firstproman

Reconnecting with Economics

Well put. Time for us all to get serious.


On Mar 02 04:41 PM Phil Trupp wrote:

> Robert Mcdowell has it right: business and economics are not the
> same. The "too big to fail" banks are no longer in a position to
> be private, shareholder-financed concerns. They have become public
> utilities propped up by public equity, and as such they are now beholden
> to their new shareholders--the taxpayers.
>
> No one is especially happy about the situation. Yet the i-banks,
> through a series of almost unimaginable blunders, enabled by an inept
> administration in Washington, have driven themselves out of the private
> sector and placed an enormous and unfair burden on the rest of us.
>
>
> Meanwhile, Ms. Mitra's fears over Obama's lack of "business experience"
> may be a bit naive, if not discouraging. Not many presidents have
> come to office with hands-on business experience. Harry Truman was
> an unsuccessful haberdasher. Jimmy Carter lost his shirt in the peanut
> business. Their collective grasp of fundamental economics was practically
> invisible, save for Truman's union-busting crusades. On the other
> hand, Ike had no business experience at all; and yet, in partnership
> with G.M. and a melding of economic teams public and private, he
> managed to create one of the biggest money makers of all time: the
> Interstate Highway System. G.H.W. Bush had limited business experience
> and no meaningful economic sense and left us with a deficit. His
> son was (is) the Mastermind behind the current financial calamity,
> and W. did have business experience. He used other people's money
> to fail. Did FDR have business experience? No, but he understood
> the metrics of emergency economic policy, a rare quality in any American
> president.
>
> Perhaps Ms. Mitra is caught up in party politics, which is a vote-getting
> game and far from policy decisions. Obama is dealing with policy
> while at the same time juggling the irrelevant political nonsense
> tossed about by high minded philosophers such as Rush Limbaugh. At
> a time like this, political games are a waste of time and energy--or
> worse. Politics makes zombies of otherwise intelligent people.<br/>
>
> Talk of new entrepreneurship is all well and good. However, it is
> made possible by conditions of abundant, balanced wealth and course-corrected
> fiscal/monetary policy. How much entrepreneurship can we expect when
> banks refuse to lend money and new fiscal policies are still on the
> drawing board?
>
> I may be wrong, but my guess is that the Ewing Marion Kauffman event
> provided a well-meaning outlet for frustration and opinion, touching
> lightly on serious matters and giving the participants a sense of
> pitching in to the great debate. Sounds like fun. Alas, am I wrong
> to believe that fun isn't the best way to find solutions to dire
> problems?

Reconnecting with Economics

Earlier on in 2008 the current meltdown was regarded by some as mainly as a problem for Wall Street. Since then we’ve all learnt that indeed it’s also a problem for Main Street. Layoffs, tougher credit, a slowdown in economic activity etc are now hammering small and large businesses alike. At its core the current economic blow-up is due to a loss of confidence among lenders and businesses and for good reason. As many have been saying for a while the U.S. consumer has been driving the economy largely through debt. Part of what we are going through now is a contraction back to reality.
The current administration is not responsible for the current crisis, REPUBLICAN rabid laissez-faire and Negative Liberty philosophies brought the WHOLE World down into this mess. Yes, the Obamaniks are doing some pretty radical stuff but then nobody has been through this kind of meltdown before. I also am aghast at the size of some of the expenditures (money we don’t have by the way), talk about spending like a drunken sailor; we’re currently spending like a drunken navy!
We may end up discovering that the Keynesian strategy the current administration is pursuing is the right one. If you know better let us know and before you say anything study the Japanese experience in the 1990s for a little while.

Re: rewarding bad behaviour. Not quite. Yes, the U.S. , U.K. and other governments around the world have pumped in public money into "banks" but at a cost to bank’s equity holders. We're actually wiping out old shareholders (through dilution and outright elimination as with Fannie and Freddie). In some cases (Morgan, JP) public funds are going in as preferred shares with greater than 8% coupons. We can argue about the wisdom of investing public funds into what should be private enterprise (banking) but that’s another argument. Bottom line: for the worst off banks the public funds they are getting is a poison pill for existing shareholders.

Radical Solution to Housing Mess

I feel your anger markg. Unfortunately we are all in this leaking boat together. Even if you're not one of the passengers who drove a hole in the hull you will still go down with the crowd. How? If we eliminate enough jobs and production eventually some if not many of the businesses you depend on to service your needs will go bust. Those that remain will eventuall charge YOU a lot more for what they provide to you. Your local bank may close. The value of your house and savings have almost certainly fallen. Worst case scenario you may lose your job or most of your investment income. We need to fix this for all our sakes! I know, it sucks.


On Feb 10 02:01 AM markg wrote:

> This is called socialism. Is this what we want to live by going forward?
>
>
> The reason the real estate market is in the tank is simple, it was
> overbought. Why do so many try to complicate the matter? There is
> NOTHING that will change this, and every one of these solution proposed
> just spreads the loss. I did not live under a rock for ten years,
> I just lived at my means, and didn't make stupid decisions. And I'm
> mad as hell every time some yokel calls for a government bailout.

Radical Solution to Housing Mess

Hugh. Good laugh, I wish you were right. As you probably know the Fed and Treasury aren’t limited to the printing press when they want to monetize. They can get money into the system simply by keying in a balance on their computers (e.g. $1,000,000,000) and handing out a cheque book to the lucky spender.
We are witnessing a roundabout debt “cancellation” or “debt reduction” RIGHT NOW.
Let me explain: the Fed has expanded money supply and will likely expand further through the repurchase of long dated treasuries. At the same time governments around the world are executing their massive deficit “funded” stimulus packages, almost certain result?... a massive devaluation of currencies and inflation which eventually result in wage inflation (nominal dollars). Those with large debt loads who haven’t already declared bankruptcy repay debt with “Zimbabwe” dollars.
Possible rejoinder: the Fed will start to increase rates as inflation rears its head. I expect the Fed to respond slowly, allowing “acceptable” rates of inflation (an end of deflation) for a period. Remember, Bernanke’s “Helicopter” answer to deflation. For those who don’t get that: Bernanke “jokingly” quipped that using a helicopter to drop boxes of cash into the market is an easy solution to deflation... paraphrasing.



On Feb 09 11:12 AM Hugh F wrote:

> The printing presses will break before they have printed the money
> that this solution would require.

The Real Crisis: Collapsing Capital Accumulation Process

Thank you for the fair response Rakesh. I agree with this briefer assertion. Left leaning thinkers have commonly argued that “state capitalism” is the natural next step in development of economies post “private capitalism”. In the west we are too often completely blind to this school of thinkers.
Talking about our markets:
I agree with your article that the current market collapse (equities, commodities, real estate) is largely due to the leverage excesses caused by Greenspan’s monetary expansion i.e. the last boom. I differ with you on what will happen next. I believe we are currently witnesses the birth of the Bernanke expansion and eventual bubble. A major question for investors is “which asset class or classes will experience exaggerated price increases?” even if only “nominal dollar” price increases.
The market is infatuated with “booms”. We have so much cash (private capital) sitting on the sidelines waiting for the next drunken “price party” that the next “recovery” will become a self fulfilling prophesy. The Obamaniks will ensure this happens.
Talking about world development in general:
Most of the world is now trying to consume more i.e. improve living standards (development). At Davos even Putin, after condemning the U.S. for the current global economic reversal rejected a return to completely controlled economies OR protectionism (yes, yes, yes, self serving) . The current contraction may indeed get worse before it gets better but our central banks and governments are already sowing the seeds for the next boom and eventual bust cycle. I’ll be very surprised if nominal prices of one or more of the “hard” asset classes (equities, commodities) aren’t surging higher before 2010 ends!


On Feb 09 03:57 PM Rakesh Saxena wrote:

> Dear firstproman: I am not predicting any catastrophe, just to be
> clear. I am merely emphasizing that "state capitalism" will shape
> the next few decades. That is the first issue we need to debate and
> resolve first. Many thanks - Rakesh

The Real Crisis: Collapsing Capital Accumulation Process

Rakesh, with respect I'm afraid this article is off base. This is akin to Malthusian Catastrophe doctrine. We've heard it all before. History to date indicates otherwise. Our experience so far is that we (the human race) can, through technology, produce a lot more than we can consume. Some will argue that we are reaching a tipping point where the world can't produce any more. Even that argument is wrong. Man's damage to the environment is due to excessive OVER consumption by a small percentage of the world population i.e. SUVs, unnecessary toys etc. As Henry George pointed out "Both the Jayhawk and the man eat chickens; but the more Jayhawks, the fewer chickens, while the more men, the more chickens." We have OVER produced chicken so much so that in North America we eat the white meat and wings almost exclusively and get rid of the rest and any price.

The challenges of the third world are an opportunity. Think of all the business and profits that will eventually be made as entrepreneurs build the water and power plants, hospitals and schools etc that are desperately need AND THAT EVENTUALLY WILL BE BUILT when sanity reaches those shores. Yes, I don’t know when the warlords will see sense BUT note that China has already announced that they are turning inwards and launching a two year >$1 Trillion development plan. India will likely follow, then parts of Eastern Europe etc
Rakesh, I concede that you may be right in the very short term. My response takes the longer term view.

Stimulus Watch: How the Devil Are They Going to Finance All of It?

Great write-up sir. The answer to the question "how will they finance it all?" seems to be Debt Monetization. I can't help smiling a bit when I imagine the reaction of U.S. bond holders when this happens. The one bright spot for the US dollar is that most of the other major currencies will probably be imploding faster so the US dollar may actually GAIN against some! As for bond yields, I won't be surprised if we have historical high yields sometime in the next 1-2 years.

Why the Fed Can't Prevent a Deflationary Depression

I concur with Kelm and Rob above. When we cut through all the theorizing what is happening is that Central Banks around the world are increasing money supply. At the same time, governments are heading into major deficit spending periods. While this is going on the world is REDUCING production capacity by shutting down factories, closing mines, cutting crude production, laying off workers etc How in the world can we imagine that we're goin to avoid a sharp inflationary surge when the cash on the sideline comes back into the market???

The Inflation / Deflation Debate

The discussion seems to really be about two different questions. 1) Are we currently experiencing price defaltion? The answer is almost certainly yes no matter what yardstick you use e.g. commodity prices (even Gold is well off it's 2008 highs), CPI, real estate prices, etc the only asset class that has appreciated since mid 2008 is U.S. government paper. 2.) what is the present and forward impact of current monetary and fiscal policy? Unless I'm missing something this seems to be a puerile question. Fact: The Fed has vastly increased money supply. Fact: governments around the world, led by the U.S. government have embarked an odessey of DEFICIT spending. Unless all the economic history, learning and reasoned though up till now is completely wrong we should be battening down the hatches and awaiting an extreme inflation storm. The purchasing power of currency will drop, simple. With higher taxes, a sharp increase in productivity/revenue (e.g. finding a moon size lump of gold under the white house) this is another way to get out of the debt trap i.e. simply print and sent ship loads of "paper" to lenders.
The current "drop" in price (deflation) is almost certainly due to a short term drop in the velocity of money and a realignment of the surplus production from the last peak in the economic cycle. The Obama administration (along with others around the world) are working hard to "get lending going again" i.e. increase monetary velocity. They will probably succeed in an environment where producers have cut back on capacity. Guess the result....

Split Strike Is a Valid Strategy, Despite Madoff Scandal

As always the objective dictates the strategy. If outperforming S&P or any diversified index is the objective it's hard to see how this paysoff (insurance and transaction costs). IF, as with pessimists such as Taleb Nassim, your objective is reaping bounty during sudden crashes or surges (black swans) while beating "normal" bond yields then there may be some merit in a defensive option strategies e.g. doubling up on the long option AGAINST the current technical trend. In today's market (Jan '09) that would entail a short SPY position, buying x2 nearby calls and selling a further out Put for a small COST (implied vol favours PUTs currently).