Category Archives: Economy

Financial Follies: Banana Republicans…..

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Now, here in the US, we are supposed to be geographically challenged, i.e., we enjoy a deficit in social studies information of the kind that runs — what is the capital of Outer Mongolia and name its three leading exports. Ok..guilty as charged.

But guess what, turns out we don’t even know where we’ve been living all these years.

The U.S of A? Nope. Turns out, we’re Zimbabwe:

Here’s Puru Saxena on our banana republic:

“Take a look at the annual money-supply growth rates around the world –

US +12%
Euro zone +13%
Britain +14%
China +20%
Russia +51%
India +23%
S. Africa +22%
Brazil +12%

Now, you don’t have to be a NASA-scientist to figure out that as the quantity of money increases, each unit of money will continue to lose its value or purchasing power against assets whose supply cannot be increased at the same pace. This confiscation of purchasing power has bullish implications for precious metals.

Today, several highly-intelligent economists and analysts are anxiously waiting for “The Crash” which will wipe out the value of the Dow Jones by 50-60%, cut the value of gold by half, cause an economic depression and create a vicious bear-market in asset prices. In my humble opinion, these people are going to be disappointed because “The Crash” will be stealth and will take place via plummeting currencies rather than an outright collapse in nominal asset-prices. Those who are forecasting a significant decline in US asset prices need to look no further than Zimbabwe where stocks have been making record-highs, albeit in a collapsing currency!”

PS: The figures for the growth of M3 in the US were removed from the official stats sometime last year, I believe, but are available at a number of websites, such as, nowandfutures.com.

Now, the US rate doesn’t even look that bad next to some other places, like Russia, for instance. But should Russia, in its current state, with its huge criminal element, be the standard for the US? And note, please, that official Consumer Price Index numbers are massaged in various ways so that inflation rates are heavily disguised. Money supply increases seem only to be boosting asset prices and not hitting the grocery shelves right now, but that’s because we aren’t thinking about things like the massive growth in insurance rates, especially health insurance, but also home insurance costs, increases in rents (not as high as increases in house prices but still growing in most major cities), and another big one, increases in college tuition costs. The important thing is that in India, for example, money supply increases and asset prices inflation, while also bad, have at least been accompanied by increases in salaries (in some sectors) and growth in productivity. Not the case in the US, as far as I can tell…..where growth has been largely in the housing sector (in addition to the burgeoning of the health- care sector).

Bubble trouble…

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WASHINGTON (MarketWatch) — The U.S. economy will fall perilously close to recession in the next year, but will probably continue to grow at a very slow pace, according to the latest UCLA Anderson Forecast released Wednesday.

Strong growth in exports and business investment should be enough to avoid a “classic recession,” said economists at the UCLA Anderson School of Management.”

 

More at Market Watch. Apparently, the Anderson school was one of the few to predict the 2001 recession, so this should be less of a sheep-entrail reading than the average bunch of economic soothsayers produces.

 

 

 

War-mongering: Bush could really go into Iran

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“Yes, I was quite sceptical. Less so over the years. They’re desperate. Everything they touch is in ruins. They’re even in danger of losing control over Middle Eastern oil — to China, the topic that’s rarely discussed but is on every planner or corporation exec’s mind, if they’re sane. Iran already has observer status at the Shanghai Cooperation Organization — from which the US was pointedly excluded. Chinese trade with Saudi Arabia, even military sales, is growing fast. With the Bush administration in danger of losing Shiite Iraq, where most of the oil is (and most Saudi oil in regions with a harshly oppressed Shiite population), they may be in real trouble.Under these circumstances, they’re unpredictable. They might go for broke, and hope they can salvage something from the wreckage. If they do bomb, I suspect it will be accompanied by a ground assault in Khuzestan, near the Gulf, where the oil is (and an Arab population — there already is an Ahwazi liberation front, probably organized by the CIA, which the US can “defend” from the evil Persians), and then they can bomb the rest of the country to rubble. And show who’s boss….”

Noam Chomsky to Alexander Cockburn, in Counterpunch.

Meanwhile, Nawaz Sharif, former Pakistani PM and a determined opponent of the Musharraf government (our ever-so ambiguous partners in the War on Terror) has been arrested on corruption charges on his return from exile in, of all places, Saudi Arabia.

More at Bloomberg.

And if that is a non-sequitor, make what you will of it…..

Housing Bubble trouble: Countrywide, Fed rate cut, and Osama as chief policy advisor

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“Home loan colossus Countrywide Financial Corp. announced Friday that it would slash as many as 12,000 jobs, or nearly 20% of its workforce, saying the downturn in the housing market and the credit crunch related to sub-prime loans have created the worst conditions ever seen by the modern mortgage industry.

The announcement by Calabasas-based Countrywide came hours after a smaller rival in the mortgage business, Pasadena-based savings and loan IndyMac Bancorp Inc., warned that it probably would record its first loss since 1998 in the third quarter. IndyMac said it would cut 1,000 jobs, 10% of its total.

Countrywide, the No. 1 home lender, funded $284.2 billion in mortgages this year through July 31, up from $255.8 billion in the same period in 2006, but said it expected lending to decline 25% next year….”

More by E. Scott Reckard at the Los Angeles Times.

Is this just a subprime lender problem?

At Thoughts from the Frontline, John Mauldin doesn’t think so:

“Goldman Sachs suggests home values could drop as much as 20%. Gary Shilling has been saying 25%. We don’t have time and space this week to go into housing prices, but many of the mortgages sold in the past two years only made sense in a housing market that was rising by 10-15% a year. A market that is dropping 10-15% a year, as it may do in the next 12 months, is only marginally be helped by a Fed funds cut.

But that does not mean they should not cut. They should, simply because the economy is clearly slowing, and the risks are now to the downside.

I have maintained for a long time that the bursting of the housing bubble would cause a serious slowdown or a recession in the economy. My critics would counter that housing is only 5-7% of the economy and a housing recession would not be enough to drag the whole economy down.

They are wrong for the following reasons. First, rising home values have allowed homeowners to use their homes as an ATM through mortgage equity withdrawals, which have added almost 2% to GDP annually over the last five years. That is now evaporating.

Secondly, falling home construction and lower home sales means fewer jobs not just in the direct home building market, but in the parts of the economy related to the home building markets, like mortgage brokers, real estate agents, hardware and furniture, etc. As an example, Countrywide announced a planned 10-12,000 person lay-off, when just a few weeks ago they were thinking of expansion, as they now think new mortgages may drop 25% in 2008. Fewer jobs mean lower consumer spending.

Consumers are not going to spend as much due to the wealth effect. If you feel your house was going to be a major part of your retirement, and now the value is going down, you are going to be more cautious and actually think about saving. This has been a dangerous prediction for 50 years, but I think consumer spending, some 71% of the US economy, is due to slow down. Year over year growth could drop below inflation later this year.

Further, with all the additional homes coming onto the market due to foreclosures, hone values are going to drop even more, and new home construction, which peaked at an annual run rate of 2,000,000 homes per year, is likely to fall to less than 1,000,000. We are currently at a level of 1,400,000, so we are not yet close to the bottom.

Rising unemployment. A housing market looking at the deepest recession in values since the Great Depression. A consumer under siege. A visibly slowing economy……”

Rate cut or not?

Since he seems to be setting himself up as a foreign policy advisor, maybe we should ask Osama Bin Laden.
“Iraq and Afghanistan and their tragedies; and the reeling of many of you under the burden of interest-related debts, insane taxes and real estate mortgages; global warming and its woes; and the abject poverty and tragic hunger in Africa; all of this is but one side of the grim face of this global system,” he said….”

Police State Chronicles: corporate liberalism and the expert class

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Is progressive legislation always good for “the people”? Or is it a statist fable? A detailed analysis of the rise of the technocratic managerial class as a function of the growth (rather than the constraint) of the corporate-state:

“The conventional understanding of government regulation was succinctly stated by Arthur Schlesinger, Jr., the foremost spokesman for corporate liberalism: “Liberalism in America has ordinarily been the movement on the part of the other sections of society to restrain the power of the business community.” Mainstream liberals and conservatives may disagree on who the “bad guy” is in this scenario, but they are largely in agreement on the anti-business motivation. For example, Theodore Levitt of the Harvard Business Review lamented in 1968: “Business has not really won or had its way in connection with even a single piece of proposed regulatory or social legislation in the last three-quarters of a century.”

The problem with these conventional assessments is that they are an almost exact reverse of the truth. The New Left has produced massive amounts of evidence to the contrary, virtually demolishing the official version of American history. (The problem, as in most cases of “paradigm shift,” is that the consensus reality doesn’t know it’s dead yet). Scholars like James Weinstein, Gabriel Kolko and William Appleman Williams, in their historical analyses of “corporate liberalism,” have demonstrated that the main forces behind both Progressive and New Deal “reforms” were powerful corporate interests. To the extent that big business protested the New Deal in fact, it was a case of Brer Rabbit’s plea not to fling him in the briar patch.

The following is intended only as a brief survey of the development of the corporate liberal regime, and an introduction to the New Left (and Austrian) analysis of it.

Despite Schlesinger’s aura of “idealism” surrounding the twentieth century welfare/regulatory state, it was in fact pioneered by the Junker Socialism of Prussia–the work of that renowned New Age tree-hugger, Bismarck. The mainline socialist movement at the turn of the century (i.e., the part still controlled by actual workers, and not coopted by Fabian intellectuals) denounced the tendency to equate such measures with socialism, instead calling it “state socialism.” The International Socialist Review in 1912, for example, warned workers not to be fooled into identifying social insurance or the nationalization of industry with “socialism.” Such state programs as workers’ compensation, old age and health insurance, were simply measures to strengthen and stabilize capitalism. And nationalization simply reflected the capitalist’s realization “that he can carry on certain portions of the production process more efficiently through his government than through private corporations….. Some muddleheads find that will be Socialism, but the capitalist knows better.” Friedrich Engels took this view of public ownership:

At a further stage of evolution this form [the joint-stock company] also becomes insufficient: the official representative of capitalist society–the state–will ultimately have to undertake the direction of production. This necessity for conversion into state property is felt first in the great institutions for intercourse and communication–the post office, the telegraphs, the railways. (7) The rise of “corporate liberalism” as an ideology at the turn of the twentieth century was brilliantly detailed in James Weinstein’s The Corporate Ideal in the Liberal State. It was reflected in the so-called “Progressive” movement in the U.S., and by Fabianism, the closest British parallel. The ideology was in many ways an expression of the world view of “New Class” apparatchiks, whose chief values were planning and the cult of “professionalism,” and who saw the lower orders as human raw material to be managed for their own good. This class is quite close to the social base for the Insoc movement that Orwell described in 1984: The new aristocracy was made up for the most part of bureaucrats, scientists, technicians, trade-union organizers, publicity experts, sociologists, teachers, journalists, and professional politicians. These people, whose origins lay in the salaried middle class and the upper grades of the working class, had been shaped and brought together by the barren world of monopoly industry and centralized government. The key to efficiency, for the New Class, was to remove as much of life as possible from the domain of “politics” (that is, interference by non-professionals) and to place it under the control of competent authorities. “Democracy” was recast as a periodic legitimation ritual, with the individual returning between elections to his proper role of sitting down and shutting up. In virtually every area of life, the average citizen was to be transformed from Jefferson’s self-sufficient and resourceful yeoman into a client of some bureaucracy or other. The educational system was designed to render him a passive and easily managed recipient of the “services” of one institution after another. In every area of life, as Ivan Illich wrote, the citizen/subject/resource was taught to “confuse process and substance.” Health, learning, dignity, independence, and creative endeavor are defined as little more than the performance of the institutions which claim to serve these ends, and their improvement is made to depend on allocating more resources to the management of hospitals, schools, and other agencies in question. As a corollary of this principle, the public was taught to “view doctoring oneself as irresponsible, learning on one’s own as unreliable, and community organization, when not paid for by those in authority, as a form of aggression or subversion.” For the full article, read Kevin Carson at the Mutualist.

Mobs in the Market: the crisis is unfolding…..

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The sub-prime debacle rolls on:

“American Home Mortgage joins more than 50 lenders in bankruptcy this year.”
~MSNBC – Aug 6, 2007
~Bloomberg, Aug 10, 2007

“Goldman Sachs Group Inc.’s $8 billion Global Alpha hedge fund has fallen 26 percent so far this year…”

Check out this piece I wrote in Money Week about Goldman Sachs
I kind of jumped the gun on it, but the fact is the big bank is in trouble over the credit crunch, something few people would have once thought possible.

Hedge funds are keeling over all over the place as well:

“Hedge fund operator Sowood Capital Management said Friday it would return $1.4 billion to investors after losing an estimated 60% of their money last month…”
~LA Times, Aug 4, 2007

Hedge funds are taking a hit for 60% in a month.

Home mortgage lenders are going belly up, 50 this year alone.

Meanwhile, the “plunge protection team” at the Federal reserve is on the job with soothing words:

On March 28th, Fed Chairman Ben Bernanke told Congress he believed that sub-prime defaults were “likely to be contained.”

On June 20th, Treasury Secretary Henry Paulsonsaid the fallout “will not affect the economy overall.”

On June 27th, Merrill Lynch CEO Stanley O’Neal claimed the defaults were “reasonably well contained.”

    In August, $40 billion in credit had been pumped into the financial system over two days – more than anything the Fed has done since 9/11.

    But can the economy stay on keel?

    Today, Sept. 6, there are announcements of terrorist warnings as dire as any since September 11…

    Are we near a crisis?

    Who knows? The point is when you have a situation this large and this complex, all bets are off.

    The economic handwriting is on the wall….

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    August 31, 2007

    This week, Larry Kudlow and others strongly chastised Bernanke for his failure to read the writing on the wall and urged the Fed Chairman to quickly slash the Fed Funds rate. Methinks the pundits doth protest too much. For years, Kudlow, who practically coined the term “Goldilocks economy,” has dismissed with scorn suggestions that the American economy was anything less than ragingly healthy. If our economy is really so strong, why does he call so loudly for the artificial stimulus of a significant rate cut?

    In truth, the writing has been clearly on the wall all along. A credit bubble has been steadily inflating for at least the last six years, which in its final frenzy produced some of the most absurd mortgage funding products the world has ever seen. To anyone not dependent on the hysteria, a no-doc, no money down, negative amortization, interest only, adjustable rate jumbo mortgage was just as clear a sign of pending catastrophe as was $200 for a share of Pets.com, or 5,000 Dutch guilders for a single tulip bulb.

    The one thing all bubbles have in common is that they eventually pop, and ours just did. Unlike the popping of the last bubble in 2000-2001, this one will fall directly to our economy’s bottom line. And this time the Fed can not step up to the plate with unlimited liquidity injections.

    A record percentage of our GDP is comprised of consumer spending. The source of this spending was the housing bubble. Would our savings rate really be negative were it not for housing related “wealth?” Could consumers really have spent as much as they did without the benefits of temporarily low teaser rates and the ability to extract equity from their homes? How many service sector jobs are directly related to that extra spending? When the low mortgage payments and home equity disappear, so too will the spending and jobs they engendered.

    Those who feel that the economy will keep growing must believe that discretionary consumer spending is unrelated to wealth or expenses. In other words, they believe that individuals will spend as much with no home equity and $3,000 per month mortgage payments as they did with $200,000 in home equity $1,500 monthly payments. Factor in other rising expenses; such as food, energy, insurance, and taxes and discretionary spending will not just slow, it will completely collapse.

    With the ugly truth laid bare, many now prod Bernanke and Bush for solutions. Unfortunately there are none. Based on absurd assumptions about real estate, we simply borrowed more money than we can ever hope to pay back. There is no magic elixir we can swallow to cure what ails us. The free market is the only force that can fix this mess. Unfortunately, the fix won’t be pretty. Prudent lending standards will return, guaranteeing that real estate prices collapse. This is an important connection that very few have made. There is no way the average American can afford to buy the average house at today’s prices with a mortgage he can afford. Assuming that the lax standards of 2005-2006 do not return, the only way this can happen is if real estate prices collapse, which is exactly what is happening.

    The financial institutions that are calling most loudly for a bailout claim the Government must act to protect homeowners. However, the most severe losses will not be born by homeowners but by those who loaned them the money. Therefore any bailouts will ultimately go to lenders not borrowers. Homeowners who offered no down payment and who have no equity in their homes will in reality lose nothing in foreclosure, except perhaps a debt burden on an overpriced house. In addition, even those homeowners who made down payments likely extracted larger sums in subsequent refinancings or home equity loans. With plenty of available foreclosed homes on the market to rent it is unlikely that these former homeowners will become homeless……”

    Walter Block on economists who bite libertarian hands….

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    Walter Block in Lew Rockwell on Caplan, Bryan. 2007. The Myth of the Rational Voter: Why Democracies Choose Bad Policies. Princeton, N.J.: Princeton University Press:

    “These charges that Caplan launches against the Austrians are very serious; very serious indeed. How is it then that they come accompanied by not a single solitary footnote, reference or citation? Caplan is a very careful researcher. His book contains only 276 pages, and no fewer than 56 of them are devoted to reference, citations and footnotes. Yet, he could not spare even one of them to buttress his wild-eyed accusations against the Austrians. Why is this? Our answer can only be speculative, but a plausible explanation is that Caplan is only venting his own quasi-religious views, which are similar in character to those of which he accuses the great unwashed, the ignorant prejudiced voting public. It is difficult to reject this hypothesis. As good logical positivists, we need an empirical “test” for this contention. Here is the evidence: Caplan is himself guilty of engaging in market fundamentalism himself, throughout his book. (For example, he accepts the concept of “economic truism”; this sounds like “market fundamentalism” to me.) This suggests that he is indeed guilty of harboring motivations of this sort. He is a self-hater, in other words, who benefits from condemning vices he sees in himself.

    In the view of Caplan, “A person who said, ‘All the ills of markets can be cured by more markets’ would be lampooned as the worst sort of market fundamentalist.” I, myself, would never make such a statement. But this is because I do not see any “ills of markets” in the first place. Did I but, then I would gladly embrace this statement. But are not markets plagued by imperfect information? Not a bit of it. Rather, this is a characteristic of the human condition, not markets. But are not markets plagued by products such as pornography, prostitution, addictive drugs, and other harmful goods and services such as French fries, tobacco, race car driving, alcohol, etc? Not at all. Rather, the existence of these goods and services are eloquent testimony to the efficacy of markets. If blame there is for such items, it must be laid at the proper door: not markets, but the choices of human beings. All “markets” consist of is the concatenation of all voluntary commercial interactions. Market “fundamentalism,” then, consists of no more than an appreciation of the fact that free trade promotes economic welfare, and is the only system compatible with economic liberty. If this be “market fundamentalism,” let opponents make the most of libertarian support for this system of “capitalist acts between consenting adults.”

    According to Caplan, “Imagine if an economist dismissed complaints about the free market by snapping: ‘The free market is the worst form of economic organization, except for all the others.’ This is a fine objection to communism, but only a market fundamentalist would buy it as an argument against moderate government intervention.” Say what? What is this? “Moderate government intervention”? One wonders how Caplan squares his advocacy of “moderate government intervention” with his well-known support for anarcho-capitalism? It is also difficult to see how he can reconcile his opposition to “market fundamentalism” with this statement of his: “… like all trade, international trade is mutually beneficial…” But that is all that constitutes markets: trade between people on a voluntary basis.

    A final point on this topic, and this by far the most astounding. Caplan and Stringham won a $25,000 Templeton Prize. And here is the abstract of their prize-winning paper: “The political economy of Ludwig von Mises and Frédéric Bastiat has been largely ignored even by their admirers. We argue that Mises’ and Bastiat’s views in this area were both original and insightful. While traditional public choice generally maintains that democracy fails because voters’ views are rational but ignored, the Mises-Bastiat view is that democracy fails because voters’ views are irrational but heeded. Mises and Bastiat anticipate many of the most effective criticisms of traditional public choice to emerge during the last decade and point to many avenues for future research.”

    As can be seen by this admission, Caplan’s book, and the entire research program of this author on the drawbacks of democracy, owes a great self-confessed debt to that “market fundamentalist,” Ludwig von Mises. How, then, does he come to bite the (intellectual) hand that feeds him? Truly, amazing.

    Welcome to the wonderful world of “market fundamentalism,” Caplan.”

    Financial Follies: Run on banks in LA….

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    From “Mobs, Messiahs and Markets” (with Bill Bonner):

    “People will no longer care about the return ON their money….

    Instead they will only want the return OF their money”:

    Now here’s from this past Friday’s news:
    “In Los Angeles, economic concerns hit close to home.

    Anxious customers of Countrywide Bank jammed its phone lines, branches and website after the nation’s largest mortgage lender — which owns the bank — announced it was facing problems from a credit meltdown.

    “Countrywide Financial Corp., the biggest home-loan company in the nation, sought Thursday to assure depositors and the financial industry that both it and its bank were fiscally stable,” wrote the LA Times Friday. “And federal regulators said they weren’t alarmed by the volume of withdrawals from the bank.”

    “The rush to withdraw money — by depositors that included a former Los Angeles Kings star hockey player and an executive of a rival home-loan company — came a day after fears arose that Countrywide Financial could file for bankruptcy protection because of a worsening credit crunch stemming from the sub-prime mortgage meltdown,” the paper continued.

    “At Countrywide Bank offices, in a scene rare since the U.S. savings-and-loan crisis ended in the early ’90s, so many people showed up to take out some or all of their money that in some cases they had to leave their names,” the Times added. “Bill Ashmore drove his Porsche Cayenne to Countrywide’s Laguna Niguel office and waited half an hour to cash out $500,000, which he then wired to an account at Bank of America.”

    “It’s because of the fear of the bankruptcy,” Ashmore, president of Irvine’s Impac Mortgage Holdings, which escaped bankruptcy itself recently by shutting down virtually all its lending and laying off hundreds of employees told the paper. “It’s got my wife totally freaked out. I just don’t want to deal with it. I don’t care about losing 90 days’ interest, I don’t care if it’s FDIC-insured — I just want it out.”

    More at Raw Story .

    Housing bubble trouble….

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    Thanks to Rob Dawg at Exurban Nation for this:

    DEED TRADE MY HOUSE NOW

    Reply to: hous-393348572@craigslist.org
    Date: 2007-08-09, 6:38PM PDT

    TERMS WOULD BE:
    If you have real estate that appraises today for $90,000 to $105,000. You give me your real estate straight out withOUT me owing you or anyone any cash at anytime. Your Deed would be an even exchange for my Deed.
    IN TRADE My house:
    The current assumable loan on my home is $298,000 and it is a neg am. loan @ 7%. It’s appraised value today according to the county tax assessor is $280,000. This house appraised at $383,000.00 when I bought it brand new 2 years ago this month. Plus, There is a 2nd on this house for $36,000. not assumable. Or you could negoiate a short sale with my lender. This house will easliy be a million dollar home in 20 years! In 7 years it should come back at $450 $500 when they complete building the stores gas stations and freeway access! I lost my job a year into it and can’t make the payments …… TRADE NOW! See pics of home below.

    992 LAKEPORT WAY at Hyway 70 google map yahoo map
    Location: 992 lakeport way 95961 plumas lake ca
    it’s NOT ok to contact this poster with services or other commercial interests

    PostingID: 393348572
    —–

    Insane. To think this idjit spent the time to make the add. He’ll trade his $280k house for $105k if you assume his $298k loan and pay off his $36k loan. That’s $141,000 upfront and $298,000 in debt, $439,000 for something worth maybe $220,000 and eventually $160,000.
    —–
    Comment:

    And you think our problems are all about who is in power….

    Sure – there’s the larcenous bunch at the top who’ve turned the economy into a gambling den…but look at what they’re working with…