kingaj12

U.S. Government's Size: The Slow-Motion Crisis

I read this guys webpage.

chrismartenson.com...

Takes me back to the hippie days of the 70's. Organic farms. Alternative food. Limits to Growth. Jimmy Carter wearing a sweater in the Oval Office.

Gold -- speaking of gold: I bought gold in 1974. Sold it a few years later to pay rent. Lost half my stake. Got a PhD. Rode the internet boom into a great research job.

I still believe we need community like Chris says. But don't count the scientists out. We understand exponential. We are resourceful.

But I really do have a neighbor who won't fix his septic. We do need governments for some things.

U.S. Government's Size: The Slow-Motion Crisis

I think the guy from Quebec was right about this issue of insurance pointing fingers at the person who is at fault. BTW, same goes for title insurance. I had to buy it every time I refinanced.

We all want to live in a country where our neighbors have functioning septic systems. If one of them breaks (ugh) we want the repair guys to actually repair them, and those guys do want to actually get paid.

How do you get folks to do the right thing? You wanna pay for your neighbor's septic? You wanna hafta sue him or threaten him to get him to do it right? I didn't think so. Better to call in the inspectors. Then nobody gets hurt.

The Puzzles of U.S. Political Economy Today

Basically we need programs that will spend enough money fast enough and have a high probability of getting something useful at the end.

The technical school system in Germany has always impressed me, although I don't know much about it. Would a national program to establish high-technology training for non-college goers spend enough money fast enough? Even just equipping some of those furniture engineering labs I saw in Germany would be a huge boost to the machine tools industry.

The Puzzles of U.S. Political Economy Today

Brad -

I think it is just that the chattering classes are having a hard time reacting to what needs to be done when the banking system blows up.

After all, a big government that spends money on entrenched clients (defense industries, investment banks) is fine and dandy. But once that big government runs out of clients to spend money on -- then what? Spending money to help ordinary folks with jobs, health care and affordable housing is a bit too much of a U-turn for this country's governing consensus.

Dear Fed: The Problem is Solvency, Not Liquidity

Seems to me that liquidity crisis comes first and is dealt with, then the solvency crisis unwinds.

What does this article say? What is a "solvency" policy?

What if World Governments Had Washed Their Hands of the Financial Crisis?

Following Soros' well made points on radical fallibility, we must assume that it is highly unlikely that we have got all of the most important things right. The things we can't know (closed systems) are likely to be the source of the next trouble.

The best we can do is to insist on more transparency into the most strategic parts of the economy. It would be good to know that someone is watching balance sheets of systemically important institutions, for example, so that all the liquidity generated by new taxpayer debt doesn't just go into building the next unproductive bubble (USD carry trade anyone?).

Wouldn't it be nice to know that of all our precious new debt some of it was funding something important -- like new energy sources?

Don’t Blame Free Markets for the Crisis: They Never Existed

Seems like you don't need the Fed -- until you really need someone to create a lot of liquidity in a hurry.

Ponzi investors need to pay for that liquidity backstop. Insurance premiums or haircuts related to the systemic cost of defaulting on their hugely leveraged bets might do the trick.

Financial Reform: The Moment Has Passed but the Need Is Clear

There is a Committee to Establish the National Institute for Finance -- a group in industry and academia proposing to fund a concrete effort to develop infrastructure and research programs concerning systemic risk. At the very least we might get something going that has the potential to gain some insight into our bubble economy.

Check out the NIF at www.ce-nif.org/. It has a petition you can consider signing.

Judge's Message to Rating Agencies: Free Speech Not Freedom to Defraud

Very good article and comments, especially Chap08 and MikeOz. Thank you.

Reform of ratings agencies is the main piece of business needed to restore financial health and to allow the central bankers to draw down government issued liquidity. An effective reform will probably require changing the notion of a "rating".

Transparency is the key issue. A ratings service that enables investors to run their own internal models against the underlying assets would go a long way to restoring confidence in asset-backed paper. The technology to do this is all based on Monte Carlo simulation of cash flows from an underlying factor model. As I understand it, these models and their assumptions are part of the material reviewed by a CRA to justify the ratings application.

How to make this transparent to investors? Well, the models and assumption are captured in computer programs that are run against a database of assets, the results of which are part of the submission to the CRA. Computer programs have interfaces that enable users to change their input assumptions (for example: HPA, interest rate trends, etc). If these computer programs are required to have standardized interfaces, then investors could substitute their own models for those reviewed by the CRA - without needing access to the details of each and every asset in the portfolio.

Extending this thought a bit further: CRAs in effect rate the qualities of a computer model that is seeded with assumptions and is run against a database of privileged information. There are many models out there in the financial world. Some models perform better than others in certain environments. If the interfaces are standardized, then investors could subscribe to multiple model providers. Ratings services could track and rate "model" performance!

So how could we get started on this? I think the key requirements are 1) standardization of the inputs of the cash flow generation modules, and 2) the right of any investor to substitute their own model for those examined by the CRA.

Will the Efficient Markets Hypothesis Survive This Crisis?

EMH is more of a slogan than a principle. It needs to be replaced by a much more careful analysis of how information flows in markets.

Goldman's Success: Put Down Those Pitchforks

Goldman moved themselves up on the risk spectrum and are reaping the benefits. The point is that these profits depended on the US Treasury to finance a huge systemic rescue.

The profits of the surviving banks are a direct result of the liquidity written by the US Treasury and Fed. That liquidity had to be injected because of the bad bets on the US housing market. If regulators had required banks to take haircuts in proportion to the systemic risk they were taking, then there would not have been any profits on shorting the bubble.

Its our fault. If we don't charge for systemic risk, then surviving banks will look successful and pay themselves big bonuses.

It looks like capitalism, but it's not. It depends on the socialization of credit.

What Were Subprime Loans Modeled On?

The Fed has a great analysis on securitization of subprime.

www.newyorkfed.org/res...

The basic point is that the subprime ARMs were so punitive that that owner was forced to refinance in 24 or 36 months at the option of the issuer. The issuer (of course) counted on the refi to turn a risky mortgage into hard cash.

You don't need to invoke CRA abuse to follow their argument. So long as investors believed that home prices would not fall, then subprime was an amazingly good deal for the issuers.

Systemic Risk Is Unmanageable

The bottom-line question appears to be what to do during the inflationary build-up that preceeds (or triggers) a deflationary crisis. According to Minsky, the financial sector inevitably transitions from conservative lending (when liquidity is plentiful), to speculative activity (when liquidity is scarce and and risk-taking is well-rewarded), and finally to outright Ponzi schemes like subprime securitization.

We need to make all this financial scheming pay in advance for the liquidity that these schemes depend on. The reserve banking system has in effect sold a "put" option on the equity of the financial sector: a systemic bank rescue restores the balance sheets of the financial system so it can be viewed as the payout of a put option on bank equity. The marginal change to the cost of hedging this put option can be attributed to changes in bank positions, and some percentage of this change can be charged back to the banks in the form of a systemic risk haircut, or some such device.

Even if one got the calculation wrong (a reasonable assumption!) systemic risk haircuts would supply a counter-cyclical pressure on leveraged financial risk-taking. Moreover such attributions can be scaled based on a reasonable view of the fundamentals. Financial institutions taking large leveraged positions in crowded markets are making use of a social good (liquidity). Liquidity is not free. If they paid for it up front then maybe, just maybe, their behavior would change.

A Socratic Dialogue: Fearing the Collapse of U.S. Treasury Bond Prices

The key point (not really well put by the author) is that the only source of liquidity creation since mid-2008 has been US Treasury borrowing.

Liquidity creation = creating assets that folks willingly hold in place of cash.

When the rest of the world starts creating liquid instruments that folks want to hold in place of cash, then you might see effects from oversupply of US Treasuries.

The Mystery Behind the Parabolic Yield Curve

Time for a bankcor, anyone?

en.wikipedia.org/wiki/...