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2008-09-18 Home Front Economy

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Posted by badanov 2008-09-18 00:00|| E-Mail|| Front Page|| [11129 views ] Top

#1 We were pretty much saying that months ago here at the Rantburg U Econ 301 classes.

THey left credit too easy for too long, and to raise it sufficiently to bring sense back to the banking sector woudl collapse the hosuing market further, and trash the stock market, as well as likely triggering a deflationary spiral; that is prices drop because consumption has dropped, and companies get squeezed by falling profits and higher credit requirements.

Its a nasty spiral, and cutting rates to help economic activity risks igniting inflation of the teyp we saw in the 70's under Carter - 10% inflation with 10% unemployment.

The only thign to do is regulate the hell out of the hedge funds that have been acting as locusts and distorting & destroying markets segments (and have now moved from the finance industy into commodities).

Either that or start handing out high explosives and rifles to the normal citizens and declaring open season on Soros and other manipualtive bankers and malinvetors.

Posted by OldSpook 2008-09-18 01:47|| 2008-09-18 01:47|| Front Page Top

#2 The day has passed when the US alone can control stuff like this. We are still the largest economy but not by the margin we used to be.

Posted by Goober Phitch2747 2008-09-18 02:16|| 2008-09-18 02:16|| Front Page Top

#3 This isn't going to stop until housing prices firm up.

Posted by Goober Phitch2747 2008-09-18 02:17|| 2008-09-18 02:17|| Front Page Top

#4 See WORLD NEWS > TIMES OF INDIA = US BECOMES THE USSR: US$85.0BILYUHN BAILOUT FOR AIG.

Once again, I fail to see what AAFIA SIDDIQUI is reportedly depressed about vee RADICAL ISLAMIST AGENDA!?

Posted by JosephMendiola 2008-09-18 03:24|| 2008-09-18 03:24|| Front Page Top

#5 Either that or start handing out high explosives and rifles to the normal citizens and declaring open season on Soros and other manipualtive bankers and malinvetors.

I think you are on something, Old Spook.

Posted by JFM">JFM 2008-09-18 04:45|| 2008-09-18 04:45|| Front Page Top

#6 If housing prices "firm up" at their still unaffordable levels, this will guarantee the US malaise will continue for years a la Japan. The solution for the real estate crisis is for home prices to again fall within historical ranges of affordability.
The dollar will suffer. Better that than 25% unemployment.

Posted by Anguper Hupomosing9418 2008-09-18 05:39|| 2008-09-18 05:39|| Front Page Top

#7 One factor in all this has been the massive rise in war-related spending. In wars like WWII, a large percentage of that spending went to pay and personnel, both military and especially for factory workers. In that sense it was productive for our economy, so we could weather the deficit spending and stabilize the economy when the fighting stopped.

That's far less true for our spending in the GWOT which, in any case, is going to go on for years. Add in the much more reactive global markets, including 24 hr computerized trading and the derivative financial instruments that enables, and we've got a system that is to previous economies what a Ferrari is to a Ford Focus. Unfortunately, this Ferrari has the braking and steering system of the Ford .... And the GWOT, our reliance on foreign oil and outsourced maufacturing etc. are the winding road we've got to travel.

Posted by lotp 2008-09-18 05:54|| 2008-09-18 05:54|| Front Page Top

#8 OS is right on the money (pun intended). He, myself, and others have been pointing out the fact that interest rates were held at levels far below the actual cost of borrowing money for so long that the value of money has been altered for a few years at minimum. Better to let the rates go up and suffer those consequences he describes than go back to stagflation and/or the type of stagnation suffered by Japan (ht: AH) when they pursued a policy of prolonged years of zero interest/zero money to lend.

Further, everyone except the super rich is going to have to get used to the fact that income stream security and continually rising standard of living being guaranteed by some agency outside one's self are now going to largely disappear. Expectations of material living standards are returning to pre-New Deal levels, and it's about time. It will cause a lot of psychological hurt to a lot of workers who grew comfortable with these things, particularly in the post WWII era, but there isn't anything now which can stop a return to more historically accurate lifestyle expectations for a given amount/type of work from happening and simultaneously leave that which is authentically American about our economy intact.

Posted by no mo uro 2008-09-18 06:16|| 2008-09-18 06:16|| Front Page Top

#9 The two biggest factors in the current crisis are (1) the housing mania, now dying a well-deserved death, and (2) "financial weapons of mass destruction," first described as such by Warren Buffet over five years ago. These WMDs are commonly called "derivatives", now amount to $50-60 trillion, although the exact amount is unknown at present. At that time Buffet said the rapidly growing trade in derivatives poses a "mega-catastrophic risk" for the economy. Some derivatives contracts, Mr Buffett said, appear to have been devised by "madmen".
Buffet's warnings were politely ignored by the Masters of the Universe and their sycophants. This week AIG was brought low by derivatives more than any other factor.

Posted by Anguper Hupomosing9418 2008-09-18 06:22|| 2008-09-18 06:22|| Front Page Top

#10 housing mania, now dying a well-deserved death"

Can somebody give me an AMEN!

Posted by no mo uro 2008-09-18 06:27|| 2008-09-18 06:27|| Front Page Top

#11 Expectations of material living standards are returning to pre-New Deal levels I agree that living standards will be dropping. I don't know about pre-New Deal levels, when many Americans lacked indoor plumbing & electricity. Frustrating these expectations will likely result in a lot of anger in the electorate.

Posted by Anguper Hupomosing9418 2008-09-18 06:28|| 2008-09-18 06:28|| Front Page Top

#12 I should have clarified better what I meant to say AH.

Given changes in technology - we will probably not go back to no indoor plumbing, electricity, etc.

I meant to refer to income stream security and disposable income, and the "stuff" these allow people to "afford".

No new cars every three years. Ditto the newest television technology, leisure travel, etc.

Not everyone will live in an owned house, even some people with decent jobs. Not everyone will automatically send their kids to college, especially private ones.

It may take some time and pain, but people will need to derive satisfaction in life more from community, church, and family, because easy access to cash to purchase "happiness" in the form of a mcmansion or a cruise or a wide screen flat panel TV will simply not exist.

There will be anger at first. But in the end, don't you think people will actually be better off, where it counts?

Posted by no mo uro 2008-09-18 07:00|| 2008-09-18 07:00|| Front Page Top

#13 There will be anger at first. But in the end, don't you think people will actually be better off, where it counts?

No. I am perfectly capable of getting on with friends, family and my church while also making a decent living and hoping to provide for my children. Poverty is not a reward.

Posted by Excalibur 2008-09-18 07:52|| 2008-09-18 07:52|| Front Page Top

#14 What magic word did I just type to make the comment vaporize?

Posted by 3dc 2008-09-18 08:11|| 2008-09-18 08:11|| Front Page Top

#15 Trying it shorter...
Let's tattoo or brand the MARK of CAIN on these ingrates who put the screws on the population and then put us in the situation where we have to bail out their sorry asses.

They should have to see it every day in the mirror for the rest of their lives.

Posted by 3dc 2008-09-18 08:14|| 2008-09-18 08:14|| Front Page Top

#16 The word "Thief" with the cost of their particular bail out underneath... Tattooed and branded right above their eyebrows and on each cheek.

Posted by 3dc 2008-09-18 08:16|| 2008-09-18 08:16|| Front Page Top

#17 I don't know what to make of this, from Bloomberg:
"The Democratic-controlled Congress, acknowledging that it isn't equipped to lead the way to a solution for the financial crisis and can't agree on a path to follow, is likely to just get out of the way...Senate Majority Leader Harry Reid said yesterday...``no one knows what to do'' at the moment."
But somehow Obama knows what to do. Right.
"Still, the Democrats opened themselves up for attack with Reid's comments. The Republican National Committee pounced on the Nevada lawmaker for his ``despair,'' and Senator Mel Martinez, a Florida Republican, said his remarks are ``not a way to inspire confidence or begin to turn the tide.''...Senator Johnny Isakson, a Georgia Republican active on housing issues, scoffed at suggestions that lawmakers postpone adjournment to rewrite laws governing the financial markets.

``The last thing you need,'' he said, ``are 535 people, not many of whom are that well-versed in financial markets, trying to do quick fixes to a market correction that's one of the more significant that we've ever seen.'' "
Maybe our esteemed representatives could crack the books & spend a few weeks studying what's been going on these last 10 years, that might help a bit. The horse ran out of the burning barn last year anyway.
This week I have been noticing on the MSM many questions about whether or not the FDIC might run out of money should several large banks fail (as is likely). Sheila Bair, FDIC chairman, has been on radio & TV multiple times a day, attempting to reassure the public. One thing Congress & the President could do before adjournment is a massive show of support for the FDIC -- increase its funding/reserves/whatever-you-call-it-to-support-its-protection-of-depositors by 10 x in order to put out the fires of doubt as to whether this key part of the US financial system is really supported or not. The last thing we need are runs on bank deposits. Of course bank depositors are not a voting bloc (yet). This level of support is certainly within the ability of Congress to do before they go home for the elections.

Posted by Anguper Hupomosing9418 2008-09-18 08:45|| 2008-09-18 08:45|| Front Page Top

#18 What a stupid thing to say. There are some things that, even if true, you just don't say. I wonder if Bernanke tells his wife she looks fat in that dress. Bernanke is the last Ph. D. to hold the job. He should resign now before he makes Greenspan look even better. I hate to say it, but Clinton had a great Treasury Secretary in Robert Rubin. He should be at Fed, not this pipe smoker.

Posted by Nimble Spemble 2008-09-18 08:47|| 2008-09-18 08:47|| Front Page Top

#19 I studied the Great Depression intensively in graduate school under a Nobel laureate. What I came away with was the absolute conviction that what was most important in that debacle was the lack of confidence in both the markets and the currencies. Bernanke should never have said such a thing even if he believed it. However, I do think we'll come through this economic downturn without another Great Depression simply because world governments won't make the same mistakes they made in the 30's about tariffs and the consequent restriction of international trade.

Whoever gets elected in November would do well to brush up on FDR's fireside chat technique. I think, however, that McCain is far better suited to be the person trying to restore and maintain confidence in government than Obama. Elect Obama and there could be some serious damage done to the economy by people with money and resources fleeing the U.S. in fear of draconian tax rises.

Posted by Jolutch Mussolini7800 2008-09-18 09:16|| 2008-09-18 09:16|| Front Page Top

#20 Don't forget Benjamin Strong.

Posted by Nimble Spemble 2008-09-18 09:46|| 2008-09-18 09:46|| Front Page Top

#21 This looks like hearsay to my uneducated eye. What proof is there that Fed. Chairman Bernanke actually said any such thing? For that matter, who is Economist Hale, and what agenda does he please by telling this tale of a private conversation between what one presumes were friends?

Posted by trailing wife ">trailing wife 2008-09-18 10:41|| 2008-09-18 10:41|| Front Page Top

#22 Either that or start handing out high explosives and rifles to the normal citizens and declaring open season on Soros and other manipulative bankers and malinvestors.

This would be my choice, and, I think it is going to come to that. When it does, Soros won't be the only one on the hit list.

Posted by Unomotch Hatfield6675 2008-09-18 10:42|| 2008-09-18 10:42|| Front Page Top

#23 It is indeed sole sourced. But it is so stupid and deleterious that its continued unchallenged existence in the etherworld implies accuracy.

Posted by Nimble Spemble 2008-09-18 10:48|| 2008-09-18 10:48|| Front Page Top

#24 There are five critical things the government should do right now, based on the possibility of an international credit collapse. The axiom MUST be accepted as a possibility, because inherent to it is the idea that *neither* inflation or growth, the two standard economic solutions, will work at all.

1) Immediately balance the federal budget through cuts. As much as 25% of the federal government could be shut down, leaving a huge amount of money to protect the economy.

2) Constitutional amendments for a balanced budget with no off-budget items, and a line-item veto for the POTUS, "in consultation with congress".

3) Since the US Mint is at 100% capacity printing our paper money, the Mint should be directed to print a run of very high denomination ($100k to $10M) bills, until we have a paper backed economy. That is, a 1:1 ratio for all outstanding US money. This would stop any catastrophic currency deflation.

While these high denomination bills would be only for the use of *domestic only* financial institutions and corporations, with the movement of every bill tracked and authorized by the government, they would represent a "token" of the *only* money protected by the "full faith and credit" of the US government.

Vast amounts of leveraged, virtual money could disappear, but physical possession of paper meant that it was "yours", and could not be taken from you except by court order. There would be no obligation to trade it for virtual money.

It would be to a great extent protected from speculation, and represent "real", not leveraged, collateral. Credit could be offered *only* to the amount of paper you had on hand, that is, 100% collateral.

4) Because there is no way the US mint can produce enough lower denomination paper money for ordinary transactions, the government should issue high security blank debit cards to financial institutions. Secured by both fingerprint and retinal scan, these would be issued if the credit card companies had to invalidate all credit cards.

All transactions with these cards would be processed through the credit card companies, which would keep them in operation during the credit collapse.

5) All US exports would have to be paid for in US currency, or in exchange for relieving the foreign portion of the US national debt. That is, a bushel of wheat would cost either $10 in paper dollars, or $100 in debt relief.

This would have the double effect of first making the dollar extremely strong in international markets, and radically lowering our national debt.

Posted by Anonymoose 2008-09-18 12:01|| 2008-09-18 12:01|| Front Page Top

#25 Moose, it would be a lot more persuasive if you didn't keep saying the Mint make paper currency.

Posted by Nimble Spemble 2008-09-18 12:24|| 2008-09-18 12:24|| Front Page Top

#26 Paper money is no more real than the digital money sitting in your bank. Both are presumably backed by something of value.

Posted by AllahHateMe 2008-09-18 12:51|| 2008-09-18 12:51|| Front Page Top

#27 Sorry for going off target but I've wondered this for months.... "No Mo Uro"... does your nym have something to do with a prostate condition?

Posted by Slilet Guelph4679 2008-09-18 14:25|| 2008-09-18 14:25|| Front Page Top

#28
TW's question is dead on.

Hale is a masters-degreed economist who leveraged a job with Zurich Financial Services Group into a consultancy for himself as a global econ advisor. He has a reputation as a name dropper who never tells a story without making himself seem like an insider who knows all the key players. Whether or not his advice is all that useful is a separate matter though ....

Posted by lotp 2008-09-18 14:33|| 2008-09-18 14:33|| Front Page Top

#29 What difference, with respect to what he may have said, does it make whether he said it in private conversation, the confidentiality of which was betrayed, or in a public address?

Posted by Nimble Spemble 2008-09-18 15:00|| 2008-09-18 15:00|| Front Page Top

#30 Nimble Spemble: Yes, I know. I use "US Mint" as a shorthand for "the US Bureau of Engraving and Printing (B.E.P.)", both because most people don't distinguish the two, and because I don't want them distracted from the main point.

AllahHateMe: normally yes, but the essence of a credit collapse is that there is no credit available to anyone, from nations and corporations, to individuals.

This means that you need some *other* means than a credit card, to take money "from the bank" to go shopping with. It sounds almost asinine, but you could have $100k in the bank and not be able to spend it.

Most people immediately say "What about bank checks?" Again, normally, yes. But for a large percentage of people, credit cards are used because they do not have the money in the bank, except for a brief time after they're paid.

This means if suddenly "no credit cards", their inclination would be to overdraft their checks. And while checks are not a credit instrument, trying at a grand scale to force them to be would force the banks to suspend checking as well.

This leaves debit cards and cash. Perhaps only 5% of our economy right now is backed with paper cash. And the US Bureau of Engraving and Printing (B.E.P.) is printing cash at 100% production. If suddenly we need vast amounts of paper money to make transactions, we instantly have astounding levels of *deflation*.

Which is why the US Bureau of Engraving and Printing (B.E.P.) needs to start printing huge amounts of very high denomination bills, so that certain companies won't suck all the small denomination currency we have out of the economy.

This can happen, BTW. Once there was a breakdown in the process for AT&T to return all the coins used in public telephones, and in less than two weeks, the entire State of California was stripped of its coinage.

Even with the US Bureau of Engraving and Printing (B.E.P.) printing enormous amounts of high denomination bills, there is still going to be impressive cash deflation at the consumer level.

Ironically, something that costs a dollar may still cost a dollar via debit card, but if you pay cash, it may only be a dime. For the simple reason that nobody has any dimes.

Massive deflation happened during the Great Depression, too. A pound of hamburger to feed the dog only cost a nickel. But nobody had nickels.

But both political party candidates have it wrong. One side wants to cut taxes to increase growth, so that we can "grow our way out of the problem", and the other side wants to raise taxes and cause inflation while enlarging the federal debt.

Both of these are the solutions that have worked since WWII, but they won't work any more. The problem is both too great, and that there was an inherent flaw in the post-WWII easy credit economy.

Posted by Anonymoose 2008-09-18 15:00|| 2008-09-18 15:00|| Front Page Top

#31 If we are sitting on the edge of a deflationary spiral, then we need somethgin to provide the bankers with a reason (liek a gun ot the head type reason) to put their money to work instead of sitting on it in fear -- and (again gun to the head) NOT in derivitives, but in loans to small business and individuals.

The confiscatory tax policy of Obama will suck money out of the system, and hasten it into a depression spiral, backed by federal malinvestment due to cronyism and self-dealing that inevitably happens when Congress tries to involve itself in the market: c.f. Fannie & Freddie, or fails to properly restrict derivatives.

I think step one is to require much higher margins, and that a majority of traders bwe directly representing suppliers and consumers in the futures market for given commodities. This reduces volatility while still allowing a few brokers to provide liquidity. And simply outloaw many of the derivatives that have led this mad destruction of capital, a destrution that is robbing the economy of capital formation capabilitythat is needed to sustain growth.

This prevents the collapse of the markets by forcing them into sanity.

A second would be to increase federal guarantees for small business loans and individual loans to be wider spread (possibly even providing a point based interest subsidy for given classes of smaller loans), and at the same time, reduce Fed backing (or eliminate it entirely) for speculative large investments or loan to hedge funds (and things of that nature).

This prevents banks from being destroyed by their conduct in loaning large amounts to unstable high-risk hthigns liek hedge funds, and reqarding them for putting the money to work in loans that provide economic growth and stability (individuals and small business).

Teh third part would be to put some real teeth into the investment and banking laws. Make naked shorting illegal, and othr securiteis related crims felonies, and a bar to employment in any financial ro investment field. Then make violation of those securities laws to include penalties such as civil forfeiture of ALL personal and corporate property, ultimately resultgin in mandatory dissolution of all assets via CH7 style "forced bankruptcy" with punative seizure of assets as part of that process (the creditors get paid, and the Fed gets the rest to put into a restitution fund, the criminal gets NOTHING) -- and no home exemptions, etc. I want these guys going to PMITA prison, and coming out with homeless and utterly broke.

I want THIS to be their last words from the judge, just before the guards haul them off to prison:

Posted by OldSpook 2008-09-18 15:11|| 2008-09-18 15:11|| Front Page Top

#32 "prostate condition"

Ah, no, SG.

Not sure why that thought occurred to you. Perhaps projection?;)

Posted by no mo uro 2008-09-18 15:46|| 2008-09-18 15:46|| Front Page Top

#33 To your point, Excalibur.....

I didn't mean to imply that you can't have a good spiritual and community life AND make money and avoid poverty; that is the goal, after all, to do well in all areas.

It is also a fact that pretty good numbers of people in the U.S. have substituted the material end for the nonmaterial entirely simply because it has been easier to do so, and that is far more corrosive and far less desirable than having the community/family/church thing maximized at the expense of a little bit of material wealth, if the choice must be made (and sadly, some folks seem to be incapable of achieving both). In the absence of easy wealth to "purchase" happiness, people will be obliged to look for joy elsewhere. Not everyone is the sort who naturally recognize that the nonmaterial is really the better source of joy and fulfillment. Obviously you have figured out that that is the case, and good for you, but just as obviously millions have not.

I think the history of the last 60 or so years bears this out.

Posted by no mo uro 2008-09-18 15:59|| 2008-09-18 15:59|| Front Page Top

#34 Thought it might be short for "No more Urology".... and yes, at my age it does prey on one's mind...... 8p

Posted by Slilet Guelph4679 2008-09-18 16:16|| 2008-09-18 16:16|| Front Page Top

#35 I'd comment but I'm too disgusted with the whole mess that's been created. If we ran our households like Washington politicians run our government, we would be in prison.

Posted by JohnQC 2008-09-18 19:09|| 2008-09-18 19:09|| Front Page Top

#36 In the absence of easy wealth to "purchase" happiness, people will be obliged to look for joy elsewhere. Not everyone is the sort who naturally recognize that the nonmaterial is really the better source of joy and fulfillment.

Oh goody - social engineering.

Again.

Posted by Milton Fandango 2008-09-18 19:12|| 2008-09-18 19:12|| Front Page Top

#37 1) This guy is talking about something Bernanke said months ago and the comment doesn't make any sense to me. The Fed Freakin Chairman!!! knows well that he can't 'control' commodity prices. Commodities are subject to supply and demand, just like money.

Which brings us to the dollar. Supply and demand. That's it. The Dollar was way too cheap so the supply was higher than demand.

The cheap rates are the cause of the current problems. Not big, bad, rich white guys, not naked shorts (those are generally used against weak companies anyway. I like to think of it as the market thinning out the herd.), absurd housing prices, no complicated 'paper', not anything else we complain about.

Bad Fed policy. There was more money than there was good places too put it (because it was cheap), so the money made it's way to bad investments.

I expect us to be at the end of an era. The time of uber cheap short rates is coming to an end. When growth comes back, rates will come up.

Posted by Mike N. 2008-09-18 21:17|| 2008-09-18 21:17|| Front Page Top

#38 No shit, Ben.

Posted by General_Comment 2008-09-18 22:47|| 2008-09-18 22:47|| Front Page Top