Econ 2009

[ewmayer]

Originally Posted by R.D. Silverman

This is nothing more than legalized theft

A.k.a. "business as usual" on Wall Street and in corporate America. This is the kind of thing that makes my disappointment in Obama`s hollow promises of "change" so great: After many loud promises of reform and endless congressional-committee meetings, it`s right back to business as usual in the Great Kleptocracy known as the American "free market system".

----------------------------------------

Today`s Historical Vignette: Trading the Battle of Waterloo

Today's financial-historical vignette involves perhaps the most famous episode of (what is in modern times referred to as) insider trading in history: Nathan Mayer Rothschild (no relation, AFAIK), one of the co-founders of the (in)famous house of Rothschild of international finance (and later, the famous eponymous French vineyards) trading on advance information gleaned from his European intelligence network about Wellington`s victory at the Battle of Waterloo: As Wikipedia (alas too briefly) describes:

The basis for the Rothschild fortune was laid during the latter stages of the Napoleonic Wars. From 1813 to 1815, Nathan Mayer Rothschild in London was instrumental in the financing of the British war effort, handling the shipment of bullion to the Duke of Wellington's army in Portugal and Spain, as well as arranging the payment of British financial subsidies to their Continental allies. Through the commissions earned on these transactions, the Rothschild fortune grew enormously.

The four brothers helped co-ordinate activities across the continent, and the family developed a network of agents, shippers and couriers to transport gold and information across Europe. This private intelligence service enabled Nathan to receive in London the news of Wellington's victory at the Battle of Waterloo a full day ahead of the government's official messengers.[3]

Wikipedia does not mention the (still disputed, but plausible in the "he`d have to have been an idiot to not trade the news, and we know he was not an idiot" sense) related story about Nathan Rothschild making a killing at the London bourse in the few hours before the news from Waterloo became public knowledge. The Independent has a better article about that:
The Rothschild story: A golden era ends for a secretive dynasty

It has long been supposed that Nathan increased the family fortune 20-fold by speculating on the outcome of the Battle of Waterloo in 1815. The Rothschilds had a network of agents throughout Europe who, using fast boats, coded letters and carrier pigeons, got information to the family ahead of official sources. Victor Rothschild, third baron and former chairman of the London bank, N M Rothschild, always maintained that Nathan had made a killing by encouraging rumours that Wellington had lost when he knew he had won, though the historian Niall Ferguson in his magisterial history of the family recently disputed that.

Certainly, for all the family motto of Concordia, Integritas, Industria (Unity, Integrity, Industry), Nathan's ability to depress stock prices by using the network of agents to spread rumours, true or false, and then buy the stock up after people panicked, was legendary.

More significant, however, was that in the process the Rothschilds created the world of banking as we know it today. Nathan operated principally as an underwriter and speculator in the early 19th-century bond market. He and his brothers invented, or at any rate popularised, the government bond, which allowed investors, big and small, to buy bits of the debts of sovereign states by purchasing fixed-interest bearer bonds.

Governments liked this because they could use them to raise colossal sums of money. Investors liked them because they could be traded - at prices that fluctuated in relation to the performance of the issuing government - and shrewd investors could make big sums. It brought investment in railways, the industrial revolution and ventures like the Suez Canal. The Rothschilds got a cut of everything.

It was a new kind of power. "I care not what puppet is placed upon the throne of England to rule the Empire on which the sun never sets. The man who controls Britain's money supply controls the British Empire, and I control the British money supply," Nathan said. The family developed a lack of awe for the powerful and important. A pompous aristocrat one day called on Nathan who was head down at his desk. Without looking up, the banker said: "Take a chair." His caller, affronted, said: "You are speaking to the Prince of Thurn and Taxis." To which Rothschild replied: "Take two chairs." At one point he even rescued the Bank of England after a run on gold caused the collapse of 145 banks. In 1885 he was given the hereditary title of Baron Rothschild.

My Comment: It`s a fascinating history ... while there is of course an element of ruthless profiteering, I find myself even more unsympathetic to the warmongering royal twits on both sides who used the Rothschilds to finance their lunacy. Note that the objectivity of Ferguson`s biography of the Rothschilds is disputed (as in "Next to the word 'hagiography' in the dictionary you`ll find a link to N. Ferguson...") Recommendations for Rothschild family bios (in particular ones centered on the time around the Napoleonic wars) would be appreciated.


Friday`s Existing Home Sales: Oops, Not so Much

Barry "Bailout Nation" Ritholtz appears to have spent a good part of his weekend crunching last Friday`s "Not only less worse than expected, but downright bullish!" existing-home-sales report from the NAR:

Existing Home Sales Far Worse Than Advertised

On Friday, the market rallied smartly – and while expiry had something to do with it, the larger part of the gains came after the release of the Existing Home Sales data. Traders’ kneejerk reaction seemed to reflect the belief that not only is the worst of Housing now behind us, but that Housing was actually getting better.

Indeed, Housing is going to be a growth driver for the economy going forward!

Only, not so much. A close look at the data reveals this to be a false premise. If you only read the NAR spin, its easy to fall into their web of happy talk. (We’ve said it so many times, it still bears repeating: The National Association of Realtors are a highly misleading news source. Look past what they say to the actual numbers if you seek economic truth).

In the past, I have gone so far as to imply the Realtors group are spinmeisters. This month, I will be more blunt: Their actual data has become untrustworthy, their spokesmen lie for a living, and their “news releases” is little more than misleading junk.

Investors who rely on the NAR version of the news do so at their own great financial peril.

With that intro, lets dig intot he actual data to show why the real estate trade group happy talk is misleading bunk. IF YOU ARE INTERESTED IN HOUSING, then you need to thoroughly fisk the NAR data, put it into context, and strip the lipstick off the pig.

Let’s do just that: A closer look at the actual unspun data reveals the NAR fantasies. Rather than recently improving, we see that January to July 2009 is actually the weakest 7 month period in 5 years — since the market topped in ‘05.

Consider Mark Hanson’s analysis: He points out that “If not for a surprise and suspect 16k increase in Northeast condo sales, Existing Home Sales would have been lower month-over-month and only up 12k units from July 2008, which was the worst year on record for housing.”

Let’s see what happens if we back out those condo sales to look at just Single Family Homes ex Condos — which accounts for the vast majority of the US housing market. We see a very different picture. Existing home sales (ex-Condos) were down 10% from July 2007, flat from July 2008, and off 5% from June 2009.

Hence, the boom in cheap Northeast condo units accounted for all of the excitement in Friday’s EHS release. Indeed, the overall UNADJUSTED data shows not only that housing is not getting better, it is still getting worse.

Let’s go back to the NAR release. As noted on Friday, on a NON-seasonally-adjusted basis, existing home sales were nowhere near as strong as advertised. According to M Hanson Advisors:

“Even with condos included, the all-important Western Region was down 10% m-o-m. It is consensus that the housing market in the West is booming. While sales are booming at low end, I have argued for months that demand from first-timers and investors was at peak levels and July’s results prove this.Such weak results m-o-m and relative to 2008 underscore how critically injured the housing market remains.

Think about it…prices are down sharply y-o-y; rates are at historic lows; moratoriums and modification initiatives have kept hundreds of thousands of foreclosures off the market; housing sentiment is worlds better; a tax credit is available; and still, y-o-y sales are flat for all intents and purposes and down 6.5% from weak 2007 levels when pricing was near the peak. Conditions won’t get much better than this in the future — what is it going to take to sell houses?

My Comment: In that light, the (not trumpeted quite as loudly by the MSM) same-release datum about unsold home inventory increasing by 300,000 from 3.8M to 4.1M, a rather-more-robustly-signed statistic than the rounding-error-level "increase in July EHS" begins to seem less incongruous.

[R.D. Silverman]

Originally Posted by ewmayer

A.k.a. "business as usual" on Wall Street and in corporate America. This is the kind of thing that makes my disappointment in Obama`s hollow promises of "change" so great: After many loud promises of reform and endless congressional-committee meetings, it`s right back to business as usual in the Great Kleptocracy known as the American "free market system".

That $5M in bonus money quite properly belongs to the 6 Flags creditors.

Rather than getting bonuses, the senior execs should be FIRED with no
severance for their incompetence in running the company. They were at the
controls while the bankruptcy occured. Instead, they get bonuses while
others pay for their mistakes.

I too am greatly disappointed in Obama. He is a wus.

[ewmayer]

Debit Card Trap: If federal regulators don’t act quickly to enforce new overdraft rules that could provide more transparency, Congress should step in.

Not many people would knowingly pay more than $35 for a cup of coffee. But far too many people are getting saddled — with no warning — with outsized bills for minor purchases, under a euphemistically labeled “overdraft protection program” that most major banks have adopted over the last 10 years.

Before that, most banks would simply have rejected debit transactions, without a fee, when the card holder’s account was empty. Now, they approve the purchase and tack on a hefty penalty for each transaction.

Moebs Services, a research company that has conducted studies for the government as well as some banks, reported recently that banks will earn more than $38 billion this year from overdraft and bounced-check fees. Moebs also estimates that 90 percent of that amount will be paid by the poorest 10 percent of the customer base.

Federal regulators who stood idly by while this system evolved are considering new overdraft rules that could provide more transparency. If they do not move quickly and aggressively to protect consumers, Congress should step in.

Banks have historically covered bad checks for valued clients, who were invited to opt in to overdraft protection or to link their checking accounts to savings accounts or to lines of credit. But as more people began to use debit cards, the banks started to view overdraft fees as a major profit center and started to automatically enroll debit card holders into an overdraft program. Some banks instituted a tiered penalty system, charging customers steadily higher fees as the overdrafts mount.

A study by the Center for Responsible Lending, a nonpartisan research and policy group, describes what it calls the “overdraft domino effect.” One college student whose bank records were analyzed by the center made seven small purchases including coffee and school supplies that totaled $16.55 and was hit with overdraft fees that totaled $245.

Some bankers claim the system benefits debit card users, allowing them to keep spending when they are out of money. But interest rate calculations tell a different story. Credit card companies, for example, were rightly criticized when some drove up interest rates to 30 percent or more. According to a 2008 study by the F.D.I.C., overdraft fees for debit cards can carry an annualized interest rate that exceeds 3,500 percent.

My Comment: Ah, but things are even more deliciously bank-rigged than that ... as Karl Denninger notes in a recent rant-orial,

This is clearly-predatory behavior. Nobody with half a brain would knowingly sign up for a "service" that would cover a POS or ATM withdrawal at 5,000% interest, yet that is exactly what nearly every bank in the land will currently do by default when you open a new account. They bury the "disclosure" in their terms and conditions, but nowhere do they state these "fees" in equivalent annual percentage rate terms.

It gets better: Banks will intentionally "sort" transactions from a given day to produce the maximum overdraft fee. They sort withdrawals to debit them largest-amount-first, because the fee is assessed per item. An example:

$1,000 in your account.

You write checks for $20, $50, $100, $1,000 and all are presented on the same business day.

How many checks will hit you with an overdraft fee?

THREE - every time. The bank will re-order the transactions so that the $1,000 check is processed first, guaranteeing that the $20, $50 and $100 checks overdraw, thereby generating three overdraft charges. If they processed the transactions "largest item LAST" you'd generate one overdraft fee - on the $1,000 check.

It gets better.

You have $1,000 in your account.

It is after 2:00 PM, the cut-off for a business day.

You go to the mall and use your debit card four times to buy a $5 Latte, $15 lunch, a $40 pair of pants and $25 for a couple of movie tickets.

The next morning a $1,000 check hits your account.

The bank processes the $1,000 check first, even though in terms of actual presentation time the debit card withdrawals were approved first, and whacks you for four overdraft fees instead of the one legitimate fee on the $1,000 check. That Latte just cost you as much as $45!

This sort of predation is responsible for nearly $40 billion dollars a year in pure "profit" for the banks, it is directed specifically at those who have the least in resource to cover it, and it relies on lack of clear disclosure and intentionally-predatory "sorting rules" to get past what would otherwise result in a howl of protest by consumers and lawmakers alike.

This sort of practice should be absolutely outlawed, and if we had anything approaching an honest Congress and Federal Reserve it would have been years ago.

Say thanks to Barney Frank, Chris Dodd and of course BenDover Bernanke when you're bent over the table and repeatedly violated by the banksters as a consequence of this "little" scam.

After all, its only $40 billion dollars.

Your Daily 3:30 pm Market Ramp Job, Sir

Wondering where all the recent (insert CNBC-style fawning adjective such as "miraculous" and "resilient" here) late-session rallies in the Dow have come from? ZeroHedge illustrates the source nicely (note their ticker has Pacific Time, so 12:32 means 3:32 pm Eastern time, hence the name "daily 3:30 pm ramp job".

My, that`s a lot of "green shooting" going on there in the "Price" column. What did all that late-session futures buying accomplish? Why, nothing short of an "economic recovery is well underway" pundit-validating "up day" on the Dow. Let's have a closer look, shall we?

For instance today, despite an early-morning pumpfest, markets were heading relentlessly down starting around 1 pm New York time (perhaps the sobering prospect of tomorrow's consumer confidence report - one of the few major macroeconomic headline reports *not* put out by the government, hint, hint - and the over $200 *billion* in new Treasury debt on offer in the coming days had something to do with that). A 3:15 pump attempt was apparently not enough to stem the tide. Time to break out the big guns: No need to overdo it, just get that closing print on the Dow (which will furnish the headline for nearly all MSFM evening broadcasts) ever so slightly into green ... nearly there ... nearly there ... just a bit more ... yes, mission accomplished once again! Look at all that lovely green shading, positive-sign-ing, and up-arrow-ing in the "+3.32 (+0.03%)" end-of-day DJIA ticker - so very soothing, so immensely reassuring to be rescued again from the depredations of those pesky hordes of commie-sympathizing red minus numbers by Uncle Ben, Cousin Timmay and their trusty allies at the TBTF prop-trading desks:

[Fusion_power]

We now know who the 1000 pound gorilla in the basement is. His name is Money Market Fund.

http://www.thestreet.com/_yahoo/stor...ket-funds.html

Volcker, in an interview with Bloomberg, said money market funds are "free-riders" that compete with banks for assets but aren't subject to the same kind of strict rules and regulations.

Volcker's comments appear shocking because the strain on money market funds didn't attract the same kind of publicity as the woes of big banks like Citigroup and Bank of America.

Still, money market funds have had their share of woes lately. The $62.5 billion Reserve Primary Fund "broke the buck" last September when its net asset value fell below $1 due to its investment in Lehman Brothers' commercial paper. That caused a run on money funds, which according to The Wall Street Journal is a $3.7 trillion dollar industry.

Seriously folks, you would think a person with the background and know how of Paul Volcker would be able to see that MMF's are an issue but not at all primary to the market meltdown of the past year. The real elephant was and still is Risk. When a company takes on excessive levels of risk and does so with little heed to the possibility of major events, we wind up with AIG, Lehman, Citi, etc.

DarJones

[R.D. Silverman]

Originally Posted by Fusion_power

We now know who the 1000 pound gorilla in the basement is. His name is Money Market Fund.

http://www.thestreet.com/_yahoo/stor...ket-funds.html



Seriously folks, you would think a person with the background and know how of Paul Volcker would be able to see that MMF's are an issue but not at all primary to the market meltdown of the past year. The real elephant was and still is Risk. When a company takes on excessive levels of risk and does so with little heed to the possibility of major events, we wind up with AIG, Lehman, Citi, etc.

DarJones

They incur the risk because their compensation and bonus plans
encourage extreme risk taking in the short term. The employees
do not care about long-term company viability. They only care
about getting their short-term bonuses.

[ewmayer]

Huge Plunge In Mortgage Cure Rates Portends Foreclosure Disaster

Mortgage cure rates have fallen off a cliff. For those unfamiliar with the term, a "cure rate" pertains to those who go delinquent on loans then catch up and become current. Late payments that don't "cure" have a tendency to get later and later over time, before they eventually default

Fox Reappointed to 2nd Henhouse-Guarding Term

Bernanke Named to Second Term at Fed After Keeping U.S. Out of Depression: Federal Reserve Chairman Ben S. Bernanke, who led the biggest expansion of the central bank’s power in its 95-year history to battle the worst economic slump since the Great Depression, was nominated to a second term today by President Barack Obama.

Bernanke “has led the Fed through one of the worst financial crises that this nation and this world have ever faced,” Obama said in remarks prepared for delivery today at 9 a.m. in Martha’s Vineyard, Massachusetts, where Bernanke is to join him.

“As an expert on the causes of the Great Depression, I’m sure Ben never imagined that he would be part of a team responsible for preventing another,” Obama said. “But because of his background, his temperament, his courage, and his creativity, that’s exactly what he has helped to achieve.”

My Comment: IMHO, a slightly more accurate headline would have been "Bernanke Reappointed Fed Chair After Year of Furiously Papering Over Financial Crisis His Institution helped Bring About" - but I`m sure that lacks the kind of "hopiness" and "growthitivity" required by the MSFM in their reporting.

Never one to pass up a trite "hip leading-edgy" metaphor, Obama also congratulated BSB on his "out-of-the-box thinking" ... I guess that's *one* way to describe "gross, repeated and willful violations of the Federal Reserve Charter". It will be interesting to see if Bernanke`s OOTBT doesn`t end up having a similar effect as when one`s housecat engages in similar behavior. "Hey, my litterbox is kinda full o` turds here ... time for some out-of-the-box thinking ... yes, this patch of fine carpet looks purr-fect for some OOTBT... and better save a little for the vintage quilt in the master bedroom..."

Mish has a commentary on "Four More Years!" for Helicopter Ben here, with some nicely pointed commentary from Joh Hussman:

On Friday, investors took great cheer in an optimistic statement by Ben Bernanke suggesting good prospects for economic growth ahead.

“Our forecast is for moderate but positive growth going into next year. We think that by the spring, early next year, that as these credit problems resolve and, as we hope, the housing market begins to find a bottom, that the broader resiliency of the economy, which we are seeing in other areas outside of housing, will take control and will help the economy recover to a more reasonable growth pace.”

We might be inclined to place a sliver of credibility in Chairman Bernanke's assessment – if not for the fact that the quote above wasn't from last week at all, but rather, hails back to November 8, 2007, just before the recent recession began. You might recall that the S&P 500 was pushing 1500 at the time.

Bernanke's economic research is a minefield of partial equilibrium analysis. Helicopter Ben is a lot like John Maynard Keynes, who wrote in his General Theory “If the Treasury were to fill old bottles with banknotes, bury them at suitable depths, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again, there need be no more unemployment.”

Solving economic problems, to our Fed Chairman, is as easy as throwing money out of helicopters. Not surprisingly, throwing money out of helicopters has been the basic core of his strategy during this crisis. This does not involve complex thought about debt restructuring, moral hazard, incentives, equitable distribution of resources, or other factors. All it requires is the three second tape playing in Bernanke's head - "We let the banks fail in the Great Depression, and look what happened." And then the tape repeats. Never mind that the cause of the upheaval was not the failure of banks per se, but the disorganized Lehman-style failure of banks. The tape isn't long enough to encompass such nuances.

Unfortunately, the resources used in the recent bailout were not just free money tossed out of a helicopter. Only a partial-equilibrium economist thinks that way. No, this was an allocation of trillions of dollars of real resources that could be spent improving access of poor families to health care, finding cures for life-changing diseases, providing better education, and reversing the crowding-out of productive private investment.

A public servant willing to act this carelessly with the resources entrusted to him, and so strongly in defense of fellow bankers, frankly does not deserve the job.

My Comment: The snip I underelined in the Hussman quote above is as pithy a description of Keynesian-Klown-Konomics as I`ve seen. If people simply have access to fiat money (i.e. It`s a liquidity issue, not a solvency issue), all will be well. Never mind that all those poor deluded fools in Keynes` original example probably dropped their farming implements asnd other tools and stopped producing anything of value as a result of the perverse incentive Keynes would offer them to do so. "Look, my wife and kids are on the verge of starving to death, but I got this here great bottle full o' paper money to buy food for the winter with." From whom, praytell? All the other former food producers have similarly gone over to full-time (literal) money-grubbing. In fact this is a really nice metaphor for the offshoring of productive jobs and the increasing Ponzi-fication of the U.S. economy, whose ultimate outcome is to make everyone but the bankers and politicians who serve them a debt slave. You may have this neat-o bottle of funny fiat money you dug up but they have the last of the remaining food and supplies, and now that you've put all your faith in the Fiat Money Bottle, you can be sure they will sell you the actual *goods* you need to live at a very dear price. "Oh, that money you dug up? That was only good last year ... we started printing this new money here a couple months ago, and if you want some of it, you have to give us something in return. Say, that`s a pretty nice piece of land ya got there ... how about we take that, give you a couple months` of food in exchange, and then you farm it for us on the small-print terms in this contract here..."

[cheesehead]

Originally Posted by Fusion_power

Seriously folks, you would think a person with the background and know how of Paul Volcker would be able to see that MMF's are an issue but not at all primary to the market meltdown of the past year. The real elephant was and still is Risk. When a company takes on excessive levels of risk and does so with little heed to the possibility of major events, we wind up with AIG, Lehman, Citi, etc.

But isn't Volcker's criticism of money market funds based on the higher risks associated with them than with banks? Why do you seemingly accuse him of not recognizing the primary role of risk? Aren't the regulations he calls for intended to curb risks just as bank regulations are?

In the Bloomberg article (http://www.bloomberg.com/apps/news?p...d=a5O9Upz5e0Qc) linked from the article you cite, Volcker is paraphrased or quoted as follows (with my bolded emphasis):

Paul Volcker, the former Federal Reserve chairman who is an adviser to President Barack Obama, said money-market mutual funds undermine the strength of the U.S. financial system and should be regulated more like banks.

“Banks remain the functioning heart of the financial system, and they are protected and regulated,” Volcker said in a telephone interview last week from his New York office. “To the extent they have competitors that have different ground rules, kind of free-riders in my view, weakens the financial system.”

. . .

Money-market funds can provide cheaper financing because they aren’t bound by regulations such as federal insurance requirements on deposits and reserves on loans that increase costs for banks, Volcker, 81, said. The funds, which are overseen by the U.S. Securities and Exchange Commission, should submit to the same “regulatory burden” as banks or give up accounting flexibility that lets them maintain a stable $1 share price, a chief attraction to investors, he said.

. . .

Insurance on deposits, and reserves on loans, are required because they reduce the risk to the public compared to a situation where those requirements would be absent.

So, isn't Volcker actually taking the primacy of risk into account, rather than overlooking it as you imply?

[ewmayer]

If Volcker wants the government to "level the playing field", why not start with the real biggies? For example:

1) The GSEs (Fannie and Freddie), which - even before they blew up and were quasi-nationalized last year - have no effective limits on their leverage. Last I heard they were leveraged somewhere around 70:1, i.e. double of the already-insane Bear-Stearns and Lehman-style leverage ratios which doomed those firms last year. And despite that outrageous waiver on risk-taking, they are BACKED BY THE FULL FAITH AND CREDIT OF THE U.S. GOVERNMENT (said guarantee previously having been "implied", now explicit), allowing them to take on such unbelievable levels of risk at DISCOUNT RATES! Hello? What's wrong with this picture?

2) The big I-banks, which earlier in the decade convinced the regulatory authorities to relax their previous "restrictive" 12:1 leverage limits and permit them up to 40:1. So they all promptly leveraged up to the hilt, and as a result of the more-outrageous risk-taking this permitted them to engage in, magicaqlly became "systemically risky" and thus "too big to fail". Pretty sweet deal, eh? How are any more-prudent firms supposed to compete with that? In good time the TBTFs enjoy the massive profits their cheap borrowing power and huge leverage gives them, and when things blow up, the TBTFs get bailed out by Uncle Stupid at the expense of the prudent. Meanwhile, we have the FDIC giving negative reviews to regional banks for not being "aggressive enough" in their lending practices, while at the same time imposing hefty fee increases on the same banks in order to bolster their insurance fund, which was depleted thanks to the (presumably highly-rated-by-the-FDIC) risky bets gone bad of their "more aggressive" peers.

The whole thing is a criminal racket of the highest order, having captured all of the key regulatory agencies and most of the Federal government, by way of generous campaign contributions, massive lobbying budgets and placement of Big Finance insiders in key government positions. I get so angry seeing these crooks and fraudsters in action every day, in plain sight, with a free pass from congress and the white house, it makes me want to scream.

And who cares WTF Volcker thinks, anyway? He's been completely marginalized by the bank-owned triumvirate of Geithner/Bernanke/Summers. He makes an occasional sober speech and gets some ink here and there in WSJ, but nobody with any real say in these matters gives a shit. Business as usual in the great rigged Wall Street casino, fleecing the hoi polloi and blowing the Next Big Bubble. who cares what some doddering old bad-news-bear fool has to say? Didn't you get the memo? Recession is over, banking system has been saved, Great Depression 2 averted, etc. "Mission accomplished", you might say. All we need now is for BHO to stand on the deck of the USS Free Markets - a flight suit would be such a nice touch, don't you think? - and preach it to the world.

[cheesehead]

Originally Posted by ewmayer

If Volcker wants the government to "level the playing field", why not start with the real biggies?

/* Begin straw-man, NOT claimed to be responding to what anyone here has actually posted */

I don't see where, except possibly in the imaginations of some critics, Volcker ever claimed that his project to reform money market mutual funds was the absolute best possible thing that could be done, to the exclusion of any other ideas in the financial field. If he has done so, will someone please show me where he claimed that?

/* End straw-man */

- - -

As to your particular question, Ernst: Volcker has decided to work for a particular goal. He can't work on every possible improvement, so he's concentrating on money market mutual funds. It looks to me like the field of money market funds is at least as much a "real biggie" as anything you list. What's wrong? Do you think he should be SuperVolcker, able to mend all financial flaws within a single lifetime?

- - -

How about you, DarJones? Is what Volcker's doing really all that bad, now that I've pointed out that he's not ignoring risk? If you still think so, why?

[Fusion_power]

Cheesehead,

You miss the point almost entirely. If the banks were stable in the way they are regulated, then we would not have Citi, BofA, etc. on the ropes. It is not a matter of regulating the MMF's the same as banks. It is a matter of regulating RISK in the financial sphere including the BANKS and the MMF's and the investment/brokerage/insurance behemoths on wall street.

Show me how regulating the MMF's the same as banks would have prevented the fiscal meltdown? and please don't give me some weak rationale that if the banks were not having to compete with unregulated MMF's, they would never have taken on the risk inherent in the mortgage backed securities markets. Banks will do whatever they can get away with so long as they believe it will make money flow into their maws.

Volcker is right that there is a problem with regulation of the MMF's. He would also be right if he said there is a problem with regulation of the Banks. And he would be right if he said there is a problem with regulation of the investment/brokerage/insurance segments too.

DarJones

[ewmayer]

Musings on the Gold Standard

One of the frequent arguments used by the fiat-money crowd (e.g. the folks that run the Federal Reserve) against a return to some kind of hard-money standard - which need not be a gold standard, though that is the appellation often applied to any kind of hard-money currency standard - is that a hard-money standard "restricts entrepreneurs` access to investment capital." For instance we have this exchange today on ZeroHedge:

by Judge
on Tue, 08/25/2009 - 10:37
#47389

Mark pretty much owned Michael - who was very loose with the facts. For example he stated Greenspan 'favored the gold standard' - but he neglected to mention that this was in the late 50's when Greenspan was a masters student. He reversed his position as a Ph.D and again when he joined the Fed. Secondly, the housing bubble had little to do with the Fed. If you look at the divergence of housing prices and inflation in the 90's it coincides with the revision to the CRA - which forced banks to make 'liar loans' and FNMA's/FHLMC's changing of their strategy from customer service to market share - and who agreed to buy all the trash mortgage lenders could produce and stamp the US's govt's AAA rating on it and sell it to the markets.

We've been on the gold standard before - it failed, and would fail again for the same reasons. Even the inflation argument is bogus. It ignores productivity gains - largely from the easier access to capital, which is no longer restricted to the rich as it is under a gold standard. Back in 1911 a suit did cost about $100 - and the average worker had to work 6 months for that suit (at 50 cents to $1 a day wages.)

Today, the same custom suit costs $1500. So yes that's inflation. What is different is that the average worker now works a week or two for that same suit - that's productivity. That is why we've had the greatest era of prosperity the world has ever seen and why we have more leisure time than our grandparents - who didn't have more when compared to their grandparents - both under the gold std.



by Bam_Man
on Tue, 08/25/2009 - 11:58
#47573

Access to capital was not "restricted" under a gold standard. Throughout the time the US was on the gold standard Capital formation was extremely robust thanks to SAVINGS. SAVINGS was made possible by the fact that the nation as a whole was a PRODUCER and NET EXPORTER.

Of course once you have wasted several decades OVERCONSUMING and producing next-to-nothing of value for export (other than military hardware) that is a different matter altogether. In the absence of robust domestic capital formation, BORROWING huge sums at artificially low rates of interest becomes a matter of sheer survival. BORROWING on this scale of course could never be possible on a gold standard. Hence the need for fiat money and a Federal Reserve to manage the ongoing INFLATION that is absolutely essential to this process.

My Comment:In followup postings "Judge" claims to be a professor of finance, which earns much commiseration - for his students - from other readers. Note that Judge makes the same bogus (and long-since discredited) claim that the community Reinvestment Act (CRA) was the main cause of the housing bubble that the same right-wing liars who are now claiming the Obama healthcare plan will "promote euthanasia" helped spread.

And his argument about the "massive gains in productivity" allegedly resulting from abandonment of the gold standard - yep, it`s true, the American economy was quite stagnant for the preceding 300 years - is ludicrous. One could just as easily rejoin "What is different is that the average worker who dreams of owning such a suit is in fact now unemployed, but can charge it to his credit card, while an underpaid Chinese sweatshop worker works a day or two to make that same suit, while her kids suffer from industrial lead poisoning and she is unable to afford such a suit herself." Ah yes, the miracle of fiat money, loose credit and globalization...

Lastly, I really wonder about the "we have more leisure time than our grandparents" claim. The following points would seem to weigh against it:

1. Much of that extra "leisure time" is negated by the much greater prevalence of two-wage-earner couples. A better measure than "time spent watching 'American Idol' and reality TV" would seem to be "time spent together as a couple and with one`s children".By that metric I suspect we are worse off as a society than our grandparents were.

2. Indisputably we have more "stuff" than our grandparents ... more cars, more clothes, more e-gizmos, bigger houses, bigger waistlines. And undoubtedly agricultural and industrial productivity gains are responsible for much of that. But a huge increase in DEBT is responsible for much of it, too, i.e. we actually *own* much less of "our" stuff. Just look at average home equity - plunged below 50% last year, and the savings rate dropped below zero. The productivity gains have been ongoing since the start of the Industrial Revolution, so it`s implausible to link them to the invention of fiat money. But the latter explosion in debt can certainly be related to fiat money - all ages have had their speculative frenzies, but fiat money and fractional reserve banking allow one to blow bubbles of nearly unlimited size, out of nothing - whereas in previous crises people may have lost their life`s savings, in the present one we (as a society) went into the bubble with no savings to begin with! (I realize this is in many ways an oversimplification, but the "household debt" charts tell much the same tale). There is also the question, which the last 3-4 generations are probably the first in the history to have the "luxury" of facing: At what point does "enough" transition to "too much"? Are we really better off (in the sense of being happier and healthier) with too much of everything that is noisy, crass and material?

Now, I think return a literal "gold standard" would be idiotic - gold mining is toxic, the amount of gold in no realistic way reflects the population/productivity of society (and would need to grow with population), etc. But a standard "tied to" something tangible (perhaps a wide basket of industrial commodities?) seems reasonable.

Thoughts from the readership?