mathgeek's Comments RSS Syndication from SeekingAlpha.com http://seekingalpha.comuser/283496/comments http://seekingalpha.com/article/133228-railroad-companies-good-better-best?source=feed#comment-480128 480128
A couple minor points:

- The long term battle between trucks and train has gone something like this: Trucks are faster and more reliable, Trains (or intermodal services) are cheaper, particularly for longer hauls. (>500 miles). Over time, train service speed and reliability has improved, displacing trucks. This can be expected to continue.

- As one poster correctly points out both BNI and UNP have excellent access to PRB coal. I don't belive there is a true advantage of one over another, but the advantage over the eastern rails is real.

- For those who are asking about passenger rail... keep dreaming, the economics just doesn't work very well, except for shortish trips between congested urban centers (e.g. the NE corridor) where time "to and through" the airport makes up the majority of the travel time. Think about it this way: People's time is valuable; it makes more sense to move people by the fastest means possible (e.g. airplanes) while letting lower value stuff move by slower means such as trains.

]]> Mon, 27 Apr 2009 20:13:39 -0400
A couple minor points:

- The long term battle between trucks and train has gone something like this: Trucks are faster and more reliable, Trains (or intermodal services) are cheaper, particularly for longer hauls. (>500 miles). Over time, train service speed and reliability has improved, displacing trucks. This can be expected to continue.

- As one poster correctly points out both BNI and UNP have excellent access to PRB coal. I don't belive there is a true advantage of one over another, but the advantage over the eastern rails is real.

- For those who are asking about passenger rail... keep dreaming, the economics just doesn't work very well, except for shortish trips between congested urban centers (e.g. the NE corridor) where time "to and through" the airport makes up the majority of the travel time. Think about it this way: People's time is valuable; it makes more sense to move people by the fastest means possible (e.g. airplanes) while letting lower value stuff move by slower means such as trains.

]]> http://seekingalpha.com/article/133097-how-are-those-banks-doing-depends-who-you-ask?source=feed#comment-478507 478507
While it has become everyone's favorite sport to blame the bankers for everything bad in the world, I think this shows the dilemma they face.

Do you lend more? This reduces the capital cushion and makes it more likely you will fail the stress test. Banks have long been caught between conflicting pressures from Washington. (Lend more! Lend more cautiously! Lend more to lower income people! Keep your rates down! Keep more capital on hand! etc. etc.) TARP combined with the stress tests are merely a bit more blatently schizophrenic than usual.

I think that the insight that the stress test may be used to force banks to hold on to TARP funds longer is an excellent one... the question then becomes what is the government willing to do to try to force more of those funds to be lent? The real answer to that question may very well be nothing.... at least nothing beyond giving the media a few juicy soudbites about greedy bankers.


]]> Sun, 26 Apr 2009 23:30:31 -0400
While it has become everyone's favorite sport to blame the bankers for everything bad in the world, I think this shows the dilemma they face.

Do you lend more? This reduces the capital cushion and makes it more likely you will fail the stress test. Banks have long been caught between conflicting pressures from Washington. (Lend more! Lend more cautiously! Lend more to lower income people! Keep your rates down! Keep more capital on hand! etc. etc.) TARP combined with the stress tests are merely a bit more blatently schizophrenic than usual.

I think that the insight that the stress test may be used to force banks to hold on to TARP funds longer is an excellent one... the question then becomes what is the government willing to do to try to force more of those funds to be lent? The real answer to that question may very well be nothing.... at least nothing beyond giving the media a few juicy soudbites about greedy bankers.


]]> http://seekingalpha.com/article/132978-why-chrysler-needs-to-declare-bankruptcy?source=feed#comment-478208 478208
On Apr 24 02:22 PM Car Guy 1999 wrote:

> Ever heard of NADA? The automotive dealer's trade association is
> one of the oldest and strongest of all. Please reseach your subject
> before making blanket statements.

The problem is, that unlike the union, NADA can't enforce an agreement on its members, and unlike the bondholders, each dealer has wildly differently situated, and protected by one of 50 different sets of state franchise laws.

To those who wonder why this is a problem, there are two main reasons. The first is that closing down a whole model line requires payouts to dealers.... making the elimination of unprofitable brands prohibitively expensive. Further, excess numbers of marginal dealers hurts the amount of dealer-financed promotion, investments in service, and requires more inventory financing, all of which ultimately hurt the automakers.



]]> Sun, 26 Apr 2009 16:37:49 -0400
On Apr 24 02:22 PM Car Guy 1999 wrote:

> Ever heard of NADA? The automotive dealer's trade association is
> one of the oldest and strongest of all. Please reseach your subject
> before making blanket statements.

The problem is, that unlike the union, NADA can't enforce an agreement on its members, and unlike the bondholders, each dealer has wildly differently situated, and protected by one of 50 different sets of state franchise laws.

To those who wonder why this is a problem, there are two main reasons. The first is that closing down a whole model line requires payouts to dealers.... making the elimination of unprofitable brands prohibitively expensive. Further, excess numbers of marginal dealers hurts the amount of dealer-financed promotion, investments in service, and requires more inventory financing, all of which ultimately hurt the automakers.



]]> http://seekingalpha.com/article/131509-mark-to-market-vs-mark-to-model-what-ever-happened-to-real-value?source=feed#comment-467270 467270
I think one nice way to test your conviction about mark to market is this - Since house prices were transacting in an open market, do you agree that house prices were totally appropritate and correct to use as a basis for lending at the peak of the so-called bubble? (And I say so-called, because if the most recent market price is really the only indication of value, there cannot be such a thing as a bubble)

There are a myriad of other issues with mark to market - for example, m2m instantly amortizes expected changes to a future cash flow to present earnings... kind of the opposite of the time matching that accounting is supposed to acheive...

And that leads to the ultimate question here... what exactly are you trying to acheive? If you think market to market makes it easier to evaluate a bank's real financial situation, you have either never done it or are a fool... and have no business trying to understand a bank balance sheet. On the other hand, if you are a trader or a hedgie who is trying to make a buck exploiting the extra volatility created by mark to market, it makes perfect sense.

]]> Fri, 17 Apr 2009 21:45:16 -0400
I think one nice way to test your conviction about mark to market is this - Since house prices were transacting in an open market, do you agree that house prices were totally appropritate and correct to use as a basis for lending at the peak of the so-called bubble? (And I say so-called, because if the most recent market price is really the only indication of value, there cannot be such a thing as a bubble)

There are a myriad of other issues with mark to market - for example, m2m instantly amortizes expected changes to a future cash flow to present earnings... kind of the opposite of the time matching that accounting is supposed to acheive...

And that leads to the ultimate question here... what exactly are you trying to acheive? If you think market to market makes it easier to evaluate a bank's real financial situation, you have either never done it or are a fool... and have no business trying to understand a bank balance sheet. On the other hand, if you are a trader or a hedgie who is trying to make a buck exploiting the extra volatility created by mark to market, it makes perfect sense.

]]> http://seekingalpha.com/article/131024-note-to-nassim-taleb-you-can-t-kill-off-black-swans?source=feed#comment-464261 464261
"Ok, so we can't know anything, what do we DO?"

He attemps to provide an answer, of course, but at least in my estimation was unconvincing. Here is a man who has come to recognize the inherent fragility of... basically everything... and has allowed it to paralyze any sort of course of action. But act, we must. ]]> Wed, 15 Apr 2009 18:33:42 -0400
"Ok, so we can't know anything, what do we DO?"

He attemps to provide an answer, of course, but at least in my estimation was unconvincing. Here is a man who has come to recognize the inherent fragility of... basically everything... and has allowed it to paralyze any sort of course of action. But act, we must. ]]> http://seekingalpha.com/article/130459-why-it-s-better-to-bail-out-borrowers-than-banks?source=feed#comment-460013 460013
While Leman was alive, the focus was there. The moment Leman fell, the focus shifted to WaMu and Wachovia... and please remember... WaMu was wiped out in less than two weeks not by losses... but by panic deposit withdrawls. As soon as WaMu went under, the pressure shifted almost instantly to Wachovia and Morgan Stanley.

What the regulators realized they needed to do was to draw a line underneath the financial system and say, this far, and no further. That is why TARP funds were crammed down all of the largest banks... the government needed to make it clear that the government would not allow either speculative attacks nor a deposit runs to close any more major institutions.... Period.

And, for better or worse, it worked. Almost overnight, speculation about who would be the next to go ended and that phase of the crisis ended. Now, its not at all clear that WaMu or Lehman share or bondholders were treated fairly... why let them hang while protecting Citigroup, for example? But the decisions were not made on principle, they were made in response to a chain of events, and by the time WaMu and Wachovia were gone, the Fed realized that they had to stop what had basically become a rolling bank run, and consistancy of policy was far less important than changing the psychology... and at the point, the train had already left the station on bailing out borrowers. The Fed needed to credibly back the remaining financial institutions, and they did.




]]> Sat, 11 Apr 2009 16:57:12 -0400
While Leman was alive, the focus was there. The moment Leman fell, the focus shifted to WaMu and Wachovia... and please remember... WaMu was wiped out in less than two weeks not by losses... but by panic deposit withdrawls. As soon as WaMu went under, the pressure shifted almost instantly to Wachovia and Morgan Stanley.

What the regulators realized they needed to do was to draw a line underneath the financial system and say, this far, and no further. That is why TARP funds were crammed down all of the largest banks... the government needed to make it clear that the government would not allow either speculative attacks nor a deposit runs to close any more major institutions.... Period.

And, for better or worse, it worked. Almost overnight, speculation about who would be the next to go ended and that phase of the crisis ended. Now, its not at all clear that WaMu or Lehman share or bondholders were treated fairly... why let them hang while protecting Citigroup, for example? But the decisions were not made on principle, they were made in response to a chain of events, and by the time WaMu and Wachovia were gone, the Fed realized that they had to stop what had basically become a rolling bank run, and consistancy of policy was far less important than changing the psychology... and at the point, the train had already left the station on bailing out borrowers. The Fed needed to credibly back the remaining financial institutions, and they did.




]]> http://seekingalpha.com/article/129157-mark-to-market-time-of-death-8-45am-april-2-2009?source=feed#comment-449982 449982
Who would ever be willing to intermediate between liquid assets (deposits) and illiquid assets? What is basically being suggested is that any entity that wants to hold illiquid assets has to hold enough equity to withstand the lowest possible market value over the entire lifetime of that asset... which means the worst case NPV plus an undefinable and possibly infinite liquidity premium. What exactly is the benefit of a rule like this, if in fact the objective is to invest in illiquid assets and hold them to term?

Hedge funds and other asset managers are the worst forms of hypocrites about this issue (in large part because they can and do exploit illiquidity to make profitable short bets) How about we make a deal. I'll agree that everything should always be marked to market, if hedge funds, private equity funds, and everyone else agrees to post 100% collateral for their loans, in the form of US Treasuries.

The idea that mark-to-market provides a form of transparency is also disingenuos at best. All it really tells you is that a company is holding asset class X, which in the current environment has an impaired value made up of an unknown amount of actual value loss, plus some unknown liquidity premium. Anyone who thinks this actually helps to understand a balance sheet doesn't know what they are talking about. At the very best... and this is not likely... but at the very best it might give you some clues as to underlying asset classes and structures that are not otherwised disclosed. Its far more likely that it will be distorted by the need to find odball comparable trades in an illiquid market.

The only people who really support mark to market accounting are academic accounting geeks who place highly abstract theoretical concerns over any pragmatic considerations, hedge funds and other traders who have been able to exploit the problems m2m creates to reap huge profits, and idiots who don't know any better.

Which are you? ]]> Thu, 02 Apr 2009 16:55:09 -0400
Who would ever be willing to intermediate between liquid assets (deposits) and illiquid assets? What is basically being suggested is that any entity that wants to hold illiquid assets has to hold enough equity to withstand the lowest possible market value over the entire lifetime of that asset... which means the worst case NPV plus an undefinable and possibly infinite liquidity premium. What exactly is the benefit of a rule like this, if in fact the objective is to invest in illiquid assets and hold them to term?

Hedge funds and other asset managers are the worst forms of hypocrites about this issue (in large part because they can and do exploit illiquidity to make profitable short bets) How about we make a deal. I'll agree that everything should always be marked to market, if hedge funds, private equity funds, and everyone else agrees to post 100% collateral for their loans, in the form of US Treasuries.

The idea that mark-to-market provides a form of transparency is also disingenuos at best. All it really tells you is that a company is holding asset class X, which in the current environment has an impaired value made up of an unknown amount of actual value loss, plus some unknown liquidity premium. Anyone who thinks this actually helps to understand a balance sheet doesn't know what they are talking about. At the very best... and this is not likely... but at the very best it might give you some clues as to underlying asset classes and structures that are not otherwised disclosed. Its far more likely that it will be distorted by the need to find odball comparable trades in an illiquid market.

The only people who really support mark to market accounting are academic accounting geeks who place highly abstract theoretical concerns over any pragmatic considerations, hedge funds and other traders who have been able to exploit the problems m2m creates to reap huge profits, and idiots who don't know any better.

Which are you? ]]> http://seekingalpha.com/article/127021-generational-demographics-can-young-adults-save-the-markets?source=feed#comment-434237 434237 Fri, 20 Mar 2009 23:33:59 -0400 http://seekingalpha.com/article/126230-how-to-not-pay-the-aig-bonuses?source=feed#comment-428415 428415
The bottom line is, public outrage... even justified outrage... doesn't give anyone a license to walk away from contracts.

The real devil here is the nature of AIG's business. If AIG could be put into bankruptcy, all of those contracts would vanish. The problem is that because of the specific importance of ratings to AIGs products, bankruptcy hasn't been an option.

The FDIC can (and has) used its specific legal powers to accomplish this with banks. Perhaps the question we should really ask is why the government... both the outraged Congress and New York State... never chose to create a sensible legal regulatory structure for insurance companies.

]]> Mon, 16 Mar 2009 18:58:38 -0400
The bottom line is, public outrage... even justified outrage... doesn't give anyone a license to walk away from contracts.

The real devil here is the nature of AIG's business. If AIG could be put into bankruptcy, all of those contracts would vanish. The problem is that because of the specific importance of ratings to AIGs products, bankruptcy hasn't been an option.

The FDIC can (and has) used its specific legal powers to accomplish this with banks. Perhaps the question we should really ask is why the government... both the outraged Congress and New York State... never chose to create a sensible legal regulatory structure for insurance companies.

]]> http://seekingalpha.com/article/124476-defending-financial-journalists-and-bloggers?source=feed#comment-418479 418479
I believe that the critics need to be held to an equal standard. The fact is, circa 2004, very very few saw this coming... except of course those who have been predicting disasters of various sorts 20 out of the last 20 years.

Even Nouriel Roubini, who has become famous for predicting the outlines of the crisis gave his famous talk in September, 2006. By that time, a significant portion of the subprime and alt-a paper that started the snowball rolling had already been originated... Washington Mutual... often the poster child of bad lending practices... sold most of its 2006 production to reduce exposure in early 2007.

Were their clear signs of trouble? Absolutely. Should leaders of banks done a better job of managing risk? Emphatically yes. Were regulatory flaws part of the problem? Definitely. But, too often bloggers and journalists make uncritical use of 20/20 hindsight to bash decisionmakers, this theater is of no use execpt possibly those who value entertainment above insight.

]]> Sun, 08 Mar 2009 19:02:49 -0400
I believe that the critics need to be held to an equal standard. The fact is, circa 2004, very very few saw this coming... except of course those who have been predicting disasters of various sorts 20 out of the last 20 years.

Even Nouriel Roubini, who has become famous for predicting the outlines of the crisis gave his famous talk in September, 2006. By that time, a significant portion of the subprime and alt-a paper that started the snowball rolling had already been originated... Washington Mutual... often the poster child of bad lending practices... sold most of its 2006 production to reduce exposure in early 2007.

Were their clear signs of trouble? Absolutely. Should leaders of banks done a better job of managing risk? Emphatically yes. Were regulatory flaws part of the problem? Definitely. But, too often bloggers and journalists make uncritical use of 20/20 hindsight to bash decisionmakers, this theater is of no use execpt possibly those who value entertainment above insight.

]]> http://seekingalpha.com/article/121316-fixing-finance-incubating-new-banks?source=feed#comment-394261 394261
Perhaps you have some truly innovative ideas for the banking industry, or perhaps you don't... but if one were to base their opinion on this article, its unclear you understand the business at the most basic of levels. (You know, borrowing, lending, transaction processing... that sort of thing)

And its too bad, because, you do seem to have a solid grasp... it just doesn't show here. As you said so well in past articles... actually coming up with new and better ways to serve customers is hard.





]]> Wed, 18 Feb 2009 18:57:40 -0500
Perhaps you have some truly innovative ideas for the banking industry, or perhaps you don't... but if one were to base their opinion on this article, its unclear you understand the business at the most basic of levels. (You know, borrowing, lending, transaction processing... that sort of thing)

And its too bad, because, you do seem to have a solid grasp... it just doesn't show here. As you said so well in past articles... actually coming up with new and better ways to serve customers is hard.





]]> http://seekingalpha.com/article/118447-why-capping-pay-is-likely-to-work?source=feed#comment-375960 375960
I think that you, like Felix and so many of the people on SA have what I like to call an Eddie Lampert problem. In short, because you are intelligent, and in some cases, have made a lot of money making big directional bets on firms, you severely underestimate what it takes to run a large company. Perhaps Dilbert's pointy haired boss put it better: Anything I don't understand must be simple.

Insiders at Sears discuss a raft of basic problems that any halfway competent retail executive knows how to fix, but are destroying Sears. Bankers keep ATMs running, service millions of loans, run a network of retail stores (we call branches) larger than most large retail companies... not to mention trying to manage exposure to vast currency, interest rate, and other markets. If you really think any joe off the street... even one that is intelligent, hardworking, and can manage an enterprise of this level of complexity well... frankly... you know not of what you speak.

Yet, here we go saying that every bank executive in America (really the world) was incompetent and should be fired. Great rhetoric, horrible basis for decision making. First of all, think a minute about what you are saying... Everyone was incompetent? Really? ALL of them? How is that even possible... surely some should be competent, if only by chance. Or, is it a more reasonable and realistic assumption to belive that something extradordinary happened in the environment that no reasonable person would have anticipated? Is it more reasonable to understand the pressures and constraints of regulated banks (and despite the other favorite talking point of the day, banks are regulated... heavily)... which led inevitibly to business models allowing banks to remain competitive with unregulated entities. But then, thats a lot less fun than making jokes about how these people expected to get paid a lot of money to destroy the industry.

Its a bit of a strech, but blaming banking executives for this crisis is not really so far from blaming a drought on the incompetence of farmers.

I am not saying that compensation is not out of hand in many cases. But, as a general rule, executives at major banks are paid a fraction of what they could earn at private equity firms, hedge funds, and other money management jobs, or in fact at private investment banking firms... it is no accident that Goldman wants out of these restrictions as quickly as possible.

Ultimately, regardless of moral indignation, the question has to be about consequences. Its seems many of the people on SA are happy to gamble putting these huge, complex, and immensely important institutions in the hands of people without adequate experience... To which all I can say is... sincerely... I wish us all the best of luck, we're going to need it.















On Feb 04 12:13 PM Anandakos wrote:

>
> Think,
>
> I believe you are making a fundamental mistake about what banks are
> and should be. Because banks drank the Wall Street Kool-Aid they
> abandoned their traditional role and adopted the behavior of investment
> banks (leverage!). The regulators were drinking too, so they allowed
> them to act like investment banks, even encouraging them.
>
> This was a disastrous error, and like the last time it was allowed
> in the 1920's, led to exactly the same sort of excesses. The so-called
> "talent" you want to reward subsumed the depository function into
> large casino capitalist enterprises and poisoned the well for all
> and sundry.
>
> Depository banks should be free from political interference -- we
> don't want the kind they have in China and Japan. But also they should
> be strictly regulated and prevented from engaging in behavior that
> can eviscerate their capital adequacy. Such institutions would not
> and should not make a gazillions of dollars in profit. So they don't
> need the sort of buccaneer "leadership" that unlimited compensation
> attracts.
>
> Those folks have a perfectly valid place in American capitalism:
> as entrepreneurs, private equity managers, and venture capitalists.
> But they should not run depository institutions because their gambling
> ways put the government's insurance programs at risk. Let them reap
> huge gains and suffer huge losses on their own, without the taxpayer's
> implicit, explicit, or fantasy backing. And caveat investor when
> dealing with them.
>
> Banks serve the vital function of providing credit to businesses
> and citizens, and obviously they need to make a profit to increase
> their regulatory capital allowing greater loan making capability.
> But they should NEVER engage in non-depository activities. They also
> need to be forbidden from becoming "too big to fail". The only real
> value I can see in Wells-Fargo and Bank of America having become
> truly "national" banks is that people can visit an ATM in a different
> state without having to pay a fee.
>
> Thus they will not need enormously compensated CEO's. There are plenty
> of people running local banks and credit unions profitably for low
> six figure salaries who are completely capable of running larger
> enterprises so long as the "financial engineering" element of the
> mega-banks are not present. Let them.
>
> By the way, credit unions offer the same fee-free "foreign" ATM access
> through their national co-op. Smaller banks could do the same thing
> if they wanted to offer the service to their customers.
>
> On Feb 04 11:23 AM Think! wrote:]]> Wed, 04 Feb 2009 15:41:45 -0500
I think that you, like Felix and so many of the people on SA have what I like to call an Eddie Lampert problem. In short, because you are intelligent, and in some cases, have made a lot of money making big directional bets on firms, you severely underestimate what it takes to run a large company. Perhaps Dilbert's pointy haired boss put it better: Anything I don't understand must be simple.

Insiders at Sears discuss a raft of basic problems that any halfway competent retail executive knows how to fix, but are destroying Sears. Bankers keep ATMs running, service millions of loans, run a network of retail stores (we call branches) larger than most large retail companies... not to mention trying to manage exposure to vast currency, interest rate, and other markets. If you really think any joe off the street... even one that is intelligent, hardworking, and can manage an enterprise of this level of complexity well... frankly... you know not of what you speak.

Yet, here we go saying that every bank executive in America (really the world) was incompetent and should be fired. Great rhetoric, horrible basis for decision making. First of all, think a minute about what you are saying... Everyone was incompetent? Really? ALL of them? How is that even possible... surely some should be competent, if only by chance. Or, is it a more reasonable and realistic assumption to belive that something extradordinary happened in the environment that no reasonable person would have anticipated? Is it more reasonable to understand the pressures and constraints of regulated banks (and despite the other favorite talking point of the day, banks are regulated... heavily)... which led inevitibly to business models allowing banks to remain competitive with unregulated entities. But then, thats a lot less fun than making jokes about how these people expected to get paid a lot of money to destroy the industry.

Its a bit of a strech, but blaming banking executives for this crisis is not really so far from blaming a drought on the incompetence of farmers.

I am not saying that compensation is not out of hand in many cases. But, as a general rule, executives at major banks are paid a fraction of what they could earn at private equity firms, hedge funds, and other money management jobs, or in fact at private investment banking firms... it is no accident that Goldman wants out of these restrictions as quickly as possible.

Ultimately, regardless of moral indignation, the question has to be about consequences. Its seems many of the people on SA are happy to gamble putting these huge, complex, and immensely important institutions in the hands of people without adequate experience... To which all I can say is... sincerely... I wish us all the best of luck, we're going to need it.















On Feb 04 12:13 PM Anandakos wrote:

>
> Think,
>
> I believe you are making a fundamental mistake about what banks are
> and should be. Because banks drank the Wall Street Kool-Aid they
> abandoned their traditional role and adopted the behavior of investment
> banks (leverage!). The regulators were drinking too, so they allowed
> them to act like investment banks, even encouraging them.
>
> This was a disastrous error, and like the last time it was allowed
> in the 1920's, led to exactly the same sort of excesses. The so-called
> "talent" you want to reward subsumed the depository function into
> large casino capitalist enterprises and poisoned the well for all
> and sundry.
>
> Depository banks should be free from political interference -- we
> don't want the kind they have in China and Japan. But also they should
> be strictly regulated and prevented from engaging in behavior that
> can eviscerate their capital adequacy. Such institutions would not
> and should not make a gazillions of dollars in profit. So they don't
> need the sort of buccaneer "leadership" that unlimited compensation
> attracts.
>
> Those folks have a perfectly valid place in American capitalism:
> as entrepreneurs, private equity managers, and venture capitalists.
> But they should not run depository institutions because their gambling
> ways put the government's insurance programs at risk. Let them reap
> huge gains and suffer huge losses on their own, without the taxpayer's
> implicit, explicit, or fantasy backing. And caveat investor when
> dealing with them.
>
> Banks serve the vital function of providing credit to businesses
> and citizens, and obviously they need to make a profit to increase
> their regulatory capital allowing greater loan making capability.
> But they should NEVER engage in non-depository activities. They also
> need to be forbidden from becoming "too big to fail". The only real
> value I can see in Wells-Fargo and Bank of America having become
> truly "national" banks is that people can visit an ATM in a different
> state without having to pay a fee.
>
> Thus they will not need enormously compensated CEO's. There are plenty
> of people running local banks and credit unions profitably for low
> six figure salaries who are completely capable of running larger
> enterprises so long as the "financial engineering" element of the
> mega-banks are not present. Let them.
>
> By the way, credit unions offer the same fee-free "foreign" ATM access
> through their national co-op. Smaller banks could do the same thing
> if they wanted to offer the service to their customers.
>
> On Feb 04 11:23 AM Think! wrote:]]> http://seekingalpha.com/article/118030-the-detour-around-banking-disaster-how-we-lost-the-roadmap?source=feed#comment-373836 373836
Its easy to find people who said something that happened to be right after the fact... the trick is identifying who is saying the right things now.

The premise is that financial firms are currently insolvent. The question I ask is this: under what set of assumptions? If housing prices were to stabilize right now, I would guess very few if any are insolvent. If housing prices crash another 40% on a nationwide basis, pretty much every financial institution is insolvent.

Fundamentally, banks take short term, liquid funds and convert them into longer term, illiquid investments. It is a necessary feature of this role that short term, market pricing of long term illiquid investments will not correctly reflect their ultimate value.

The objective of government invention should be neither to protect nor to punish bank shareholders and executives... rather, the role should be to allow bank investments to play out over their natural time frames and prevent panic liquidations. The TARP program, implemented correctly, could acheive these objectives. ]]> Mon, 02 Feb 2009 17:30:43 -0500
Its easy to find people who said something that happened to be right after the fact... the trick is identifying who is saying the right things now.

The premise is that financial firms are currently insolvent. The question I ask is this: under what set of assumptions? If housing prices were to stabilize right now, I would guess very few if any are insolvent. If housing prices crash another 40% on a nationwide basis, pretty much every financial institution is insolvent.

Fundamentally, banks take short term, liquid funds and convert them into longer term, illiquid investments. It is a necessary feature of this role that short term, market pricing of long term illiquid investments will not correctly reflect their ultimate value.

The objective of government invention should be neither to protect nor to punish bank shareholders and executives... rather, the role should be to allow bank investments to play out over their natural time frames and prevent panic liquidations. The TARP program, implemented correctly, could acheive these objectives. ]]> http://seekingalpha.com/article/116932-eight-mistakes-that-caused-the-financial-crisis?source=feed#comment-369381 369381
Derivatives:

I think the problem is not some vague need for regulation, but rather to ensure that complex structures not be used to arbitrage away from basic princples... in other words, if it looks like a duck, and quacks like a duck, it should be subject to the same regulations as a duck... this point goes far beyond just derivatives per se, but a host of alternative structures (SIVs,auction rate securities... even money market funds) who's basic purpose is to avoid capital rules.

Leverage:

Excess leverage is clearly one of the greatest core causes... and for the most part it isn't leverage of commerical banks, but the leverage of a variety of other financial participants... particularly investment banks but also hedge funds and others... the real core banking problem is supplying excess leverage. Hedge funds can and should be able to lose as much as they want... of their own money. The most shocking regulatory failure will ultimately allowing banks to lend hedge funds 90% of their capital (or more) with relatively modest capital requirements for the lending bank.

Subprime:

I think painting subprime lending with such a broad brush is a mistake, and we lose sight of the core issue, which was that subprime and alt-a mortgage lending stopped worrying about capacity to repay. One of dark secrets of this business at its worse is that lenders were basically harvesting fees from people by repeatedly refinancing, eating away at equity in home... knowing that the borrower could not repay out of their income, but depending on the fact that they could... and did... refinance, over and over again. While not as cynical, it also allowed for mortgage originators to profit from house flipping at the hight of the boom... essentially providing bridge financing to house flippers, in the guise of a mortgage loan. The bottom line is, there is a good reason why capacity to repay is an important mortgage underwriting criteria... as the owners of these loans are re-discovering to their anguish.

Forclosures

Limiting forclosures was a missed opportunity, but perhaps not in the way suggested. Simple minded approaches would have either failed or created worse problems; Nonetheless, it is a fair point that there are structural issues that could have been addressed. There are structural reasons why mortgage servicers foreclose and sell (even at distressed prices) when it might be more economically rational to take a different action (work-out mortgage, convert to rental, etc.). This is mostly a case of what is rational in normal circumstances becoming collectively irrational, but with no system or structure in place, there is no way to change the "normal" course of action to something that makes more sense... especially since doing something different requires a re-negotiation of who bears how much of the economic loss that has occured.

Lehman

Yes.

TARP

It was a good decision to inject capital rather than buy bad assets... this creates a multiplier effect that gives more "bang for the buck"... it would have been ideal if this was done with stronger incentives to lend, however.

Hopefully the remainder of the TARP funds will be used effectively to buy up bad assets. The devil has always been in the details... what valuation to place on what the government buys, and given that the quantity of bad assets out there is far greater than the funds available... how to deterimine which assets to buy become sticky questions for which there are no easy answers... which is almost certainly part of the reason that the Bush administration chose to leave the inevitably controversial decisions to the Obama white house.









]]> Wed, 28 Jan 2009 22:20:31 -0500
Derivatives:

I think the problem is not some vague need for regulation, but rather to ensure that complex structures not be used to arbitrage away from basic princples... in other words, if it looks like a duck, and quacks like a duck, it should be subject to the same regulations as a duck... this point goes far beyond just derivatives per se, but a host of alternative structures (SIVs,auction rate securities... even money market funds) who's basic purpose is to avoid capital rules.

Leverage:

Excess leverage is clearly one of the greatest core causes... and for the most part it isn't leverage of commerical banks, but the leverage of a variety of other financial participants... particularly investment banks but also hedge funds and others... the real core banking problem is supplying excess leverage. Hedge funds can and should be able to lose as much as they want... of their own money. The most shocking regulatory failure will ultimately allowing banks to lend hedge funds 90% of their capital (or more) with relatively modest capital requirements for the lending bank.

Subprime:

I think painting subprime lending with such a broad brush is a mistake, and we lose sight of the core issue, which was that subprime and alt-a mortgage lending stopped worrying about capacity to repay. One of dark secrets of this business at its worse is that lenders were basically harvesting fees from people by repeatedly refinancing, eating away at equity in home... knowing that the borrower could not repay out of their income, but depending on the fact that they could... and did... refinance, over and over again. While not as cynical, it also allowed for mortgage originators to profit from house flipping at the hight of the boom... essentially providing bridge financing to house flippers, in the guise of a mortgage loan. The bottom line is, there is a good reason why capacity to repay is an important mortgage underwriting criteria... as the owners of these loans are re-discovering to their anguish.

Forclosures

Limiting forclosures was a missed opportunity, but perhaps not in the way suggested. Simple minded approaches would have either failed or created worse problems; Nonetheless, it is a fair point that there are structural issues that could have been addressed. There are structural reasons why mortgage servicers foreclose and sell (even at distressed prices) when it might be more economically rational to take a different action (work-out mortgage, convert to rental, etc.). This is mostly a case of what is rational in normal circumstances becoming collectively irrational, but with no system or structure in place, there is no way to change the "normal" course of action to something that makes more sense... especially since doing something different requires a re-negotiation of who bears how much of the economic loss that has occured.

Lehman

Yes.

TARP

It was a good decision to inject capital rather than buy bad assets... this creates a multiplier effect that gives more "bang for the buck"... it would have been ideal if this was done with stronger incentives to lend, however.

Hopefully the remainder of the TARP funds will be used effectively to buy up bad assets. The devil has always been in the details... what valuation to place on what the government buys, and given that the quantity of bad assets out there is far greater than the funds available... how to deterimine which assets to buy become sticky questions for which there are no easy answers... which is almost certainly part of the reason that the Bush administration chose to leave the inevitably controversial decisions to the Obama white house.









]]> http://seekingalpha.com/article/116297-evidence-that-big-inflation-is-coming?source=feed#comment-365940 365940
Of course the money supply (absent credit) is increasing at a massive rate... this is the Fed's desperate action to counteract the equally massive contraction in money supply that is credit driven... Let's all hope it works.

On the flip side, it is absolutely true that if credit were to reappear tomorrow at 2006 levels, everything the Fed is doing would be wildly inflationary... and in fact, if the economy normalizes, it will be difficult to unwind some of these manuvers quickly enough to prevent meaningful inflation but slowly enough to keep a recovery from stalling out. It is probably a wise observation that the Fed will probably err somewhat on the side of allowing a higher than average level of inflation for some period.



]]> Sun, 25 Jan 2009 18:00:30 -0500
Of course the money supply (absent credit) is increasing at a massive rate... this is the Fed's desperate action to counteract the equally massive contraction in money supply that is credit driven... Let's all hope it works.

On the flip side, it is absolutely true that if credit were to reappear tomorrow at 2006 levels, everything the Fed is doing would be wildly inflationary... and in fact, if the economy normalizes, it will be difficult to unwind some of these manuvers quickly enough to prevent meaningful inflation but slowly enough to keep a recovery from stalling out. It is probably a wise observation that the Fed will probably err somewhat on the side of allowing a higher than average level of inflation for some period.



]]> http://seekingalpha.com/article/115557-the-nationalization-debate?source=feed#comment-361390 361390
> Oh yes, the greedy bankers...they should have factored in that house
> prices can go down 30 % in 2 years nationwide, plus ABS and CMBS
> deal prices will be cut in half wihin 12 months, even if they're
> AAA and 30 % subordinated and still fully performing. What a no brainer.
>
>
> One question though: if you factor in calamities 15 times worse than
> anything that ever happened before, how can you ever lend to anybody
> again with any degree of leverage? Nationalized or not?

Its nice to see that there is someone posting who knows what they are talking about.

You don't build a church for easter sunday, and you can't build a bank balance sheet for a great depression.

Furthermore, no balance sheet... no amount of prudence... and not even a bank CEO possessing the best virtues of Mother Theresa, Ghandi, and Warren Buffet combined... can prevent a bank run.

Far too many of the comentators are touting ex-post facto wisdom (Of course there was a great depression right around the corner circa 2006... everyone knew that, right?). and... as klarsolo vividly points out... they pretend to know whether insititutions are insolvent or not, when they can't possibly know. (I have my own way to illustrate this problem... I like to tell people that if they can tell me exactly what the future trajectory of real estate prices will be, I will tell them who is insolvent. If you can't answer the first question (and of course, no one can), than it is impossible to answer the second question (although lots of people act like they can).

Broad nationalization is bad idea in my view.. because it paints too many with the same brush. Narrow nationalization (e.g. C, perhaps BAC), may be appropriate, but the differences between that and alternatives are largely technical... it runs the risk of scaring away private captial because of the risk of being wiped out at the government's discretion... enough of that has happened already.

The ideal solution would be some structure that:

- Allows isolation / removal of bad assets
- Creates strong incentives to build new/good assets on the balance sheet
- Puts existing shareholders and bondholders on the hook for the eventual performance of the "bad assets"... but NOT the near term valuations of those assets

Some structure / program that allowed banks to put bad assets into a government backed trust, in return for some kind of convertable bond and equity swap from that trust with a future dated exercise value might do the trick.

In other words, banks have an incentive to lend (accumulate assets), because of the drag on returns created by the bond interest payments.

Impaired assets are allowed to safely unwind over time.

But, at some future point in time, either each institution will have enough new earnings and capital to cover the losses, or they will be subjected to a forced recapitalization, wiping out the legacy equity and bond holders... but any new investors after the warrant issue are only one the hook for performance of subsequent assets.

This plan is probably flawed, as I haven't thought out all the angles, but I do belive something of this nature is the right way forward.





]]> Tue, 20 Jan 2009 20:42:01 -0500
> Oh yes, the greedy bankers...they should have factored in that house
> prices can go down 30 % in 2 years nationwide, plus ABS and CMBS
> deal prices will be cut in half wihin 12 months, even if they're
> AAA and 30 % subordinated and still fully performing. What a no brainer.
>
>
> One question though: if you factor in calamities 15 times worse than
> anything that ever happened before, how can you ever lend to anybody
> again with any degree of leverage? Nationalized or not?

Its nice to see that there is someone posting who knows what they are talking about.

You don't build a church for easter sunday, and you can't build a bank balance sheet for a great depression.

Furthermore, no balance sheet... no amount of prudence... and not even a bank CEO possessing the best virtues of Mother Theresa, Ghandi, and Warren Buffet combined... can prevent a bank run.

Far too many of the comentators are touting ex-post facto wisdom (Of course there was a great depression right around the corner circa 2006... everyone knew that, right?). and... as klarsolo vividly points out... they pretend to know whether insititutions are insolvent or not, when they can't possibly know. (I have my own way to illustrate this problem... I like to tell people that if they can tell me exactly what the future trajectory of real estate prices will be, I will tell them who is insolvent. If you can't answer the first question (and of course, no one can), than it is impossible to answer the second question (although lots of people act like they can).

Broad nationalization is bad idea in my view.. because it paints too many with the same brush. Narrow nationalization (e.g. C, perhaps BAC), may be appropriate, but the differences between that and alternatives are largely technical... it runs the risk of scaring away private captial because of the risk of being wiped out at the government's discretion... enough of that has happened already.

The ideal solution would be some structure that:

- Allows isolation / removal of bad assets
- Creates strong incentives to build new/good assets on the balance sheet
- Puts existing shareholders and bondholders on the hook for the eventual performance of the "bad assets"... but NOT the near term valuations of those assets

Some structure / program that allowed banks to put bad assets into a government backed trust, in return for some kind of convertable bond and equity swap from that trust with a future dated exercise value might do the trick.

In other words, banks have an incentive to lend (accumulate assets), because of the drag on returns created by the bond interest payments.

Impaired assets are allowed to safely unwind over time.

But, at some future point in time, either each institution will have enough new earnings and capital to cover the losses, or they will be subjected to a forced recapitalization, wiping out the legacy equity and bond holders... but any new investors after the warrant issue are only one the hook for performance of subsequent assets.

This plan is probably flawed, as I haven't thought out all the angles, but I do belive something of this nature is the right way forward.





]]> http://seekingalpha.com/article/113520-the-new-normal?source=feed#comment-347982 347982
> only if you don't mind the other parts of that. the cars stopping
> for no reason. and can't run on all the roads. or require fuel from
> only certain gas stations.
> and they get bigger and heavier but go faster. when they go. and
> only certain business can fix them. and you pay them lots.

The even better ending to that particular quote is:

"And once every 15 days or so, [cars] would blow up for no apparent reason killing everyone inside"

]]> Tue, 06 Jan 2009 19:14:55 -0500
> only if you don't mind the other parts of that. the cars stopping
> for no reason. and can't run on all the roads. or require fuel from
> only certain gas stations.
> and they get bigger and heavier but go faster. when they go. and
> only certain business can fix them. and you pay them lots.

The even better ending to that particular quote is:

"And once every 15 days or so, [cars] would blow up for no apparent reason killing everyone inside"

]]> http://seekingalpha.com/article/113520-the-new-normal?source=feed#comment-347970 347970
> You're getting warmer.
>
> There's a difference between deflation (ie. lower prices) caused
> by improvements in productivity, like in the computer industry, and
> deflation caused by a shrinking money (or credit) supply, as we're
> experiencing in today's environment.
>
> Most items whose prices are falling these days are doing so because
> of the latter. It's not getting tens of thousands of dollars cheaper
> to build a house, there's just less money to credit available to
> buy it with, so the price falls.
>
> Deflation via productivity is a good thing. Deflation via shrinkage
> in the supply of credit (ie. debt based money) is bad for those who
> either hold the debt and default, or those who are creditors and
> find that the collateral they receive won't bring enough money to
> make them whole on the loan.
>
> One of the main confusing factors in the discussions regarding our
> current economic crisis is that the term "deflation" is used as though
> there is only one definition, when there are actually two that mean
> vastly different things.
>

Smarty is dead on here... although I would argue that the only correct use of the term "Deflation" is when refering to the second, monetary form of price increases, just as the term "Inflation" is only properly used refering to a general increase in prices, not price increases in one sector.

As others have posted, this makes all the difference in the world, and is why the analogy between current challenges and the benign price decreases seen in the tech world and the deflation seen in Japan in the 1990s and what what we face today.]]> Tue, 06 Jan 2009 19:04:23 -0500
> You're getting warmer.
>
> There's a difference between deflation (ie. lower prices) caused
> by improvements in productivity, like in the computer industry, and
> deflation caused by a shrinking money (or credit) supply, as we're
> experiencing in today's environment.
>
> Most items whose prices are falling these days are doing so because
> of the latter. It's not getting tens of thousands of dollars cheaper
> to build a house, there's just less money to credit available to
> buy it with, so the price falls.
>
> Deflation via productivity is a good thing. Deflation via shrinkage
> in the supply of credit (ie. debt based money) is bad for those who
> either hold the debt and default, or those who are creditors and
> find that the collateral they receive won't bring enough money to
> make them whole on the loan.
>
> One of the main confusing factors in the discussions regarding our
> current economic crisis is that the term "deflation" is used as though
> there is only one definition, when there are actually two that mean
> vastly different things.
>

Smarty is dead on here... although I would argue that the only correct use of the term "Deflation" is when refering to the second, monetary form of price increases, just as the term "Inflation" is only properly used refering to a general increase in prices, not price increases in one sector.

As others have posted, this makes all the difference in the world, and is why the analogy between current challenges and the benign price decreases seen in the tech world and the deflation seen in Japan in the 1990s and what what we face today.]]> http://seekingalpha.com/article/113487-deflation-the-800-lb-gorilla-in-the-room?source=feed#comment-347718 347718
> "Summing up, deflation first, followed by inflation. Details on timing
> to be determined. Next question."
> The question then becomes: Why isn't the market discounting the future
> Another guess would be that the liquidating
> forces of the unwind are so massive as to dwarf investment buying
> of the "inflation later" theme.

Yes.]]> Tue, 06 Jan 2009 14:26:23 -0500
> "Summing up, deflation first, followed by inflation. Details on timing
> to be determined. Next question."
> The question then becomes: Why isn't the market discounting the future
> Another guess would be that the liquidating
> forces of the unwind are so massive as to dwarf investment buying
> of the "inflation later" theme.

Yes.]]> http://seekingalpha.com/article/113268-from-crunch-to-catatonia?source=feed#comment-346861 346861 On Jan 05 06:27 PM Socialism cannot compete! wrote:

> Stimuli are the wrong answer because the question is wrong. The question
> should not have been "how do we restimulate this economy", but "is
> this the right kind of economy to have, and will it ever be what
> it was again?"
>
> Banks aren't lending because a) they've been burned; b) we are not
> wanting to borrow and go into debt. And that's as it SHOULD BE. We
> had a faux economy, based on too much debt. It *shouldn't* go back
> to where it was. What the government should have done instead of
> bailouts, was to cut nonessential government (heh...2/3 of it?),
> and give the people their money back...permanently. I.e. lay a WHOLE
> NEW FOUNDATION, based on a new economic reality of much, much, lower
> taxation. To make the economy more nimble and non-debt focused, we
> need small government, and a move to the Fair Tax, so that taxation
> is decided and controlled at a micro level -- that of the individual
> consumer. When each of us regains full control of our OWN money,
> and the power to decide how to use it as WE KNOW BEST...then you
> introduce new efficiency in the U.S. economy that we haven't seen
> in decades, since the dawn of the IRS. And let's face it...who enjoys
> doing their taxes??? Kill the beast.
>

The old economic reality was huge economic swings (that made the so called "great depression" look like a minor recession) and there was no more "efficiency in the U.S. economy."

Credit is the same as money supply. Contracting credit leads to contracting money, which leads to Deflation. Deflation kills economic activity because no one wants to buy anything that they know will cost less if they just wait. It's the "catching a falling knife" issue, only for everything in the economy (including employees).

All the commentary (and it is very widespread) that paying off debt, and "living within our means" is good for us is understandable, but it makes one of the most common errors in economics... assuming that something that is true individually is true collectively.

Saving more and spending less may be virtuous... but when everyone tries to do it at the same time, the result can be dire. It is similar to saying that you should sell a stock that is going down in price. Perhaps it is true, but everyone trying to sell it at the same time means there are no buyers, and by definition when there are no buyers there can be no sellers.

It is vital that credit availability be restored... and as the main article points out, the current TARP has failed to accomplish this goal. We had all better hope that the government takes action to whatever steps are taken next are more sucessful.






]]> Mon, 05 Jan 2009 19:01:19 -0500 On Jan 05 06:27 PM Socialism cannot compete! wrote:

> Stimuli are the wrong answer because the question is wrong. The question
> should not have been "how do we restimulate this economy", but "is
> this the right kind of economy to have, and will it ever be what
> it was again?"
>
> Banks aren't lending because a) they've been burned; b) we are not
> wanting to borrow and go into debt. And that's as it SHOULD BE. We
> had a faux economy, based on too much debt. It *shouldn't* go back
> to where it was. What the government should have done instead of
> bailouts, was to cut nonessential government (heh...2/3 of it?),
> and give the people their money back...permanently. I.e. lay a WHOLE
> NEW FOUNDATION, based on a new economic reality of much, much, lower
> taxation. To make the economy more nimble and non-debt focused, we
> need small government, and a move to the Fair Tax, so that taxation
> is decided and controlled at a micro level -- that of the individual
> consumer. When each of us regains full control of our OWN money,
> and the power to decide how to use it as WE KNOW BEST...then you
> introduce new efficiency in the U.S. economy that we haven't seen
> in decades, since the dawn of the IRS. And let's face it...who enjoys
> doing their taxes??? Kill the beast.
>

The old economic reality was huge economic swings (that made the so called "great depression" look like a minor recession) and there was no more "efficiency in the U.S. economy."

Credit is the same as money supply. Contracting credit leads to contracting money, which leads to Deflation. Deflation kills economic activity because no one wants to buy anything that they know will cost less if they just wait. It's the "catching a falling knife" issue, only for everything in the economy (including employees).

All the commentary (and it is very widespread) that paying off debt, and "living within our means" is good for us is understandable, but it makes one of the most common errors in economics... assuming that something that is true individually is true collectively.

Saving more and spending less may be virtuous... but when everyone tries to do it at the same time, the result can be dire. It is similar to saying that you should sell a stock that is going down in price. Perhaps it is true, but everyone trying to sell it at the same time means there are no buyers, and by definition when there are no buyers there can be no sellers.

It is vital that credit availability be restored... and as the main article points out, the current TARP has failed to accomplish this goal. We had all better hope that the government takes action to whatever steps are taken next are more sucessful.






]]> http://seekingalpha.com/article/110492-forbes-says-devalue-the-dollar-bad-idea?source=feed#comment-327985 327985
I more wanted to comment on Chris B's comment... it is exactly right. Baby Boomers have consistantly failed to support a level of taxes to pay for their expected Social Security and Medicare benefits. I have little doubt that Baby Boomers will begin to support such tax increases when they are no longer earning and are living off the benefits... and continue to vote against anyone who threatens to cut their benefits.

This problem manifests itself in structural trade imbalances, which, despite considerable wishful thinking to the contrary, will eventually force the dollar down. ]]> Fri, 12 Dec 2008 21:25:54 -0500
I more wanted to comment on Chris B's comment... it is exactly right. Baby Boomers have consistantly failed to support a level of taxes to pay for their expected Social Security and Medicare benefits. I have little doubt that Baby Boomers will begin to support such tax increases when they are no longer earning and are living off the benefits... and continue to vote against anyone who threatens to cut their benefits.

This problem manifests itself in structural trade imbalances, which, despite considerable wishful thinking to the contrary, will eventually force the dollar down. ]]> http://seekingalpha.com/article/106776-7-key-points-about-deflation?source=feed#comment-310473 310473
The reality is, when most of the major economies of the world were on the gold standard, the result was a series of boom and bust cycles like nothing we have experienced since... for example, the severe economic dislocations occured in 1819, 1837, 1857, 1873, and 1893.

Even with fiat currency, deflation can be an issue because the effective money supply is a function of both quantity and velocity. In short, money that is hidden under a bed and not circulating doesn't prevent a price collapse.

Yes, a reduction in bubble asset prices is a positive and expected part of a bubble popping, but a general price decline is something alltogether different, because buyers stop buying in anticipation of lower future prices, and borrowers default because the real burden of servicing their debt increases... leading to credit defaults, which in turn futher contract the money supply.

Episodes of severe inflation and deflation have both been regularly experienced in gold standard based economies.



On Nov 19 11:32 AM Chris B wrote:

>
> If you want to go back to the economy of 1900, please take a hard
> look at the historical results of hard monetary policy. Stormy seas
> of inflation and deflation destroyed businesses, over and over again,
> as the value of both gold and currency violently changed over time
> as measured by prices of labor and products. Bank crisis after bank
> crisis and currency crisis after currency crisis destroyed life savings
> and made saving and earning interest hazardous. Subsistence farming
> was considered employment. Want a mortgage? Too bad, build your 500
> sf cottage by hand. Want to start a business? Hope you already have
> money. In hard currency times, the US was what we now call a 3rd
> world country, with living standards worse than during the so-called
> great depression.
]]> Wed, 19 Nov 2008 23:18:05 -0500
The reality is, when most of the major economies of the world were on the gold standard, the result was a series of boom and bust cycles like nothing we have experienced since... for example, the severe economic dislocations occured in 1819, 1837, 1857, 1873, and 1893.

Even with fiat currency, deflation can be an issue because the effective money supply is a function of both quantity and velocity. In short, money that is hidden under a bed and not circulating doesn't prevent a price collapse.

Yes, a reduction in bubble asset prices is a positive and expected part of a bubble popping, but a general price decline is something alltogether different, because buyers stop buying in anticipation of lower future prices, and borrowers default because the real burden of servicing their debt increases... leading to credit defaults, which in turn futher contract the money supply.

Episodes of severe inflation and deflation have both been regularly experienced in gold standard based economies.



On Nov 19 11:32 AM Chris B wrote:

>
> If you want to go back to the economy of 1900, please take a hard
> look at the historical results of hard monetary policy. Stormy seas
> of inflation and deflation destroyed businesses, over and over again,
> as the value of both gold and currency violently changed over time
> as measured by prices of labor and products. Bank crisis after bank
> crisis and currency crisis after currency crisis destroyed life savings
> and made saving and earning interest hazardous. Subsistence farming
> was considered employment. Want a mortgage? Too bad, build your 500
> sf cottage by hand. Want to start a business? Hope you already have
> money. In hard currency times, the US was what we now call a 3rd
> world country, with living standards worse than during the so-called
> great depression.
]]> http://seekingalpha.com/article/100808-the-return-of-lending-still-distant?source=feed#comment-287527 287527
The idea that the fundamental problems in the economy and the finanical crisis were over use of mathematical risk modeling appeals to a kind of folk wisdom, much in the same way that people claim that at some undefined point in the past politics was civil and children obeyed their parents, but in fact this is nothing but nostalgia and lack of understanding of history... in short... complete nonsense.

It helps to have a cogent understanding about what really happend. Simply put, no one plugged in to any model an assumption of large, nationwide decline in real estate prices... becasuse it never happened since 1929.

In other words, mathematical models would do just fine, thank you very much, if people had the imagination to consider more extreme scenarios than what has actually happened in the past 30+ years. The idea that individual loan officers would somehow have a deep wisdom to ignore the seemingly endless appreciation of house prices and their entire experience to conclude that lending was dangerous is absurd. If anything, it is more likely, they would feel immense pressure from those "relationships" not to be a wet towel and make money along with everyone else... or else those dear first person relationships would quickly find someone else to do business with.

Was it foolish to assume house prices only go up? Absolutely. Would reliance on person-to-person relationships have prevented this debacle? Absolutely not.

There is a much more simple truth here. When people forget that risk is real, eventually bad things happen. This was true when people thought that the share price of any dotcom could only go up, and when people thought that tulip bulbs could only get more valuable. And when there is "no risk"... of course it makes sense to leverage everything through the roof... if there is no risk... why not?

This was a bubble. Nothing more, and nothing less. An enourmous bubble to be sure. Absolutely made worse by regulators and decision makers who either didn't or didn't want to understand the multiple levels of leverage implied by off balance sheet vehicles, derivatives, and trading accounts... but again, at the end of the day we still have nothing more than a speculation inflated asset that was leveraged through the roof because "there's no risk" Oldest story in the book. We won't go back to person-to-person based on a handshake, because frankly, it didn't work nearly as well as using a mathematical model. That hasn't changed, and the current crisis has no bearing on the question.]]> Tue, 21 Oct 2008 23:11:09 -0400
The idea that the fundamental problems in the economy and the finanical crisis were over use of mathematical risk modeling appeals to a kind of folk wisdom, much in the same way that people claim that at some undefined point in the past politics was civil and children obeyed their parents, but in fact this is nothing but nostalgia and lack of understanding of history... in short... complete nonsense.

It helps to have a cogent understanding about what really happend. Simply put, no one plugged in to any model an assumption of large, nationwide decline in real estate prices... becasuse it never happened since 1929.

In other words, mathematical models would do just fine, thank you very much, if people had the imagination to consider more extreme scenarios than what has actually happened in the past 30+ years. The idea that individual loan officers would somehow have a deep wisdom to ignore the seemingly endless appreciation of house prices and their entire experience to conclude that lending was dangerous is absurd. If anything, it is more likely, they would feel immense pressure from those "relationships" not to be a wet towel and make money along with everyone else... or else those dear first person relationships would quickly find someone else to do business with.

Was it foolish to assume house prices only go up? Absolutely. Would reliance on person-to-person relationships have prevented this debacle? Absolutely not.

There is a much more simple truth here. When people forget that risk is real, eventually bad things happen. This was true when people thought that the share price of any dotcom could only go up, and when people thought that tulip bulbs could only get more valuable. And when there is "no risk"... of course it makes sense to leverage everything through the roof... if there is no risk... why not?

This was a bubble. Nothing more, and nothing less. An enourmous bubble to be sure. Absolutely made worse by regulators and decision makers who either didn't or didn't want to understand the multiple levels of leverage implied by off balance sheet vehicles, derivatives, and trading accounts... but again, at the end of the day we still have nothing more than a speculation inflated asset that was leveraged through the roof because "there's no risk" Oldest story in the book. We won't go back to person-to-person based on a handshake, because frankly, it didn't work nearly as well as using a mathematical model. That hasn't changed, and the current crisis has no bearing on the question.]]>