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Econovan
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I was a software developer for 25 years at a (now large) software company. Now I'm just trying to make sense of what's going on in the economy.
  • FASB And Its Effect On The World Economy

    Originally posted in August 2011 here: http://vwpoint.blogspot.com/2011/08/fasb-and-its-effect-on-world-economy.html

    The Financial Crisis of 2007-2009 started and ended largely as a result of the actions of a small group of men known as the FASB (Financial Accounting Standards Board). This is WAY under-reported by the media, but I learned about it from Bill Isaac on Fox News Channel during the financial crisis.

    To be brief, in 2007 the FASB introduced accounting rule FAS 157 aka the "Mark to Market" accounting rule. That required financial institutions to raise more and more capital to meet reserve and margin requirements as their illiquid asset values plummeted. In other words, they had to sell more and more assets as the value of those assets declined. This created a self-perpetuating and accelerating financial vortex for some very large institutions from which they could only be saved by the Federal Government.

    Under great political pressure, Congress passed the "Emergency Economic Stabilization Act of 2008", which authorized the SEC to review the FASB rules. By March 16, 2009 FASB finally relented on the worst provisions of the rule and the market instantly turned positive. This rule has also been attributed with increasing bank profits in the recovery (and thus executive bonuses) by exaggerating the increase in asset values after they were artificially depressed by the collapse.

    I'm not really complaining about FAS 157 (as modified) since it brought the financial world back to reality from its euphoric bubble. But as with any good regulatory body, they abused their power. Thank God they finally came down off their pedestals before financial Armageddon, which was within days of becoming reality in 2009. "Vogons" exist in the FASB...

    I suppose the point of bringing this up now is this: the financial meltdown and its meteoric resurrection was a bunch of bureaucratic nonsense. But the political reaction to it, and the resulting massive public debt are very real. Unwinding that will be painful if even possible.

    Nov 22 5:06 PM | Link | Comment!
  • Bernanke: Still Easy After All These Years

    I don't blog much on this subject, but I couldn't resist today.

    SO the Fed chairman decided to keep the pedal to the metal and continue pumping money into the pockets of sellers of "bond substitutes" today. Yes, they may actually be buying treasuries and MBS, but the net effect is the money that would have been absorbed by these markets has to find another home. Some of that money finds its way into "lower quality" debt but the smart money is going to find a home that has more inflation protection.

    Recently I posted a note about an "art bubble" forming because very wealthy people like JayZ are paying obscene (what about JayZ isn't obscene after all) amounts of money for some pretty trashy art and very expensive collectible cars. My comment:

    This is just another example of where all the QE money is going. Can't buy bonds, stocks are risky; let's buy collectibles! It's not inflation till it hits the other 99%.

    To which I got these replies:

    The QE money is sitting in bank reserves, not chasing goods, services ... not art.

    QE money is not going to buy art. What the hell are you smoking?

    If he is smoking anything, I'm sure that he needs several moments to figure out that he should light the end furthest from his face.

    It is true that JayZ probably didn't decide to go buy Bugatti's and Jean-Michel Basquiat art work because bond rates weren't high enough, but there are other bidders out there who are using art and other limited-supply investments to shelter their assets from inflation.

    The inflation is limited to the "bond-substitute" market for now because these people don't shop at Wal-Mart and don't eat at McDonald's, and they probably don't need any more food even if they did. So they continue to buy stocks, junk bonds, and yes even collectibles and that is how all that QE money leaks into the economy.

    What I have to wonder today is why the Fed chairman didn't "taper" their bond purchases. It was widely expected and would have been accepted without much fanfare, but instead the Fed chose to "laissez le bons temps rouler" (let the good times roll) another quarter. Something tells me a gran mal headache is waiting around the corner.

    Does anybody still think I'm smoking something?

    Sep 18 6:00 PM | Link | 1 Comment
  • Where Did All The Quantitatively Easy Money Go?

    A few days ago I was complaining to my son about how the markets are rigged by the Federal Reserve; that stock prices aren't really going up but the dollar is going down, etc. because the Fed is printing extra money every month.

    He then asked me to explain where all that money is going. After starting to explain, I found myself stumped. It took me a weekend of thinking about it to be able to explain it.

    The extra money they are fabricating has obviously been going to buy U.S. Treasury Bonds and Mortgage Backed Securities. But those securities would be sold to SOMEBODY so the money isn't really making the government or the GSEs richer.

    The government is then using that money to support their deficit spending habits like the perennially underfunded entitlement programs. But the people receiving those entitlement checks aren't getting any more money, and the government departments aren't seeing their budgets increase.

    No, the answer is not where the printed money is going, it's where investor money IS NOT going. Those debt securities the Fed is buying are being ripped off the market at non-economical rates, so investors seeking safe income must put their money elsewhere.

    This means that the extra money in the system is really being pumped into the things those investors were looking for before the Fed took them away. They are looking for absolutely safe long-term income. These investors include pension funds with guaranteed income contracts to fulfill, retirees with needs to replace maturing bonds with equivalent income, etc.

    When these investors move their money (the money that should have been absorbed by treasuries and mortgage loans) outside their comfort zone, they end up inflating those other things they are buying. This is why stocks, junk bonds and rental real estate are among the assets which have been moving in a straight line up in the last few years.

    All that extra Fed money isn't creating general inflation because the ongoing and increasing supply of excess human capital ensures that no wage-price spiral can occur. There are simply too many people on earth that have access to transportation and the Internet that can compete for fewer and fewer jobs as those jobs are replaced by information technology and factory automation. Yes, a few industries are labor-constrained but those are specialized jobs that don't have broad economic effects when their wages are driven up.

    So we find ourselves in a world where (at least for now) investment assets have a funnel of fresh money constantly driving them upward. In that economy we simply have no choice but to participate in those markets, until such time as the risk-adjusted return on those investments does not compete favorably with fixed income. The tipping point will come when the Fed can no longer afford to suppress long-term interest rates. In the meantime, I think I hear the sound of asset bubbles being inflated, which is a bit frightening!

    Sorry if all this seems painfully obvious to you brilliant Seeking Alpha readers (and there are a lot of you). In that case, you might try showing this to your kids and help enlighten the younger generations. My twenty-something son gets it now.

    Feb 07 6:34 PM | Link | Comment!
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