Ransome

Why a Market Crash Doesn’t Matter

My concern is structural. Wall Street has increasingly been converting our money supply into financial products. The obfuscation of liquidity of these products and the stability of underlying values and associated risks is controlled by fewer and fewer hands and outside of the regulated money supply. This has been building for 40 years.

We have recently observed much of the under-belly of the shadow banking system enhanced by leverage, mis-calculated risk, and in some cases, intentional fraud. Liquidity of securities is a big issue along with complexity and interconnectedness. This has little to do with company value of a simple stock. There is no loyalty on Wall Street, they would eat each others' lunch. No one is going to ride the market down gracefully after regaining some profit. As an example, mutual funds are a vulnerable structure, let alone funds of funds of funds. It is a structure problem and a short term pricing problem. One supposes that HFT which ignore valuation, can exacerbate the hash of prices. To prevent a catastrophic crash, the flow of money needs to slow down for awhile. We need to seriously re-consider the value of all the different Frankenstein financial products that are replacing our money supply. On good days they may work, but on bad days there is trouble.

I read on another blog that the Administration seems to have pulled back on jobs and is focusing more on a consumer and business credit solution to recovery.

Banning Derivatives and Other Such Foolishness

Buffet has a different perspective. He is more tuned in to the national economy and impacts on society. I guess being concerned about society makes him a leftist but he does a lot of value investing within the economy and he seems to be attuned to the interface between society and capitalism. He is not a blood sucker, he is a win-win investor. The companies he buys are given a protective shield. He doesn't load them with debt and draw a big dividend.

Banning Derivatives and Other Such Foolishness

Derivatives allow the broker dealers to print money, the so called liquidity. Long ago, individual banks printed their own money backed by "assets". After many bank failures and loss of confidence, we went to the Reserve system. Now we want to by-pass it using derivatives, money backed by the salesman that sold the security to you. Money that is backed by another security that is backed by another security that is backed by risk diversification but I don't know who but somehow we bought a AAA rating.

But not to worry, the Administration is captured. To mess with the financial sector would cause a drop in the GDP and a loss of confidence in the dollar. The financial sector will emerge untouched, bigger than before and with less regulation. In addition, they will be 100% backstopped by the taxpayer, forever, including trading, self-dealing, broker-dealer activities, insurance and anything else they innovate. They may even do a little lending.

Marc Faber Is Conflicted About the Price of Gold

I may disagree with Faber, whom I enjoy immensely and read his words with his unusual voice, also. Much of Bernanke's money printing is sequestered. It is not in general circulation. That in circulation is in th form of loans, loans to those that can use it in the short term, which is not many. It was used to kick start liquidity. We have a hangover of securities that are no longer money good. The Wiemar Republic injected money directly into the economy and kept at it. Injecting money into social safety nets is not inflationary, it maintains some of the relationships between economic variables that define our standard of living. I think the Fed is learning to control where money goes and is presumably paying attention. Although any central planning infuriates some people, especially the Austrians such as Hayek. We have those that say abolish the Fed, but I remain firmly unconvinced.

Greenspan was against any government surplus so in a downturn, all we have is debt. Many other economies build surpluses. Debt fuels financial capitalism but a debt based economy is hard to kick-start and imposes a debt tax on output. Our economic policies are confusing. Old savvy industrial capitalists financed with stock, not debt. We learned the issues of debt financing during the Long Depression. Innovative debt remains debt.

Property Values Set to Fall 43% from Current Depressed Levels

I am not so sure we haven't hit the bottom. I bought a house for 165k in 1987. In 1997, my neighbor in real estate said it was worth 140k. I am one that refuses to take a loss. Back in the '80's mortgage interest rates were up at 8 or 9%. It depressed the market. When banks started giving money away my house increased in value overnight by about 50% based on a monthly payment without any loan gimmicks. The drop in value over 10 years created a latent demand that was overstimulated by cheap money. Over the entire period from '87, replacement value increased.

We went from a depressed market to an overstimulated market to a restrained market. Taking into account the cost of money and the latent demand, prices seem about right Location still exerts a positive pull on value. The '87 house is on a cul de sac where kids can play in the street and the houses have big lots in a good school district. It has twice the value to a young family than a town house, which sells for 170k. If I increase the value of the house with no appreciation, based on money cost and latent demand it is about 280k (50% + 20%) . Adjust for real inflation at 2% per year (50% + 20% + 40%) * 165K = 345k. The real price is between 280k and 345k which is in the range predicted by the town house price.

I also heard that Dodd may propose opening up the 8k bonus to all comers to help move inventory. The timing would be especially good for local banks who are deposit rich but cautious as they lose more money on development and new construction loans. This could open lending for them, generating badly needed revenue and establish the housing value floor if money is lent prudently. It may unfreeze the ABS market with asset values stabilizing at a low point and lending being prudent. Now we need jobs to support all this.

The Secret Paulson-Goldman Meeting

I've handled sensitive info before and agree that Paulson broke so many obvious rules that he must have been on an amateur dis-information assignment that the Russians would never take seriously because everyone follows the same rules. Paulson may have been there to help Goldman penetrate. Who knows. This is not the way sensitive info is handled by crooks or saints, it must have been a performance.


On Oct 20 02:02 PM Warm_Paw wrote:

> And if Paulson telling Goldman at a meeting in Moscow which would
> surely be disinformation, that all will be wonderful in America and
> that it should be fixed within a year, the Russian's now know it's
> worse than they thought and that the US is vulnerable.
> How do we put such dim witted people into such positions of authority?!

Replace Ben Bernanke with Paul Volcker

I'm thinking the deposit banks are not up for paying more interest on deposits. This may be a poor reason to hold rates down but it could push them over the edge. The flow of money is chasing short term returns instead of long term investment. Goldman is going gangbusters because they can borrow short and invest short. Deposit banks can not do that. If interest rates climb and the deposit banks don't respond, money will flow like a river out of the banks. This is a big experiment in financial capitalism where moving money for short term gains becomes 40% of GDP, replacing industrial capitalism which is now less than 10% and agriculture which is 1%. The Fed is captured.

Look at the stock market, we no longer value companies, we play the pricing spread, the asymmetric information spread, not the value spread. Everyone is a crook because there is so much money to be made the fast way. It is almost beyond regulation. Besides, this money generated by financial capitalism is kept from the so called "productive forces" that make a society and a national economy strong. People seeking Alpha don't want to hear this, but the productive forces are so weak, you can't even give money away. Without productive forces, money becomes valueless, hence the move into gold. You don't need burning inflation to destroy the value of money. I'm sure we will muddle through until the next collapse because financial capitalism is not sustainable by itself.

We fueled the productive forces in Asia, weakened the productive forces at home, while fueling the speculators at home. The bailout further damaged the weakened productive forces at home and bailed out the speculators. This is why we need Volcker, Bair and Warren. I think they understand.

The monetarists and the Chicago School must be banned from the economy and take Harvard while you are at it as they are a big promoter of financial capitalism, the economic Nosferatu that drains energy from the productive forces. Warren must have been considered an Alien from Outer Space at Harvard as she did not support borrow and spend nor debt till you drop.

The Problem with Zombie Banks

Perhaps this is why Hedge Funds want to buy banks. Pay higher interest to attract deposits and buy under valued securities at fire sale prices. Renegotiate loans so they are performing and finally sell the bank. As more banks close, the contributing banks of the FDIC are clearing the way for more Hedge Funds to buy undervalued assets. There are plenty of vultures out there looking at commercial loans. A bank that pays anything in interest will attract savers and the deposits are guaranteed. Part of the problem now are the low interest rates.

We are simply falling up because the most toxic loans were not dealt with immediately and taken out of the economy. The dominoes started falling faster and faster. It is equivalent to the liquidity problem at the top, borrow short and lend long, but it is death by millions and millions of liquidity problems at the bottom where you earn short and pay long. Every troubled asset is a hundred, a thousand or a hundred thousand troubled families. You can close down banks for the next ten years but it won't help what in effect is a Hedge Fund Bank Ponzi scheme. You can't stop it because we are running out of people to buy failing banks and failing loans.

Profiting from Foreclosures?

Some people may feel there is no safe haven for paper currency. Gold is the option. I met a gold bug. They don't use banks or credit and they pay their taxes. It was a family legacy. Gold bugs trade and lend amongst themselves. Perhaps it is economic conditions, perhaps it is the Swiss that have generated a new interest in a tradition.

The Coming Consequences of Banking Fraud

I will take a contrary opinion. I don't think they know what they are doing. It is simply crisis management. My views have changed since reading the recent articles at Bloomberg about the Lehman collapse.

In other words, if you call GS and ask for a crisis solution, they will give a GS solution. They are not geared towards saving the economy, they are geared toward succeeding at financial capitalism. If Paulson called a distressed homeowner, he would have been given different advice. The main thrust of the crisis solution was focused on the middlemen. The middlemen have little effect on the economy. The faulty or toxic products they created had an enormous effect on the national and global economy but that was not the focus, it was propping up, writing down securities, moving securities, a bookkeeping exercise with respect to the real economy. All the "secret" movement of money and securities are bookkeeping exercises to manage the colossal leverage and interconnectedness that would burn down the house if rules were followed and activities transparent.

It's the millions of people being displaced or losing jobs that is wrecking the economy. It is the investors and borrowers that got creamed and ignored. The fact that GS can now make money algo trading has not helped the economy one bit.

This is simply crisis management with attendant information control. Folks are nervous that a AAA plan will go bankrupt tomorrow mostly because the "problem" has spread in so many directions and into so many sectors that can not be controlled as simply as giving a bunch of money to AIG. The complexity and interconnectedness has been stunning. Every player has been fined tuned in the art of financial capitalism and not remotely geared to undo or fix problems. In financial capitalism you never look back, you look for new opportunities, whereas forest firemen are always looking back. These crises are not planned, it is the result of recklessness and a gross lack of foresight while living in the moment. Once you and the herd are swept up and can hear the roaring of the falls around the bend, it is too late.

Besides, gold gave us a lot of problems during the Long Depression. Stability comes from a Real Bills Doctrine but folks at SA don't want stability. Financial capitalism withers away and Industrial capitalism requires folks to make money the hard way, where value is exchanged for value and those adding the most value are rewarded. Financial capitalism appears to be adding value but moving money from pocket to pocket for a fee is not.

What I really think is going on is the monetarists, and there are plenty, are trying to salvage their relevancy while in crisis management mode. It turns out that if folks have the freedom to make the best choice, it is often results in following the herd over the falls.

Economic Recovery: Determining the Undeterminable

Retirement funds giveth and algo traders taketh away.

Virtually no adjustments were made in retirement account fund balancing during the entire crash. No one buys value, stocks are micro traded or gobbled up by index funds. The market is not rational.

Life Settlements: Still No Dice

Another example of a product using asymmetric information and proprietary algorithms as it's basis. Risk can be assessed with certain information. Without, risk can be misrepresented and this asymmetry leveraged. Virtually any new security will have at it's heart, the potential to mis-price risk although that would be simply a protected opinion, not a misrepresentation.

Like a World Cup sailboat race, everyone follows the leader. If one gets it wrong they all go down. Luckily they will all be backstopped by the taxpayer.

Colonial Bank Failure Highlights the Problem

I realize that this is Seeking Alpha, I get a chuckle from people that want to make money on the collapse of the economy.

The problem was the securitizing banks created bad paper. The Fed bailed them out for a specific purpose, they were systemic and too interconnected. The mistake was not recalling the toxic loans. They continue to fester and get passed around hoping to get government backing. The solution is not goofy accounting or closing banks. A government bad bank needs to get the loans off the market. Buying the loans capitalizes the banks, this is how it should have been done from the beginning. Restructure the loans to reflect the current economy. The government does not need to lose in the long run.

No new security should be allowed that can not be recalled and unwound, even if bundled. These loans, which now include commercial loans are no different than toxic pet food. They were made under distorted and sometime fraudulent conditions, get rid of them. The entire effect is systemic and it is preventing a recovery. Closing banks has no effect on anything and it is just throwing money away. All the moral hazard people will squeal like a stuck pig but it needs to be done. The government allowed this stuff on the market and they are the only ones big enough and motivated to fix the problem. Bailed out solvent banks could care less, they are making millions trading, it is someone else's problem

Calpers: Betting the House

My guess is that someone holding toxic assets has his ear. Sooner or later, the iBanks need to move toxic waste off their books. The scheme will be complex and generate fees.

Coming Soon: Banking Crisis of Historic Proportions

I was pondering the collapse of the housing bubble. Poor quality lending created securities that were not money good. But the lax lenders were not the only to suffer, homeowners, even those that sat on the sidelines castigating their imprudent credit leveraged neighbors, all suffered tremendous wealth destruction. Far more than the bubble wealth.

The chaos theory seemed to explain this phenomenon. A butterfly beat it's wings and decided that no doc loans and other types were profitable and the entire lending and borrowing enterprise adapted, throwing us over the edge into a death spiral that continues to uncontrollably expand as the chaos theory predicts. The Fed's attempt to correct the death spiral was too late, too focused and too weak, much like fighting a forest fire that has spread into discrete child fires. As chaos continues to spread, we will experience the uncertainty and the fallout until the children fires are contained. Predictions will simply be guesses.

Some are looking at regulation to prevent a repeat. Some endorse self-regulation. Some endorse watching the fires burn. Certainly if enough participants raised the alarm, it might have allowed the retreat from the cusp of chaos. If a majority of the transactions were win-win and market discipline maintained, lending would have been self-limiting when the supply of truly qualified borrowers was depleted.

Rescuing the too-big-to fail affects chaos direction but does not contain it nor is the selective approach necessarily positive. It may in fact create new chaos. A comprehensive approach is necessary if intervention is to be successful, and the government is the only entity large enough to intervene. Without discipline, we may be in a permanent state of chaos. It is apparent that the consumer is already attempting to restore discipline.