America's Financial Mess

[Capitalism Forever]

the Pope has the answer

Al Qeuda has the answer as well

Looks like Al Gore is getting slow. I thought he would be the FIRST to come out with the answer, which is of course that the credit crisis is caused by Global Warming!

[IchorFigure]

Oh by the way, over the weekend the House silently passed a $25bil bailout for the auto industry too, and it was signed into law today. It can even potentially extend to foreign companies with plants in the U.S. Michigan is going to bleed itself to death out of its own idiotic masochism apparently.

The Energy Department has not yet written all the regulations for the loan program,

...what? How does that even work? You can just pass a bill now that doesn't even have spelled out rules? It's like Bush is flat determined to go out while pushing us toward the abyss.

[Thomas M. Miovas Jr.]

...what? How does that even work? You can just pass a bill now that doesn't even have spelled out rules? It's like Bush is flat determined to go out while pushing us toward the abyss.

You do realize there are no rules for the $700 billion Act either, which means that some Washington inside guy is going to be secretly buying up these bad loans knowing that the government will bail him out and he will become a multi-millionaire. Kind of like what happened with the heads of Fannie Mae and Freddie Mac. Wasn't it Oren Boyle who did that in Atlas Shrugged? But, I guess if someone is pointing a gun, then somebody will be there to steal the loot. And it won't be considered corruption for a few years, and by that time he will step down while living in his mansion, saying that he was just following the letter of the law. And everything will be peachy coo, so long as they throw a few bankers in jail to pay for the crimes of the politicians. By the time they finagle things around, the stock market will be making a come-back at the next artificial boom, so the real crooks will get off with a slapped wrist, as the law came to the rescue and straightened everything out for the best -- eh hem.

[Tenure]

Some days I wish I was Francisco. I'd set up a wonderful, secure bank for all them government guys to deposit their money in...

.... and then, KABOOOM!

[tribe me]

Obama's recent anti-capitalist comments demonstrate how the concept of Capitalism has been twisted and distorted in the common political culture. McCain, who is surely a statist and who frequently criticizes "greed" and businessmen, is not a deregulator in any rational use of that term. As I listen to the two very imperfect presidential candidates and watch this fiasco unfold, I continue to be struck by its parallels to the Great Depression. Here's an interesting opinion piece on that same topic:

http://www.unionleader.com/article.aspx?he...a5-be733a3d84f3

This really is a problem of Ethics not Capitalism

OK. So now what happens? The government has stepped in to the tune of $1,000,000,000,000 or so, so what does it mean? What is going to be the result of this intervention?

I think it just weakens the dollar and increases debt and make things worst.

[Clawg]

I think it just weakens the dollar and increases debt and make things worst.

No, don't you see? With inflation the national debt will sooner or later return to zero.

[Steve D'Ippolito]

Quick, go out and borrow money. You can repay the debt with worthless paper.

(The above is sarcasm, of course, designed to evoke the following: Er, isn't that in part (and rather concretely) what got us into this mess? The perception that the value of whatever it was you were buying--in paper "dollars"--would go up more rapidly than whatever the interest rate is? That's the only rationale for interest only mortgages, for instance.)

If we *do* have a bout of hyperinflation, it will be to the short-term benefit of anyone who is in debt, provided of course that their income keeps up with the inflation.

[IchorFigure]

Every new day seems to bring a new kind of government interference. In light of the stock market tanking again I expect to hear lots of assurance that the baillout plan will "take time to have an effect" during tonights debate. Obviously we'll only be able to know when it kicks in whenever the economy should decided to grow.

[softwareNerd]

Every new day seems to bring a new kind of government interference.

Yeah, today the Feds decided they will buy commercial paper. Basically, the Fed has decided that deflation is the most important enemy. So, wherever people stop buying some type of financial asset that usually has widespread trade, the Fed will step in.

Interestingly, the Fed has not been inflating wildly yet (in the short term sense). What they've been doing is taking money out of the economy (by selling government securities) and putting it back by buying risky securities. In effect, they're buying risky securities with government securities, rather than with cash. They're holding their "buy-crap-for-cash" weapon mostly in reserve.

Edited October 7, 2008 by softwareNerd

[Tom Rexton]

Yeah, today the Feds decided they will buy commercial paper. Basically, the Fed has decided that deflation is the most important enemy. So, wherever people stop buying some type of financial asset that usually has widespread trade, the Fed will step in.

Interestingly, the Fed has not been inflating wildly yet (in the short term sense). What they've been doing is taking money out of the economy (by selling government securities) and putting it back by buying risky securities. In effect, they're buying risky securities with government securities, rather than with cash. They're holding their "buy-crap-for-cash" weapon mostly in reserve.

Inflation is actually falling despite the Fed's attempts because banks worldwide have been contracting credit (the main means of monetary expansion in a fractional reserve banking system). The erosion of existing banks' capital and the failure of several banks are working to shrink the money supply, so even though the Fed is pumping hundreds of billions into the system we will not face high inflation (or for that matter hyperinflation) anytime soon. We are facing a scenario where the demand for money-balances has skyrocketed while the money supply has shrunk or is barely keeping up even with the Fed's efforts. Not surprisingly (at least to me), the dollar has rallied massively as gold and other commodities have fallen substantially. Just look at the direction of prices in general--gas, housing, food, commodities, many ordinary consumer goods--they're stalling or falling. This is equivalent to the dollar gaining value.

And as you mentioned, these hundreds of billions the Fed is pumping into the system is not even a net increase in money because they've been withdrawing hundreds of billions from the system by issuing government securities to finance these "rescues". The worry, of course, is that when the economy finally recovers and banks begin to expand credit once more, these trillions of dollars the Fed has added will begin to take effect.

[Zip]

Interesting.. http://www.financialpost.com/story.html?id=866521 All your bank are belong to us!

[Clawg]

The worry, of course, is that when the economy finally recovers and banks begin to expand credit once more, these trillions of dollars the Fed has added will begin to take effect.

That's what the New New Deal will be for.

[brian0918]

That's what the New New Deal will be for.

Quick! History teachers: start ramping up your glorification of FDR! History Channel: put out a week-long tribute to government intervention that saved us from the evils of capitalism!

[Steve D'Ippolito]

You are not joking, Tom. Gold and silver have fallen somewhat from their peaks earlier this year, but the platinum group metals have taken an absolute *beating*. Platinum was over $2300/oz earlier this year, it is now under a thousand. (If I had cash, I'd be a buyer since currently it is much less than its typical approximately-twice-as-much-as-gold value.) These metals are typically of industrial use primarily (though they have some use in jewelry) whereas gold gets used for jewelry and a value store. Silver has fallen harder than gold; it too has more of an industrial market than gold.

The large drops in these metals tells me industry in general is starting to hurt.

[KendallJ]

Every new day seems to bring a new kind of government interference.

Today's blunder of the day. Interest rate cuts.

This is stimulatory to borrowing. Not what one needs in a liquidity crisis. It is the equivalent of price controls on capital. It will send capital to the wrong places. Interest rates need to go up.

Stocks continue their plunge.

Edited October 8, 2008 by KendallJ

[Thomas M. Miovas Jr.]

Quick! History teachers: start ramping up your glorification of FDR! History Channel: put out a week-long tribute to government intervention that saved us from the evils of capitalism!

I read an interesting report that concluded that FDR increased the problems of the Great Depression

"The fact that the Depression dragged on for years convinced generations of economists and policy-makers that capitalism could not be trusted to recover from depressions and that significant government intervention was required to achieve good outcomes," Cole said. "Ironically, our work shows that the recovery would have been very rapid had the government not intervened."

Unfortunately, the study focused on the fact that FDR permitted businesses to merge against a law that stood, leading to prices going up. At least that is their claim. So, the premises aren't quite correct, but I love the conclusion

By the way, I've read reports here and online that the government is buying commercial paper, and I think Software Nerd says this is leading to deflation, but can someone explain that to me. I understand deflation is the result of less dollars in the economy (the opposite of inflation), but what is "commercial paper" and how is this effecting the money supply. Are banks holding onto money, which in essence leads to less dollars in circulation?

[KendallJ]

By the way, I've read reports here and online that the government is buying commercial paper, and I think Software Nerd says this is leading to deflation, but can someone explain that to me. I understand deflation is the result of less dollars in the economy (the opposite of inflation), but what is "commercial paper" and how is this effecting the money supply. Are banks holding onto money, which in essence leads to less dollars in circulation?

Commercial paper is the market for short term debt. This has been the latest "doomsday" senario. Most companies finance their short term cash operations (receivables, payroll, etc) with commercial paper. Because the market is illiquid, hypothesis is that if it collapses that it will directly impact corporations. Reality is corporations can finance short term operations via other instruments, but more difficult and more costly, and the less financially sound companies wont be able to access it.

When FED "buys" commercial paper, they are essentially putting money into the economy by loaning it out short term. But as Snerd points out this is a fallacy. The commercial paper market and the market for treasuries are generally viewed in the same class. When Treasury raises money by selling treasuries it has been hypothesized that it is likely to draw money OUT of the commercial paper market, thus exacerbating the problem that the subsequent buying of paper is supposed to relieve. In fact, because the commercial paper market is distressed, it probably means that investors will leave it to seek "safety" in Tbills if more Tbills are offered. It is a "liquidity trap". Does no good.

See: http://www.nakedcapitalism.com/2008/10/bai...ney-market.html

If you want to follow details as they happen, then naked capitalism is a good site. It's a bit technical but Yves Smith is a Wall Streeter with connections and a will informed readership. She is going south on the bail-out by the minute. But based on concrete fundamentals.

When the money supply contracts and real assets devalue, and demand shrinks then deflation happens. There is a belief that this is somehow "systemic" and can spiral out of control i.e. built into the system, but it is part bad monetary policy. The idea that you can pull money out of the economy and throw it back in and prevent deflation is fallacious.

Another good depression retrospective is: http://www.mackinac.org/4013

Everything the govt is doing right now is wrong. It is stunning to me to see just how wrong-headed it is.

Edited October 8, 2008 by KendallJ

[adrock3215]

Everything the govt is doing right now is wrong. It is stunning to me to see just how wrong-headed it is.

I agree. The hardest part of the whole thing for me to wrap my mind around is that the government is doing everything wrong from not only a moral perspective, but also a practical perspective. The interventions of the government are simply wrong on every measurable account. It's stunning.

[brian0918]

I read an interesting report that concluded that FDR increased the problems of the Great Depression

I'm reading The Forgotten Man by Amity Shlaes right now, which is supposed to show in detail how FDR turned a stock market correction into a decade-long depression.

[KendallJ]

I agree. The hardest part of the whole thing for me to wrap my mind around is that the government is doing everything wrong from not only a moral perspective, but also a practical perspective. The interventions of the government are simply wrong on every measurable account. It's stunning.

Principles in action here. End arguably economics is a pretty tough science to unravel the cause and effects. But there is a whole school of thought that is just shaking their heads right now.

More than that, I'm starting to realize that the inflationary policy that the fed took earlly last year was actually consciously advocated (!!!) by people who though that the export boost it brings would help trade balances.

Keynes is alive and well these days it seems. Bernanke fundamentally believes that govt can stimulate the economy out of a crisis, and in fact it is govts function and duty. He's staked his whole academic career on it, and now that he's in the real world he isn't gonna turn that ship very easily. The worst sort I can think of to run the main bank in the economy.

[IchorFigure]

Thanks for the explanations KendallJ and others, this situation keeps getting more complicated to follow.

I was listening to a recording of Rand yesterday where she talks about the Goldwater campaign and the receptivity of Americans to be educated about capitalism. She talked about how it was probably too early, and Goldwater did an awful job of running an educational campaign. Then remarked that a crisis could potentially shock the publics attention enough to grant a better opportunity (although crisis is terrible and she was not saying to hope for one). Saying that a depression or war caused by the usual government policies could be an opportunity to wage a campaign to expose them for what they are.

Keeping up on politics lately, it's obvious the Republicans have totally squandered what could have been an opportunity of a lifetime to shine some light on this mess, embarrass the Democrats and turn this election around 180 degrees. Of course they wouldn't, because they barely even pretend to stand for capitalism anymore and theres blood on their hands as well.

I think she was right. As awful and frustrating as this mess is, there's a very big opportunity (for Objectivists especially) to educate rational people about what's really going on, and why it's so important. One big asset I think we have today is the free market and Austrian economists from the last 20 years or so to refute the stupidity of Keynes. It'd be spectacular if someone or a group of people who had the time and energy to produce a simple pamphlet or a series of youtube videos or something that was easy for anyone 18 years or older to understand the financial crisis. There is one

that makes a simple case for government interference being the cause, but it's really a McCain ad, and the tone is almost conspiracy theory-like.

I think that the average person really wants to understand what's going on (probably out of shock and fear for their own sake), but it is such a complex incoherent mess that they're more likely to just buy whatever the media presents to them. It might seem late at this point but, it doesn't look like the government interference, or the economy is going to stabilize any time soon. And perhaps such free market advocacy could be needed during the entire next four years, if Obama is elected and begins his make-work programs and FDR emulating.

[KendallJ]

Interest rate cuts resoundingly fail.

http://feeds.feedburner.com/~r/NakedCapita...tion-fails.html

Edited October 8, 2008 by KendallJ

[Thomas M. Miovas Jr.]

Interest rate cuts resoundingly fail.

http://feeds.feedburner.com/~r/NakedCapita...tion-fails.html

From that article:

``The reality is there's no private sector balance sheet willing to step in so the Fed and the Treasury are becoming the only balance sheet,'' said Mark Kiesel, executive vice president at Pacific Investment Management Co., the manager of the world's biggest bond fund. ``In a market that lacks trust and confidence the private sector is on the sidelines.''

Nothing like getting the fox to guard the hen house. It was governmental interference that got us here, and now they want the world to trust governmental interference

Since no one will deal in free trade offerings, governmental force is needed. Makes sense to me

Sounds like the Feds are driving wildly down the road, skidding all over the place, and no one can predict what the outcome will be so they are holding back on major transactions.

[UptonStellington]

I don't know if someone had mentioned this earlier, I just skipped to the last page of this discussion, but commercial paper aside, it's curious how much talk there is of credit markets being frozen for Main Streeters and yet: http://www.federalreserve.gov/releases/h8/data.htm

Am I missing something?

[Thomas M. Miovas Jr.]

http://www.federalreserve.gov/releases/h8/data.htm

Am I missing something?

There is too much data on those pages...can you sum up in a paragraph what you want us to notice?