Ransome's Comments

Is Criticism of the Bernanke Fed Justified?

Mon, 21 Dec 2009 23:08:56 -0500

There is only one reason to have interest rates at 0% and that is to help the banks recapitalize. Main Street banks are not lending because of the lack of qualified borrowers and fear of adding to their current default rates both commercial and residential since they are barely solvent. They don't have a source of income and an increase deposit payments would be a cost. Deposits are increasing and adding to their costs. Until the economy stabilizes, they will not lend. If Bernanke puts pressure on them to lend by raising rates, they will engage in risky behavior. Bank foreclosures are going to continue. Citi will be the first too big to fail that will be deconstructed.

We had low rates for a very long time during the subprime and little inflation other than housing and commodities. Our supply channels are infinitely full. If we begin spending, 600,000 out of work Chinese will go back to earning 70 cents an hour and China's GDP will hit double digits. We will see no inflation. Keep commodities off limits to speculators otherwise the recession will be prolonged for no good reason.

All the money the Fed has been "printing" is tied up in the bad securities produced by the banks and will never see Main Street. Eventually those securities will need to be resolved and the Fed will get it's money back.

Supply can only satisfy demand so producers must noticeably lower prices while America goes on sale, creating demand like a worm on a hook. Any found stimulus money will be banked. A decided tax decrease for the middle class would help sort out household budgets.

People spend when they move into a new house so housing needs to be stabilized. Jobs need to be created to sustain demand which will happen very slowly as we adjust to the new normal. Most of the demand benefits will be felt in Asia.

We should terminate all health care, food stamps and unemployment benefits so the small government folks can get a good taste of life without government safety nets. We can decrease the deficit with their entitlements.

Interest rates will rise rapidly, not because of inflation. People will borrow if they need the money for value creating business investment at 6%. Below 6% encourages the wrong kind of borrowing and the banks need the lending income. In the 1850's, farmers needed low interest loans (4.5%) over long intervals because their land was minimally productive. Even back then, 6% was considered a good loan for the capitalists. A loan at 3% has the lender wondering if it is worth the risk of not getting the principal back. Housing will be so under valued because of supply, people will take a 5-6% fixed mortgage. Savings rates will go up and reward savers.

Is the Treasury’s Monetary Policy Effective?

Fri, 18 Dec 2009 11:56:52 -0500

I think you answered your own question. Back before the Fed system, banks printed their own money backed assets in the vault. It created an unstable money supply with runs on the bank if the banks "over printed" money or the paper was not backed adequately. The shadow banking system created their own ABS currency, everyone had it, just like the Wild West banks and with the same result. Those that didn't have it had paper associated with the institutions that were holding it.

So the AAA securities were treated as liquid money good and then overnight illiquid with uncertain final value. The Fed stepped in to fill the gaping hole in different ways. Until the hole in the money supply is filled, no inflation. There is no extra money floating around Main Street. The GDP is probably overstated.

On Dec 18 06:30 AM Andrew Butter wrote:

> Excellent Excellent Article, you have finally explained something
> that has been nagging me your almost a year, and very lucidly, thank
> you.
>
> I must have asked a twenty economists of all denominations, "but
> isn't a "liquid" security just the same as money?" And they all say...all
> the way from the Austrians to Anarchists..."No, no - you don't understand
> a thing - you moron".
>
> So consider this then, MBS and all the other variants were, two years
> ago considered "liquid".
>
> And they more or less were thanks to the house of cards constructed
> by Goldman et.al....such as the quaint "exchanges" where hardly any
> business was done (and what was done was likely rigged) except they
> were used as a convenient "benchmark" for valuation.
>
> Then suddenly all those liquid assets became illiquid, all $23 trillion
> of them.
>
> So what did that do to the supply of "money".?
>
> So the Fed pumped in $3 trillion, $5 trillion....who knows?
>
> Yet still no inflation.....I wonder why?

Volcker's Wake Up Call: Spread the Word

Wed, 16 Dec 2009 16:05:31 -0500

A problem with innovative products is they replaced money. They were treated like gold. No one looked past the AAA rating. 99% of salesmen of these products could not explain them. They were intentionally complex and opaque.

There are two issues, one involves what went wrong and the other what have we discovered. These issues are different. What went wrong was a sliver of what we have discovered. When one cluster bomb goes off, you don't leave the rest hanging around because they have not harmed anyone.

Once the issues were identified, massive amounts of money were applied, applied in a way that have aggravated many people. Then everyone sat back and waited for the economy to correct itself. It has been a long wait. The export of manufacturing and trade imbalances were sitting in plain sight. The Asian excess savings and galloping economies were well known. Over the top US consumer debt was well known and encouraged. Now we are going to learn about a jobless recovery that supply-side economics can not fix. We have learned that wealthy people do not create jobs and trickle down is a fable. We are going to learn that only taxation can tame the wild animal spirits and focus money back toward Main Street investment. Give a millionaire another million and he will gamble, not invest. He will create no jobs. We have 600 Trillion notional value derivatives. How many jobs are being created with the money protecting them and at risk?

Hank Paulson told everyone that TARP was going to allow banks to lend and credit flow. Others said the banks were insolvent. An insolvent bank has a hard time lending. Once the cash infusions took place, the banks needed to re-capitalize and they took the route where short term money could be used, trading. The economic climate is too unstable for long term lending.

I would be spending a lot of time examining trade imbalances and trying to understand them. We require a wide range of jobs and they need to be widely distributed as people are not that mobile. Every city should have a business and tech incubator campus that can be placed outside of town. We should consider producing more food locally and have year round farmers markets. We should be beefing up the education system with more volunteers that have knowledge to share with an emphasis on technical training for all ages. We need more community health clinics because health care via the private sector will be unaffordable.

On Dec 16 01:10 PM Cambrian Capitalist wrote:

> The premise that financial innovation has not improved global productivity
> or economic growth is wrong.
>
> The simplest example of financial innovation facilitating economic
> growth involves the following: If I was a large corporation that
> wanted to construct a new office building in Manhattan with an initial
> budget of $2 billion, who is going to give me a construction loan?
> When can I transform that loan into a commercial mortgage? What will
> the costs of this financing be? The point is there are only a few
> financial institutions that can comfortably assume the risk of such
> an enterprise on a standalone basis. Because of the specific risk
> of such activity and the lack of potential competition at this level,
> it is highly likely that the financing costs associated with this
> venture will be very high. Without securitization, which allows banks
> to spread the specific risk of these activities around to a broad
> pool of investors, these activities would never get off the ground.
>
>
> Further illustration of this point is when the CEO's of money center
> banks were called in front of Congress. Congressmen would ask them
> why they were pulling back their lending activity to which the CEO's
> would respond that their individual companies had expanded their
> lending activity. They were not lying. The answer to why aggregate
> lending activity had declined was because the securitization markets
> (i.e. mortgage pass-throughs, CDO's, RMBS, CMBS) was frozen and were
> liquidating. At their peak in 2007 the securitization markets were
> almost as large as the aggregate level of conventional credit assets.
> The point is that credit can no longer flow into the economy in the
> absence of functioning securitization markets. These markets are
> essential to the optimal allocation of financial resources in the
> United States and the world. Glass-Steagall is and was irrelevant
> to the hazards involved in the freezing of securitization markets.
> The central issues that drove the credit meltdown were derived from
> agency conflicts, and the improper incentives created by government
> involvement in subsidizing the overproduction of housing stock.

>
> Recreating Glass-Steagall is tilting at windmills thinking.

Bernanke Is Not the Problem

Mon, 07 Dec 2009 11:25:31 -0500

If you want to read about the Fed and jobs and globalization, go to the annual reports of the Dallas Fed starting at about 2000. Hint, they never addressed what Joe six-pack and his wife were supposed to do to earn a living in a globalized economy.

The Fed mandate of price stabilization and maximum employment is quite complex. It means inflation control while having workers produce what they consume, with a little left over. It also implies a balance of trade. Capitalism is about production and consumption, and the great cycle of money.

Inflation is inefficiency and cost shifting. Our system has been supporting monetary parasites and inefficiency and part of the inefficiency was government spending without cost controls. The concept of maximizing profits in the private sector does not play well with the goal of a balanced national economy. There is clearly a social component that was purposely ignored. businesses don't operate in their own little vacuum. Like it or not, if you reduce wages, you reduce consumption. That is why the balance is so important. Now toss in the globalization of production where the great cycle of money takes a detour out of the US and creates growth somewhere else while maximizing profits within the US. then add the concept of keeping score quarterly. This exposes the fallacy of capitalism. It must be managed. Unions can not keep asking for more wages and benefits without increasing productivity. Companies can not pay management ungodly sums nor can they increase prices based on their monopoly power. Companies can't export labor without considering the impact on consumption.

Look at health care, no matter how money is channeled, the consumer pays. We now know that the system costs are growing like cancer because of inefficiency and profit taking. We also know consumers spend money proportionally. If we spend more and more on health care, we spend less and less on something else. Our standard of living becomes distorted as well as the economy. There plenty of examples outside of the US to observe and measure against.

The Fed has used very blunt tools, varying the interest rates and the overall supply of dollars to control the great cycle of money. The great cycle of money needs better tools to direct the flow; the volume, velocity and target/direction of money. Taxes have been a traditional tool of choice. If it is jobs you want, jobs must come at all levels, not just knowledge workers. If it is social stability that is desired, then the workers need locational stability and job function diversity. This requires a national economic strategic plan just as any business would have in place, including tracking metrics. No more invisible hand, creative destruction is not necessary, it is an excuse for a lack of a national plan. Any talk of government planning is dismissed but we have no experience in national planning so results would be poor as we learn. Take California for example, its economy is out of balance along with its balance of trade with other States.

Bernanke Is Not the Problem

Mon, 07 Dec 2009 11:25:12 -0500

Why Did Housing Go into a Bubble?

Sun, 06 Dec 2009 21:45:12 -0500

The government forced nothing, it is a fable. The whole scenario was developed on the credit card model. It was why credit scores became the most important credential for a mortgage. The loans were asset backed and most importantly risk was transferred via securitization. Wall Street has a junk bond dream left over from the asset stripping 80's.

Greenspan put the gas pedal down with low interest rates to promote growth to pay for a war. He had is eye on inflation, which never happened. Unnoticed were the dollars and jobs moving overseas. We did not experience inflation because the supply of goods coming into the States was infinite and cheap. It was Asia that experienced the growth.

No bank has ever sent someone knocking on your door begging you to re-finance or obtain a home equity loan to pay off your credit card debt. Remember the credit card come-ons, 0% for 6 months, the same come-on as toxic ARMS. Like credit cards, asset backed lending generated fees with no risk, risk was securitized in bundles and off-loaded. Servicing the loans was immensely profitable, with a penalty fee structure like credit cards, which stayed with the servicer.

Greenspan continued to have low rates and money went looking for other AAA securities. Once the fee fever hit, they could not turn off the machine. Greenspan tried to raise rates but money, offshore "savings", was buying the bundled securities keeping long term rates low, the "conundrum". The savings were the profits from us buying all the imported stuff. The growth Greenspan was waiting for was taking place in Asia and coming back as "savings". Inflation was localized to real estate as supply dwindled and investment banks swindled. Increasingly lax lending to unqualified borrowers allowed commission fueled sales reps wallets to bulge stuffing more lending down people's throats. The inflating housing prices created it's own wind.

Local banks were out of the picture around 2004 unless they did commercial lending for new construction or exceedingly overpriced rental units that were destined to become condos for snow birds. Idiots in town government were floating gimmick securities to build local infrastructure for new construction. People were lining up in the streets to put down payments on condos yet to be built and that were sold three times over before the ground was broken. Any idiot could become a real estate broker, and they did. The old hands were complaining about all the competition. Ultimately, very few were making money because of the insane competition, so they lied as much as they could to make a sale.

It was the best example of out of control capitalism because everyone was making money. No one wanted it to stop, so it didn't. Builders could not build houses fast enough. Rates and terms had never before been seen this favorable (but low rates did not force anyone to buy. Rates are low now, and people are not acting foolishly.) Real estate brokers were touting low rates, gimmick loans and the "better buy now or you will never afford a house in your life time. If terms seem unaffordable, you can sell the house at a profit. If you have bad credit, make payments on an exploding mortgage and re-finance before it blows up."

Fannie and Freddie were out of the picture by 2005, there were no more qualified borrowers. Raines was out for accounting fraud. Mudd had his arm gently twisted by Frank and investors wanting better returns. Frank wanted the poor not to miss out on the housing appreciation "miracle" (but he didn't say make bad loans). Bush wanted everyone in a house so they would buy stuff and keep the economy afloat. Fannie and Freddie bought AAA ABS of loans they would never be allowed to make, even before Mudd. Every bank in the US did likewise. Mozilo offered Mudd conventional loans but he had to take ALT-A and twisted ARMS as well. Mudd was in competition with the investment banks with the exception that he would hold on to the loans or guarantee them.

Then the defaults came, first slowly as HELOCs were used to make payments. Investment banks lost buyers so they turned attention to oil and made that market, drawing in dumb money from pensions and retirement accounts. Remember? Gas at $5 a gallon by the end of the year?. Bear Sterns lost some funds and then Lehman went down and a big freeze settled in.

Case-Shiller Still Predicts Massive 45% Fall from Today’s Values

Fri, 27 Nov 2009 09:44:49 -0500

Zero Hedge collected some excellent material on balance sheet recessions presented by Richard Koo. He had a slide that compared rents to housing prices from 1975. The presentation was prepared in March and the predicted intercept was equivalent to housing prices around the fourth quarter of 2003, which I estimate to be approximately $100 to $125 a square foot.

Murdoch’s Bing Bluster Will Hurt News Corp, Not Google

Fri, 27 Nov 2009 09:13:35 -0500

Eventually Google will be spending more time on the secondary sites and blogs where one can find much superior information than the dis-information the WSJ puts out.

Is Dubai's Default a Black Swan Event?

Fri, 27 Nov 2009 08:37:26 -0500

Most likely the banks have off-loaded the debt and protection on unsuspecting investors. Won't they be surprised. It is more like Russian Roulette. It is why casino capitalism and opaque risk sharing are destabilizing. The Black Swans are yet to come, which is the real source of panic when it hits the market..

Why a Market Crash Doesn’t Matter

Mon, 23 Nov 2009 12:03:15 -0500

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

Tue, 17 Nov 2009 13:59:39 -0500

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

Tue, 17 Nov 2009 13:41:07 -0500

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

Fri, 13 Nov 2009 11:58:22 -0500

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

Tue, 03 Nov 2009 11:48:11 -0500

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

Wed, 21 Oct 2009 11:21:01 -0400

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

Mon, 19 Oct 2009 10:37:33 -0400

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

Thu, 24 Sep 2009 20:30:55 -0400

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?

Mon, 14 Sep 2009 18:45:48 -0400

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

Mon, 14 Sep 2009 15:23:28 -0400

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

Mon, 14 Sep 2009 12:53:55 -0400

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

Tue, 08 Sep 2009 19:29:34 -0400

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

Mon, 24 Aug 2009 13:53:58 -0400

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

Tue, 18 Aug 2009 17:04:07 -0400

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

Sun, 16 Aug 2009 10:28:44 -0400

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.

Waiting for the Next Fed Apology

Sat, 15 Aug 2009 11:26:15 -0400

Which is why there is little inflation. The printing presses are replacing real money for leveraged money. Money created during securitization of faulty assets and the generous proposal to buy bad securities at elevated prices. It is still a half measure.

Waiting for the Next Fed Apology

Sat, 15 Aug 2009 10:54:50 -0400

I have some different views. Traditionally, cheap money should fuel investment. At some point, access to cheap money fueled consumer debt and flowed to China, fueling investment and growth in China. This was considered a triumph in globalization.

I think Greenspan was focused on inflation. As long as inflation was contained inexpensive money would be available. I also think that Greenspan was seeing some disconnects but I don't know what they were. It may have been the increase in securitization and money becoming available outside of the regulated environment. At some point, faulty lending looking for more borrowers kept the game going, creating the unstable bubble and sector inflation.

My intuition believes that having the Fed back the banks was a half measure. It prevented immediate collapse. It was just as important to modify the faulty loans and de-lever the consumer as well as banks, as it is the actual loans that are the etiology of all that followed. A bad bank could have purchased the loans at market and restructured them. Buying bad securities as proposed, would have helped the banks but would do nothing for the bad loans. Buying the loans would fix the bad securities and the loans. It is the inattention to the wide spread bad loans and consumer debt that caused the overall long term collapse of the economy. Unhampered speculation in oil pushed the consumer over the edge, destroying all confidence.

It is a bit like mishandling poisoned pet food. You identify the source, contain it, and bail out the factory, while leaving the poisoned food on the market. Relying on banks to repair the loans was a faulty assumption. The banks themselves are not responsible for the economy, they are responsible for themselves.

Wal-Mart and the Baked Beans Economy

Fri, 14 Aug 2009 14:36:19 -0400

The food prices at Walmarts are dropping and they are expanding the store brand for value shoppers. This is tricky business. Korvette's offered brand name goods at discount prices but went under when the quality of the store brand became crap and eventually the store brand was all they offered.

Microsoft: Whistling in the Dark

Fri, 14 Aug 2009 14:16:36 -0400

I would have liked to see numbers. Does MS loss equal Apple's gain? So there is more to the story. I think there are two things going on.

People don't care to change OS once something works, like XP. People are fed up with radically changing UI, they just want to use the tool to get the job done. Computers are no longer novel or an end in themselves. In the long run, most people just want their car to start every morning.

Hardware continues to become cheaper and as a result, people buy more of it. Computers are becoming the new multi-purpose calculators. Thirty-five years ago, a simple calculator cost the same as a netbook today. Paying $500 a pop for software for each unit is no longer viable. There is a lot of downward pressure on MS to reduce prices and to produce better quality outcomes with less frequent releases. MS has passed peak oil. They will downsize to meet demand, rather lack of demand. Cloud computing, if it takes off, will require the giving away of software and selling space. MS is now going give away Office online to see if it can become an ASP with a monthly fee. No one is going to pay a fee for each owned unit so there will be another revenue hit. There is nothing that Balmer can do, nor can anyone else.

Interview: Journalist Matt Taibbi

Thu, 09 Jul 2009 09:05:15 -0400

I'd be interested in MT's take on algo-trading with software that can manipulate markets. That would make them both useful to politicians and untouchable.

Uh-Oh: Banks to Stop Accepting California’s IOUs

Tue, 07 Jul 2009 10:55:04 -0400

The banks probably had their own solution, something around 16%.