Tuesday, December 23, 2008
If after next January, the bank CEO's 2008 compensation and how the banks used the bailout money still cannot be revealed, by then the president Obama will have a lot to do to prove his changes are really that we can believe in and he will have a hard time to get his second term.
On the other hand, will the bank execs fly back from their holiday vacations and start to cook the books?
Wednesday, December 17, 2008
Both kinds of policies are aiming at the increase spending, directly or indirectly through increase in lending (leviating the credit crunch). While in avoiding a second mistake like the government made during the great depression, Jim Hamilton pointed out that we should also try to avoid a second mistake which lead us to the current situation, namely, very low savings thus investment in the U.S. economy. Hopefully, the future investment plans can pay off. One concept need some clarification is that the government spending in this situation should be considered and should be investment into the future, not just buying bombs and drop them in the middle east desert. On the other hand, Paul Krugman put his bet on the spending from the super rich class, not the middle class. Traveled too much Paul?
Monday, December 15, 2008
Madoff’s madness (from the Financial Times)
This newest financial fallout on Wall Street just further hurt the bleeding heart of investors who had suffered quite enough losses these days. The abuse of trust and regulation failure in this case is just astonishing. Quite a few commentators said they expect more cases like these to be revealed. Another round of hedge fund redemption can help to put the market into further distress. Financial managers in many cases neglected basic rules such as diversification and transparency.
The basic problem behind this is a flowed reasoning. The world, including the Americans, think that the U.S. is so rich because the Americans must did something right. This reasoning transformed to a belief that the Americans did the right thing so that the U.S. is so rich. Yes, the American way is the right way and the ONLY way. No questions should be asked.
The endowment of natural resources, geographical location and unique history contributed to the wealth of the U.S. as well as many right institutions for some time in history.
Friday, December 12, 2008
It seems that the White House is about to do something to help GM and Chrysler. The problem is that after they spend tax payers' money, they will be gone. Nobody can be held for responsible for tax payers' money.
The American auto industry need a revolution through proliferation of innovations from many smaller firms. Give money through a incompetent government to incompetent management teams is not a solution to the long-term problem of energy and environmental challenges.
Click here to see it.
I don't think I need to include Bill Clinton and George W. Bush in it. The similarity between the two is that Bill lied about where his sperm died abnormally and George lied then thousands of people died abnormally.
Thursday, December 4, 2008
I think Michael Moore has a point on the public transportation.
Michael Moore: President-Elect Obama has to say to them, yes, we're going to use this money to save these jobs, but we're not going to build these gas-guzzling, unsafe vehicles any longer.We're going to put the companies into some sort of receivership and we, the government, are going to hold the reigns on these companies. They're to build mass transit. They're to build hybrid cars. They're to build cars that use little or no gasoline.
I agree that people need their own spaces but I think the cars, single family houses and long roads separating Americans from each other cause mental problems for them as well.
Here are some newspaper headlines:
Most Retailers Report a Dismal November
Monday, December 1, 2008
Tuesday, November 25, 2008
When the bailout plan first draft leaked to the media, a lot of economists are against it and most of them support an idea of purchasing equity stakes in the banking-financial firms. Here is what a group of five economists from the University of Chicago's Graduate School of Business (Diamond, Kaplan, Kashyap, Rajan and Thaler) have suggested back then:
"......The first could be accomplished by adopting much of the Treasury plan, perhaps with Mr. Dodd's proviso. The Treasury would buy assets through a reverse Dutch auction or some variant, but without any intent to overpay. The idea would be to jumpstart the market by establishing trading prices.
The second component, raising capital, could be achieved in other ways, for example through a mixture of a mandate and an offer of partial government support. The authorities could require all regulated financial institutions, no matter how well capitalized, to present plans to raise 2% of their assets in additional capital over the next quarter to preserve the stability of the financial system. This increased capital will not represent an increase in the permanent level of required capital for bank holding companies, but instead give institutions the extra capital that will allow them to lend. ......"
Notice that the economists never really completely rejected the idea of purchasing the troubled assets, which Paulson announced on November 12, 2008 that :
"Over these past weeks we have continued to examine the relative benefits of purchasing illiquid mortgage-related assets. Our assessment at this time is that this is not the most effective way to use TARP funds, but we will continue to examine whether targeted forms of asset purchase can play a useful role, relative to other potential uses of TARP resources, in helping to strengthen our financial system and support lending. But other strategies I will outline will help to alleviate the pressure of illiquid assets. "
The Dow (DJIA) fell over 400 points on that day and as the Detroit 3 failed to prove to congress that they are worth saving and Citigroup fell deeper into trouble, the Dow declined close to 7500 points.
Then, on Monday Nov. 24, 2008, the bailout plan on Citigroup involves some kind of insurance on the toxic assets, and on Tuesday, Nov. 24, 2008, Fed and the Treasury put together a 800 billion package to facilicate lending in the consumer credit market.
So, what's that claim of no TARP money for toxic asset all about?
As Chris Probyn put it: "The government has subtly reversed course. The original idea of the bailout was to remove toxic assets from the balance sheets of banks. That was subsequently abandoned but they are getting back to it. ......"
Thursday, November 20, 2008
I have to say I cannot buy this argument. The bankruptcy is really a overhaul of the current business model of the Detroit 3, which is a function of the recession: sweeping out the bad apples. The production lines or say, the physical capital of the auto industry will still have value and the production will resume once the reorganization of the auto industry is done. This is a necessary process for the US auto industry itself and let the economy do its job, please!
Friday, November 14, 2008
Thursday, November 13, 2008
Tuesday, November 11, 2008
I have previously suggested a little more policies on how to boost demand in the housing market.
Thursday, November 6, 2008
I will have to invent a leading indicator for recession based on the level of trivial news in the media, too much bull crap signaling a recession on its way.
Wednesday, November 5, 2008
- His supporters are happy and they don't mind spend a little bit more. As long as the electoral votes and the popular votes are consistent with each other, this effect will be there. Even if McCain wins this election, the effect will be smaller than Obama's victory since the amount that old white people spend won't increase as much as the broader base of supporters that Obama has.
- Uncertainty resolved around the future directions of the U.S. policies. Due to both his personality and the race factor, I believe Obama's policy choice will not be as extreme as the second Bush presidency thus people, at least for now, can expect the future policies rolling out more in the direction that is acceptable to most people, not only in the U.S. but also around the world.
- As the tax policy of Obama may give more confidence in the US treasury, which is an important for financing the US Economy.
Tuesday, November 4, 2008
It is relatively easy to mobilize young people, but what you will do after they are mobilized?
Nobody can deny the fact that today's US economy and society are facing great challenges that deserve a charismatic leader to mobilize the nation to deal with them. Should Barack Obama be elected as the next president, the temptation to abuse his power is even greater than that for George W. Bush. It is not that he does not have good intentions but it is the fact that his power may be so great that it is out of his own control. Our only hope is that he is a wise enough man who fully understand the situation and has the courage to resist the temptation as George Washington did. On the other hand, will the young voters become angry should McCain be elected as the next president?
Friday, October 31, 2008
It is possible that market can work if trusted quality check can be purchased. However, when the Republicans simply propagate the idea that market works like magic and people simply believe that idea, there may be no demand for quality checking service and then the markets fail. This Republican belief is like Melamine for food as to the market economy. The second Bush administration also abolished many needed services provided by the government for preventing market failure (Midnight Regulations on the Diane Rehm Show). To some extend, the lack of a well-functioning government will lead to the lack of a well-functioning market.
Wednesday, October 29, 2008
Mankiw noted some supply side plans:
- the shared appreciation mortgage, or SAM, in which the homeowners who get a mortgage relief will have to forfeit the future appreciation on their house.
- Zingales's Plan B, which is essentially an equity-for-debt swap.
Friday, October 24, 2008
1. low fixed rate mortgage on the purchase of nearly foreclosed homes;
2. tax incentives on first time home buyers;
3. give mortgage insurance as promised in the bailout plan.
In this way, the demand side can help to boost the housing market price and people who should not have get a subprime loan and investors who should not have hold so much subprime loans will not benefit from tax payers' money.
Even though the recent home sales went up but the prices are lower, which can drag the housing market into an even lower level. With help from the demand side, the housing market may be stabilized as soon as possible.
Wednesday, October 22, 2008
You have 2 cows.
You give one to your neighbour.
You have 2 cows.
The State takes both and gives you some milk.
You have 2 cows.
The State takes both and sells you some milk.
You have 2 cows.
The State takes both and shoots you.
You have 2 cows.
The State takes both, shoots one, milks the other, and then throws the milk away…
You have two cows.
You sell one and buy a bull.
Your herd multiplies, and the economy grows.
You sell them and retire on the income.
You have two giraffes.
The government requires you to take harmonica lessons.
AN AMERICAN CORPORATION
You have two cows.
You sell one, and force the other to produce the milk of four cows.
Later, you hire a consultant to analyse why the cow has dropped dead.
ENRON VENTURE CAPITALISM
You have two cows.
You sell three of them to your publicly listed company, using letters of credit opened by your brother-in-law at the bank, then execute a debt/equity swap with an associated general offer so that you get all four cows back, with a tax exemption for five cows. The milk rights of the six cows are transferred via an intermediary to a Cayman Island Company secretly owned by the majority shareholder who sells the rights to all seven cows back to your listed company. The annual report says the company owns eight cows, with an option on one more. You sell one cow to buy a new president of the United States, leaving you with nine cows. No balance sheet provided with the release. The public then buys your bull.
A FRENCH CORPORATION
You have two cows.
You go on strike, organise a riot, and block the roads, because you want three cows.
A JAPANESE CORPORATION
You have two cows.
You redesign them so they are one-tenth the size of an ordinary cow and produce twenty times the milk. You then create a clever cow cartoon image called ‘Cowkimon’ and market it worldwide.
A GERMAN CORPORATION
You have two cows.
You re-engineer them so they live for 100 years, eat once a month, and milk themselves.
AN ITALIAN CORPORATION
You have two cows, but you don’t know where they are.
You decide to have lunch.
A RUSSIAN CORPORATION
You have two cows.
You count them and learn you have five cows.
You count them again and learn you have 42 cows.
You count them again and learn you have 2 cows.
You stop counting cows and open another bottle of vodka.
A SWISS CORPORATION
You have 5000 cows. None of them belong to you.
You charge the owners for storing them.
A CHINESE CORPORATION
You have two cows.
You have 300 people milking them.
You claim that you have full employment, and high bovine productivity.
You arrest the newsman who reported the real situation.
AN INDIAN CORPORATION
You have two cows.
You worship them.
A BRITISH CORPORATION
You have two cows.
Both are mad.
AN IRAQI CORPORATION
Everyone thinks you have lots of cows.
You tell them that you have none.
No-one believes you, so they bomb the shit out of you and invade your country.
You still have no cows, but at least now you are part of a Democracy…
AN AUSTRALIAN CORPORATION
You have two cows.
Business seems pretty good.
You close the office and go for a few beers to celebrate.
A NEW ZEALAND CORPORATION
You have two cows.
The one on the left looks very attractive…
Financial Market Cow Models Commentary by Mark Gilbert Feb. 9 (Bloomberg)
If Hedge Funds Kept Cows, Your Milk Would Go Sour: Mark Gilbert
Similar thinking can be applied to financial markets. Here, then, is the world of money recast in bovine terms.
You have two cows. You come home from the fields one day to find Henry Kravis chatting to your spouse at the dining-room table. Two days later, you have no spouse, no farm, and no table. Two guys the size of sumo wrestlers have saddled up the cows and are riding them around the farmyard.
You have two cows. China has 1 trillion cows. Guess who sets the price of milk?
You have two cows. One is Brazilian, one is Australian. They yield 25 quarts of milk per day. That's half as much as three years ago, when you traded your less-lactiferous German and U.S. cows for them. You are thinking of swapping for a pair of Namibian cows. They only have three legs but, hey, they produce 26 quarts per day.
You have two cows. You repackage five of them into a Collateralized Lactating Obligation, pay for a AAA credit rating, slice the CLO into 10 pieces and sell it to investors, skimming the cream from the milk for yourself. Three of the cows fall ill, and the credit rating plummets. You get to keep the cream.
You have two cows. A guy in an open-necked shirt drives up in his Bentley and offers to take care of them for you in return for a year's supply of steak and 50 percent of their milk. They won't be allowed to leave his compound for two years.
Six months later, you have half a cow, producing sour milk. ``You have to be willing to lose rump today to get rib-eye tomorrow,'' the hedge-fund guy mumbles through a mouthful of sirloin and champagne.
Assume two cows.
You have two cows. They produce 1.2 tons of methane gas per day. After a hefty donation to the re-election campaign of your local representative, the government gives you enough emission permits for six cows. You sell three permits, buy another cow, and apply for a European Commission grant to build a methane-gas power station.
You have one old, tired cow. A recent heart transplant may have come too late to save the beast.
You have no cows. You slap advertisements on everyone else's cows. The milk floods in. You use the proceeds to reinvent the cow.
Nobody wants your cows. You design the cutest little milk bottle. Now, everybody wants your cows.
You have 26,467 cows. They are strapped into the milking machines 24/7. Some of them have more hay than they could ever hope to eat. Others aspire to one day having more hay than they could ever hope to eat. The cows with the most hay end up with big government jobs.
You have two cows. How boring is that? You pay a month's supply of milk to a consultant, who advises you to sell one cow and buy two aardvarks instead. The aardvarks die. The consultant charges you four months of your (now reduced) milk supply and advises you to sell half of your remaining cow and buy a wombat. The wombat dies. The consultant charges eight months of milk for a copy of his new report, ``Two-Cow Strategies for Alleviating the Impending Pensions Crisis.''
You have two cows. Comrade, those cows are an environmental hazard. We suggest you hand one of them over to us.
You have two cows. You buy insurance against them dying, and tuck the contracts into the middle of that tottering pile of documentation on your desk. One dark night, Henry Kravis sneaks off with your cows. By the time you track down the paperwork, your now worthless contracts have expired.
You have two cows. You pledge one of them to me as collateral in a swap for some of my pigs. I pledge the cow to my neighbor as collateral in a swap for some of his sheep. He pledges the cow to his cousin as collateral in a swap for some of his cousin's goats. Better pray the livestock market doesn't crash and we have to try and round up that cow.
You have lots of stocks and bonds, but no cows. Are you crazy? Cows are the hot new market. Here, buy this exchange- traded cow futures contract. It can't lose. It gained 40 percent in the past six months.
You have two cows. You wear a cap you made out of tin foil so that the tiny black helicopters can't read your thoughts. You spend your days blogging about how the government's decision to abandon the cattle standard in 1933 was part of a global conspiracy by the world's central banks to destroy the value of your herd.
(Mark Gilbert is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this article: &cls;Mark Gilbert&cle; in London at firstname.lastname@example.org
Sunday, October 19, 2008
The basic point is still that the American people should trust neither market economy or the government, and the economy need oversight, the government need check and balance, and the national need to do some serious long-term planning, before it turns its focus back on to the celebrities. For that to happen, we probably need a reform in the regulation of the media industry first to encourage competition and free speech.
As the turn of the administrative branch approaches closer, a really important thing to do is to send both candidates' choice of secretary of the Treasury to Washington to start their on-the-job training now. The crisis is not over yet.
Friday, October 17, 2008
Thursday, October 16, 2008
The fact is that both market failure and government failure both exist in the economy. For health care, private market may fail to provide effective solutions under asymmetric information and the associated monopoly power, especially, if one using the fairness criteria to evaluate the health care system of the society. The problem with the current health care system of the US is that even though the government heavily regulate the health care industry, it has been lobbied against the consumers it supposed to protect. Bill Cusack gives a longer argument supporting the regulation in the market place in general.
A health care system with direct government involvement, may not be a full solution but it may be still useful and I do believe if we set up a good incentive structure for the clerks of the government, the benefit from a health care system with heavy government involvement can provide better service to the society than private market alone.
The solution of the problem is how to make sure that the government work well, which deserve a lot of research and study. The inefficiency of the current government activities should not be the reason to completely neglect the possible roles that can be played by the government. The basic dilemma here is that we can trust neither market or government alone, and the moment we start to trust either is the moment the trusted one starts working against us. The fact that market works or government works is not a reason to loose the leash on them.
Wednesday, October 15, 2008
I have to repeat myself here: there should be a mandate for the banks to conduct their business as usual during an apparent turmoil time.
On the other hand, what the Fed is doing these days is to keep an out-of-body circulation of the money in the financial system when they buy the CPs at a higher-than-the-market price. I don't know how much they need to do this but eventually, they need to sterilize the liquidity they injected when the credit market revived.
Tuesday, October 14, 2008
A theory of regulation cycles in this paper by Erik F. Gerding can provide some explanation to this phenomenon. Basically, when the economy booms, people trust the market more and would accept deregulation, which encourage financial fraud and followed by a burst of the bubbles drags the economy into a recession. During the earlier part of this cycle, market is working then republican/conservative arguments win. After that, problems in the market accumulate and eventually, market returns fall as the bubble bursts. People then wake up in the aftermath of the bubble and demand more regulation of the financial market, which lead democrats to the White house and congress, who may overburden the economy with regulation however, the economy recovers and grows with new boom and the next round of deregulation and bubble are brewing.
Mankiw thinks that the good returns in the stock market during democrat presidencies are simply a sequence of random event.
A theory of regulation cycles in this paper by Erik F. Gerding can provide some explanation to this phenomenon. Basically, when the economy booms, people trust the market more and would accept deregulation, which encouragew financial fraud and followed by a burst of the bubbles that drags the economy into a recession. During the early part of this cycle, market is working and republican/conservative arguments win but eventually, market returns fall as the bubble bursts. People then wake up in the aftermath of the bubble and demand more regulation of the financial market, which lead democrats to the White house and congress, who may overburden the economy with regulation however, the economy recovers and grows with new boom and the next round of deregulation and bubble brewing.
Monday, October 13, 2008
Ellen R. McGrattan and Edward C. Prescott provides a theoretical model to explain the effect of dark matters in terms of technology capital (Know-how, brand names and R&D etc.) but these authors argue that there is no need of real differentials in technology capital, wherever the US openess to FDI matters to the accounting return differentials for timing of in-wards/out-wards FDI through the accumulated stock differentials of plant-specific intangible capital investment. This timing difference alone can explain 60% of the BEA accounting return differential. The McGrattan-Prescott model thus basically partially eliminated the advantage embeded in the US economy argued by Hausmann and Sturzenegger, and therefore dampen their optimism on the sustainability of the US current account, which is a kind of crucial for the current world wide financial crisis.
Years later after this crisis and may be much sooner, however, most of us may have to realize the central banking innovations made by Ben since later last year, which Hamilton has paid great attention to since then, may have saved the whole world economy from the edge of abyss. Hamilton's recent work on this issue has been picked up by bond traders as a must read.
So, 5 years from now, Greenspan may be deemed as a man who has extended his luck into an excess thus made a big mess afterward, but Bernanke may be remembered as a man who bravely led a battle against his and our crisis with all his intellectual power possible. Bernanke matched the destruction of unchecked financial innovations with at least similar amount of central banking innovations in a very short period of time. I hope the result of this battle is his triumph.
Friday, October 10, 2008
May be it is time to contemplate how to rebuild the system from now on. Just maybe.
Thursday, October 9, 2008
In some sense, the Great Depression helped to form today's world and it run finely after WWII until, well recently, at least for the Western World.
Should we let the world fall apart and rebuild a new one or we would rather try to find a easy way to solve the current crisis and wait the next crisis to come around 5-10 years.
Is inflation really bad for now? Probably not, since when inflation come, as long as it is not rolling up into double digits, the real interest rate can fall below zero to support an expansionary monetary policy. But, maintaining a healthy inflation level is very hard since people can index the price to inflation and as a result, the inflation can run out of control, how about some price control then? Wow, market is getting killed little by little.
I have suggested similar strategies two weeks ago. We only know that tight monetary policy will help to kill the economy for sure, learned from the great depression. But to prevent this falling economy from drop-dead, a heavy dose is not a bad choice since we don't actually know what rescue plan can work. On the other hand, may be the true market solution is simply left the banking system to die as it deserve. The problem is that we cannot ensure ourselves from not taking on so much risk again once the current system is revived.
1. The amount they can use from the political donation they receive is tied to their approval ratings. The lobbyists can send money to Washington but the money should be first received as a fiscal revenue for American people.
2. Deduct the percentage of interest payment on US debt as a fraction of the federal fiscal revenue from their salary.
3. The pork brought home by the senators/congressmen-women should not exceed 120% of the federal revenue from that state.
Wednesday, October 8, 2008
2. The wealth effect of the declining stock market and the loss of consumer confidence may actually kick the economy into a recession or deeper into a recession.
On the other hand, what the US political leaders worried about when they criticize the over-sized trade deficit with China is that someday China will reclaim this debt back. However, one policy the US politicians pressed to ease the trade deficit - the appreciation of Chinese currency RMB (yuan) - actually triggered this process of repayment, which is in the form that the US politicians fear most, very fast repayment, caused by the speculations on RMB appreciation. See this paper I cited before. An easier solution of this trade/money imbalance is to find some way for the US to repay its debt to China gradually, however, the proponent of this approach is simply absent in the past and now. The basic problem is that both sides are skeptical about the other side's intention. The US simply do not feel comfortable be nice with the Chinese government and the Chinese people, who learned from a lot of Japanese yen appreication--Japanese economy stagnantation problem, also do not feel comfortable to do more business with the US, which actually put some pressure on the Chinese government in dealing with US requests. Plus, problems like Taiwan and Tibet keep plague the relationship between the two countries, which make the co-operation between the two even more difficult.
Monday, October 6, 2008
1. US willingly sell the arm package to Taiwan to rise revenue in order to deal with the financial crisis and boost its economy. China certainly do not like it.
2. Considering the GW Bush has delayed the deal before, this may be a nice gesture to CCP even though the CCP has to protest against the deal on the surface. There has been doubt about whether the 2nd Bush administration will let the deal proceed and that has lead to speculations on the U.S. concerns over closer relationship between Mainland China and Taiwan which may make the arm deal actually benefits CCP's defense power. If this concern has some real elements, then GW Bush is using the military goods to persuade the cooperation of China in dealing with the current financial crisis.
3. GW Bush administration is using this deal as a blackmail to force CCP to cooperate with US in dealing with the financial crisis.
Anyway, to finance the 850 billion dollar rescue plan, US need foreign investors to purchase its treasury bonds and with 1.7 trillion USD reserves, China is one of the biggest possible buyers.
It is quite interesting to see that Economists nowadays distrust markets. The reasons? I talked about them before.
Sunday, October 5, 2008
Fannie Mae said it will set aside the loan of a woman who shot herself as sheriff's deputies tried to evict her from her foreclosed home....
"We're going to forgive whatever outstanding balance she had on the loan and give her the house," Faith said. "Given the circumstances, we think it's appropriate."
In other words, the taxpayers are now subsidizing self-injury.
from: Marginal Revolution
Dad: Because there are a lot of grizzly bears in Alaska, honey.
Daughter: Can I buy a bear in a bear market?
Dad: Honey, a bear market means the stock prices in the stock market are falling, they don't trade bears in the stock market.
Daughter: Can the Governor of Alaska bring us a real bear market?
Dad: I guess not, but may be she can put lip stick on a bear.
Daughter: Will that makes the bear a pig?
Dad: No, it is still a bear.
Friday, October 3, 2008
Mankiw suggests that this intelligent Wendy's ad illustrates well the economic concept of consumer surplus. I concur, and would add that it also illustrates concepts such as the costs of time and decision making.
Wednesday, October 1, 2008
The sweeteners below are added to the Rescue plan so as to win some house republican votes.
1. temporarily raising the limit on federal deposit insurance to $250,000 from $100,000.
2. various tax breaks
3. a "Mental Health Parity" provision
With a deal so sweet, is Uncle Sam on the road to Obesity?
Tuesday, September 30, 2008
Should global investors have faith in the ability of US government to raise taxes? Are you kidding me? Neither current presidential candidate dares to say that they will increase taxes and any person who learned a little about American politics hasn't heard the famous phrase "Read my lips: no new taxes"?
Will the politicians/regulators follow the rule below for the U.S.?
Rule No.1: Appropriate regulation and oversight is needed for a well-functioning financial market in the U.S.
Rule No.2: If you consider deregulation, refer to rule N0.1.
Monday, September 29, 2008
Sunday, September 28, 2008
Added on Oct 29, 2008: the current situation is this -- the credit market broken after a sequence of adverse events (Lehman Br. AIG, and bad earnings of banks etc.), the Fed is working very hard to re-inflate the liquidity flow in the economy, which is why the Fed has started to directly lend to businesses. Even if they do not sterilize the liquidity they are injecting into the economy, there may not be inflation pressure since the monetary multiplier has broken down.
However, once the order in the credit market/monetary multiplier is restored, inflation pressure will pile-up if the Fed does not shrink the monetary base fast enough. At that time, financing the deficit may be harder if the global investors are reluctant to buy US Treasury bonds/bills.
So, for now, US dollar looks good and Treasury is still safe. The danger is on the way of recovery after the credit market back-up working again. Since US Treasuries are denominated in the US dollars, if the Treasury decides to print money in order to avoid default, the default will take the form of depreciation of US dollars.
Friday, September 26, 2008
If no bailout plan get through this time and economic disaster does occur, will American people regret about their anger now or will they say that it is a price they would like to pay in order to punish the greedy bankers?
Ohio, no matter how low key it is in the U.S. economy now as it is, provided some biggest political riddles starting from the second term of George W. Bush and now another Ohio man, John Boehner, from the west part of Ohio just helped to created another dismey on wall street in years. I cannot imagine what will happen after today's opening bell, not to mention this shock comes with together with the fall of WaMu. Or let's just say that the falling knee of the former CEO of Goldman Sachs says it all. Who have deep pockets should just buy anything and Warren Buffet is going to make more money.
The long term credit problem for the U.S. economy now is materializing day by day. Various liquidity drains show up in the economy. If this economic disaster actually happens, it states that the interruption of the flow of wealth from the rest of the world to the US leads to an immediate drop in the U.S. consumption. Market economy really has its own way to make everything happen just according to what it should be, except that this time the should-be event is really bad. I am sorry for the fact market economy has to work in its own way and the title of my yesterday's post.
Thursday, September 25, 2008
1. If it get passed, the rest of the world may loss their trust on the US government and raising money to finance fiscal deficit will become problematical.
2. If it cannot pass and no other bailout plan get passed, the above problem still exist.
It seems that Japanese firms are stepping in and we have to wonder how they will manage this wind-fall of management responsibility and liabilities in the future. The track record for Japanese is that they changed their wealth into a bubble and after the bubble burst, they got stuck in recession and stagnation for almost two decades. Do they have a big plan for their future? Doesn't seem to be the case if you look at Japan's political turmoils these days. But let's hope Japanese can once again be as innovative as they are for electronics.
So, if there is a good bailout plan get passed and the rescue of the economy is successful, the US economy may be able to hold on longer and experience a slower period of transforming. The problem is not even which bailout plan is good, people like an easy plan!
by Barry L. Ritholtz
Most people are unfamiliar with the evolution of financial management over the years. It began as a clubby old boys network, who you knew mattered more than what you knew. It evolved over time. Starting in the late 1970s, retail stock brokerage became a telemarketing sales business. Although that model is clearly changing, there is still trillions of assets under management today that got that way via the cold call.
The cold calling sales approach was developed and refined at Lehman Brothers (perhaps their collapse was Karma). It was encapsulated by a man named Martin D. Shafiroff, who wrote up, refined and perfected various phone techniques. These include the straight line, the first trade, the trust close. All of his various techniques were published in the book "Successful Telephone Selling in the '80s" and subsequent editions ('90s, etc.)
Having worked on the Sell side for the first decade of my Wall Street career, I am intimately familiar with the various pitches the retail world uses to obtain clients and assets. There is not a single retail broker of my acquaintance that does not have Shafiroff's how-to on his bookshelf.
The reason I bring this up today is due to the latest sales pitch from various people, aggressively pushing the bailout plan. The newest spin on the massively expensive plan is "Hey, its a jumbo money maker!"
The spin reminds me of the classic retail stock jockey. The guy has buried his clients in a series of bad trades, bad judgment, poor risk management -- all motivated by his self-interested, commission-generating trades. The only way out of the money losing mess, pitches the broker, is a big, Hail Mary trade.
This technique is one of the last ones in the the Shafiroff book. Once an aggressive retail broker is upside down, the plea goes out for raising more money from the
mark client. "Believe me, I hate being under water more than you. I pulled in some favors, this is the trade that makes it all back for us and then some. I could even get in trouble telling you this, so don't mention this to your pals. This is the one -- but I need you to send in more capital so we can recoup the prior trades that went bad on us."
I guess Paulson read the book in the early days of his career. That line of bullshit is identical to what the public is now being fed. A series of OpEds in the Washington Post and the Wall Street Journal (and who knows where else) are all pushing the same nonsensical line: The bailout plan is a big money maker:
Andy Kessler in the WSJ:
"My analysis suggests that Treasury Secretary Henry Paulson (a former investment banker, no less, not a trader) may pull off the mother of all trades, which could net a trillion dollars and maybe as much as $2.2 trillion -- yes, with a "t" -- for the United States Treasury...
Now Mr. Paulson is pitching Congress for $700 billion or more to buy distressed loans and CDOs from the rest of Wall Street, injecting needed cash onto balance sheets so that normal loans for economic activity can be restored. The trick is what price he will pay. Better mortgages and CDOs are selling for 70 cents on the dollar. But many are seriously distressed (15-25 cents on the dollar) because they are the last to be paid in foreclosures. These are what Wall Street wants to unload the quickest.
Firms will haggle, but eventually cave -- they need the cash. I am figuring Mr. Paulson could wind up buying more than $2 trillion in notional value loans and home equity and CDOs for his $700 billion."
"The extreme measures are extended government guarantees and the formation of an RTC-like holding company housed within the Treasury. Critics call this a bailout of Wall Street; in fact, it is anything but. I estimate the average price of distressed mortgages that pass from "troubled financial institutions" to the Treasury at auction will be 65 cents on the dollar, representing a loss of one-third of the original purchase price to the seller, and a prospective yield of 10 to 15 percent to the Treasury. Financed at 3 to 4 percent via the sale of Treasury bonds, the Treasury will therefore be in a position to earn a positive carry or yield spread of at least 7 to 8 percent. Calls for appropriate oversight of this auction process are more than justified. There are disinterested firms, some not even based on Wall Street, with the expertise to evaluate these complicated pools of mortgages and other assets to assure taxpayers that their money is being wisely invested. My estimate of double-digit returns assumes lengthy ownership of the assets and is in turn dependent on the level of home foreclosures, but this program is, in fact, directed to prevent just that."
Now, I have a few question for Messrs. Kessler & Gross: What does this say about the private sector? Why can't the all of the private equity funds, sovereign wealth funds, and enormous pools of capital do this themselves? There are trillions of dollars sitting around in cash, yet none of it that sees any value here?
I guess that Hank Paulson, George Bush and Ben Bernanke -- all of whom have been been unequivocally, expensively, tyrannically wrong about the entire crisis from the beginning -- are smarter than both the markets, and all of the private equity pools, about this paper?
Does that sound right to you? The guys who missed this from day one -- despite many many admonitions from many people -- only they see the value in this paper, whereas the smart guys who saw the shitstorm coming in advance, and bet against it, don't?
I am in the same camp as Michal Lewis, who writes at Bloomberg "the Treasury plan also creates this wonderful hidden opportunity for Goldman Sachs to make a killing, and thus preserve its bonus pool for a long time to come."
Put me down as sympatico with Anatole Kaletsky, who writes in the London Times:
"Mr Paulson may be a former chairman of Goldman Sachs, but as US Treasury Secretary he does not know what he is doing. His recent blunders, starting with the “rescue” of Fannie Mae, have triggered unintended consequences around the world, resulting in the death-spiral of financial values. But last Friday Mr Paulson outdid even these Rumsfeldian achievements, when he demanded $700 billion from Congress for a “comprehensive and fundamental” solution to the global financial crisis, without apparently having any idea of what he would actually do."
I have a 10 year bet for those folks now pushing the "Trust me, we will make it all back on this one trade" spin. If you who think the Paulson plan is a money maker, a cash winner, and a net after-fees taxpayer surplus creator, put your money where your mouth is. I bet you one million dollars, to the charity of the winner's choice, that the current plan is ginormous money loser.
Wednesday, September 24, 2008
Free market is some time is used synonymously with perfect competition but today's politicians have abused this term and it no longer means perfect competition but a market without government oversight.
This is why: Democrats Are Better Republicans than Republicans Are, copied from Brad Source: Doug Henwood, Liscio Report.
Tuesday, September 23, 2008
Wait a minute, I thought Hank and Ben were saying the economic system will collapse into a depression if this bailout plan did not get passed by the congress. Now, its only about have a high risk of recession? No need to bailout then. There has been several recessions and people are still alive.
Why not to use a complete override plan and mandate every institution that holds toxic assets to participate the auction. How much different is there between a partial market bailout and a complete government takeover bailout? The later may be more reasonable and effective for now and the government can release the tight control of financial institutions after the housing market recovers. Since everybody already agree to reform the financial system, why don't the government just do it now: cap the executive pay, setup renegotiation rules for the home owners facing foreclosure and order the banks to conduct business viewing each other as a government owned entity until the conditions get back to normal. This way will set a good precedent to deter future moral hazard since the CEOs will know that if they again recklessly take risk and put the whole financial system on the edge of total collapse, they will be punished by the government in a ruthless manner so as for the shareholders of these banks and future shareholders of banks will watch carefully on the risk-taking behaviors of the CEOs. "Hank" is simply too nice to his old buddies.
Monday, September 22, 2008
Things US can offer to the world have been movies, English, education, food and IT product. It is hard to sell cultural product once US lose her status of an admirable country. It is very hard to believe American heroes can actually save the world after 9/11, and Hollywood has been repeating its stories for several years by now with the mentality getting lower from Napoleon Dynamite to Superbad. The high-tech movie making skills can be transferred easily. In the development of the their own economy, the rest of the world would want to maintain food security and their own technological independence and advantage. It seems that education is still valuable at college and graduate level in the US but the dim job prospectus make the foreign students more reluctant to come and with the huge amount of US PhD produced, the education level in the rest of the world will also catch-up. The financial sector used to the be largest in the US economy and now its in peril, what's next?
The game has been the financial sector of the US channeling the wealth from the world to the US so that Americans can consume what are provided from the rest of the world without pay it back for a while, evidence from the huge trade deficits. Deleveraging this debt is a taunting task!
The investment banking industry dead on Sept 21, 2008 and today, Sept 22, 2008 let's hold a solemn funeral for this suicidal industry and speculate some day in the future it will resurrect.
The post is named after this movie.
Saturday, September 20, 2008
"Power corrupts and absolute power corrupts absolutely"A gentleman from the post office recited this to me today when he was delivering my package and he thought the current turmoil was a result of corruption from power fostered by money. May be the big picture can be viewed as "the get rich fast = American dream" leads money to seek power and use power to get more money and when the money-making is in trouble, power now come to rescue. Like Luigi Zingales said: "The time has come to save capitalism from the capitalists."
The observation I would like to make is that, actually, nobody has really shown obvious sign of corruption in the after mess. Two trouble makers to blame are the kept-too-long low interest rate by Greenspan and the predatory lending. People who are now trying to prevent the system from collapsing have good reasons for doing what they are trying to do. The problems lie more in the social-economic system itself than something can be simply attributable to power and corruption. What people are worrying about is that it is very possible the quick fixes for the current crisis are only short term patches with hidden agenda to even rob more from the poor or middle class and feed the riches. If things go better in next week, next month and next year but no fix for the social-economic system itself, a bigger crisis can still be looming and the U.S. can be totally wracked. I think that's the problem most people worry and I think it is very hard to fix, which is the reason I start to write this blog.
Friday, September 19, 2008
In sum, the American people have to save more and slowly retire their debt to the world with what ever American products that they are willing to export, such as food or movies.
The domestic political sentiment of the U.S. focused on the manufacturing job loss and the trade deficits to China, which a country viewed by the U.S. not as a friend. So, the U.S. politicians started to demand the Chinese currency, Yuan or RMB, to appreciate. There is domestic demand for the appreciation of Yuan in China as well. In more recent years, China's wealth has accumulated to a level that can feed its own bubble in the stock market and her domestic housing market. The Chinese officials hope the appreciation of Yuan can help to keep the wealth produced by the cheap domestic labor remain in the country and benefits Chinese people, and they also passed a labor law to protect workers' rights for the same purpose. This consensus between the Chinese and Americans led to the depreciation of US dollar. The devaluation on the US dollar denominated assets owned by the Chinese government make the Chinese realize the depreciation of dollar is actually a default on the liability owed by the U.S. to China thus the wealth flow from China to the U.S. is disrupted abruptly both intentionally by the underweighting of USD denominated assets holding by the Chinese government and unintentionally by the higher labor costs for the Chinses suppliers. It is generally thought that to shift production of the exporting goods out of China will take time and incur higher production costs. Ultimately, very soon the cost of living in the U.S. will be higher than had the Sino-US trade relationship not been broken abruptly.
The U.S. can repay its debt by transferring wealth through trade or selling its assets to the Chinese or the Arabs, which is a choice that neither the U.S. government nor business leaders would like to make. However, when there is no obvious way to repay the debt through international trade, the U.S. have to sell its assets one way another once the process of wealth transfer from China to the U.S. is disrupted. The U.S. authorities realized that cheap dollar lead to higher oil price and higher inflation eventually a deep recession so they decided to reverse the depreciation of dollar. Then the only way to sell US assets is the the prices of these assets to collapse, as seen in the stock market and the housing market in the U.S. Even so, the barrier for Chinese to purchase U.S. assets is still extremely high due to the Chinese capital flow restriction and the reluctance of the U.S. government to accept this choice. So the U.S. government step in and bailed out the U.S. assets by either have direct stakes in some U.S. firms or now, an entity to hold toxic MBS derivatives. The question remains, however, how the U.S. economy will repay the liability to the rest of the world in general and China or OPEC countries in particular.
In the short term, if the U.S. economy is stabilized through the above government actions, the depreciation of dollar is inevitable since the market still needs to enforce the repayment of the liability owed by the U.S.