Saturday, November 8, 2008

Bird and Fortune Part 2-Watch Part 1 Below First

Bird And Fortune Enjoy!




NAR's New Housing Subsidy

The line of supplicants at the government bailout window just got a little longer.

L.A. Land is reporting that the National Association of Realtors ended their annual convention today by suggesting the government subsidize an interest rate buy down for homeowners. They figure that buying down the 30 year fixed rate to 4.5% on the feds nickel should do the trick. Projected cost-$100 billion. Their economist Lawrence Yun explained their reasoning by noting that, "Given the $700 billion package (The TARP), $100 billion would seem reasonable." Sound economic analysis there.

Let's just inflate that balloon one more time with low rates.

Credit Suisse Shuttering Bond Fund

Here is a small reminder that we are not quite out of the woods yet.

MarketWatch is reporting that Credit Suisse is shutting down a bond fund as illiquidity in the bond markets has made it impossible to meet redemption requests.


The bank said it will close the CS Bond Fund (Lux) Target Return because the lack of liquidity in the market has made it impossible to sell assets to meet redemption requests, Reuters reported.
"In the course of the last days and weeks investors have significantly sold assets in a flight to liquidity. The volume of redemptions has meant that many subfunds have become too small to operate on practical and economic terms," Credit Suisse said in a statement.

The fund produced stable returns for the first four years following its inception in 2003 but the closure became necessary in the current "absolutely exceptional" circumstances."


Who's next?

Tom Lindmark

CDS: Where Is The Truth?

Whether they're "Financial weapons of mass destruction" per Warren Buffett or simply an intelligently designed instrument for managing risk as many claim, there is a marked difference of opinion on credit default swaps. The opinions flow back and forth in the media, even "60 Minutes" jumped into the fray, and among the blogs there is little agreement.

I won't profess to be anywhere near an expert but I did take some time this morning pulling up some recent posts from two pretty good bloggers who appear to be on opposite sides of the argument (if I misrepresent their opinion I apologize in advance). Both Yves Smith at Naked Capitalism and Felix Salmon at Portfolio.com state their positions well and provide lots of ancillary sources to support their position. I'll put some links to their posts at the end of this but let's do a quick overview of their takes on credit default swaps.

First, Felix Salmon is an unapologetic supporter of CDS's. Beginning with the orderly unwinding of the Lehman's default swaps he has supported a position that argues that the market is fully capable of handling defaults. Through netting and various other hedging strategies he feels that the net exposure in the CDS market is minimal. He does support his arguments with some good facts.

Salmon, however, goes further and seems to take the position that absent the CDS market the losses suffered by the banks in the credit crisis might have been much worse. He points out, correctly I think, that the banks were not writers but rather purchasers of protection. As such they have been able to reduce loss as a result of the protection they purchased. The argument has been advanced that the mere existence of CDS's induced banks to over leverage. A sort of the devil made me do it argument. Salmon's position is that if it wasn't CDS's then it would have been some other financial innovation that led to the banks taking on too much leverage.

On another side of the table is Yves Smith. While she may have other positions, I took away from her posts three main issues.

First, recent reports from DTCC and some news outlets suggest that the CDS market is not as large as previously reported. DTCC announced in early November that the market was no larger than about $34 billion. Shortly thereafter, individuals familiar with the market pointed out that only a portion of the contracts that had been written were actually accounted for by DTCC. Smith notes that there is a need to know the dimensions of this market and that the current pronouncements are doing little to get to the bottom of the dimensions of the market.

Second, she points out that the supposedly orderly settlement of the Lehman CDS's may not have been all that orderly. Again DTCC creeps in as they were not shy about trumpeting the non-event the settlement is painted to have been. Smith quotes a column from Institutional Risk Analytics that contends not all of the Lehman CDS contracts were settled through DTCC and that in fact those that weren't were responsible for some of the disruption in the Libor market. It's a very interesting discussion and again one which beautifully illustrates the opaqueness of the CDS market.

Finally, she notes that even though a settlement goes well that does not mean that the system hasn't suffered dislocations due to the default. Essentially, Smith is arguing that the process of providing additional collateral as credit events occur can be serious as well. The argument rings true especially when credit events are occurring at a rapid pace in a time of overall system stress. Precisely the state of current markets.

Just to throw one more opinion in here, I will refer you to Derivative Dribble. They are on Salmon's side. I mention the blog simply because it's the best I've found for learning the basics of derivatives. They explain it in an easy for the layman to understand manner. They won't make you an expert but they will give you a good basic understanding. You're on your own after that.

Anyway back to Smith and Salmon. As I said, Salmon is pretty much in the CDS's are good and not that big a problem corner. At least that's the way I see it. I don't think Smith is anti-CDS but she clearly is skeptical about our understanding of the size and ramifications of the market.

As for me, I come down on the fence. Not a comfortable place to be. I'm willing to give Salmon the benefit of the doubt and agree that they may be useful tools. I agree a lot with Smith if she is saying that we need to get our hands around this puppy and we aren't anywhere near doing so. The pity is that this argument has been going on since the demise of Long Term Capital ten years ago. Now we're in a monumental battle to save the financial system and we still have no understanding or control of CDS's.

Now is probably a good time to quit talking and force these things onto some existing or new clearinghouse. If they lose a little of their vaunted flexibility in the process then so be it. Once we can confidently say they are under control and the risks understood and manageable we can move from the "G" version to "PG" or "R" iterations. Not before.

Tom Lindmark

Yves Smith 1 and 2 and 3
Felix Salmon 1 and 2
Derivative Dribble 1 (Go back and read prior posts)

Friday, November 7, 2008

Two More Friday Failures-One With An Ominous Note

A couple of Friday failures from the WSJ.

First Security Pacific Bank in LA was seized and the deposits sold to Pacific Western Bank. It was a piddling little bank and the loss to the FDIC is supposed to be about $200 million. That amount of money doesn't get above ground clutter on the radar anymore.

The other is a bit bigger and it has a famous chairman. Franklin Bank a $5.1 billion bank base in Houston was taken over. The $3.7 billion in assets and $850 million in assets were sold to Prosperity Bank. The FDIC estimates (if you believe them) are for a loss of $1.4 to $1.6 billion. Now we're back in Washington type numbers! The kicker here is that Lewis Ranieri, the chairman of Franklin, was one of the pioneers of mortgage backed securities.

What puzzles me is how in the world do you tank a bank in Texas? That state has one of the only good economies on the planet. You can get rich just walking through Houston and picking up the money falling out of everyone's pockets. Or maybe this tale tells us that this whole thing is completely out of control.

What Gives With China's Economy?

This has been running around the blogs for the past twelve hours or so and I didn't pay much attention to it or think it through. China's Finance Minister, Xie Xuren, had more or less landed in Peru when his country called him home to fix problems at home. Bloomberg's piece on it suggests he might not make it to Bush's faux Bretton Woods conference on the 15Th.

So what's the big deal? Evidently, the banks in China are resisting government pressure to lend to small businesses (sound familiar?) and bankruptcies are mushrooming. According to Bloomberg, the toy industry is tanking which doesn't say much for the future prospects for that sector given the time of year.

What to make of all of this. Just a wild guess, but I suspect the Chinese are discovering that there was nothing more to their economy than a lot of over spending Americans. Take them out of the mix and the quicksand that economy is built on becomes evident.

This isn't just a problem for China, however. If they start fading, one of our major financiers is lost and at the rate things are going it might get pretty dicey financing America's trillion dollar deficits. And to toss a little salt into the stew here, history indicates that totalitarian regimes can get particularly nasty when squeezed badly by economic circumstances.

Tom Lindmark

This Is What Gives Politicians Insomnia


From Jake at EconompicData, here is Barack Obama's biggest problem


Bloomberg Gets Stonewalled By The Fed

Bloomberg is taking on the Fed. The news service has filed a Freedom of Information Act suit against the New York Fed. Bloomberg had asked for information on the collateral that the bank is accepting from borrowers under its various lending facilities and the Fed told them to take a hike.

It is somewhat curious that the government should want to stonewall this request. I think just about everyone assumes that they have been taking junk as collateral so a little light on the situation isn't going to come as a big shock. At the same time, maybe there's something they need to hide. I can't think of what it might be but if anyone reading this has an idea let me know.

Tom Lindmark

A Little News Roundup

Here's a quick roundup of some of the bigger stories today, some links and a few thoughts.

The employment numbers were expected to be bad and they didn't disappoint. The unemployment rate jumped up to 6.5% and the number of newly unemployed rose by 240,000 in October. These numbers were a bit less than expected. It's doubtful that increased hiring for the holiday season will do anything to change the trend in these numbers given the outlook for retail spending. Estimates for where unemployment tops out are anywhere from 7% to 9%. I think the higher number is unfortunately closer to the mark.

Pending home sales for September fell 4.6% from the prior month but were up 1.6% over September 2007, The index for September was 89.2. The base year for the index is 2001. As we move farther into the year and into early next year, year over year changes are likely to be misleading as September 2007 marked the beginning of the implosion in home prices. Put another way anything is going to look good when put up against the numbers last year and into early 2008. In a sense, we'll just be looking at numbers and comparing ugly and uglier.

The auto companies, specifically Ford and GM, showed everyone just how bad off they are with the release of their third quarter numbers. Ford lost $3 billion and GM lost $2.5 billion. Now forget that as the net income numbers are skewed by all sorts of accounting issues. Concentrate on how much cash their burning through. In Ford's case they went through $7.7 billion and GM burned through an hold onto your hats $14.6 billion.

Ford said they were cutting jobs, reducing benefits, spending less on CAPEX etc. and expected to have things thereby under control. Not so GM. They said they may not have enough cash to fund operations through the end of the year. GM is rapidly losing its status as a going concern if it hasn't already.

Naturally, a good dose of skepticism is required when it comes to these numbers. The companies are after all lobbying for substantial government support and unlikely to post good numbers that might gainsay their pleadings. Still and all it's not a pretty picture.

Tom Lindmark

Thursday, November 6, 2008

Surprise-The TARP Is Stalled

I'm from the government and I'm here to help you. So goes the famous joke. Well here it is in real life.

The WSJ has an article that points out that the plan to purchase bad paper from the banks and now whomever else happens to have been stupid or greedy enough to load up on it is going nowhere. As the Journal points out they haven't even hired any asset managers. Firms who might sell their junk to the government are getting cold feet as well given the lack of clarity from those who are supposed to solve this thing.

Think about this. We went through a week of high drama, press conferences, John McCain destroying whatever credibility he ever had and endless blovation on CNBC to end up with nothing. But then again why did we expect anything else?

The best that we should expect is that they don't make this worse.

Tom Lindmark

Advice From Across The Pond For Obama

This is an updated version with links, sorry.

If you were Barack Obama and had just been elected President of the United States on a platform of change and hope how would you approach the situation you would now be faced with. Realistically, you know that change as your supporters perceive it is probably not the best medicine for a very sick economy and hope may be something they will have to do for a very long time.

A few brave souls have ventured some opinions on how he ought to approach this dilemma. I found the best to be in the Telegraph. Admittedly written from a British viewpoint, I think it lays out well the difficulty he faces and the risks of not getting it right.


To be as responsible as he has promised, he has to change the behaviour of
consumers, of government and of regulators that has led America into a period of
declining growth and employment.

If he is successful, he could create so much resentment that he will be
booted out of the White House after just one term. Obama's supporters may
imagine their man to be the next Roosevelt or Kennedy. But instead of BHO to follow FDR and JFK,
he could end up being the next Jimmy Carter.

Fixing the economy pitches Obama into two big battles. The first will
be with many of the Americans who have just voted for him. They have responded
to a promise of "change you can believe in" - and they had better start
believing that they have to accept falling house prices and a pervasive feeling
of being less wealthy.

The Democratic-controlled Congress is Obama's second battle. If the economy starts to grow
again, then Democratic politicians had better believe that spending must be cut
heavily and that they will not be able to fulfil campaign promises.


Just an aside here, the WSJ has quite a good editorial on the players in the Democratically controlled Congress that may give Obama fits. Read it if you have time, it's fascinating.


It is hard to imagine that a new president with a thumping majority in the
electoral college will start to lower expectations quickly. But Obama must.
American consumers had only one of the starring roles in the financial and
economic crisis, but it was important.

Goaded by cheap credit they spent more of their income. They took out
ludicrously unsafe mortages and ran up big balances on their credit
cards. Their overborrowing was mirrored by private equity groups
that overpaid for businesses. Such deals encouraged shares to go up as investors
foresaw being bought out at crazy rates. Higher share values made people feel
wealthier: it must be time for another cruise, or car.

Now all that credit has been withdrawn, house prices must continue to
fall until people who are not taking unsustainable risks can afford to pay them.
People are starting already to spend less. Their reduced economic activity will
drive down asset prices.

Obama must tell Americans that this is necessary. A painful recession
is inevitable. He can promise help from the government with targeted spending of
its own until the economy picks up
.


Indeed it is hard to imagine that Obama or any other politician for that matter will have the courage to throw much cold water in the face of the electorate. I, for one, don't think it is saleable as I don't believe my countrymen and women are at all prepared for the reality that is bearing down upon them. To not do so, however, may be suicidal. Is he in fact trapped by the fallacy of prophecy?

The article goes on to discuss the problems he is likely to encounter with the Congress both in terms or working through current problems and then persuading them to cut spending as the economy recovers. Getting things growing is going to be enormously expensive, yet the mopping up that will be required later may be more than the political class can swallow.

The final lesson of history that the article imparts is well worth encapsulating here.


I found this online, from Time magazine in June 1977: "Determined to
balance the budget by the end of his first term, Carter, the fiscal
conservative, is clipping away at congressional spending. The more liberal
Congress is on the verge of passing three bills that could exceed his spending
plans...the White House seems to be virtually itching to veto the [plans] ...
when [they reach] ... Carter's desk."

And so the seeds of Democratic civil war and electoral disaster were
sown.


I wish Barack Obama well, only a fool would not. If he successfully navigates all of this he will certainly have earned a place in history.

Tom Lindmark

Obama's Economic Braintrust

You're going to be hearing about TEAB a lot over the next couple of weeks. What is it? It's Obama's economic transition team. The acronym stands for Transition Economic Advisory Board. Here's a list of the members. Expect some to show up in high level places and a few to make it to his Council of Economic Advisors.


-David Bonior (Member House of Representatives 1977-2003)
-Warren Buffett (Chairman and CEO, Berkshire Hathaway)-will participate via speakerphone
-Roel Campos (former SEC Commissioner)
-William Daley (Chairman of the Midwest, JP Morgan Chase; Former Secretary, U.S. Dept of Commerce, 1997-2000)
-William Donaldson (Former Chairman of the SEC 2003-2005)
-Roger Ferguson (President and CEO, TIAA-CREF and former Vice Chairman of the Board of Governors of the Federal Reserve)
-Jennifer Granholm (Governor, State of Michigan)
-Anne Mulcahy (Chairman and CEO, Xerox)
-Richard Parsons (Chairman of the Board, Time Warner)
-Penny Pritzker (CEO, Classic Residence by Hyatt)
-Robert Reich (University of California, Berkeley; Former Secretary, U.S. Dept of Labor, 1993-1997)
-Robert Rubin (Chairman and Director of the Executive Committee, Citigroup; Former Secretary, U.S. Dept of Treasury, 1995-1999)
-Eric Schmidt (Chairman and CEO, Google)
-Lawrence Summers (Harvard University; Managing Director, D.E. Shaw; Former Secretary, U.S. Dept of Treasury, 1999-2001)
-Laura Tyson (Haas School of Business, University of California, Berkeley; Former Chairman, National Economic Council, 1995-1996; Former Chairman, President’s Council of Economic Advisors, 1993-1995)
-Antonio Villaraigosa (Mayor, City of Los Angeles)
-Paul Volcker (Former Chairman, US Federal Reserve 1979-1987)

The Governator Is No Economist

Arnold Schwarzenegger is swiftly proving that he is close to clueless when it comes to economic issues. Two articles in the LA Times (links here and here) disclose his latest lunacy.

First, he proposes to put in place a 90 day moratorium on foreclosures. He hopes to induce lenders to modify loans during this period by offering them an out on the moratorium. If they can prove they are aggressively modifying loans then they could avoid the freeze. That shouldn't be too hard to game, should it? The governor must not be reading much recent history either. If he had he would know that Massachusetts tried this and saw their foreclosure rate soar 460% after the end of the first 90 days. If you're going to kick the can down the street do it long enough to make sure the problem is somebody elses.

He was just warming up though. He also wants to raise taxes and cut spending in order to deal with a looming $24 billion deficit. His plan is to increase the sales tax by 1.5%, broaden the base of goods and services that are subject to the sales tax, charge Californians five cents a drink for alcohol and on and on. On the spending side he wants to cut $2.5 billion. Part of that will come from state workers taking two extra days a month off without pay and forfeiting two paid holidays. By the way, the sales tax increase would raise the sales tax rate in Los Angeles to 10.5%. Ouch!

Evidently Arnold subscribes to an obscure branch of Austrian economics that suggests raising taxes and cutting spending in the middle of one nasty recession is good policy. I at least hope that's the case because I don't want to believe that one of my favorite actors is that incredibly dumb.

Actually, he should just sit tight. It looks as if the November stimulus package is going to contain some real aid for states. Don't spend your political capital on this one big guy. Let the feds shovel some money your way and leave it up to some poor schmuck from Kansas or Georgia to go back to his constituents to explain why he's spending their money to bailout profligate spenders like California.

Tom Lindmark

Nancy Pelosi Supply Sider

One of the wonders of the American political system is how politicians can vilify their opponents and their policies one moment and the next shamelessly take those same policies to their bosom.

Nancy Pelosi provided a beautiful example of this phenomenon today when she came out in favor of tax cuts. Yes you read that right, she is proposing tax cuts. Not only that but she's proposing them in lieu of direct cash payments as part of the next stimulus boondoggle being planned by Congress. Of course, a week ago it was the ruinous Bush tax regime that landed us in this mess according to her and her cohorts.

No word yet on how they plan to give tax cuts to the 40% who don't pay taxes but I suspect there is a plan. I certainly can't imagine the "rich" benefiting.

Tom Lindmark

more:here

Wednesday, November 5, 2008

Obama's Very Short Honeymoon

What now for President-elect Obama? I congratulated him last night for on his victory and spent too much time today reading vacuous articles about what he is planning to accomplish. Let's talk a very little bit about reality and a little more about how he might approach his impending term as president.

Paul Kedrosky who has a very good blog called Infectious Greed wrote in The Daily Beast that the future president faces a lot of hurdles. Essentially, he argues that Obama is hemmed in by events in the economy. I couldn't agree more but check it out and draw your own conclusions.

Leaving economics and finance aside I think that the more fascinating exercise is how Obama and his team deal with the need to engage on the immediate issues. I wrote a post yesterday referencing two excellent articles on the Great Depression one of which noted that Roosevelt declined to take an active roll in fighting the economic downturn after his election. He essentially deferred any involvement until after his inauguration despite the urgings of Hoover to become immediately involved in the process.

That was a great political decision and one of a very similar nature now faces Obama. No doubt he inherits a difficult situation. Early engagement risks identification with the problem rather than the solution. It's probably better to let Bush suffer alone what is likely to be a disastrous fourth quarter.

He has shown himself to be a shrewd politician and I have no doubt he will negotiate these shallow waters skillfully. The problem, of course, is that he can't avoid the helm forever. In that exercise he is shackled with a liberal congress that could lead him into danger if he does not have the political will to bring them to heel. Progress on the economy will be unreasonably expected in short order by the electorate. The memories of Bush will be short and if things deteriorate badly, the Democratic Party will be pilloried. There is little margin for error.

Not since 1932 has a President assumed power with so much hanging in the balance. Obama has the chance to make history. The problem is that he could become one of histories biggest goats or one of its biggest heroes. Pay not attention to the fluff you saw spread throughout the press today. The fate of this administration is going to be known quite quickly.

Tom Lindmark

The Worst Job In America

Like all of you, I'm a little tired of political analysis . So how about a quiz? What's the worst job to have going into 2009.

My nomination is an audit manager for a major accounting firm that has the Citi, BofA, Wells Fargo-you name it-financial firm requiring an unqualified opinion. Now honestly how do you walk into one of these companies that you probably audited last year and tell them at the end of your audit that they are, in your opinion, essentially FUBAR.

You have the kids to think about. Your job and future. You're not that far up the ladder that you can stand on principle. But realistically, you can get a job as the CFO at your local manufacturing plant that will keep your life together. Or are you going to roll the dice, put your neck under the SOX guillotine and hope to hang onto the good times.

So what's it going to be champ. Hang onto the house you can barely afford and hope the feds don't make an example of you or do a Howard Cossell and call them like you see them. Good luck.

Tom Lindmark

Radian Posts Surprising Profit

Housing Wire reported the more than somewhat surprising news that Radian Group, one of the largest mortgage insurance companies posted a $36.7 million profit as opposed to a $703.9 million loss for the third quarter of 2007. Analysts had expected a large loss. I will leave it up to you to peruse the article to see if you think it marks a turning point for the company. I'm not convinced but the article didn't provide enough detail to make a firm decision.

Of particular note, however, was the graph that they included which shows a significant increase in delinquencies across all loan classes. Note that subprime after seeming to level a bit has taken off again and the slope of the curve for Alt-A loans is astonishing. Even prime loans are getting into heady territory. By and large little of this represents the fallout from the economy and increasing unemployment. Factor that in and we may not be as far through this as I thought we were.

Tom Lindmark

Tuesday, November 4, 2008

A New President

I will write a nonpartisan post tomorrow giving my thoughts on the election. After all, there are still some pretty issues regarding the Senate and House to be decided.

In the meantime congratulations to Barack Obama on his victory and to John McCain for his efforts. I thought both were as good as they have been throughout the campaign in their statements acknowledging defeat and accepting victory.

Finally, congratulations to the country for seamlessly transferring power in the midst of difficult times.

Tom Lindmark

Sorry Once Again

Sorry for the formatting below. I liked the posts and wanted to keep them up so I hope you can figure it out. Still trying to get used to this platform. Not the best.

Hopefully it works out. If not, I will move the blog but count on the fact that I will leave forwarding instructions and hopefully just get the site to refer over.

Thanks for the patience.

Tom Lindmark

Mortgage Mods-A New Plan And A Warning

Washington is awash in homeowner bailout plans and just about every politician and economist is lining up in favor of something. Here is the latest idea floating around and then a cautionary tale from history about the consequences.

First, the new plan that leaked out today has the government subsidizing homeowners' mortgage payments. The plan is being advanced through Senator Robert Casey, a member of the Senate Banking Committee, and was prepared by Assured Guaranty Ltd. Assured just happens to be one of the larger mortgage insurance companies. Anyway here is the skinny as reported in Housing Wire:

"The proposal outlines the mechanics of a mortgage bailout that would cost
as much as $441 billion, relying primarily on a three-year borrower subsidy
that would be repaid in five years, with interest. “Upon receipt of a notice
of default on an owner-occupied primary residence, a homeowner could apply
to participate in a program under which the government would fully subsidize
three years’ mortgage payments in exchange for a note, to be paid in a lump
sum five years from receipt of the first payment subsidy, equal to the
payment subsidies plus interest accrued at the federal funds rate,” reads
the proposal, in part. "

“In five years’ time, participants would, in all likelihood, be able to
sell their homes or refinance their mortgages at amounts that would allow them
to repay the loan.”

Like me, you probably picked up immediately on the last sentenceof the quote. Clearly, the drafters of of the plan have an insight into the future of home prices since they seem confident that refinancing or sale will be available to the plan participants in five years. Is it just me that thinks they sound like mortgage brokers trying to sell an Option ARM to a first time homebuyer?

The warning about the consequences is found in another article from Housing Wire.
In it the author points out that during the Depression, numerous laws were enacted that forestalled foreclosures as well as began the process of limiting lenders rights to recover deficiencies. While the societal benefits of keeping people in their homes and on their farms was accomplished, the abrogation of legal rights that this result necessitated caused interest rates to soar. Lenders unsure of how to cope with a new
legal paradigm, effectively how to price the new risks, simply began charging excessive rates. Of course, all of the current proponents of mortgage modification are paying scant heed to the requirement that contracts will have to be eviscerated
in order to accomplish their goals. Investors are going to be bludgeoned into
accepting modifications which might be less favorable than foreclosing and selling the property would be. Does anyone think that the natural response to the
uncertainty this will cause will not be an increase in borrowing costs for new homebuyers?

I hope to have a longer post up about the loan modification issue by the end of
the weekend. For now let's just say that this may be a road we could well rue ever
having ventured down.

Tom Lindmark

Useful Thoughts On The Great Depression

It's a tough night to concentrate on writing. I'd rather be indulging my political junkie side and getting an overdose of network analysis. Nevertheless, I do want to pass on to you a couple of very interesting articles I read in the past few days.

They are both from the Wall Street Journal, pertain to the Great Depression, are complimentary and have some good thoughts that need to be noted as we move towards a hoped for correction in this economy.



The first was written by Russell Roberts an economics professor at George Mason University. In the article he points out that even before Roosevelt was elected, Hoover was frantically pulling the levers of government in a vain attempt to get the economy moving again. He notes that Roosevelt in many ways simply upped the ante and threw more money at the same set of programs that started under Hoover. The point he makes well is that most of the actions taken by both administrations was done in a helter skelter manner. Hoping that something would work.



Mr. Roberts draws parallels with the Bush administration and its erratic, urgent attempts to deal with the current crisis. The massive accumulation of power that is currently occurring is eerily similar to the New Deal and all is justified as he says by "...the need to do something."

He advances an interesting thesis as to how the attempts to right the economy actually contributed to the Great Depression and asks if we might be going down the same road.

A recession is coming (or has already arrived) no matter what happens in
Washington. The question is whether the attempt to forestall it is going to make
it worse and turn it into another Great Depression.

By acting without rhyme or reason, politicians have destroyed the rules of the
game. There is no reason to invest, no reason to take risk, no reason to be
prudent, no reason to look for buyers if your firm is failing. Everything is up
in the air and as a result, the only prudent policy is to wait and see what the
government will do next. The frenetic efforts of FDR had the same impact: Net
investment was negative through much of the 1930s.

Does that not resonate with you? How else could on explain the spectacle of thousands of small and medium sized banks lining up for a capital infusion. How else to explain the Treasury proposing to invest (partially socialize) numerous industrial countries. How else to rationalize a massive bailout for individuals that cannot pay their debts. Forgo the free markets and join the state.

Mr. Roberts offered one other observation that bears repeating.


Worst of all are the political incentives that are unleashed when Washington promises to spend a trillion dollars (and counting). No one can spend such money wisely even if they want to. The information about who needs to be bailed out and who needs to fail is too complicated. Inevitably, such decisions will begin to be more about politics than economics.


What more need be said, save to end with a quote from his article. "The economists are almost as clueless as the politicians. At such a time, inaction may be the wisest course."

The other article ties nicely with Mr. Roberts'. It is about the myths of the Great Depression. Written for the WSJ by Andrew Wilson, a former Business Week writer, it debunks many of the long held beliefs about the times. One of the more interesting sidelights about the column is the spotlight it shines on Hoover and shows him rightly as not the typical pro-business President as he is portrayed to be, but more realistically as the President who provided the blueprint for Roosevelt's policies.

I will leave you to peruse the myths he lays out. The more interesting to my mind included a good debunking of the idea that the market crash of 1929 caused the Depression, that ordinary people were truly helped by the actions of the government and that the actions of the government pulled the economy out of the depths. Nothing of the sort happened.

Mr. Roberts' ends his article suggesting that that with as much as stake it is to be fervently hoped that we don't adopt policies based on myths. Advice worth taking.

I don't know, and in fact I don't believe, that we are heading for a depression. By the same token, I respect and am a student of history and think there is much to learn therefrom. If we don't heed the lessons then we do risk making a bad situation much worse than it need be.

Tom Lindmark

Monday, November 3, 2008

Treasury Just Needs Another Half Trillion To End The Year

The numbers are almost incomprehensible. The Treasury announced today that it expects to raise $550 billion between now and the end of the year.

Bloomberg has the report and it's stunning. From July through December of this year, Treasury borrowings are expected to exceed $1 trillion. That does not count the money they are borrowing on behalf of the Fed. The deficit is now forecast to be somewhere in the neighborhood of $1 trillion. That's a pretty good neighborhood.

I will probably be proven wrong but it seems as if this level of borrowing has to inevitably crowd out private borrowers, many of whom are already paying onerous rates for new debt. If nothing else, it can't help interest rates and certainly can't be viewed as something that will enhance economic recovery. Oh, don't forget these numbers are all before we start paying for all of the campaign promises and the inevitable fiscal stimulus bills sure to come down the pike.

Tom Lindmark

No Coffee For You

Here's one more example of Washington screwing you and me.

Blooomberg is reporting election officials in Washington State have put the kibosh on Starbuck's offer to give all of us who vote a free Cup of Joe. Seems that federal law prohibits the payment of money, goods or services in return for voting. Thank God there on top of this. Can you imagine the corruption. It could have been worse than hanging chads.

Keep this in mind the next time you argue in favor of single-payer health care insurance. Remember who and how the rules will be enforced.

(Sorry no link to Bloomberg. Their site is running like a pig. Check it out if you have insomnia.)

Tom Lindmark

Miserable Numbers From Detroit

Got to at least mention the car sales numbers. They were abysmal but maybe not far off what we can expect for the foreseeable future.

Here are the numbers:

Ford Down 30%
Chrysler Down 35%
GM Down 45%
Toyota Down 23%
Honda Down 28%

Overall sales were 838,165 cars which translates into a seasonally adjusted annual rate of 10.6 million vehicles. The industry considers 16 million vehicles a year as healthy.

Let's stipulate that these numbers reflect sales in an extraordinarily rough period. That being said, the idea that the industry will soon see 16 million unit per year sales in the near term is a pipe dream. The sea change in the credit markets is going to put a crimp on sales for some time to come. In my opinion 12 million to 13 million sales per year are going to become the norm.

In that environment, the industry has to rationalize itself. There is simply too much capacity and someone has to merge or fail. We are probably going to go through a period of denial and government assistance before the music is faced. But faced it will be sooner or later.

Tom Lindmark

More Begging From Detroit

This is one of those posts where I have to include a link just to prove that I didn't make this up.

Bloomberg is reporting that the automakers, not content with umpteen billion dollars from the government have now come up with two new suggestions on how to spend your money. They are suggesting that the government give a tax deduction for new car purchases and also consider a program to have the government back a program that scrapped older cars to boost new car sales.

Toyota Motor Corp. and Chrysler LLC said federal income-tax deductions for interest on car loans could help stem the slide that sent U.S. sales to their lowest monthly total since 1991. General Motors Corp., the biggest U.S. automaker, also said today it had studied the idea of boosting auto demand through a government-backed program to encourage scrapping older
vehicles.

What can you say? The sad thing is that these tawdry people may well get a hearing from our elected officials.

Tom Lindmark

A Middle Class Squeeze



I was jumping around sites today when I came across this chart and it stopped me dead in my tracks.

Now I'm a fairly conservative person from both a political and economic perspective but when I saw the divergence in this pictorial, I was shocked. I've read a lot of opinion about the relative share of prosperity in the country over the past twenty years or so and it always seemed to me that the proposition that it was being shared inequitably was a political talking point for the Democratic Party. That it might be but it would appear that their might be some solid evidence that their lament is not without merit.

I can't imagine that a trend of this sort can for long persist without some quite serious societal problems developing. Those on the outside are not oblivious to what is occurring and are not likely to countenance it for an extended period of time. More importantly, perhaps, is that economically this would seem to be a dead end trend. The graph suggests to me that the consumer, which is the main driver of the economy, is slowly being starved. If that is indeed the case then long term prospects are not all that rosy.

If one factors in the likelihood that the middle class is not going to have access to credit as it has in the past then the trend becomes more ominous. It also helps explain how and why the credit load of the citizenry ballooned so much over the past decade or so. Shut off from participating in the growth from an income standpoint, they were forced to assume debt to consume.

It's a sobering trend and one that can't, in my opinion be sustained. There may be other factors at work here or maybe the chart misrepresents reality. If anyone has a different point of view, I would like to hear it.

Tom Lindmark

Sunday, November 2, 2008

No Government LBO Loan For Chrsler/GM

Here's a surprise. The Bush administration has turned thumbs down on money for a Chrysler/GM merger. That takes some big ones.

Reportedly (NY Times Report Here) the Bushies are pushing to get the $25 billion already committed to the industry on the fast track. Apparently they didn't want to devot any of their $700 billion slush fund to the car makers. Could that mean they see bigger problems down the pike and thus more calls on the kitty from the financial sector?

This just gets more and more curious.

Apologies For The Poor Formatting

I can't quite figure out this blogging platform. I apologize for the messy look of the posts. The edit function doesn't seem to work. I edit and the same formatting errors recur.

At any rate I hope the content still makes sense. Somehow I'll figure this out or just ditch it for something better.

Tom Lindmark

Chicago PMI's Scary Numbers


From Jake at EconompicData.com here is a depiction of the components of the Chicago PMI that was released on Friday. For an analysis, consider these comments from Across the Curve.

Scary doesn’t do this report justice. This abysmal report follows all
other pre-ISM regional reports which carried the same tone - an abrupt change occurred in Oct. The plunge in the headline index left it at the lowest level since the 2001 recession. Demand side indicators collapsed. The 21.4 point drop in New Orders was the worst since the series began in 1968; the 40.5 drop in Production was the worst since its inception in 1946! The excess supply signal has never been worse - the New Orders-Inventories spread was -24.0. Price pressures eased rapidly - the 27.0 point drop in the Prices paid index was a record since 1946!
I think that sums it up perfectly. We may be getting the credit component of this crisis under a semblance of control (MAYBE) but the problems with the larger economy are just coming to light. There is a long way to go.
Tom Lindmark

Dow Rally In Perspective


It's been a crazy weekend trying to get this blog configured. A techie I'm not. I have no idea if anyone is reading this stuff yet. Nevertheless, here are some quick thoughts for you.

Infectious Greed has a very interesting chart. It shows that the Dow rally last week was one of the ten best. Sounds pretty good right? Not so fast, look at when the other big rallies occurred.
Sleep well.
Tom Lindmark