Because you can't keep beating a dead pitbull

[teflor the ranger]

If lending is hurt, fewer dollars are being introduced into the equation. I actually think we'll see a slowing of inflation (possibly). It will, of course, depend on how flexible the treas is willing to be on interest rates.

[Corth]

It isn't a slowing of inflation. Its out and out deflation - destruction of money on a vast scale. Note that I do not subscribe to the common misconception that inflation/deflation has anything to do with prices of goods. Prices of goods do tend to increase during inflationary times, and decrease during deflation, but thats due to the underlying expansion and contraction of money supply. In fact, in many situations you get an opposite effect. Its intellectually confusing to define inflation and deflation in terms of prices.

The Fed has already pretty much blown its interest rate wad. A few months ago a small interest rate reduction of 25 basis points could be good for a decent stock market rally. Nowadays they cut 50 basis points and the dow jones index tanks several hundred points. The problem is that interest rate cuts are not really addressing the problem here, which is that the banks are pretty much all technically insolvent.

[teflor the ranger]

There may be some straight deflation. Maybe. You would be surprised by a reactionary government's ability to turn what should be deflation into something else. Ask Mugabe.

[kiryan]

I've been thinking about canadian investments too.

I'm not sure on the tar sands. Buffet turned it down, but that could just be because he has the pick of the litter for investments and they weren't willing to bend over a barrel for him.

I'm thinking more of freeing up of resources in their northern territories due to global warming and the possibility the bread basket may move up enough to include parts of canada.

What scares me is their socialist government and their tax rate.

[Corth]

Heh, they are less socialist than we are now..

I like Canada for three reasons.

First, I want exposure to the Canadian dollar, as I expect at some point, like yourself, that the USD will get pummeled as inflation skyrockets.

Second, its a stable democracy with more reserves than Saudi Arabia if you take into account the oil sands. They are in a great position to weather the coming economic storms of the next 20 years. Its my belief that energy (or lack thereof) will be the biggest story of our generation. We will soon long for the days of $4.00 gasoline.

Third, I don't want to invest in US oil companies because as soon as they start making a lot of money, as they will, some asshole politicians will enact a 'windfall profits tax' which is essentially a redistribution of wealth from the shareholders of the corporation to the taxpayers. The US government has demonstrated that they are very prepared to change the rules of the game based upon shortsighted political considerations. As an investor, I believe that this inherent instability, the constantly changing rules (short sale ban for instance), makes it impossible to set any type of expectation about what will happen in the future. Investors do not like uncertainty, and I have a difficult time investing in US companies given this anti-corporate environment.

I'm in a funny position now because my energy positions are getting absolutely hammered in this market, but I actually want the market to come down more so I can buy more. I'm about 25% invested in energy (and some precious metals) and the rest in cash. Keeping the powder dry. Its just that like everyone else, I have no bloody clue when this will end, so I need to scale into these positions. Every time the energy stocks I invest in drop another 15% I buy more.. and I'm rooting it on. Just wish that I had a crystal ball to tell me that I should have waited previously.

[teflor the ranger]

Stability is so essential for STABLE markets. Agreed that part of the problem is the willingness to keep changing the rules.

[Kifle]

some asshole politicians will enact a 'windfall profits tax' which is essentially a redistribution of wealth from the shareholders of the corporation to the taxpayers.

As opposed to the reverse socialism we have in place now -- where the tax cuts redistribute the wealth even more towards the upper 1-10%? Sorry, but I have no idea how you can back the current form of capitalism in this country and say that it's better than the opposite. And I'm not talking about the situation we're currently in. The "free market" in this country has been a lopsided institution in favor of the aristocracy for a long time.

[Ragorn]

Yeah, I wouldn't mind a flavor of socialism where big companies are taxed and I get some of their profits. Y'know, instead of the current system, where I just paid $2,000 to make sure that some investment brokers can keep their bonuses this year.

[Corth]

This abhorent bailout, which is a massive transfer of wealth from taxpayers to shareholders of financial institutions, is just as bad as a windfall profits tax where the opposite would happen with respect to oil producers.

Notwithstanding, the purpose of that paragraph was to explain my perspective as an investor, not as a commentary on taxing schemes. It was probably a mistake to use the term 'asshole politicians', although they are indeed assholes. It adds a bit of unnecessary commentary on the policy, instead of leaving it simply as a rational explanation for why I prefer not to invest in US oil producers.

[kiryan]

I thought we were getting to be as bad as russia, but apparently their people have been lead to believe by the state controlled media that the Russian economy is doing fine. At least we still get some truth out of ours.

[Corth]

We have always been at war with Eastasia.

[Ragorn]

I thought we were getting to be as bad as russia, but apparently their people have been lead to believe by the state controlled media that the Russian economy is doing fine. At least we still get some truth out of ours.

THERE ARE WEAPONS OF MASS DESTRUCTION IN IRAQ

[avak]

That's an interesting perspective...the idea that 'we' have access to the 'truth' while 'they' are being 'deceived.'

The fact is, regardless of obvious iraq-related media control (WMDs, can't show coffins, everything is fine here) the financial markets have been delivered as 'fundamentally sound,' as McCain put it, up until very recently. I'm sure there will be an awesome Frontline episode on how close we were to economic meltdown while the Feds were negotiating a bail out plan.

Despite the fact that a bail out plan was supposedly in the works for a year or more, no one in Congress knew about it until the eleventh hour. Just like Bush asking us to go shopping after 911, the government-influenced media helped prevent mass hysteria by tiptoeing around the crisis.

Fortunately there are no smart people in Russia that can figure it out on their own.

[Corth]

Lathander and others can confirm that I was very pessimistic about the economy for quite some time. I was calling for a real estate crash for about the last 3 or 4 years. It was interesting to me to see the complacency of the financial press, when all I had to do was take a look at median home values compared to median income and KNOW that the whole thing was a house of cards. There was a huge financial edifice built on a shaky foundation of overpriced assets. The information was always there.. it was not hidden. Its just that few people were willing to actually give it any thought. Some of those people, such as Bill Fleckenstein, Mike Shedlock, Nouriel Roubini can document years of warnings on the subject. They were not in any way coerced into silence. In the age of the internet its funny to see people complain that the media is somehow in anyone's pocket.

[avak]

In the age of the internet its funny to see people complain that the media is somehow in anyone's pocket.

I completely agree.

Don't you get the sense that the housing market bubble and imminent financial crisis were, in large part, perpetuated because the people who had the knowledge were making a lot of money? Just like an exploit in the mud, you take advantage as long as you can get away with it. I'll stand by my position that this fundamental problem is the reason pure capitalism can't exist...it is heavily biased towards the individual interest and the short term gain.

[Corth]

Its an interesting topic.

I agree that in a sense it was almost taking advantage of an exploit like you describe. Actually, a more accurate way of describing it is that they took very large risks, which for a time resulted in huge returns.. and ultimately in humongous losses.

The fact that they took such huge risks is actually why I am so against the bailout idea. A free market system doesn't work unless you get rewarded for making right decisions, and penalized for making wrong ones. The bailout undermines this incentive system. I believe that to some extent, the reason that these bankers took such inordinate risks was that they believed they would ultimately be saved in the end if the shit hit the fan. By going ahead and doing just that, you are reinforcing that message and it will only lead to more risk taking in the future, and bigger bailouts.

The government has sent that message in a variety of different ways over the years (for instance, the so-called "Greenspan Put"), and the message that was always being sent was.. if you win, you keep the money, if you lose, we make you whole. Is it any wonder they took such risks? The free market system was broken here because of the implied government backstop. I am not so sure that more government involvement is the solution. As far as I am concerned, I would rather see the whole system melt down and start from scratch in a sustainable matter, than prop up this unsustainable broken edifice.

[Sarvis]

I love how Libertarians would love to see mass poverty, starvation and suffering due to their perceptions of government interference.


Corth, I'm willing to bet that even without the bailout everyone in charge when this was going on will be just fine. They made billions, and have it in nice safe investments. They've gotten their profit, regardless of what the government does. Making a billion dollars on deals risky enough to ruin an entire country's economy is it's own safety net.

[Corth]

Let me put this another way..

We all pretty much want a market economy. We can argue about to what degree we want it regulated, or to what extent we want to redistribute income via a taxation system (French/Swedish socialist market economy), but unless you are Fidel Castro, Kim Jung Il, or Sarvis, you recognize that the market is the best way to produce wealth and improve the standard of living.

The element of risk is necessary in a market economy. With risk comes reward... or failure. There are prudent risks, and imprudent ones. Hopefully in most cases, the market rewards and punishes people as it should. You want people to save up a nest egg so they can open up a store on main street. That produces wealth and increases the standard of living. You want oil companies to drill for oil with the expectation that a succesful exploration will result in profits for shareholders and bonuses for executives... and more supply of energy for the human race. You also want people and companies to fail when they are not providing a service or good that others want or need. Such resources are better used elsewhere.

The idea of bailing out participants in the free market undermines the incentive system such that prudent risks are rewarded... and imprudent risks are rewarded too. It is antithetical to a free market. The free market simply cannot function without these basic incentives.

The government has chosen to bail out imprudent individuals who bought houses at historically expensive prices and took out mortgages they could not hope to repay, and has now also chosen to bail out the wall street bankers that were enabling it by taking even larger risks.

My question to those of you who want a market economy, but also want a bailout, is how you can reconcile these two desires. Do you believe it is sustainable?

[Corth]

Oh man.. Sarvis.. I just realized the names I listed you with. Please believe me when I say that I like you and appreciate you despite the company you keep! :)

[Sarvis]

Oh man.. Sarvis.. I just realized the names I listed you with. Please believe me when I say that I like you and appreciate you despite the company you keep! :)

*pat Corth* It's ok, you're a lawyer. We all know you need to drag others down into the mud with you...

[Sarvis]

Let me put this another way..

We all pretty much want a market economy. We can argue about to what degree we want it regulated, or to what extent we want to redistribute income via a taxation system (French/Swedish socialist market economy), but unless you are Fidel Castro, Kim Jung Il, or Sarvis, you recognize that the market is the best way to produce wealth and improve the standard of living.

The element of risk is necessary in a market economy. With risk comes reward... or failure. There are prudent risks, and imprudent ones. Hopefully in most cases, the market rewards and punishes people as it should. You want people to save up a nest egg so they can open up a store on main street. That produces wealth and increases the standard of living. You want oil companies to drill for oil with the expectation that a succesful exploration will result in profits for shareholders and bonuses for executives... and more supply of energy for the human race. You also want people and companies to fail when they are not providing a service or good that others want or need. Such resources are better used elsewhere.

The idea of bailing out participants in the free market undermines the incentive system such that prudent risks are rewarded... and imprudent risks are rewarded too. It is antithetical to a free market. The free market simply cannot function without these basic incentives.

The government has chosen to bail out imprudent individuals who bought houses at historically expensive prices and took out mortgages they could not hope to repay, and has now also chosen to bail out the wall street bankers that were enabling it by taking even larger risks.

My question to those of you who want a market economy, but also want a bailout, is how you can reconcile these two desires. Do you believe it is sustainable?

I think you missed my point horribly. Sure, it sucks to bail out companies. I'd much rather bail out people.

BUT, I think the people who caused this <i>have a safety net anyway</i>. They earned so much money on these shady deals that if the company tanks it really doesn't matter to them.

[avak]

Well, the reality is that the economy is on sort of a precipice in the sense that we can go forward with the bailout or we can allow total meltdown.

Meltdown has global implications that certainly entail unimaginable suffering for people that really have jack shit to do with wall street and investment banking. I just can't stand by and watch that happen for the sake of ideological purity. Just like Libertarianism, I see a real beauty in a pure free market. I'd love it if someone could convince me it would work. In that same breath though, communism, on a purely conceptual basis, sounds pretty good too. Personally, I unconditionally favor capitalism, but I think you see what I mean...on paper and in reality are as different as night and day and really have little bearing on the discussion.

There is also no guarantee that a collapse of the financial system produces a new system that sheds the flaws of its predecessor. Using the mud for a kind of strange analogy...a wipe doesn't beget fairness...it hinders the old guard just long enough for a little shake up until the old guard gets re-established and have control again. Yes, there is an opportunity to change the system, I won't deny that, but what points to that opportunity being seized?

On the other hand, we also have an opportunity to reform the system now, but without the massive suffering mentioned previously. It may be equally difficult to reform from the position of an established system, but when I factor in the consequences of either option, I just have to come down on the side of an unfair and unhealthy bail out.

[Corth]

I respect your opinion. But I think its a bigger issue than ideological purity. I just don't see how a market works at all if you take away risk from the participants. It seems like a recipe for one disaster after another. Not an ideological issue, a real practical one.

[Kifle]

Ok, Corth, but do you think a "free market" economy can really exist? Personally, I think the human condition is enough of a monkey wrench that the market, in an unregulated environment, would crumble. Smith alluded to this in Wealth of Nations, but it seems like this is commonly disregarded in favor of personal gain and excess greed. And, while there is no pure example of this happening, so it is mostly speculation, I think the pitfalls of the current U.S. economy, and the subsequent effects of those pitfalls being made apparent now, are more than enough to give this hypothesis credibility.

Also, what I never understood about the current housing market: How does handing out mortgages to those who can't truly afford them constitute a huge risk that entails a possible huge reward? I see it as a huge risk with little possiblility of a reward. Were they hoping the assets would retain their inflated value so they could resell them as bank property?

[Corth]

If you notice, Kifle, I made a point of saying that we all want a market economy, and can disagree on to what extent it should be regulated. I think you can get by fine with a regulated market... it just won't be quite as efficient as a truly free one. If society wants that, great. But you can't have a market economy at all if institutions are too big to fail.

There were huge returns from the mortgage business. As long as home prices kept appreciating, nobody was getting foreclosed upon. The banks originated these loans, then packaged them into securities and sold them to other institutions. Insurance was sold on these assets that supposedly made them investment grade. Fees were being generated left and right. Smart guys from MIT and Harvard were hired to develop models that justified the whole thing. It was financial alchemy relying upon large indefinite increases in money supply. Basically a ponzi scheme. On the books, it looked great, once home prices start decreasing the rot underneath it all became visible to all.

[kiryan]

I said "some truth."

IMO, the fundamentals of the economy really haven't changed. I don't know how "strong" it is. but it has been fundamentally flawed for quite some time. What happened was enough has happened to change people's perceptions and change their behavior. I'm a believer of the power of the recession in your mind.

I worked for a startup asset management company in 2002. We managed the sale of foreclosed houses for the banks. We were positioning ourselves for this fall which we were expecting imminently. It took 5 more years for it to actually happen. A lot of people figured this was going to happen, but what they didn't know was when. Foreclosure volume was growing 20% back then btw, it was just such small percentage of the total it didn't matter.

So what am I saying, as the wave of people betting against the real estate boom built, it eventually crested. Really, was the Internet boom any different? or the Oil bust? The short positions were getting killed for awhile there while oil was at 135 and they started squawking louder and louder to make their point. Don't know what crested it for Oil whether it was the recession or enough players listened and joined them, but they got paid.

so what am i trying to say, its a herd mentality that takes into account the ground, but a determined herd can still climb a mountain.

[Ragorn]

I respect your opinion. But I think its a bigger issue than ideological purity. I just don't see how a market works at all if you take away risk from the participants. It seems like a recipe for one disaster after another. Not an ideological issue, a real practical one.

I actually agree with Corth. The next bailout is going to be bigger, because now we've instilled a sense of immortality into these companies. They now know that even if their plans backfire and they go insolvent, that you and I will pony up to keep them afloat.

They're now gambling with YOUR money and keeping the winnings.

[Sarvis]

They're now gambling with YOUR money and keeping the winnings.

Umm... these are investment banks. They were gambling with our money in the first place... weren't they?

[avak]

I respect your opinion. But I think its a bigger issue than ideological purity. I just don't see how a market works at all if you take away risk from the participants. It seems like a recipe for one disaster after another. Not an ideological issue, a real practical one.

I actually agree with Corth. The next bailout is going to be bigger, because now we've instilled a sense of immortality into these companies. They now know that even if their plans backfire and they go insolvent, that you and I will pony up to keep them afloat.

They're now gambling with YOUR money and keeping the winnings.

I'd agree too, but I am not suggesting that we continue on the path we're on (ie no risk). If we allow the original bail out plan then yes, we absolutely condone these high risk practices. That is why I am happy to see progress being made towards equity positions in the bailed out companies. That means -we- have some control over the assets and allows us leverage.

If we're going to get to some kind of stable hybrid free market we have to drastically change course, I am certainly not disputing that. I completely agree with the sentiment that removing risk is horribly irresponsible. Ultimately I am suggesting that we fix the system in situ instead of burning the village to save the village.

I'll put it this way, argue the point more specifically. Extrapolate a scenario where we let the system collapse.

[Corth]

Its funny that you used that term "burning the village to save the village"

A former central banker turned blogger wrote an article with that title the other day. Except, he comes to the opposite conclusion as you. The bailout itself is burning the village to save it.

http://www.rgemonitor.com/financemarkets-monitor/254053/we_had_to_burn_the_village_to_save_it

[Corth]

Avak,

By the way, I was likewise pleased to hear that the treasury would use some of that bailout money to buy equity stakes in banks rather than use it all to buy the worthless mortgage backed securities. In theory, it more directly addresses the problem which is bank insolvency. However, I am disgusted with how they ultimately went about executing the plan. Compare the terms of Warren Buffet's recent equity purchases in Goldman Sachs and GE. His terms were ridiculously better than what the government is getting. Basically, the difference between WB's return on investment (negotiated with a profit motive), and the government's return on investment, is simply a handout to the banks. I don't know why people aren't screaming bloody murder.

BTW, the government accepted no control in the banks it invested in. Not sure where you got that from.

[avak]

That was some dense prose. I'd take issue with the fundamental premise that we are nationalizing banks. We're proposing to take equity positions. As far as I know, we're not proposing taking majority positions, are we? So, explain to me how that equates to nationalizing the bank. Influence, yes. Control, no.

Anyway, there are many, many flaws in any version of a bail out. I concede that. What I am asking is for someone to propose a better alternative. Like I said, extrapolate a specific alternative. I'd like to see someone follow the path of 'collapse.' I'm not being argumentative either; some very good counterpoints have been made here and have shaped my thinking on the issue.

edit...I guess I need to read some more on the current state of the plan, because it looks like I have some unfounded assumptions. I think, without due diligence, that my general points still stand.

[Corth]

I don't think anyone could really know the complete ramifications of what would happen in the absence of a bailout. Certainly a good number of financial institutions would go under. Uninsured deposits would be lost. Perhaps some otherwise viable corporations would go under because of liquidity issues due to the absense of credit. On the other hand, I think a lot of the smaller local banks that did not lend recklessly during the boom would pick up the slack and use the opportunity to grow. Unfortunately, their prudence will not be rewarded. There would also be great buying opportunities for prudent investors who kept cash on the sidelines in anticipation of this deflationary event. That money would flow into the system and help moderate things.

Basically, I think it would be a couple of hellish years with very high unemployment, but eventually things would return to some semblance of normalcy. On the other hand, with this bailout we will still see a lot of pain (though not as intense), and it will last longer, and the underlying issues in the market will remain unaddressed.

[Corth]

Avak,

The Youtube videos below have Jim Rogers, former partner of George Soros and one of the most accomplished investors in the world, arguing against a bailout, and his interviewers at echoing your position that the ramifications of allowing a collapse are not acceptable.

http://www.youtube.com/watch?v=9D5h0_BdoH8
http://www.youtube.com/watch?v=PHPccVE95P8

[avak]

Thanks for the links to the videos.

First of all, I have a hard time accepting Jim Roger's opinion at face value when he openly states that he has 'huge amounts of cash' ready to go. What does a market collapse mean to him? Massive opportunity. Don't get me wrong, he deserves the right to rewards from prudent investing, but he also has an inherent bias.

Secondly, why doesn't he mention Sweden's economic crisis that was addressed through partial nationalization of the banks? And maybe what the Swedes did is not a perfect model to follow, but it is an example of a very similar crisis that was mitigated through intelligent intervention.

The discussion is getting in to economic theory that is beyond my experience or education, so I'm trying to stay open minded about this, but I'm still not buying the "let the system self correct" concept. My gut feeling is that the guys on the top, those with means (eg Rogers) know that boom/bust cycles are absolutely ripe with opportunity. Steady as she goes is not only boring as hell (treasury bonds), but also not all that lucrative (usually).

I think, without proof, that Rogers is glossing over the real damage self correction would cause while overemphasizing the fact that a crash is inevitable.

Again, Sweden used an interventionist approach to a very similar issue and I don't see anyone criticizing that model. Rogers pointed out the Japanese, which I found pretty interesting. I wish I had more time to research this stuff.

[kiryan]

The fed doesn't need to be able to vote shares to control the companies. regulation regulation regulation is all you hear in the media these days. Thats before you consider the de facto control that you have when you control the spigot to the trough.

Also, Paulson is apparently on the compensation committee for the companies we're bailing out (I wish we could still say it was just banks lol).

[teflor the ranger]

I thought we were getting to be as bad as russia, but apparently their people have been lead to believe by the state controlled media that the Russian economy is doing fine. At least we still get some truth out of ours.

THERE ARE WEAPONS OF MASS DESTRUCTION IN IRAQ

THERE ARE WERE WEAPONS OF MASS DESTRUCTION IN IRAQ UNTIL SADDAM USED THEM

Fixed.

[Corth]

[kiryan]

http://money.cnn.com/2008/10/24/news/ec ... tm?cnn=yes

"Low rates can also feed inflation. But that might be a sacrifice the Fed has to make.

"Inflating our way out of this mess is the Fed's only option at this point," said Peter Boockvar, market analyst of Miller Tabak, in a note Friday morning."

It was really the only option from the beginning. They thought they could contain it by waging a psychological battle, giving the markets confidence that the fed wasn't asleep on the job and the US government wouldn't let havoc ensue. Failed.

[Corth]

Unprincipled

[Sarvis]

Unprincipled

"I feel a sense of obligation to my successor to make sure there is not a, you know, a huge economic crisis."


His successor? What about, oh I don't know, the American people he was elected to represent!?! No obligation to US to not destroy our lives?

[avak]

Unprincipled?

Different principles are not no principles.

Corth, I take it that your position is in support of as limited market intervention as possible...possibly even none? I support that from a hypothetical perspective and really try to keep it in mind when thinking about these kind of issues, but I think even Bush can admit that it is impossible.

[Corth]

I've abandoned free-market principles to save the free-market system

Unprincipled

[avak]

I see your mysteriously vague post and raise you this:

Obama Outlines Principles for Bailout

Principled

[Ragorn]

Advantage: avak

[Corth]

Kiss my ass Ragorn. :)

Not looking to get into a pissing contest here or otherwise compare penis sizes with anyone. It just seems to me to be an incredible statement that he abandoned free market principles in order to save the free market. If these principles have such little importance, whats the utility of even having a free market system?

[Sarvis]

Kiss my ass Ragorn. :)

Not looking to get into a pissing contest here or otherwise compare penis sizes with anyone. It just seems to me to be an incredible statement that he abandoned free market principles in order to save the free market. If these principles have such little importance, whats the utility of even having a free market system?

Well, it DID allow all the financial managers to sell each other bad "insurance" without actually keeping enough capital on hand to cover the payouts...

[Corth]

Right, so they should have gone bankrupt for making bad business decisions, along with their counterparties for failing to conduct sufficient due dilligence. That would be a good lesson for people to learn rather than the current lesson: Don't bother with due dilligence... just make deals like crazy and if it all goes to shit uncle sam will take care of you.

Now, instead of the incompetents going bankrupt and having their assets purchased at a discount by the competents, we have the competents being taxed to subsidize the incompetents. As Jim Rogers would say, its bad economics and horrible morality.

[Ragorn]

Kiss my ass Ragorn. :)

I just thought avak's link was a funny take on your Unprincipled statement. I don't disagree with you at all on the issue at hand ;)

[Corth]

Eloquent article by the venerable James Grant touching on some of the consequences of these bailouts.

Link