CM in MA

Why Can't the Dow Join the Party?

The DJIA is like comfort food. It is familiar and reminds of long ago times when the world seemed a simpler place. It is also a quaint anachronism. As a narrow, price-weighted index it is far more flawed than the broader, market-cap weighted S&P 500 and Nasdaq Composite. Seems to me the DJIA gets so much play in the media simply because it is a large number. The point moves in the Dow sound more dramatic than the point moves in the others. For the most part, the DJIA can be safely ignored by investors.

Bailout Bill: Second Verse, Same as the First

I called my rep earlier this week and thanked him for voting against the bill. I called again today to encourage him to continue opposing it. That said, I expect the House will cave to the pressure. So, since Washington seems incapable of changing itself, we'll have to change those in Washington. The GOP is no longer the party of small government, fiscal conservatism, individual freedom, and individual responsibility. Fortunately for all Americans there is still a party based on the principles that made this the greatest country in history. That party is the Libertarian Party. I encourage folks to visit the Libertarian Party's webpage (lp.org), then register and vote for the LP presidential candidate, Bob Barr. Below is a press release with Barr's view on the bailout and his sound approach for addressing the root problems.

bobbarr2008.com/pr.../

Press Releases › BARR: No more government guarantees
October 2, 2008 10:39 am EST

Originially published at the Washington Times ...

Just one week ago, Treasury Secretary Henry Paulson was demanding that Congress grant him unprecedented, unreviewable authority to spend $700 billion or more to bail-out Wall Street. But in a major rebuke to the administration and to both the Republican and Democratic congressional leadership, the House voted down the 110-page plan that emerged from last weekend´s frenzied — if not unseemly — effort by Mr. Paulson to salvage a bailout deal.

The Dow dropped some 10 percentage points in reaction to the House vote and, while that was less than a third of the massive percentage drop it suffered in 1987, it shouldn´t surprise anyone that Wall Street was upset at being denied at least $700 billion of taxpayer´s money to practice more of what got it into trouble in the first place — buying up over-valued mortgage-based securities. A majority of members of Congress correctly concluded that the leadership-backed bailout bill was, to put it mildly, bad and that the closed-door sessions that spawned it were deeply flawed as well.

Perhaps at long last, some basic understanding of economics is seeping into the Capitol. Dare we hope that some members now understand the fact that Congress can only redistribute, not eliminate, the pain of an economic downturn? At a minimum now, as a result of the House “no” vote, Congress has time to seriously consider alternative strategies and it needs to press its advantage.

The starting point should be private market adjustment. With the knowledge that an easy government bailout is no longer around the corner, the markets can get serious about working through the mountain of bad debt that imperils homeowners, banks and companies alike.

Unfortunately, artificial booms inev itably lead to painful busts, but these can be productively addressed. Today, this means a mix of bankruptcies, company workouts, and takeovers as we are seeing in the banking sector and outside investors buying large pieces of companies, such as Warren Buffett´s $5 billion investment in Goldman Sachs. This process will reward more responsible firms and encourage them to move early to correct past mistakes.

Many companies also will have to sell mortgage-backed securities. Obviously, companies holding over-valued mortgage-based securities (MBS) prefer to dump bad securities on the government than sell them in a down market. But there is a market even though asset values are uncertain. Merrill Lynch liquidated its MBSs in July.

Bailout advocates simultaneously tell us that these assets are “toxic” and are destroying firms, but which magically at the same time are possessed of value that will ultimately make money for the government if it is allowed to buy them with ta xpayer funds. However, good business leaders know that private investors are better able than government officials to dig out that hidden value. Private buyers, too, could participate in reverse auctions and hire asset managers on their dime, not the taxpayer´s. This adjustment process should be carried out in the marketplace — not behind closed doors in Washington.

Both Congress and the administration should focus on cleaning up the mess, not making it potentially far worse. Federal and state authorities need to begin to aggressively prosecute fraud in private markets; fraud that has resulted in trillions of dollars of grossly and deliberately, if not criminally negligently, overvalued mortgage paper. The goal is not to create scapegoats, but to keep markets clean. At the same time, we need a thorough investigation of the misbehavior of public officials in spurring Fannie Mae and Freddie Mac, for instance, to engage in reckless lending. Many of the politicians leading the attack on Wall Street for its failures worked overtime to create the subprime lending debacle.

Congress should rein in the Federal Reserve System. Over the last decade the Fed has followed an easy money policy designed to spur economic growth. But this encouraged irresponsible lending and inflated property values. Increasing the money supply is a bit like mainlining heroin — it´s pleasant while you´re doing it, but it´s extremely painful when you finally stop. Yet as currently configured, the Fed is neither transparent nor accountable.

Congress must say never again with Fannie Mae and Freddie Mac, which lowered mortgage standards and pushed people into new or larger homes than they could afford. These government-sponsored enterprises must be privatized; there must be no more implicit or explicit public guarantees for mortgage lending.

Congress needs to repeal the Community Reinvestment Act. The CRA effectively forces banks to lend to poorer communities irres pective of the creditworthiness of borrowers. Many of the same legislators who demanded increased bank lending in the inner-city now criticize banks for making “predatory loans.” Agencies such as the Securities and Exchange Commission need to suspend the mark-to-market accounting standard and reconsider its application. The rule makes sense for trading assets, especially where values are well established; however, the standard has a perverse impact when applied to long-term income-producing assets in a volatile market. A single major, bad sale can force a major corporate write-down, artificially crippling an otherwise creditworthy firm.

We need better, more streamlined regulation, not more regulation. There are a multitude of government financial regulators, leaving us with expensive controls, but without the transparency most needed by customers and investors.

Finally, we must control federal spending. Where is the $700 billion or more for a bailout supposed to com e from, in a government already drowning in deficit spending and a spiraling national debt? Who will bail-out the federal government when investors at home and abroad refuse to buy its paper Instead of attempting to ram through a new version of this bad bill, the president and congressional leaders should announce that a government bailout is off the table. Companies and institutions must focus on systematically working through their problems, in a transparent, focused effort, utilizing the tools in the government´s already-massive quiver of tools.

We must learn from today´s economic disaster lest, to paraphrase George Santayana, we repeat this painful experience in the years ahead.

Bob Barr, a former Republican congressman from Georgia, is the official candidate for president of the Libertarian Party.

The U.S. Economy After the Bailout

Gabe B. Let me know when you have your hedge fund investors lined up behind your projections / future certainties. I'm certain they'll throw billions at you to invest on their behalf. Only the government, and apparently you, could still believe in alchemy.

The U.S. Economy After the Bailout

www.bobbarr2008.com/pr.../

October 2, 2008 10:39 am EST

Originially published at the Washington Times ...

Just one week ago, Treasury Secretary Henry Paulson was demanding that Congress grant him unprecedented, unreviewable authority to spend $700 billion or more to bail-out Wall Street. But in a major rebuke to the administration and to both the Republican and Democratic congressional leadership, the House voted down the 110-page plan that emerged from last weekend´s frenzied — if not unseemly — effort by Mr. Paulson to salvage a bailout deal.

The Dow dropped some 10 percentage points in reaction to the House vote and, while that was less than a third of the massive percentage drop it suffered in 1987, it shouldn´t surprise anyone that Wall Street was upset at being denied at least $700 billion of taxpayer´s money to practice more of what got it into trouble in the first place — buying up over-valued mortgage-based securities. A majority of members of Congress correctly concluded that the leadership-backed bailout bill was, to put it mildly, bad and that the closed-door sessions that spawned it were deeply flawed as well.

Perhaps at long last, some basic understanding of economics is seeping into the Capitol. Dare we hope that some members now understand the fact that Congress can only redistribute, not eliminate, the pain of an economic downturn? At a minimum now, as a result of the House “no” vote, Congress has time to seriously consider alternative strategies and it needs to press its advantage.

The starting point should be private market adjustment. With the knowledge that an easy government bailout is no longer around the corner, the markets can get serious about working through the mountain of bad debt that imperils homeowners, banks and companies alike.

Unfortunately, artificial booms inevitably lead to painful busts, but these can be productively addressed. Today, this means a mix of bankruptcies, company workouts, and takeovers as we are seeing in the banking sector and outside investors buying large pieces of companies, such as Warren Buffett´s $5 billion investment in Goldman Sachs. This process will reward more responsible firms and encourage them to move early to correct past mistakes.

Many companies also will have to sell mortgage-backed securities. Obviously, companies holding over-valued mortgage-based securities (MBS) prefer to dump bad securities on the government than sell them in a down market. But there is a market even though asset values are uncertain. Merrill Lynch liquidated its MBSs in July.

Bailout advocates simultaneously tell us that these assets are “toxic” and are destroying firms, but which magically at the same time are possessed of value that will ultimately make money for the government if it is allowed to buy them with taxpayer funds. However, good business leaders know that private investors are better able than government officials to dig out that hidden value. Private buyers, too, could participate in reverse auctions and hire asset managers on their dime, not the taxpayer´s. This adjustment process should be carried out in the marketplace — not behind closed doors in Washington.

Both Congress and the administration should focus on cleaning up the mess, not making it potentially far worse. Federal and state authorities need to begin to aggressively prosecute fraud in private markets; fraud that has resulted in trillions of dollars of grossly and deliberately, if not criminally negligently, overvalued mortgage paper. The goal is not to create scapegoats, but to keep markets clean. At the same time, we need a thorough investigation of the misbehavior of public officials in spurring Fannie Mae and Freddie Mac, for instance, to engage in reckless lending. Many of the politicians leading the attack on Wall Street for its failures worked overtime to create the subprime lending debacle.

Congress should rein in the Federal Reserve System. Over the last decade the Fed has followed an easy money policy designed to spur economic growth. But this encouraged irresponsible lending and inflated property values. Increasing the money supply is a bit like mainlining heroin — it´s pleasant while you´re doing it, but it´s extremely painful when you finally stop. Yet as currently configured, the Fed is neither transparent nor accountable.

Congress must say never again with Fannie Mae and Freddie Mac, which lowered mortgage standards and pushed people into new or larger homes than they could afford. These government-sponsored enterprises must be privatized; there must be no more implicit or explicit public guarantees for mortgage lending.

Congress needs to repeal the Community Reinvestment Act. The CRA effectively forces banks to lend to poorer communities irrespective of the creditworthiness of borrowers. Many of the same legislators who demanded increased bank lending in the inner-city now criticize banks for making “predatory loans.” Agencies such as the Securities and Exchange Commission need to suspend the mark-to-market accounting standard and reconsider its application. The rule makes sense for trading assets, especially where values are well established; however, the standard has a perverse impact when applied to long-term income-producing assets in a volatile market. A single major, bad sale can force a major corporate write-down, artificially crippling an otherwise creditworthy firm.

We need better, more streamlined regulation, not more regulation. There are a multitude of government financial regulators, leaving us with expensive controls, but without the transparency most needed by customers and investors.

Finally, we must control federal spending. Where is the $700 billion or more for a bailout supposed to come from, in a government already drowning in deficit spending and a spiraling national debt? Who will bail-out the federal government when investors at home and abroad refuse to buy its paper Instead of attempting to ram through a new version of this bad bill, the president and congressional leaders should announce that a government bailout is off the table. Companies and institutions must focus on systematically working through their problems, in a transparent, focused effort, utilizing the tools in the government´s already-massive quiver of tools.

We must learn from today´s economic disaster lest, to paraphrase George Santayana, we repeat this painful experience in the years ahead.

Bob Barr, a former Republican congressman from Georgia, is the official candidate for president of the Libertarian Party.

The Financial 'F-Word' That Needs To Be Said

www.bobbarr2008.com/pr.../

October 2, 2008 10:39 am EST

Originially published at the Washington Times ...

Just one week ago, Treasury Secretary Henry Paulson was demanding that Congress grant him unprecedented, unreviewable authority to spend $700 billion or more to bail-out Wall Street. But in a major rebuke to the administration and to both the Republican and Democratic congressional leadership, the House voted down the 110-page plan that emerged from last weekend´s frenzied — if not unseemly — effort by Mr. Paulson to salvage a bailout deal.

The Dow dropped some 10 percentage points in reaction to the House vote and, while that was less than a third of the massive percentage drop it suffered in 1987, it shouldn´t surprise anyone that Wall Street was upset at being denied at least $700 billion of taxpayer´s money to practice more of what got it into trouble in the first place — buying up over-valued mortgage-based securities. A majority of members of Congress correctly concluded that the leadership-backed bailout bill was, to put it mildly, bad and that the closed-door sessions that spawned it were deeply flawed as well.

Perhaps at long last, some basic understanding of economics is seeping into the Capitol. Dare we hope that some members now understand the fact that Congress can only redistribute, not eliminate, the pain of an economic downturn? At a minimum now, as a result of the House “no” vote, Congress has time to seriously consider alternative strategies and it needs to press its advantage.

The starting point should be private market adjustment. With the knowledge that an easy government bailout is no longer around the corner, the markets can get serious about working through the mountain of bad debt that imperils homeowners, banks and companies alike.

Unfortunately, artificial booms inevitably lead to painful busts, but these can be productively addressed. Today, this means a mix of bankruptcies, company workouts, and takeovers as we are seeing in the banking sector and outside investors buying large pieces of companies, such as Warren Buffett´s $5 billion investment in Goldman Sachs. This process will reward more responsible firms and encourage them to move early to correct past mistakes.

Many companies also will have to sell mortgage-backed securities. Obviously, companies holding over-valued mortgage-based securities (MBS) prefer to dump bad securities on the government than sell them in a down market. But there is a market even though asset values are uncertain. Merrill Lynch liquidated its MBSs in July.

Bailout advocates simultaneously tell us that these assets are “toxic” and are destroying firms, but which magically at the same time are possessed of value that will ultimately make money for the government if it is allowed to buy them with taxpayer funds. However, good business leaders know that private investors are better able than government officials to dig out that hidden value. Private buyers, too, could participate in reverse auctions and hire asset managers on their dime, not the taxpayer´s. This adjustment process should be carried out in the marketplace — not behind closed doors in Washington.

Both Congress and the administration should focus on cleaning up the mess, not making it potentially far worse. Federal and state authorities need to begin to aggressively prosecute fraud in private markets; fraud that has resulted in trillions of dollars of grossly and deliberately, if not criminally negligently, overvalued mortgage paper. The goal is not to create scapegoats, but to keep markets clean. At the same time, we need a thorough investigation of the misbehavior of public officials in spurring Fannie Mae and Freddie Mac, for instance, to engage in reckless lending. Many of the politicians leading the attack on Wall Street for its failures worked overtime to create the subprime lending debacle.

Congress should rein in the Federal Reserve System. Over the last decade the Fed has followed an easy money policy designed to spur economic growth. But this encouraged irresponsible lending and inflated property values. Increasing the money supply is a bit like mainlining heroin — it´s pleasant while you´re doing it, but it´s extremely painful when you finally stop. Yet as currently configured, the Fed is neither transparent nor accountable.

Congress must say never again with Fannie Mae and Freddie Mac, which lowered mortgage standards and pushed people into new or larger homes than they could afford. These government-sponsored enterprises must be privatized; there must be no more implicit or explicit public guarantees for mortgage lending.

Congress needs to repeal the Community Reinvestment Act. The CRA effectively forces banks to lend to poorer communities irrespective of the creditworthiness of borrowers. Many of the same legislators who demanded increased bank lending in the inner-city now criticize banks for making “predatory loans.” Agencies such as the Securities and Exchange Commission need to suspend the mark-to-market accounting standard and reconsider its application. The rule makes sense for trading assets, especially where values are well established; however, the standard has a perverse impact when applied to long-term income-producing assets in a volatile market. A single major, bad sale can force a major corporate write-down, artificially crippling an otherwise creditworthy firm.

We need better, more streamlined regulation, not more regulation. There are a multitude of government financial regulators, leaving us with expensive controls, but without the transparency most needed by customers and investors.

Finally, we must control federal spending. Where is the $700 billion or more for a bailout supposed to come from, in a government already drowning in deficit spending and a spiraling national debt? Who will bail-out the federal government when investors at home and abroad refuse to buy its paper Instead of attempting to ram through a new version of this bad bill, the president and congressional leaders should announce that a government bailout is off the table. Companies and institutions must focus on systematically working through their problems, in a transparent, focused effort, utilizing the tools in the government´s already-massive quiver of tools.

We must learn from today´s economic disaster lest, to paraphrase George Santayana, we repeat this painful experience in the years ahead.

Bob Barr, a former Republican congressman from Georgia, is the official candidate for president of the Libertarian Party.

The Financial 'F-Word' That Needs To Be Said

The Republican leadership has lost its way. The GOP is no longer the party of small government, fiscal conservatism, individual freedom, and individual responsibility. Fortunately for all Americans there is still a party based on the principles that made this the greatest country in history. That party is the Libertarian Party.

The LP is running an experienced candidate, Bob Barr, for President and is currently on 46 state ballots.

I invite everyone to visit the LP website (www.lp.org), learn about Bob and the LP platform, register as a Libertarian, and cast their vote for true change in November. By write-in if necessary. Please spread the word that there is a real alternative to the Democrats and Republicans if we take matters into our own hands in the voting booth. There is still time to rally behind Bob, so spread the word via your blog, e-mails, and by word of mouth. Help lead the way in taking back our freedom and protecting our Constitution!

The Credit Hostage Crisis

Debtacid, your second paragraph is spot on target. I hope my previous comment wasn't taken to mean that I'm in favor of a government plan or fix. Actually, I believe that no action by the government would be the best response. The markets would work things out--painfully, perhaps, but they'd work it out. That said, the government can't help itself. The legislators will do something because that's what they do. My hopes is that the principles of small government with checks and balances, along with free markets (with oversight, though) will be upheld at minimal cost to taxpayers.

The Credit Hostage Crisis

Good article, but I'm tiring of hearing commentators both in print and over the airwaves claim that yesterday's decline "cost" us $1.2 trillion while we "haggle" over $700 billion. Following this logic, if one can call it that, every time the market declines we should calculate the change in market value and have Washington, DC pump that much money into banking companies. Sorry, but equating the value of the market decline to the amount in the bailout/rescue/interve... plan is a false argument.

Changing gears, my representative voted against the bill (one of three in MA who did so), and I called his office to thank him for doing so. Taking the time to get the government's action right is too important--this bullet will only be fired once. We should be applauding those who did not give in to the fear-mongering of the administration and many in Congress. So, if your Rep was one of those who refused to go along with a panic-stricken response to give immense power and resources to an unelected official, call their office and thank them. Let them know any short-term market turbulence can be withstood while a better plan is developed and a better bill is enacted.

The Presidential Speech, in Context

The Republicrats and Democans will have their way. Thomas Jefferson warned us.......

"Warring against [the principles] of the people,... there is no length to which [the delusion of the people] may not be pushed by a party in possession of the revenues and the legal authorities of the United States, for a short time indeed, but yet long enough to admit much particular mischief. There is no event, therefore, however atrocious which may not be expected." --Thomas Jefferson to Samuel Smith, 1798.

ROI, Paulson's Plan, and the Rise of Neo-Mercantilism

H.J., I enjoyed your article. Here are my answers to your three questions:

1. No, except for providing for the common defense.
2a. See #1, 2b. Rarely, if ever.
3. ROI or your "societal ROI"? The word "societal" expands both the equation and the solution to it. For example, the government might provide a decent "societal return on investment" by compelling companies to take environmental issues into consideration while at the same time being unable to provide the product or service of that company efficiently.

Your comments on neo-mercantilism are interesting, and accurately capture the current situation. And yes, the Democrats will likely go along with the Paulson proposal in some form. Which brings me to my point. That is, anyone expecting either the Republicans or Democrats to rise above short-term political expediency is kidding themselves. They are a power-sharing oligarchy which has no fear of being voted out of office, from a party perspective, for an extended period of time. Americans must give up their allegience to the two major political parties, which in many cases comes down to "my daddy was a Republican/Democrat and so am I", and vote for a third-party or true independent candidate. To keep putting representatives of these two parties into office, while expecting different results, is foolish.

I'll end with two quotes:

- "Warring against [the principles] of the people,... there is no length to which [the delusion of the people] may not be pushed by a party in possession of the revenues and the legal authorities of the United States, for a short time indeed, but yet long enough to admit much particular mischief. There is no event, therefore, however atrocious which may not be expected." --Thomas Jefferson to Samuel Smith, 1798

- The meek shall inherit the Earth, but not its mineral rights. --J.P. Getty

Fear Not Yet a Factor

kimasabe--I agree with you and wpdragon. Shorts help to make a market. My point is that a market can't be considered free, open, transparent, etc. when one side is allowed to keep its cards from view. The fact that a sell order is a short sale is known by the person placing the order and the firm executing the order. This fact isn't disclosed to the buyers until well after the transaction--using the car analogy above (and it's not a perfect analogy), it would be like buying a car or house from someone and then finding out that the title isn't clear. My solution is to let the market know that the seller is short the shares. The only reason that I can think of not to do so is to provide the short seller with protection from longs. Since longs don't get such protection, why should shorts? I have nothing against shorts, I just believe the playing field should be level. If someone wants to sell shares short, go ahead. The short sellers should have the confidence of their conviction, just as longs do.

Fear Not Yet a Factor

Make that twice a month. Sorry.

Fear Not Yet a Factor

Sure, shorts are valuable to the price discovery mechanism. IMHO, the problem with shorts is that they hide in the weeds. Longs cross the tape in full view and in real time. Shorts disclose their position once a month, and the information is already dated when it comes out. Mark the tape as a short sale and make it a truly transparent market. As it stands, short-selling is too easy a deck to stack.

Is the VIX a Fear Index?

Bill, an absolutley outstanding article! I've spent countless hours modeling the VIX and observed exactly what you've written. You, however, said it better than I ever could have. Thanks for the great read! Chuck

Want to Fix the Fed? Get Rid of It

An outstanding article, and good commentary. Thanks, folks, you gave me food for thought today. I appreciate it.