Between The Numbers

Ticking Away: The Inflation Time Bomb

Turning Milton Friedman on his head, Grice argued that “inflation is always and everywhere a fiscal phenomenon."

Friedman's quote was "inflation is always and everywhere a monetary phenomenon"

The monetary policy of the US is controlled by the Federal Reserve.
The fiscal policy is controlled by the Congress.
Bankers control the Fed, and more recently, Congress.
Thus, inflation is a banking phenomenon that just happens to be able to finance fiscal deficits. There was still plenty of inflation during the most fiscally hawkish periods of the 20th century, even with huge federal surpluses.

Commercial Real Estate Resumes Its Descent

With the huge inventory of CRE that will sit idle for years if not decades, now would be the time for the debtholders to agree to a short sale and get what they can now. Refusing to realize the loss does not make it go away, and in some ways the recent improvements in the stock and debt markets offer a chance to get some reasonable losses given the putative nightmare soon to occur. Anyone not taking a market offer on their property now is basically just praying for another bailout.

Ending the Off-Balance Sheet Charade

Tiny slice of equity and a pile of debt is a recipe for disaster. The biggest mistake by the government is not letting bank bondholders suffer the consequences for management's actions. Add in the moral hazard of guarantees and underfunded FDIC insurance, and the incentives are clear to anyone that banks will lever up and juice returns as much as they can - there is no downside to management or creditors.

Money Supply: The Myth of Hyperinflation

Mark,
I'm with you on the deflation argument, and you made some very good points. I'm not ready to give the Fed the vote of confidence that you are, but it is clear that the net effect of the Fed's policies is not currently inflationary. I think the missing ingredient here for understanding how deflationary things are is credit - and credit is contracting at a rapid pace. Money in our economy is both credit and currency, and whatever effect that printing money is having is being balanced out by a large net decrease in outstanding credit. As we discussed earlier, the complete collapse of the securitization market is putting the squeeze on companies and individuals that want to borrow. Many of the indicators out there are still deflationary (seekingalpha.com/artic...), and until credit turns around, we will be in deflation. Japan did it for decades, and so can we.

The Fed Believes Secrecy is in Our Best Interests. Here are Some of the Secrets

I don't know why the idea of the Fed secretly loaning billions of dollars does not cause more outrage. And the argument against transparency seems to be the exact opposite of common sense ("telling you who is weak and needs money will make lies and unfounded rumors swirl that perfectly solvent banks are in fact weak."). Shelia Blair needs to use some FDIC authority and audit the recipients and then disclose the info if the Fed won't budge.

Larry Summers's Billion-Dollar Harvard Gamble

Even if it was a reasonable hedge, it magnitude of the trade was too much. If Harvard was going to issue $10B of debt (more than the endowment of most schools) than interest payments would be ~$500M a year at 5%. Even a move in rates to 7% would involve only an extra $200M a year in interest, yet he is hedging over $1B. A good hedge is one that ends up worthless with the primary investment going up more - in this case Harvard would save $200M from rates going from 5% to 3%, but lost over $1B. This hedge would be more appropriate for $25-$100B in debt, an amount that Harvard would never consider doing.

Options Trader Weekend Update: Charts, Art and Market Manipulation

Sites like SA are the check on the consolidation of media power - the internet has made it far harder to control the message the public gets consistently. Of course, the internet also makes it easier to hear what you want to hear and ignore anything to the contrary. If you see everyone agreeing on one thing, go somewhere else for your information.

Small Business Lending: Why the Programs Need to Change

I like the later of the proposals, but I disagree with your first bullet. A GSE for bond insurance would be a poor idea, basically taking the Fannie Mae and Freddie Mac business model and expanding it to an even more challenging arena. I consider fully securitized home mortgages to be a vanilla product, yet the GSEs completely mismanged their risk and used their implicit government backing (now explicit) to over leverage and profit in the good times and leave the taxpayer holding the pieces in the downturn. A bond insurance GSE would have similar incentives to under price tail risk, juice profits with taxpayer-backed leverage, and tunnel the money to the executives and the small equity slice before the whole thing blows up. Bond insurance is an incredibly complex business, and, as the CDS market has shown, can be easily mismanaged. This completely ignores that fact that a powerful GSE will be used as a political tool as well, making it unlikely that any meaningful regulation or oversight will prevent the scenario I outlined above.

The Rise and Rise of Jamie Dimon

The most genius PR campaign ever - the only way to save the US economy (which still went in the crapper anyway) is to give the largest banks trillions of dollars in cheap loans, guarantees, and just plain old free money.


On Jul 20 12:27 PM infp wrote:

> So the only way to rescue the country from another Great Depression
> was to ensure that the banks that had caused the crisis would become
> wealthier and more powerful?

Jamie Dimon vs. Larry Summers

"Why doesn’t Dimon instead seize on greater consumer protection as a way to rebuld legitimacy for finance – and to shape the new rules so as to create barriers to entry and growth for future rivals?"

Essentially the "too big to fail" bailouts and government assistance has created that barrier to entry, whereby large banks get cheap cost of capital and make outsized profits that smaller institutions with no government backing can make. Why should Dimon allow regulations that might reduce the number of rubes for the next financial innovation that large I-banks will create? Big finance buys influence with money, not by protecting consumers.

CIT's 5-Step Road to Too Big to Fail

A key step in getting "too big to fail" would be for CIT to extend hundreds of millions in loans and lines of credit to politically connected companies at below market rates. That way they can credibly argue that a bankruptcy would cause the failure of many other businesses. With only $75B if assets, it isn't getting the attention of the treasury. Lever that up a few times, and we could have some significant systematic disruption if they failed. Maybe sell a few hundred billion notional in CDS, hopefully choosing GS, BofA, Citi, and JPM as the counterparties. News sites reporting today the bailout has the US on the hook for $13T, so what is another $10B or so?

Taxing Banks: Left Meets Right

Volker is a good economist and a bad politician, which means he'll usually be right but always be ignored.

Mish Shedlock's Inflation Scorecard: June 2009 Update

On Jun 24 11:18 PM austrian63 wrote:
> Does anyone
> seriously think we are at risk of an appreciating dollar because
> that is really what deflation entails. The past 96 years shows no
> evidence of a tendancy for sustainable deflation in a fiat currency
> regime. The period from 1921 to 1941 had relatively flat price levels
> but once deficit spending was in vogue, this stability disappeared
> forever.

Japan 1987-present is a fiat regime which experienced sustained deflation. The contraction of credit and asset values was so large that it did cause appreciation of the yen even though the Japanese government deficit spent it's way to ~175% of GDP in debt. Don't think it can't happen in the US.

The Rejection of CIT

Congrats to the regulators for showing some restraint with the bailouts, sadly, this is probably the only company of any of them that I personally would not have had a problem with injecting liquidity into (not a bailout, just liquidity), as lines of credit are essential for small to medium business funding.
Still, as you mentioned, their assets are junk and it was only a matter of time. Hopefully some larger banks will jump in and make the needed loans. CIT has a million customers, so there will be some dislocation and some borrowers will end up paying more interest to get cash.

ProShares Pioneering the 130/30 ETF

I worry about the timing with these long-short ETFs. They have to pick stocks to create the basket that is used for ETF share creation/redemption, and they can't be changing it frequently like an actively managed mutual fund. What seems like a decent mix of long-short now can rapidly change, especially if the market moves directionally over a period of time (moving the allocation to 125-25 or if the market went up). Sectors tend to move together, so the short piece might be only a narrow segment of, say, financials and real estate, but if the market turns around in those areas, how will the fund cope with the long-short transition? Once selected, is a stock to be ridden long or short indefinitely? The structure of ETFs is less useful for such re-balancing and active management.