doubled its limit of dollars it can get from the Fed to $110 billion and Switzerland's central bank can offer $27 billion, an extra $15 billion. New swap facilities with the Bank of Japan, the Bank of England and the Bank of Canada amount to $60 billion, $40 billion and $10 billion, respectively. The arrangements are authorized until Jan. 30.

The ECB said it would offer $40 billion ``for as long as needed'' in overnight funds to the region's banks. It will also increase by $5 billion the amount it lends for 28 days and 84 days to $25 billion and $15 billion. The Swiss National Bank will boost its 28-day auctions to $8 billion and the 84-day offering to $9 billion. Both were previously $6 billion.

Use as Needed

The Bank of Canada said it has decided not to draw on its $10 billion swap facility at this time. The Bank of Japan, whose policy board held an emergency meeting today, said it will use its $60 billion as required by market conditions.

In auctions of their own currencies, the ECB today lent 25 billion euros in one-day money and the Bank of England 66.2 billion pounds in one-week loans.

The action is the latest attempt by central bankers to coordinate their response to the financial crisis which deepened this week after Lehman tumbled into bankruptcy, Merrill Lynch & Co. was sold and the U.S. government bailed out insurer American International Group Inc. Central bankers had this week pushed more than $200 billion into markets with those in Japan and Australia doing so again today.

Swap lines were first established in December when officials joined forces to boost dollar liquidity around the world after interest-rate reductions in the U.S., the U.K. and Canada failed to ease concerns about bank lending. The Fed increased its link with the ECB in July.

Share Prices Gain

The announcement today boosted European shares and U.S. futures, which have been pummeled this week as contagion spread through financial markets. Europe's Dow Jones Stoxx 600 Index, which has dropped 8 percent, gained 0.8 percent to 260.15. Futures on the Standard & Poor's 500 Index added 1.2 percent. More than $19 trillion has been wiped off the value of global stock markets since Oct. 31.

Failure to calm markets will see central banks inject even more cash, said Robert Barrie, an economist at Credit Suisse Group in London. Other options central banks could take include accepting greater collateral denominated in foreign currencies and increasing lending to banks abroad.

``The lack of dollars has been making the financial crisis worse around the world, which is why we now have this coordinated response,'' Barrie said.

Since the credit squeeze began in August 2007, central banks have sought to keep apart the need to soothe markets and to combat inflation. They argue that interest rates are a blunt tool for helping markets and that price pressures prevent them from cutting rates. While the Fed slashed its key lending rate to 2 percent it has left it there since April. The Bank of Japan kept its at 0.5 percent this week and the European Central Bank increased its benchmark to a seven year high in July.

If the spasms in the markets continue and threaten to derail growth the central bankers may shift, although for now they will want to wait, said Kevin Gaynor, head of economics at Royal Bank of Scotland Group Plc in London.

``Partly this is to keep powder dry and partly because cutting interest rates won't make much difference,'' he said.

To contact the reporters on this story: John Fraher in London at jfraher@bloomberg.net; Simon Kennedy in Paris at Skennedy4@bloomberg.net

Last Updated: September 18, 2008 07:15 EDT

http://www.bloomberg.com/apps/news?p...b4&refer=home#

[Arne]

Run on WAMU Bank in Oregon

Posted by Karen DeCoster at September 18, 2008 08:32 AM

A source calls me to say that people are lined up outside a Wamu bank in Lake Oswego, Oregon this morning. A Portland news station is there, but so far, no news on the web. A TV reporter was going around asking frantic people, who are afraid of losing all their money, "What about the FDIC guarantee?"

http://www.lewrockwell.com/blog/lewr...es/022934.html

[Mavdog]

arne, what do you and lew want, a depression?

as for wamu, as long as the public doen't get hysterical everthing will work out. wamu has a sizeable capital base, they most likely will not fail in the near term. their current capital ratio is almost 8%.

it seems that folks like lew are smiling that these companies, their employees and stockholders, are beaten down and whipsawed due to inflammatory news articles such as this.

are you one of them?

[Arne]

Originally Posted by Mavdog

arne, what do you and lew want, a depression?

as for wamu, as long as the public doen't get hysterical everthing will work out. wamu has a sizeable capital base, they most likely will not fail in the near term. their current capital ratio is almost 8%.

it seems that folks like lew are smiling that these companies, their employees and stockholders, are beaten down and whipsawed due to inflammatory news articles such as this.

are you one of them?

1. Best quote I read in the last weeks: "Lehmann is well capitalized".

2. Economics is not psychology. Bubbles that do not burst are psychology, eventually the market will be stronger, though.

3. A deep hard recession is necessary for markets to readjust to the real will of the individuals acting in it. All the central planning won't change that, it will only make the process longer and more painful.

4. Yes, I and presumably Lew, as well, want this system of fraud to fail. We want it to be replaced. That is not to say that we want the people to suffer, but it's inevitable, because the system of today has led to the malinvestments that will inevitably make people suffer. - Either through a long lasting Japan-like process or through a comparably short, deep recession.

5. A replacement of the current monetary and banking system would take most of the ability to cheat us from the government. It would make senseless wars that only benefit the politically well-connected, the military industrial complex and so fourth almost impossible.

Further reasons to return to a gold standard and abolsih the fractional reserve banking system can be read here:
Part 1:
http://www.house.gov/htbin/blog_inc?...ngdetail.shtml
Part 2:
http://www.house.gov/htbin/blog_inc?...ngdetail.shtml
Part 3:
http://www.house.gov/htbin/blog_inc?...ngdetail.shtml