Tuesday, September 30, 2008


I'm Pulling Out Some Extra Cash

The FDIC has asked for an increase in the size of accounts it can fully insure, presumably to forestall bank runs. I encourage everyone to have larger cash balances than normal; at least a few days' worth. It's true that an FDIC-insured account is "safe," but Robert Wenzel explains that the FDIC purposely makes you wait in line for hours to get your "safe" money at a failed bank. If your bank fails, you will wish you had pulled out a decent chunk beforehand so you can wait for things to settle down before trying to get your money.


Two Ladies on the Bailout

Judy Shelton has a fantastic op ed in today's WSJ on the need for a gold standard. I kept waiting for "her" to say, "Surprise! It's really Ron Paul writing! Gotcha!" Here's my favorite part that you rarely see mentioned in mainstream "free market" outlets:

If capitalism depends on designating a person of godlike abilities to manage demand and supply for all forms of money and credit -- currency, demand deposits, money-market funds, repurchase agreements, equities, mortgages, corporate debt -- we are as doomed as those wretched citizens who relied on central planning for their economic salvation.

Think of it: Nothing is more vital to capitalism than capital, the financial seed corn dedicated to next year's crop. Yet we, believers in free markets, allow the price of capital, i.e., the interest rate on loanable funds, to be fixed by a central committee in accordance with government objectives. We might as well resurrect Gosplan, the old Soviet State Planning Committee, and ask them to draw up the next five-year plan.

And then reader Jordan Bullock sent me this Motley Fool piece by Alyce Lomax that is pretty sound. An excerpt:

I can't help but wonder if the point of the bailout is to take the deflated bubble, which was inflated by easy credit to begin with, blow a little air into it, and apply a patch that just won't hold. Is the real point that we have to return to loose lending to maintain our economic "growth"?

How much would our economy have grown since 2001 without all the debt-fueled spending? I feel like the real message right now is that the party's over, but nobody wants it to be. (And it was an acid-trip bender to begin with -- nothing that happened was actually real.)


"Why Rescue AIG But Not Lehman?"

One possible reason: Goldman Sachs would have lost $20 billion if AIG failed, whereas Lehman is a competitor. According to this article:

The seeds of much of the financial chaos engulfing America were sown in London, by a single unit of AIG, the financial services firm recently bailed out by the US Treasury. The New York Times reported yesterday that this 377-person unit "flourished in a climate of opulent pay, lax oversight and blind faith in financial risk models" which resulted in the near-collapse of one of the world's most important firms.

The newspaper also suggested that the US government's decision to bail out AIG, within hours of letting Lehman Brothers go bankrupt, owed much to the risk posed to Goldman Sachs - the firm run until two years ago by Hank Paulson, the Treasury Secretary.

Unknown to many, Goldman had become AIG’s largest trading partner according to six people who spoke to the New York Times anonymously. If the insurer collapsed, they told the Times, Goldman stood to lose $20bn.

When federal officials - who let Lehman Bros die - decided to bail-out AIG at a cost of $85bn, Lloyd Blankfein, the CEO of Goldman, was the only Wall Street chief exec present.


Diamond Hill CEO Explains Why He Wanted Off the SEC's No-Short List

So far as I know, only Diamond Hill and JMP Investments have asked to be taken off the SEC's list. I wonder if there is behind-the-scenes pressure for other firms not to follow suit, because it seems like free advertising for firms with relatively clean balance sheets. Either that, or the other 800+ firms on the list really are in trouble.

In any event, here is Diamond Hill's CEO explaining his decision.


The Great Bank Robbery of 2008

I give the lowdown here. Incidentally, much of this is repetition for "long time" Free Advice readers, but one novelty is that I discuss the claim that the taxpayers might make money on the deal:

Some analysts think that the price paid for these "toxic" assets is important. No it isn't. The government officials running this operation will dole out the favors on both ends, when the mortgage-backed securities are coming and when they are going. Neglecting this insight, some people want to say that if the government pays $700 billion for a portfolio of assets that is really only worth $400 billion, then the taxpayers really only lost $300 billion, not the full $700 billion.

Yet this thinking is naïve. The taxpayers are not going to be treated as equivalent to shareholders of a firm that just acquired $400 billion in assets. The taxpayers are not going to get a cut of the monthly mortgage payments (less the servicing costs on the $700 billion in new debt) tied to the government's massive portfolio. Instead, the government will simply bump up its annual spending by a few billion dollars. Maybe it will have to spend the money on homeownership programs, or homebuilder job retraining, but the net income from those government-owned assets certainly won't translate into a dollar-for-dollar tax cut.

And then at some point — during a future Republican administration, no doubt — there will be a push to "privatize" the secondary mortgage market, and the government's portfolio at that time will be auctioned off at very generous prices to politically connected institutions.

Monday, September 29, 2008


The $700 Billion Pelosi Speech

Here is the "partisan" speech that allegedly so angered the Republicans that they decided to vote against the Paulson bailout after all. I can't decide which side is less ridiculous on this one. On the one hand, Barney Frank had a good comeback, when he said of the defecting Republicans something like, "So their feelings got hurt, and they took it out on the country?"

On the other hand, I can understand that if you had only very reluctantly signed on to this thing, and your constituents were contacting you against it 20-to-1 (latest numbers I've seen), that this speech by Pelosi would push you over the edge. Yes, it's true that the Republicans should have either voted for or against it based on whether they thought it would help or hurt the country. But if you push that logic all the way, it means Congressional debate doesn't really matter. I.e. there's really no sense in discussing whether Pelosi or anyone else is a good leader, if this speech doesn't prove that Pelosi is a bad leader.

P.S. Pelosi obviously doesn't know what a free market is, though she can't be blamed too much since Bush et al. claim they are big proponents of it.

P.P.S. Also note the when she is introduced, Pelosi is granted one minute. It looks like there is inflation on time as well, because she goes way way over.


"OK If We Can't Borrow $700 Billion, We'll Just Print $630 Billion!"

Or so our financial wizards seem to be saying. Here's a Bloomberg article title we haven't seen before: "Fed Pumps Further $630 Billion into Financial System." (HT2EPJ)


House Rejects Bailout Plan!!

This is great stuff. First the Democrats let the offshore ban expire, and now they don't ram through the Paulson Plan. Will wonders never cease?

I still think some version of this is going to happen, but I admit that I thought it was a done deal after the Sunday announcements.


Remarks from a Wall Street Big Gun

My buddy on Wall Street wrote to me in an email saying:

I have been catching myself thinking the last few weeks…”I will never invest in a financial institution."

Why? It seems that if they are insolvent the government just seizes them. If other kinds of companies go bankrupt there are still contracts, property rights and sufficient bankruptcy law/courts.

But, wow, did they ever wipeout Washington Mutual. The debtholders got zero.

Amongst the many unknown ramifications of this bailout, it could really damage people’s willingness to invest in financial institutions (including lending to them).

This is what I have been saying for weeks.

Again, folks, the verb used by the lapdog financial press is "seize" when it describes what the government regulators do to these troubled institutions. And also, no one is going to sell dubious assets to private buyers, since they will get such a better offer from Hank Paulson in short order.

Given this environment, what investor in his right mind would get into the financial sector?


Inside Fed Baseball, from Bill Barnett

I am on a discussion list of Austrian economists, and Bill Barnett (economics professor at Loyola University in New Orleans, when it's not underwater) posted the following, which I reprint with his permission:

The Fed's consolidated balance sheet...and its data on reserves and the monetary base...reveal several interesting points, not limited to the following: The Fed's balance sheet expanded by some $294B (not M) over the last two weeks; that is, by approximately 1/3 (no misprint - 31.4%).

The big items on the asset side are repos (-$40B), "Other loans" (+$238B) and "Other assets" (+$86B); on the liability side, rev. repos (+$47B), deposits of depository institution (+$63B), and, the real kicker, UST deposits in its "supplementary financing account" an account that appears for the first time, as far as I know, certainly it hasn't been there in the last two years, to the best of my knowledge (+$160B). This boggles the mind.

As to the monetary base, total depository institution reserves more than doubled during the last two weeks from $47B to $110B, but the base, according to H.3 table 1, only increased by $7B. Seems to me that something is wrong with that, as the cash in circulation would have had to decline by some $56B, and yet it only went up by some $2B, according to H4 table 4.

At any rate, excess reserves went up by more than 3,000% from $2.2B to $69B. Moreover, the banks and S&Ls are carrying some $15B in "surplus vault cash" that is not included in excess reserves. Altogether, some $83B they could lend out if they had capital AND were not afraid of bank runs.



"Mad Money" Senior Writer Wants Credit for Bailout

Aww, no fair! Paulson's getting all the credit for the Great Bank Robbery of 2008! So says one of Jim Cramer's henchmen. (Note: I no longer read or listen to Cramer AT ALL, but this is a loophole since I'm not quoting him directly.) Anyway listen to this guy:

I know we've spent every night talking about the Paulson bailout plan (or Invest In America Plan as we call it) ever since the rumors about it started last week, but to be fair, we've actually been talking about this plan, or something like it for months. Ever since March, if not earlier, Jim's been calling for the government to buy mortgages and mortgage-backed paper, and starting around July 16 he called for the creation of a Mortgage Resolution Trust almost every show. If we were the kind of egomaniacal people who demanded credit for every idea we pushed that eventually got adopted or at least proposed, we wouldn't have room for anything else on the show.

But just to be clear, this has been on your TV screen for months, and it should've been on someone's radar. Jim is a cable TV host and he's been pushing a plan similar to Paulson's for months, but Congress was blindsided by this? Come on. So for people who act like Paulson's plan came out of nowhere, even though we've been suggesting the government do this for months, come on! If there's any fault, it's with the administration for waiting so long before putting this plan forward. Lehman...and AIG...had to go down, not to mention Fannie...and Freddie...before they were scared enough to realize that, yes, we have a big, systemic problem.

Funny that an administration so sold on preemptive war has been so incapable of taking preemptive action when it comes to the economy.

Don't you love that last line? It's akin to Bill Kristol saying, "We were saying for years that the US should invade Iraq. It's too bad the World Trade Centers had to come down before people took our warnings of WMD seriously."

Incidentally, as I write the S&P500 is down more than 3.5%, and the credit markets are worse than they were last week.


Monday Monday...Can We Trust This Day?

I am very anxious to see what happens to the stock market and gold/silver prices today, now that the Great Bank Robbery of 2008 has gone through. Let's suppose the market tanks more than 3% this week, and another big institution goes under. Would the government say, "Hmm, I guess our bailout didn't work after all, never mind"? Or would they ask for twice as much money?


Snapshot of Free Advice Reader Profile

Wow it's already been more than a month since the Little Blog That Could opened up shop. I'm proud to say that in this brief time, we've overseen the biggest theft in world history. But snap out of it, guys, we still have the whole second half!

Anyway, I was browsing the stats from my Top Secret Demography Flux Capacitor, and noticed something interesting:

United States....317,900.........00:02:02
United Kingdom.....4,700.........00:00:55

(Note: I have adjusted the numbers in one and only one of the columns above. Also, I have tried twice to format the column margins, and even switched to periods instead of spaces. I have no idea why the columns aren't flush, because they ought to be, in a parallel universe where I understand computers.)

So I think our thousands from the U.S., Canada, Australia, and Belgium should take a bow. You are very deep thinkers, and really absorb the material. (Or maybe it just takes you a long time to "get" deadpan jokes.)

On the other hand, some of you other people... What's the story, people in Netherlands? (BTW is it *the* Netherlands? And if so, is that really necessary? It's not like somebody says, "Hi I'm Bjorderben, and I'm from Netherlands" and then the other guy says, "Do you mean you're from THEE Netherlands?!")


Economist Robert Murphy Endorses the Bailout (!!)

From this Boston Herald column:

Not even economists and financial experts could agree on the plan’s wisdom and probability of success, if the $700 billion package is approved.

Some say the bailout could easily cost more than $1 trillion.

Peter Cohan, a venture capitalist and president of Peter Cohan & Associates in Marlboro, said Paulson’s proposal is a “terrible idea” because it calls for buying up bad mortgage assets without really helping companies recover.
But Robert Murphy, an economist...said buying up bad assets of Wall Street firms will help firms get out from under the toxic securities that have already claimed Bear Stearns, Lehman Brothers, Merrill Lynch and American International Group.

In the words of Austin Powers, "Really baby, that's not my quote."

(Note they are referring to a different Murphy; they aren't misquoting me.)

Sunday, September 28, 2008


Smallville, er, Hillsdale Adventures: Tales of Murphy When He Had Hair

Aristos (not his Christian name) starts out trying to pay tribute to Alexander Shtromas, a really cool political science professor we both had in Hillsdale College, but his jealousy of me overtakes the post. It's OK Aristos, let it go. (BTW, if you are in a closet and the feds are searching your house, don't click the link. I think music kicks in and you have to hit pause on the embedded player to stop it.)


Army Gets Ready for Civil Unrest--in the US of A

Naturally they aren't billing it the way I have done above, but really, there isn't much left to the imagination in this article at the Army Times from September 8. The article starts out pleasantly enough:

The 3rd Infantry Division’s 1st Brigade Combat Team has spent 35 of the last 60 months in Iraq patrolling in full battle rattle, helping restore essential services and escorting supply convoys.

Now they’re training for the same mission — with a twist — at home.

Beginning Oct. 1 for 12 months, the 1st BCT will be under the day-to-day control of U.S. Army North, the Army service component of Northern Command, as an on-call federal response force for natural or manmade emergencies and disasters, including terrorist attacks.

Aww, how sweet of them! Rather than bringing freedom and security to Iraqis and Afghans, they're going to build dams and remove fallen trees. Be all you can be, fellas!

But then the article takes an odd turn, when they elaborate on the new training the Army of One (Quarter Million) is receiving:

In the meantime, they’ll learn new skills, use some of the ones they acquired in the war zone and more than likely will not be shot at while doing any of it.

They may be called upon to help with civil unrest and crowd control or to deal with potentially horrific scenarios such as massive poisoning and chaos in response to a chemical, biological, radiological, nuclear or high-yield explosive, or CBRNE, attack.

Training for homeland scenarios has already begun at Fort Stewart and includes specialty tasks such as knowing how to use the “jaws of life” to extract a person from a mangled vehicle; extra medical training for a CBRNE incident; and working with U.S. Forestry Service experts on how to go in with chainsaws and cut and clear trees to clear a road or area.

The 1st BCT’s soldiers also will learn how to use “the first ever nonlethal package that the Army has fielded,” 1st BCT commander Col. Roger Cloutier said, referring to crowd and traffic control equipment and nonlethal weapons designed to subdue unruly or dangerous individuals without killing them.

“It’s a new modular package of nonlethal capabilities that they’re fielding. They’ve been using pieces of it in Iraq, but this is the first time that these modules were consolidated and this package fielded, and because of this mission we’re undertaking we were the first to get it.”

The package includes equipment to stand up a hasty road block; spike strips for slowing, stopping or controlling traffic; shields and batons; and, beanbag bullets.

Now the funny/sad thing is, I'm sure a lot of regular Joes would read the above and scoff at my paranoia. But c'mon folks, obviously if the United States were to turn into a dictatorship, it wouldn't happen overnight. But the Bush Administration has been one heckuva good start.


Funny Joel Stein Article on Bailout

Joel Stein is the kind of smarmy writer who is annoying when you happen to like whatever he's mocking, but who is hilarious when you agree with him. On the bailout he and I are of one mind:

Even though I understand so little about economics that much of my long-term investments are tied up in Costco products, I feel pretty sure that letting Congress give Treasury Secretary Henry Paulson $700 billion to buy super-crappy mortgages is not the right call.

Sure, like any American, when I see a photo on the Internet of an adorable little investment bank and find out it's at risk of being put to sleep, I want to throw in $2,000 to $3,000 of my own money to adopt it.



Phew! Don't Worry Folks, the Politicians Stayed Up Past Midnight to Rob Us Blind

The swagger of these people is astounding. The public is against this 9-to-1 by some measures, such that they pass it literally in the middle of the night on a weekend, and then they have the audacity to pretend that we were worried they couldn't agree on how to split up $700 billion amongst themselves? Ha ha, I wasn't worried at all that the deal wouldn't pass.

Just read these comments:

House Speaker Nancy Pelosi announced the $700 billion accord just after midnight but said it still has to be put on paper.

"We've still got more to do to finalize it, but I think we're there," said Treasury Secretary Henry Paulson, who also participated in the negotiations in the Capitol.

"We worked out everything," said Sen. Judd Gregg, R-N.H., the chief Senate Republican in the talks.
Hours later, when he and others told reporters of the plan in a post-midnight news conference, Reid referred to the sometimes testy nature of the negotiations.

"We've had a lot of pleasant words," he said, "and some that haven't always been pleasant."

"We're very pleased with the progress made tonight," said White House spokesman Tony Fratto. "We appreciate the bipartisan effort to deal with this urgent issue."

I am getting so cynical about this stuff, now I'm wondering if the whole House Republican thing was a sham too, to give the voters the illusion that their interests were actually considered. This way everybody wins (except taxpayers): The Democrats have cover, since they weren't the only ones who signed on to this robbery. But the Republicans are OK too, since they can say they were a powerless minority and yet won concessions for the taxpayer.

Oh, and the other benefit to them is, they just extracted $700 billion more from us. Let's not forget that aspect of the "agreement."

This farce should be sobering to those who still think we have a democracy in this country--not that there's anything right with that (to paraphrase Seinfeld).


Bruce Bartlett: Another Fair-Weather Friend of the Free Market, & Commentary on Capital Consumption

Well shoot, just when I thought we had this all locked up from a disinterested academic viewpoint, Bruce Bartlett comes along and endorses the Paulson Plan. He starts out by explaining the fractional reserve system. It doesn't appear that Bartlett has even considered whether fractional reserve banking is a good idea; he just takes it as a given, to explain why banks are more fragile than other industries and so need a bailout.

But then he gives us these hysterical warnings:

There are, of course, policies in place today that didn't exist in 1929 that make another Great Depression unlikely. (The most important is federal deposit insurance for the vast bulk of deposits.) But there is still a great danger that, if the financial sector becomes overloaded with assets falling in value, it could lead to a long period of economic stagnation, such as that suffered by Japan in the 1990s.

One reason for this is that Federal Reserve policy becomes impotent when the financial system simply can't distribute changes in the money supply throughout the economy.

We're seeing evidence of this already, as interest rates on Treasury securities fall to very low levels. When this happens, we have what economists call a "liquidity trap" - and it means that the Fed is incapable of stopping a deflation once it gets started.

Bottom line: We're closer to the precipice than Congress or most of the public understands. Our entire economic system really is at stake - and those treating the bailout plan as just another government spending program are seriously wrong.

Failure of this plan risks another Great Depression. Really.

You can see the fear in Treasury Secretary Henry Paulson's eyes and in those of Federal Reserve Chairman Ben Bernanke. But they dare not say how critical the situation is - lest it shake confidence and make matters worse.

C'mon Bruce, the reason the Great Depression lasted a decade, and the reason Japan's economy was in the toilet for so many years, was that the American and Japanese governments prevented adjustments in the structure of production.

I really don't understand how these people think the world works. In U.S. history up through 1945, all but one of the economic downturns was over within two years. (I am pretty sure that's right, though I might be forgetting an episode.) Yet the Great Depression arguably lasted over 10 years. At the same time, we all know without doubt that FDR's New Deal was the most ambitious attempt ever by a US government to wage war against a bad economy.

So I want to conclude that the Great Depression lasted so long because of the New Deal. This fits perfectly with economic theory; if the government and unions prop up wage rates during a deflation, you get massive unemployment. Simple stuff.

Yet those who want to argue that there are just random chaotic forces that suddenly push fragile free markets into sluggishness, and that a strong central government response is needed to correct things: Are you saying that if FDR/Fed had done nothing, then the Great Depression would have lasted, say, 20 years--thus proving that FDR saved the country? And so that means you think these ticking time bombs latent in advanced capitalist economies, were just popping out in two-year bursts throughout US history, and then all of a sudden in 1929 there was a 20-year burst of bad vibes? And now, 79 years later, we just got hit with another random burst of super bad financial vibes?

I am not trying to be flippant. The people warning of a credit collapse have a point: It really would be awful for a while if the banking system (with check clearinghouses etc.) actually shut down.

But no matter how bad it was, if the politicians would for once just stand back and watch entrepreneurs make small improvements here and there on the edges, after 12 months things would be back on solid footing. The recession would be over, workers would be in the appropriate jobs, and growth could resume.

But instead of that, the government is going to do everything in its power to cajole Americans to continue consuming more than they produce. Financially, this of course translates into more debt held by Americans (whether privately or from government IOUs). Physically, it will manifest itself in a shrinking of the capital structure. Not enough real resources each year will go into reproducing the machines and other equipment being worn out over the course of the year.

Because resource flows can be rearranged, for a while this capital consumption need not restrict total consumption. The same amount of cereal boxes and F-150s can crank out of US factories every month, for a while. But "higher up" in the production structure, the necessary replacement investment is not occurring. So at some point, even if they are willing to say, "To heck with the future!" it will be technologically impossible to maintain the current level of output of consumer goods.

On top of the politicians' efforts to prevent Americans from rationally responding, and curtailing their consumption during these hard times, there is now another problem: The politicians are directly interfering with the financial markets. Thus the market prices that guide entrepreneurs are going to be a lot fuzzier; their information content will be lower, if you will.

We're heading for another Great Depression, all right, but it's not because of "the liquidity trap." No, it will be due to the "Obamanomics Trap" or the "Palinomics Trap."


"That's MY King. I Wonder...Do You Know Him?"

So asks S.M. Lockridge:

Saturday, September 27, 2008


The Nonsense "Free Market" House Republican Alternative

The House Republicans valiantly stood up and delayed the Paulson Plan, but their suggested alternatives make no sense. First, they want to lower the capital gains tax. That is good in general, but as some have pointed out, it doesn't really help firms unload their MBS--they obviously will be selling them at a loss, and so taking away the capital gains tax shouldn't make them more likely to sell.

On the other hand, an outside buyer would buy the assets for a higher price, if he wouldn't be taxed on the capital gain if the assets recovered in a few years.

But putting the capital gains tax cut aside, the main proposal was for the federal government to set up an insurance program, rather than buying the bad assets outright. This made no sense to me. If the plan is voluntary, then why isn't the government just replicating the credit default swap market? And if the plan is mandatory, then how is the government going to determine premiums? And how much coverage does each firm have to buy?

The whole thing is completely ridiculous. You could get an outcome where you're trying to set up a fire insurance company that includes only houses that are already on fire. Or, you could get an outcome where everyone pays a fixed premium, and then scrambles to get their hands on assets most likely to default, because the government insurance indemnifies for above-market prices. So for a while, the market price of an MBS more likely to default could be higher than a safer MBS.

I admit I haven't actually worked out a game theoretic model to prove that this could happen, but I think it could. Imagine there are two identical buildings, except one is located next to a fireworks factory. They normally would sell for $100,000 each. But now the government mandates that every building owner pays $5,000 annually for fire insurance, regardless of the value of your building, and if your building burns down you get a check for $500,000. I think in the new equilibrium, the price of the building next to the fireworks factory would be much higher than the other building.

In the same article linked above, they quote economist Robert Waldmann who wrote:

[T]he problem is the price, in this case the premium. If it is vastly less than the probability of default, the House Republicans have found a way to throw money at bankers and financial arsonists instead of just bankers. If it is actuarily fair, it will force liquidity constrained firms to unload the securities -- they could wait and hope for no default, but they can't pay actuarily fair premiums. When you are insolvent, risk, variance, double or nothing is your only hope of survival. Thus aside from the contribution to financial arson (which I guess will be huge) the plan would also force distressed banks etc to unload mortgage backed securities at fire-sale prices. Now I don't think the current problem is mainly due to systemic margin calls due to mark to market and capital requirements, but making that problem vastly worse would hasten the collapse of the US financial system even without financial arson.

Why is it that our politicians keep proposing plans that an actual economist can explode with 5 minutes of critical thinking? Does that bother you?


Is Bernanke Going to Inflate or Not?

That has been the question in my mind for the last year. As I will explain in more detail in a future post, Bernanke has been "sterilizing" his liquidity injections to Wall Street as best he could, thus far. Briefly, what Bernanke injects as reserves by lending to a bank, he takes out of the system by selling off some of the Fed's holdings of Treasury debt. So when you see stories in the WSJ talking about injections of $75 billion etc., that's at best like a revolving line of credit; you wouldn't add up all those headlines to get a cumulative increase in the money supply. Now because Bernanke has been sterilizing all along, the monetary base grew quite modestly indeed.

So it seemed that Bernanke was following the political necessity of doing something to bail out Wall Street since September 2007, but that he was putting his macroeconomics skills to use in trying to minimize the damage to the dollar. The question then became, "What happens when the Fed has drained its balance sheet, and has nothing left with which to sterilize its injections to troubled banks? Will Bernanke cut them off, or will he allow the monetary base to grow like gangbusters?"

My vote had been Door #2. And this latest figure (HT2LRC) reinforces my view (click to enlarge):


Kudlow's Line in the Sand Against Bailout Lasts For Two Days

In a CNBC description that ran on Thursday, Sept. 25, popular free market analyst Larry Kudlow had said he wouldn't support the Paulson Plan if it contained corporate equity for the government or meddled with executive pay. Kudlow said:

If the bailout bill allows executive pay-caps and government ownership warrants for all buying or selling institutions, I must withdraw my support for the bill.

There is no clear information yet on this crucial topic. CNBC is reporting that Sen. Chuck Schumer is telling people that pay-caps and ownership warrants will be included for all banks and others (Fidelity-type investment managers, KKR-type private-equity firms, etc.) that either buy or sell the toxic paper.

The Treasury Department does not want this simply because it knows it would be unworkable. In other words, giving up pay-caps and warrants would probably mean that only the most dire, down-in-the-mouth banks will sell, and they’ll sell the very worst imaginable paper. Meanwhile, no reputable institution is gonna buy the paper if they have to give up ownership or compensation rules.

So it would be stupid for Congress to write this kind of thing into the bill. It would go beyond France into pure socialism. It would represent a huge first step into government interference everywhere. And it would sink New York way down the list of world financial centers. London and Hong Kong would pass us by in the blink of an eye.

But, after two days, Kudlow is back on board. In his National Review piece on Saturday, September 27, he opens with:

The single-biggest mistake in the Paulson bank-rescue-plan marketing effort has been the failure to explain clearly how taxpayers are going to recoup $700 billion used to buy toxic assets at auction in order to unfreeze the banking system. In other words, folks don’t understand how taxpayers will be paid back, and may actually make profits, which will enable the new government debt to be erased after the Treasury bank-rescue is completed.

After explaining that the taxpayers will enjoy the cash-flows generated by the mortgage-backed assets, as well as the capital gains when they are sold back to private owners, Kudlow wants to make sure we see just how great a deal this is:

I don’t think a lot of folks understand this win-win scenario. Let me repeat: The taxpayers own the bonds the Treasury buys; the taxpayers own the cash flows generated by the bonds; the taxpayers own the profits when the bonds are sold; and the taxpayers benefit when the profits and cash flows are used to pay-down government debt.

Actually, for taxpayers, it’s a win-win-win-win.

Think about this. The troubled assets purchased by the Treasury right now are likely to be very under-priced because of the chaotic and frozen market conditions. But over time, through monthly cash-flow payments or through loan sales, taxpayers will get all their money back and in great likelihood a handsome profit.

Now what Kudlow never even addresses is, "Why doesn't Warren Buffett or a bank in Dubai sweep in and buy up these MBS, if they are such an attractive investment at current prices?"

Last point: In this later article, Kudlow goes over six conditions that House Republicans want, before they will sign on. So presumably Kudlow is endorsing a bailout that obeys these conditions. As far as I can tell, the list makes no mention of executive compensation. So apparently Kudlow changed his mind in two days, on whether he could support this thing. His warnings against socialism were dropped when Hank Paulson got him to believe the taxpayers were going to profit from this scheme. Riiiight.


Pat Buchanan: Foreigners Behind the Bailout!

Buchanan has a great piece up today at LRC. He stresses an aspect of The Great Bank Robbery of 2008 that I hadn't considered:

Since Americans save nothing and have to borrow from abroad to finance our trade and budget deficits, wars and foreign aid, what the secretary proposes is this: that Congress authorize the Treasury to spend $700 billion to buy up the toxic paper on the books not only of U.S. banks, but of foreign banks operating in the United States. According to The Washington Times, the Treasury would also be authorized to buy up securities backed by rotten auto loans, student loans and credit card debts.

Thus America would be borrowing from China, Japan and the Middle East to tidy up the balance sheets of the banks of China, Japan and the Middle East. And all the rotten paper will be offloaded onto U.S. taxpayers, who hopefully will be able to recoup some of their losses, because some of the paper will be good.

Up till now, I am embarrassed to admit, I had been thinking in terms of American power players. But now I realize that this is global in scale.

Clearly the politicians in various democratic countries aren't really running the show. If they ever really crossed their big funders, then at best they would serve out the remainder of their term, and then lose re-election. What is worse, they would forfeit the unofficial golden parachute that they surely must get from staying friendly with these groups while in office.

As Buchanan says, the US empire is clearly cashing out. And so the parasites are getting ready to jump ship, maybe to Dubai but my guess is China, which will soon be (probably within 20 years) the dominant world power once again. (If you don't believe me, just ask Jack Bauer's dad.)

The parasitic power elite (and I still don't have any idea who these people are) have sucked the US system dry. When its government was relatively small, the country was extremely prosperous. But it made more sense to "overfish" it, and run it into the ground after a hundred years of a rapidly growing State.

At this point, though, they have apparently decided it will be more profitable to concentrate on fleecing the Chinese or Russians. Those economies have a much better long-run future.

And that is why their point man, Hank Paulson, is trying to steal as much as possible before being chased away by the natives.


Conservatives Should Oppose Corporate Welfare

So I tell the great Americans at Townhall. An excerpt:

The free market is a superior economic system to central planning. This superiority demonstrates itself during normal times but especially during an economic crisis, when resources must be rearranged before regular growth can resume. By embracing massive corporate handouts and other socialist measures, the Bush Administration discredits capitalism and delays economic recovery.


U.S. Mint Halts Buffalo Gold Coin Sales

Robert Wenzel told me that Free Advice readers are taking action; the U.S. Mint had to suspend sales of its 24-karat American Buffalo gold coins because inventories had been depleted.

Friday, September 26, 2008


Free Advice Warning Issued Friday, September 26, 2008: Bank Panic May Be Imminent

I had just assumed the Paulson Bailout was a fait accompli. Yet as I write, it is still uncertain whether this heist will go through. The House Republicans gave Paulson a surprising stick in the eye. The longer the delay, the less urgent the crisis seems, and the closer the election--some figures say the public is writing Congress 9-to-1 against this thing.

And yet, the Paulson Plan involves such fantastic sums of money, surely they can just buy it. We're talking about voting themselves an extra $700 billion, and that's just for starters! Since the public easily tolerates cost increases of oh, say, 200%, that means with the precedent value, etc., this should yield $3 trillion easily over the next five years. If the federal money flows evenly over the whole period, it has a PDV of $2.7 trillion if we discount at 5%.

Now, there are 535 members of Congress (100 senators plus 435 "representatives"). But there are also lots of other interested parties. For simplicity, assume there are 1,000 members of the creme de la creme who stand to pocket this money.

The size of the pot allows them EACH to get $2.7 billion, yes with a B. You object and say I'm overlooking all sorts of slippage, the need to buy off newspapers and TV networks to give friendly coverage, blah blah blah. Fair enough, we'll bump it up to 10,000 people who will split the loot.

Hmm, that still works out to $270 million per person. How many people in Congress would be willing to lose the upcoming election for $270 million? I'm betting a lot.

But don't worry, you troubled politicians. Just ask the remaining big guns on Wall Street to engineer a run on the banks, so that President Bush has to actually close them.

The public will give you permission to spend $2 trillion before Christmas once they have a few days--with closed banks--to think about what they did.

Of course, the people running Goldman and JP Morgan will demand a bigger cut, in order for them to put on a good show. But it's worth it, right? You can easily get $100 million apiece, down the road when the dust settles.

Back to Free Advice readers: Folks, I am not formally predicting that the above will happen. But it seems entirely plausible to me; look at what these rulers did after 9/11, how they took advantage of that situation. Well with the Paulson Plan, they would get far more power over the economy; it's not just about the money.

I realize I will look foolish if nothing like this happens, but nonetheless, I urge everyone to get at least a few hundred dollars worth of silver coins. And I'm not talking about hunks of metal with the imprint of Napoleon. No, I'm talking about things like US quarters from 1964 or earlier, that are composed of 90% silver.

I do not think the entire financial infrastructure is in any danger of collapsing. The government wants you to think that, just like they want you to be in constant fear of another 9/11. It's no fun taking over a country if the monetary system doesn't work.

So let's be clear, I am not urging the accumulation of silver coins because I'm predicting the dollar will cease to circulate as money anytime soon. What I am saying is that, if the banks are closed for a few days--with no ATM withdrawals allowed either--some of you might avoid a real pinch, if you have a few hundred dollars in "real" money. It's true that you will have to find someone else knowledgeable about the silver content of pre-1965 US quarters, but people can use Google. They will learn up pretty quick if the banks are all closed.


The Mises Institute "Bailout Reader"

For those who want to immerse themselves in Austrian articles relating to the current financial crisis, here is a reader.


Murphy vs. Paulson Bailout

To paraphrase Michael Corleone* when Kay says she is taking the kids, "Henry, don't you know it is an absolute impossibility that I would allow you to engineer this bailout? Don't you know I would do everything in my power to stop you?" (Of course, Michael Corleone was in a much stronger position when he said it.)

Here is the mp3 recording of my Friday morning interview with Mark Carbonara on station KION in California. And here is the link to my Thursday op ed in the San Diego Union-Tribune, "Wall Street plan won't aid recovery." An excerpt:

The government itself has made it rational for each bank to continue stringing along its investors. After all, why should an investment bank announce the full extent of its shoddy mortgage-backed assets before its competitors do so? For the past 13 months, the government has been announcing steadily more generous measures to resuscitate Wall Street. The largest holders of these toxic assets played a game of chicken, betting that they could survive long enough to get a massive bailout from the government. And last week, Treasury Secretary Henry Paulson rewarded their foot-dragging with the promise of hundreds of billions in taxpayer dollars.

The ban on short-selling is also counterproductive. First of all, speculators perform a vital service by signaling to the public which stocks are overvalued. The reason the “vultures” attacked Bear Stearns and Lehman Brothers was that these firms were heavily leveraged in dubious mortgage derivatives. Not even New York State Attorney General Andrew Cuomo – who is making a big fuss about market manipulation by short-sellers – would suggest that Exxon could have been brought to its knees by mere rumors.

* I have recently watched The Godfather I and II. It will take about a week to cycle through my system.


"Credit Markets Mostly Frozen on Stalled Bailout"

Well that headline proves my point, which I reiterate below. And by the way, is "mostly frozen" kinda like how Wesley was only "mostly dead" after Prince Humperdinck unloaded on him in the Pit of Despair?

From my LRC column from Monday this week:

Just stop and reflect on what the government has done, even in the last few weeks. It has literally seized (the press’ word, not mine) companies tied to trillions of dollars in assets. Furthermore, these seizures were truly a "hostile takeover." For example, the common shareholders of Fannie and Freddie were quite simply robbed. The government came in and assured injections of capital to keep the firms afloat. In exchange, it acquired "senior preferred equity" shares, placing it higher on the totem pole vis-à-vis the original preferred equity shareholders, in the case of losses. However, if the real estate market turns around and the share prices of Fannie and Freddie start rising, then the government will exercise its warrants giving it ownership of 79.9% of the common stock. (Note how people are speculating that the government might make money on the deal.) Before, shareholders of Fannie and Freddie knew they were probably going to lose everything, but there was still a sliver of hope. Now there is no hope.

And yet, there is no rhyme or reason to the government’s decisions. Lehman Brothers was allowed to fail. In essence, you’ve got a massive beast stalking the financial markets. This creature has many trillions of dollars ultimately at its disposal, and oh yes, I should add: It is not afraid to send armed men to your house if you should ever really cross it. In this environment, is it any wonder that the credit markets are "frozen"? When the SWAT team bursts into your kitchen window, you freeze up, right? Why should things be so different on Wall Street?

The government is not promoting stability. The markets now whipsaw more than 2% either way, depending on the latest burp from Paulson. This would have been mind-boggling volatility a year ago, but now it is commonplace.


No More Jim Cramer!

OK, I confess that I have been reading Jim Cramer's analyses on CNBC, and I read his column in my wife's New York magazine whenever I see them. But that all stops NOW. In the Sept. 29 issue of NY magazine, Cramer actually said this:

Still, a recovery from a storm this big is going to take time. I don't see the current recession ending until the second half of 2009. Ironically, housing, which got us into this mess, could be one of the first sectors to recover, as cheap mortgage money and a dearth of new supply should lead to a bottom by June of next year.

OK it was that last sentence that made me blow up. How in the world can someone so casually make a prediction down to the month? And I'm pretty sure he's not running a giant model of the economy, either.

In fairness, Cramer might have just meant, "...lead to a bottom sometime during the first half of 2009," and that's technically equivalent to what he actually wrote. Still, he should have worded it in this broad way, lest people focus in on that "by June" and attach unwarranted specificity.

This kind of thing always cracks me up when people ask me to forecast the price of gasoline out into the future. How in the frick do I know what gas will cost in June of 2009? And this isn't embarrassing for me to admit--nobody knows what gas will cost in June 2009, and if someone says he does, he's either a liar or delusional.

Now you can still say something, just to make the people happy; it's like asking a doctor if the cancer will spread, and he just glibly says, "Nobody can know that." So I do the best I can, talking about directions and hypotheticals, like, "If there's a cap and trade, then..."

But for Cramer to just casually throw out the prediction that housing will bottom by June...nah, this guy is too smart to think he actually can know that. Sorta like Ann Coulter is clearly smart enough to know how ridiculous she is being, but she apparently decided the money and fame of that approach was worth it.


Kudlow Supports $700 Billion Bailout, Unless It Involves Government Intervention

Ahh how Larry Kudlow wrestles with his endorsements. On the one hand, he doesn't see how the government caused the credit crunch through its meddling and hopes of a bailout (now confirmed). On the other, he knows politicians always screw up the economy. Thus he utters the following ridiculous statement:

If the bailout bill allows executive pay-caps and government ownership warrants for all buying or selling institutions, I must withdraw my support for the bill.
So it would be
stupid for Congress to write this kind of thing into the bill. It would go beyond France into pure socialism. It would represent a huge first step into government interference everywhere. And it would sink New York way down the list of world financial centers. London and Hong Kong would pass us by in the blink of an eye.

Larry--can I call you Larry?--we took the "huge first step into government interference everywhere" a long time ago. And if you just meant, relative to the modern status quo, it's still true--we took huge first steps starting in September 2007. And at the time, as you may recall, a few codgers warned that the moves wouldn't solve the underlying problems, and that the government would have to keep upping the ante.

Thursday, September 25, 2008


Americans Oppose Corporate Welfare; Feds Agree to Disagree

I wish the margin were higher, but it reassures me that the average Joe ain't half bad: the American people oppose the Paulson Plan:

Americans oppose government rescues of ailing financial companies by a decisive margin, and blame Wall Street and President George W. Bush for the credit crisis.

By a margin of 55 percent to 31 percent, Americans say it's not the government's responsibility to bail out private companies with taxpayer dollars, even if their collapse could damage the economy, according to the latest Bloomberg/Los Angeles Times poll.

And yet, I am very confident that at least several hundred billion dollars will get siphoned out of our pockets and into Hank's buddies'. This episode really gives new meaning (for me) to Bob Dylan's lines from "Hurricane":

Now all the criminals in their coats and their ties
Are free to drink martinis, and watch the sun rise.
While Rubin sits like Buddha, in a ten foot cell.
An innocent man, in a living hell.


A Major Recession Seems Due--Just Look at the Pretty Picture

Folks, I am not a "chartist," because I wouldn't want to go the John Nash route of spotting spurious causal connections. But, if you accept Austrian Business Cycle Theory, then the following graph of the levels of M1 is very interesting. (Click for larger image.)

Specifically, you can tell a little story that the Fed let the money supply grow quickly, then put on the brakes (no growth in M1) for a few years, and this led to a recession. Then the process repeats. (I admit it only jumps out during the last two recessions.) But with each repetition, the delay before the onset of the recession is longer. That could be because the central bankers learn more tricks, and/or the market gets better at adapting to said tricks.

If you trust the pattern in the chart, then we seem due for a recession. The worst is yet to come. We have yet to see the impacts on what the analysts call the "real economy," but we will.

Wednesday, September 24, 2008


Cramer Says Paulson's Plan Will Stop Home Price Declines

Help me out here folks. In the following passage, Jim Cramer has committed himself to predicting that house prices will stop falling if Paulson's Plan gets approved. Right?

Opinions abound when it comes to Treasury Secretary Henry Paulson’s proposed $700 billion bailout plan for U.S. banks. And a lot of them are negative. But Cramer’s a strong supporter, and he used part of Tuesday’s Mad Money to clarify what he sees as people’s misconceptions about the plan.

It doesn’t address the real problems of people losing their homes.

Wrong. Declining home prices are the reason owners are either walking away or being forced out. Paulson’s plan puts a stop to the root cause of this: foreclosures. Other housing-related problems, from making mortgage money available to shrinking inventories, are being solved. This plan takes care of the last one.

The plan costs too much.

Actually, it might not cost anything. Once Paulson’s plan is put in motion, home-price depreciation should stop. That means the mortgage-related paper the government will then hold would no longer be worthless. Plus, the government can work with owners in any way necessary to keep them in their homes. And it looks like Washington will be taking an equity stake in any company that takes part in the plan, which means there’s even a chance to make money rather than lose it.

I haven't thought it through too carefully, but I am surprised at the confidence with which the Mad Man says... Oh wait, he hosts a show with the word "Mad" in the title. Remind me again why CNBC features him, and he has such popularity that I feel the need to discuss him?

Don't misunderstand, dear reader: Cramer's prediction could be right. For example, the housing and capital markets are now so so so screwed up because of Hank "The Oligarch" Paulson, that home construction might be a relatively long-term investment project that no longer makes economic sense. So the supply of new homes entering the pipeline won't come back to its pre-boom level, and once we burn through this glut of houses, they will become very scarce. Yet I don't think that's what Cramer has in mind when he says Paulson's plan will stop home price declines.


Why Hank Paulson Made Sprint Be Mean to Me

Now this is going to start off on a wild tangent, but bear with me. We are working toward this thesis:

Resolved, Treasury Secretary Henry "I Love the Free Market (I Have a Thing For Weakness)" Paulson is directly responsible for the mean treatment I received at the hands of Sprint.

OK, so I just bought a Blackberry. The sales clerk was really trying to impress me, I got the sense.

(Screeeeeeeeeech! Sorry I have to take this Freudian cul de sac for a moment. I think I have a very intimidating persona with sales people; it's something I picked up from my dad. Once we were at a car dealership, and after the sale the guy said, "You are the most intimidating customer I have ever had." Now what's funny is, I never thought my dad was upset, and he wasn't. So I think my dad's normal face must look like he's really disappointed, to insecure outsiders.

In a future post I will relate how I scared the heck out of an exchange student, and again without trying to at all. But we must now end this Freudian digression.)

Anyway, the guy is truly taking about 20 minutes to explain my new Blackberry to me. And the guy really was knowledgeable; if I were Don Murphioni, I would ask him to come work for me.

So when all is said and done, and he's truly sold me on how cool this Blackberry will be, he then explains that with the mail-in $100 rebate, you have to use blue or black ink. And that you can't omit any of the questions, or else they'll deny your rebate. He says that Sprint does everything it can to deny that $100 rebate to as many applicants as possible.

Now isn't that crazy, that this guy felt the need to volunteer that? Have other people been told that?

Anyway, assume it's true, and that this guy was really just looking out for me (as opposed to demonstrating his savvy). Then that means Sprint views me as a two year host to be parasitically drained as much as possible that won't be bad enough to make me eat the early-cancellation fee. Is goodwill really so cheap in our culture, that a company like Sprint doesn't find it profitable to treat customers very well, and have (say) a 5-year policy, with a $50 early-cancellation fee?

But I realized that Sprint can't possibly assign much weight to such a long-term contract. That wouldn't be enforced in any court; people would object to the "slavery" etc.

What Paulson has done is absolutely catastrophic to long-term business planning. You thought bankers were incredibly short-sighted during the last few years? Well, imagine how they're going to act now--when they don't even know if the US dollar will be in use five years from now.

Oh, and now on Wall Street as in other areas: It's about who you know, more than anything else. I'm so glad that high school meritocracy has been transferred to the markets where capital flows are routed. Yeah, nothing too important going on there. It's not the "real economy."

(Sorry folks, if you're new. I am being sarcastic in the above paragraph.)

In conclusion, I urge the judges to rule in favor of the proposition: Henry Paulson made Sprint be mean to me.


Tyler Cowen Endorses (?!) Blowing Up Homes

I have been good for a few days, and avoided my nervous tic of ridiculing Tyler Cowen's blog posts. (This is mostly because I think he's been good on opposing the Paulson Plan.) However, I cannot bite my tongue when he today writes this:

So I have a modest proposal. The Fed/Treasury can identify those parts of the country with the most foreclosures. They can buy or confiscate empty homes in those areas and destroy them. That will raise the price of the remaining homes. Anyone who is otherwise about to default could then sell the home at a high enough price (fingers crossed) to get out of the deal alive. This would stop home prices from falling and it would limit the number of future defaults.

You might think he's kidding, especially with the Swift allusion, but in context I don't think he is. And...how can I put this?...Tyler has said crazier things in his day.

Something is seriously wrong when one of the leading (and smartest) free market economists recommends that the government start destroying buildings in order to help the economy.

Another symptom of this general messed-up-itude: What is the deal with everyone contrasting the financial markets with the "real economy"?? In the real economy, financial markets really are important. If a strange virus suddenly killed off all the people working in advertising, would the analysts wring their hands over whether this would influence "actual output"? What about truckers? They don't actually make stuff, they just move it around, right?

So who are these "real" producers? Farmers and entertainers? Hair stylists?


"Free Market" Bush and Paulson Discredit Free Market

The leftists have not missed the irony in the latest power grabs by Paulson & Friends. This is why it's so annoying when mainstream Republicans run on a "small government" message and then do the opposite in office. From the article:

Of course, the ironies and the potential pitfalls of this administration enacting a socialist takeover can hardly be overstated. This is the political party that for decades has insisted on deregulation and free markets, has scolded Hugo Chavez for nationalizing the oil industry, and even now is attempting to tar and feather Barack Obama with the label of socialist. But if this bill is enacted at its advertised $700 billion price tag—and many people believe the price will ultimately prove higher—it means that the Bush administration has undertaken the single largest socialist investment in the history of mankind. The Bolshevik revolution of 1917 couldn't dream of an economy worth $700 billion; the figure dwarfs anything ever attempted by Fidel Castro or the Sandinistas.

Focusing on ironies and hypocrisy is fun, but Paulson's socialist prescription actually provides a rare opportunity to advance the state of American political and economic debate. During the Cold War, socialism became an especially unsavory idea because it was linked to the countries that pointed missiles at us. This was less the case in Europe, where democratic socialism grew to become the norm, with sometimes rocky but mostly successful results (you don't see the Spanish having to take over their banking sector, at least not yet). Paulson's relatively untainted socialism offers America a genuine Nixon-goes-to-China moment, a chance to have a more honest, less demonizing conversation about where, when, and how government intervention in the economy is effective and desirable.

I have been resisting the easy urge to label George Bush as "the worst president in US history," as some of my exasperated colleagues have done. Partly I resisted because I knew that FDR expanded government more than Bush.

However, at least FDR had the decency not to label himself as a believer in laissez-faire.*

* I know that during his campaign against Hoover, FDR criticized Hoover's reckless deficit spending, while Hoover talked about his unprecedented interventions against the advice of the crusty economists. But I'm assuming FDR wasn't the economic "conservative" in his campaigns the way Bush allegedly was.


Warren Buffett Invests $5 Billion in Goldman Sachs

Warren Buffett apparently is a Free Advice reader. He has decided to invest $5 billion in Goldman Sachs, no doubt after reading my earlier blog post which contained the following analysis:

I heard a guy say on CNBC that it was crucial to save Goldman Sachs because it is a symbol of capitalism around the world. So that means no matter what, the Goldman shareholders know that they can't possibly go bankrupt or even get bought out, especially by a foreign buyer. They are untouchable now.

Tuesday, September 23, 2008


SEC Adds to the (Long) Short List, But Allows Firms to Opt Out

The SEC added another 40 stocks to its "no short" list, but at least it is allowing firms to take themselves off the list:

Meanwhile, two companies JMP Group [JMP]...the parent of JMP Securities, and Diamond Hill Investments [DHIL]...have been removed from the list.

This is great. A libertarian writer (I want to say Boaz but not sure!) once discussed the idea of allowing vendors to sell things marked "UNREGULATED." I.e. all of the government's purity laws etc. would be the default, and only if a manufacturer clearly labeled something as unregulated, would those liability laws etc. not apply.

I am really curious to watch this play out. In the beginning it might just be a few purist firms who opt out--and our partner in exposing crime, Robert Wenzel, tells me that Diamond Hill did it for philosophical reasons as much as pragmatic ones. But if this trend picks up, then choosing to remain on the list will come more and more to be seen as an admission of weakness.


Democrats Let Offshore Drilling Ban Expire!!

This just came out Tuesday night: Congressional Democrats have decided to pick their battles, and will allow the congressional moratorium on offshore drilling to expire with the fiscal year at the end of September. (The Gang of 10 and then Speaker Pelosi's bill, which passed the House last week, were all measures to reinstate a large portion of the expiring ban.)

Well this is very exciting but also nerve-wracking. In many articles I have been saying things like, "If the Democrats let the ban expire tomorrow, we would see a significant drop in oil prices."

Now in truth, I can always cover myself (if I were a weasel) by saying that the markets expect them to reinstate the ban in a few months, and so there's no real stimulus given to offshore production.

But I promise I won't take that route out. If oil prices do not respond quite clearly to this surprise announcement, then I will admit I was wrong.


Wall Street Apologist Chadwick Latches on to Austrian Business Cycle Theory

At first I was really excited by this article linked from CNBC's main page. The writer, founder of Ravengate Partners, early on sounds like Rothbard:

There is a long trail to the current financial crisis. Listening to our Government leaders blaming Wall Street greed for the entire debacle begs a response. The Government itself is an accessory before the fact to the state of affairs we find ourselves in today. Let’s review:

In the beginning – there were bad lending practices. And they are at the core of this extraordinary mess.

What was at the heart of the bad lending practices? The Federal Government!! Under both the Clinton and Bush administrations, it was government policy to encourage the private sector to ease underwriting standards in order to expand housing ownership in the U.S. The Federal Reserve under Alan Greenspan was an enabler in that development, by employing a monetary policy that kept interest rates exceedingly low, to the benefit of mortgage seekers. So lay blame on the US Government for bad policy.

But then she--and yes the founder of Ravengate Partners is a "she," did you assume I was criticizing a man this whole time?--proceeds to blame everybody else outside her industry in very broad strokes. But when it comes to her industry, she concedes that "SOME (not all) Wall Street firms" (her caps) contributed to the current crisis.

In the grand scheme, I don't think it even makes sense to ask what Patricia Chadwick thinks about Austrian Business Cycle Theory. But I guess it's still a good sign that ABCT is now credible enough to make it into someone's talking points.

UPDATE: When I first read the article above, I didn't understand this line: "So lay blame on Wall Street for [w]recklessness." (It is in bold and ends one of the paragraphs.)

I think I get it now: In her original submission, she had called for blaming Wall Street for "wrecklessness," and then a CNBC editor contained the "w." Does that strike anyone else as ironic? It has so many meanings...


Frederic Mishkin, Standup Comedian

A CNBC article had the headline: "Top Economist Mishkin: Worse Than the Depression" so I clicked on it. The piece contained two hilarious one-liners:

Economics scholar and former Federal Reserve Governor Frederic Mishkin says the shock that continues to rip through the nation's economy is actually worse than what was felt during the Great Depression.

"The difference is, we have people on the ball," the Columbia University professor told CNBC.
"We have Hank Paulson, who understands what Wall Street is all about, and in fact the dangers that are lurking there..." Mishkin said.

(Note that Mishkin probably didn't intend for these quotes to generate mirth.)


Politicians, Not Ike, Causing the Return of Gas Lines

I explain in this IER piece. What tipped me over the edge on writing this up is that the absurdity struck us here in Nashville. It's crazy; there are lines of 20 cars out into the street at busy parts of the day. The pastor at church even worked in gas shortage jokes into his sermon. An excerpt (from the article, not the sermon):

At artificially low prices, consumers want to buy more gallons of gasoline than producers want to sell. Specifically, what happened in this case is that wholesale prices spiked, eating away the profit margin of independent retailers. Because anti-price gouging laws forbade them from raising their own prices just as sharply, some retailers decided it was better to shut down, rather than lose money with every gallon they sell.

Monday, September 22, 2008


Bailing Into Commodities: How the Wall Street Bailout Raises Energy Prices

I explain in this IER blog post.


Diamond Hill Opts Out of SEC List of "Protected" Firms!!

If I am understanding this NASDAQ announcement correctly, it is the coolest thing I have heard in a while. Apparently

NASDAQ issuer Diamond Hill Investment Group, Inc. (DHIL) has voluntarily opted-out of NASDAQ's list of Covered Securities under the SEC's Emergency Order. Diamond Hill Investment Group, Inc. will not be subject to the restrictions of the Emergency Order.

If this announcement is legit, I bet it won't last. After all, the other relatively safe firms could take themselves off the list, so that the remaining ones look unsafe. This defeats the whole (ostensible) purpose of the SEC ban. So I think they are going to say DHIL isn't allowed to invite short selling of its stock. If people can't decide whether to use heroin, they obviously can't be trusted to decide whether to take the SEC's offer of a ban on short selling.

(HT2 Tim Swanson.)


Murphy and Thornton Take on Paulson and Bernanke; Scott Horton Referees

This was a really fun interview (mp3). Scott always sets up elaborate scenarios or objections. With Mark on the phone, I could be a super geek knowing that he would keep it real.


The Buzz on the Street: Are WaMu Deposits Safe? What About WaMu Stock?

The latest chatter concerns Washington Mutual. Will it sink too? Do its clients need to get out?

To WaMu depositors, I would say: Your money (up to $100,000 per account) is insured by FDIC. So in theory it is just as safe (or vulnerable) as everything else that is insured by the feds--and that pile of assets just grew a lot in the past two weeks.

To WaMu shareholders, I would say: Be very afraid. Things are very fluid, and the government can engineer a self-fulfilling prophecy if it wants to acquire 79.9% of your shares on the cheap.

Either way, the future does not look good for dollar-denominated assets. If you are a regular Joe, I would definitely advise reducing your checking account balances and instead loading up on "junk" silver. And you wouldn't be doing it as an investment, but rather transferring one form of money into another, more traditional form.


"Henry Paulson, American Oligarch"

Robert Wenzel makes the case in a classic post. An excerpt:

We are in the midst of one of the greatest power and money grabs in the history of the world. I am stunned by the Russian style oligarch aggressiveness and boldness of the moves made this weekend, led by Paulson.

In a bold strike, he asks for $700 billion in "bailout money" and hopes the panic environment will push his proposal through with scant review by Congress. The proposal contains this remarkable clause:

"Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency..."

Then, in a Sunday night press release, 9:30 PM ET, the Federal Reserve announced that it has approved the applications of Goldman Sachs and Morgan Stanley to become bank holding companies. Goldman is, of course, where Paulson served as CEO before he joined the Treasury. (On Goldman's insider pedigree, see my column: Does Goldman Sachs Run the World?)
Talk about scooping up bank stocks on the cheap, when fear is everywhere. That is exactly what the Goldman approval from the Fed to become a bank holding company is all about! And, we might add, all of Goldmans competitors were wiped out by a series of rumors. Dick Fuld CEO of the latest victim, Lehman Brothers, thought that Goldman was behind the rumors...


Paulson Handcuffs Obama By Empowering Goldman Sachs

The very popular economics blog Marginal Revolution has a very rare mathematical property: The mean insightfulness of the comments left at MR is significantly larger than the median insightfulness of the actual blog posts. Discuss.

Anyway, today my jaw literally dropped in awe at the following comment made by "a person":

It is becoming increasingly clear to me that President Bush is again choosing the shock doctrine, as he did in pushing for the Iraq War, to subvert the democratic process. His wish is to tie up the financial freedom of an Obama presidency. There needs to be a more uniform response (screaming, yelling, etc.) from intelligent people in America that we will not be bullied again in the same way into another terrible plan.

(In retrospect, it doesn't look as impressive now that I've put in up on a pedestal and shined a spotlight on it. But trust me, for that to be just some guy's comment on a blog post...whoa.)

What's very interesting about this is the amount of power that has been transferred to the private sector. At first this is counterintuitive--haven't the feds been grabbing more power from the private sector?

Yes: In general the federal government has grown at the expense of the financial sector. However, a very few firms--chiefly Goldman Sachs--now wield much more power than they did 13 months ago.

I heard a guy say on CNBC that it was crucial to save Goldman Sachs because it is a symbol of capitalism around the world. So that means no matter what, the Goldman shareholders know that they can't possibly go bankrupt or even get bought out, especially by a foreign buyer. They are untouchable now. Unrelated trivia quiz: For which Wall Street investment bank was Henry Paulson the CEO, before he assumed his current job of CBA (Chief Bailout Architect) for the Treasury? (BTW, that link also indicates that Paulson's predecessor at Goldman Sachs was Jon Corzine, who is now Governor of New Jersey. Wow that job of being CEO at Goldman must give you some really good people skills or something.)

If Obama should win, the few remaining "independent" players on Wall Street can literally stage a crisis if they want. The politicians won't know the difference, and even if they did, enough of them could be induced to defend the legitimacy of the crisis and demand that President Obama "stop ignoring the experts and start showing leadership by supporting the Republican Financial Patriotism Act."

Look at how easily the panic on Wall Street pushed oil companies and hurricanes off the radar. They could easily do the same if McCain wins and then a scandal threatens him. "You need a few days to regroup? No problem, Mr. President. We'll stop lending to Goldman."


Did the Market Call Paulson's Bluff?

As of 10:40 AM Monday morning, the S&P 500 is down almost 1.5%. Notice how the short-term euphoria from the government's progressively bigger interventions is more and more fleeting, as the months roll by?

Investors are apparently starting to realize that Paulson and Bernanke are bluffing. They can't undo the housing bust. All they can do is rearrange a few trillion dollars, but that's a negative sum game, once the incentive effects are taken into account.

In macroeconomics it took a while but finally they learned that if the central bank keeps price inflation down, then the short-term growth from an unanticipated injection of new money is pretty high. But if the central bank keeps injecting more and more funny money into the system, then after a while the public adapts and these injections become necessary just to maintain the status quo.

It seems we are nearing that point with Paulson's power grabs. He basically took over the nation's credit markets last week, and it bought him two business days' of relief.


Murphy on Scott Horton Radio Show

We will be discussing the financial mess and (presumably) the relation to an interventionist foreign policy on Monday, from about 12:15 - 1:00 pm EST. You can listen live here, or I'll provide a link later on when it is archived.


The Government Is Not Promoting Financial Stability

My article today on LRC. A juicy excerpt:

Just stop and reflect on what the government has done, even in the last few weeks. It has literally seized (the press’ word, not mine) companies tied to trillions of dollars in assets. Furthermore, these seizures were truly a "hostile takeover." For example, the common shareholders of Fannie and Freddie were quite simply robbed. The government came in and assured injections of capital to keep the firms afloat. In exchange, it acquired "senior preferred equity" shares, placing it higher on the totem pole vis-à-vis the original preferred equity shareholders, in the case of losses. However, if the real estate market turns around and the share prices of Fannie and Freddie start rising, then the government will exercise its warrants giving it ownership of 79.9% of the common stock. (Note how people are speculating that the government might make money on the deal.) Before, shareholders of Fannie and Freddie knew they were probably going to lose everything, but there was still a sliver of hope. Now there is no hope.

And yet, there is no rhyme or reason to the government’s decisions. Lehman Brothers was allowed to fail. In essence, you’ve got a massive beast stalking the financial markets. This creature has many trillions of dollars ultimately at its disposal, and oh yes, I should add: It is not afraid to send armed men to your house if you should ever really cross it. In this environment, is it any wonder that the credit markets are "frozen"? When the SWAT team bursts into your kitchen window, you freeze up, right? Why should things be so different on Wall Street?

Sunday, September 21, 2008


Latest Bailout Tally: $1.8 Trillion; Ron Paul Talks Good Sense

This helpful CNBC article tallies up all the government promises to date regarding the crippled financial markets. It's a shocking $1.8 trillion so far. Below is a very good interview Ron Paul gives to Wolf Blitzer on this mess. (HT2LRC)


Want to Feel Like God? Have Kids!

And no, I am not at all talking about being drunk with power. On the contrary, I have never felt so helpless and non-independent (which isn't the same as dependent) as when I am being Daddy.

But, the positive side is that it is much easier for me to imagine what it must have been like for the LORD to raise the Israelites. In the very beginning He had to lay out and enforce through physical might a million and one rules. The same is true with really young kids. You literally can't go five minutes without correcting them, especially if you are out in public. You can't calmly explain why it's in their interest not to touch the oven; no you have to strictly forbid it to avoid your wrath. And if you see them running into the street, you scream your head off for them to stop.

It's only after the children internalize these habits and rules that you can explain to them their deeper purpose. Eventually, you don't really enforce rules. You are always there to give counsel when your kids seek it, but you realize they need to live their own lives.

This is analogous to how the LORD has gotten more and more aloof from the human race. After sending Jesus, in a sense we are adults now (spiritually / morally). It would hinder our maturity if the LORD led us as a column of fire or smoke. For Him to still treat us like that, would be akin to a parent taking a 21-year-old by the hand into an office job.

It's true that in a sense, human beings are the same today as they were in Shakespeare's plays, or in Greek tragedies. But in many other respects, humans today are much more civilized. Think of it this way: Each generation typically avoids the worst excesses of the preceding one. As much as the United States' military has done horrible things in Iraq, they are nothing compared to Viet Nam. And don't all of us resolve to be better parents than our parents were to us? And yet, haven't you heard stories of how crazy your grandparents were to your parents? (In my case, I can push it back one step further: My great-grandfather was a nutjob. He would tell my grandfather to go out in the shed and get a tool. If my grandfather came back without it, my great-grandfather would beat him. And then he would go out and check. If he found the tool, he would beat my grandfather again.)

So what's my point? Well, if each generation typically avoids the worst excesses of the previous one, then that means in an important sense that humans get more and more barbaric, the further back in time you go. So when we read that the LORD ordered the Israelites to slaughter foreign cities, or that He destroyed Sodom and Gomorrah, keep in mind that those cultures may have been inconceivably abominable from our modern perspective. We know, for example, how depraved the ancient Greeks and Romans could be. Now reflect that those were the leading cultures of their times. E.g. the same Romans who arguably invented the rule of law also put on sick public displays in their coliseum.


Paulson Wants $700 Billion and No Stinkin Court Oversight

This is a truly remarkable Bloomberg article outlining just how much power the single man, Henry Paulson, would achieve under the plan that--huh how bout that?--Henry Paulson invented. (HT2 Matt M.) A sample:

Through his plan, Treasury Secretary Henry Paulson aims to avert a credit freeze that would bring the financial system and the world's largest economy to a standstill. The bill would prevent courts from reviewing actions taken under its authority.
As congressional aides and officials scrutinized the proposal, the Treasury late yesterday clarified the types of assets it would purchase. Paulson would have authority to buy home loans, mortgage-backed securities, commercial mortgage- related assets and, after consultation with the Federal Reserve chairman, "other assets, as deemed necessary to effectively stabilize financial markets," the Treasury said in a statement.

The Treasury would also have discretion, after discussions with the Fed, to make non-U.S. financial institutions eligible under the program.

The plan would raise the ceiling on the national debt and spend as much as the combined annual budgets of the Departments of Defense, Education and Health and Human Services. Paulson is asking for the power to hire asset managers and award contracts to private companies. Most provisions of the proposal expire after two years from the date of enactment.

But my favorite part is this quote from Bush, who--bless his heart--at least has pangs of cognitive dissonance from all this:

"I'm sure there are some of my friends out there that are saying, 'I thought this guy was a market guy, what happened to him?'" the president said. "My first instinct was to let the market work, until I realized, while being briefed by the experts, how significant this problem became."

It isn't just your friends, Mr. President. And you should start talking to different experts.

Saturday, September 20, 2008


Chicago Prof: "Why Paulson Is Wrong"

Luigi Zingales makes some good points (pdf) about the Paulson Plan. (HT2MR) The best part is the conclusion:

The decisions that will be made this weekend matter not just to the prospects of the U.S. economy in the year to come; they will shape the type of capitalism we will live in for the next fifty years. Do we want to live in a system where profits are private, but losses are socialized? Where taxpayer money is used to prop up failed firms? Or do we want to live in a system where people are held responsible for their decisions, where imprudent behavior is penalized and prudent behavior rewarded? For somebody like me who believes strongly in the free market system, the most serious risk of the current situation is that the interest of few financiers will undermine the fundamental workings of the capitalist system. The time has come to save capitalism from the capitalists.

Friday, September 19, 2008


Ilana Mercer Plugs the Greatest Economics Book Ever

...and she talks good sense on energy issues, too.


Free Market Experts Explain Why Free Market Doesn't Work

Incidentally, the other thing that bothered me about CNBC today--btw I don't own a TV, I saw all this while in Penn State--was that the timid, female commentators were honestly asking things like, "But why was this necessary? Why should taxpayers have to pick up the tab?"

Then the swaggering tough guys--with really cool silk ties that make me jealous--explained why it had to be this way. Even Stephen Moore--*sigh*--came on to the introduction of, "Now Steve, I'm as big a fan of the free market as you, but that doesn't mean the freedom to totally collapse" or some glib excuse for repudiating their entire worldviews.


Dumbest Quote of the Day

So some guy on CNBC was explaining why the government had to buy up all the toxic debt. He said how there were only two major investment banks left, and that "Goldman Sachs is a symbol of market capitalism around the world. If the government had let that fail, it would have sent a strong message about the strength of our system" or something like that.

So the government has to socialize the financial sector, lest foreigners get the wrong idea about capitalism. Kinda like FDR saving capitalism, or better yet, Abe Lincoln violently suppressing secession to keep alive the experiment in self-determination.


Bob, 21st Century; 21st Century, Bob

For months now I have known that I "need to" get a PDA. Finally spurred by the recent loss of my cell phone (which ran on vacuum tubes), I broke down and bought a Blackberry before my Penn State trip. Let me just say: OH MY GOSH. I would have been going crazy had I not had internet access for several hours at a time during these crazy days. But now I have the CNBC Blackberry icon (not sure what the actual term for those things is). Now work can consume even more of my waking hours. Woo hoo!


The Government Is Not Promoting Financial Stability

The stock market is opening way way up today because of the announcement of massive government efforts to "support" financial shares. This just demonstrates that the government interventions have not been promoting "stability."

Imagine that during normal economic times, the government started handing out hundreds of billions of dollars to various firms every few days, but that there wasn't a discernible pattern. (I'm referring to the decision to let Lehman fail but not Bear, Fannie & Freddie, or AIG.) Moreover, investors learned that if a firm became troubled, the government might literally seize it and end up robbing the equity from common shareholders.

OK, so again, suppose we were in a normal economy and a delusional Treasury secretary started doing the above. Wouldn't every "conservative" financial analyst decry how destabilizing these actions would be? Well, those actions are still just as destabilizing, but now we are treated to them during the midst of a financial crisis. I.e. it's during periods of economic vulnerability that the government unleashes measures that would obviously be harmful even during times of strength.

Last observation: I have been saying for months that the government's steadily increasing rescue attempts were prolonging the crisis, because investment banks and others with assets tied to suspect mortgages were postponing their adjustment, hoping the government would finally provide a massive bailout. And that's exactly what happened. So those institutions performed "rationally" by trickling out the bad news and stringing their shareholders along for over a year, rather than giving a very candid disclosure 12 months ago, taking their losses, and getting on with a recovery.

Thursday, September 18, 2008


SEC to Impose More Restrictions on Short-Selling

You can't make this stuff up. (And if you did, your literary label would be "socialist fiction.") The SEC is now going to "temporarily" ban short-selling.

Details of course are yet to be announced. It's not clear what the timetable will be, or which stocks will be affected. Also, this particular story doesn't say whether it will be bans on "naked" short-selling, or even fully clothed short-selling.

I stand by my earlier opinion that the completely useless ban on naked shorting back in July had the sole purpose of softening up the public, i.e. getting them used to the government meddling with shorting. Back then nobody raised a fuss, because the ban was so easily skirted. (It would be as if the government banned people from saying, "Bush is a big a-hole" but everything else was legal. The ACLU might not even bother bringing a suit, because critics of Bush could still legally say, "Bush is a huge a-hole.")

BTW here is the madman Cramer spouting nonsense about short sellers, and how the SEC is to blame for our financial crisis. I guess it's just a coincidence that these evil short sellers spread scurrilous rumors about Bear Stearns, Fannie & Freddie, Lehman, and AIG. Luck of the draw, I guess. The shorters could just as easily have destroyed the share prices of Exxon and Shell, right?

UPDATE: Here is Robert Wenzel with his angry yet cogent analysis. Warning, he uses some phallic metaphors in describing investment bankers. (And yes, now you have no choice but to click on the link.)


Did Andrew Cuomo Make Palin-Like Gaffe On Naked Short Selling?

I'm getting ready for my Penn State student radio interview so I can't pontificate--don't worry, I'll be long-winded tonight. But I've got CNBC on in the hotel room, and CNBC's Maria Bartiromo was interviewing NYS Attorney General Andrew Cuomo, who is getting ready to crack down on "illegal" short-selling. She said something like, "Well Mr. Cuomo, a lot of analysts are focusing primarily on naked short selling, saying this is the real problem, not short selling in general. Can you explain the difference to our viewers?"

Suffice to say, Cuomo's answer gave no indication that he knew the difference. He totally dodged and just talked about other things that he understood. But because he wasn't fighting the bimbo label, Bartiromo didn't follow up with, "What do you interpret the difference to be?"

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