Wednesday, January 28, 2009

Government Housing

We now have word that the Fed finally has actual mortgages on its books. This has been spoken of for awhile, and has been a major part of the bailout planning, but in practice there seems to be resistance by the Fed and Treasury Department to accepting mortgages on their balance sheets. Nobody wants toxic mortgages.

But here it is now; mortgages from Bear Stearns and AIG are carried by the Fed. How an investment bank and insurance company came to service home loans I have no idea, but there you go. As I've anticipated before, the government will be more generous than private industry when it comes to loan modification.

In other news, today was another Fed Open Market Committee meeting. They cut interest rates to zero last time, and so until they start raising rates again, there isn't much to report. Expect quantitative easing soon.

Monday, January 26, 2009

The Depression has Arrived

In the wake of a bad holiday season, the news is more and more punctuated with job cuts by the thousands, first from the financial industry, and now from retail and tech powerhouses—Microsoft, Intel, and Sprint Nextel come to mind. The California jobless rate has crept above 9%. For those who don't quite make the statistics, there is increasing competition, less negotiating power, and one has to be a lot more adaptable to find work.

No longer can this be brushed off as a lackluster financial climate. The toll of suffering has started, and probably is going to be prolonged, and this is probably just the beginning.

Now, I do wish that house prices would fall to historic levels relative to income so I can afford to buy one. But I don't care about the prices of stocks and bonds—and commodities only to the degree that it affects prices I pay for food and gas. Though I've postulated a model which anticipates general economic stress in the face of a failing credit industry, I didn't want it to be like this.

UPDATE [1/29/09]: Unemployment claims have set a record this month with new filings at 588,000 and total at 4,776,000. In 1982, numbers were nearly this high, however it doesn't fully reflect the tightness of the work climate—as future indicators show no end to budget cuts and profit downgrades. [4/16/09]: This link from Slate goes to a map of the U.S. that shows job gains losses per county from Jan '07 to Feb '09. Just hit the play button and you will see a striking downtrend in jobs beginning at the end of 2008.

Thursday, January 22, 2009

Monetary Base and Reserves Update

It's about time to post a follow-up on the aggressive printing campaign by the Fed. Since last September, money supply has taken off in a skyward trajectory, only recently showing any sign of gradually leveling off. Naturally, this is of concern to anyone whose wealth is invested heavily in U.S. dollars, since more money supply implies weakening of the dollar.

Until September, base money remained fairly level at $850B. Since then it has expanded by $900B to be just shy of $1800B. However, bank reserves have followed that trend almost exactly: from a stable $100B reserve level until last September, they have grown by $850B to $950B today. So, base money has grown by $900B, and bank reserves by $850B.

Meaning, the dollars recently created by the Fed aren't doing anything. They are sitting in banks sequestered from the economy. The Fed and Treasury Department were hoping banks would lend them out, but there aren't very many good lending opportunities these days. Plus, banks are about to get slammed by the Alt-A implosion, and so the excess reserve capital may be put to use to weather that storm.

So, unless the money the Fed printed actually enters the economy through fractional reserve credit, its effect on restraining deflation has been surprisingly minimal.

Tuesday, January 20, 2009

New Era of Responsibility

I know there will be times ahead where interventionist policies surely to be enacted in this economic downturn will make me wish I hadn't voted for Obama. But today, watching his inaugural address, it seems hopeful a semblance of reason and ethics may return to the political forefront.

Favorite line: "Our time of standing pat, of protecting narrow interests and putting off unpleasant decisions—that time has surely passed." Also: "We reject as false the choice between our safety and our ideals."

Briefly, he made a reference to the "market"...

"Nor is the question before us whether the market is a force for good or ill. Its power to generate wealth and expand freedom is unmatched, but this crisis has reminded us that without a watchful eye, the market can spin out of control - that a nation cannot prosper long when it favors only the prosperous."

...and I hope he didn't mean free market, which has almost nothing to do with the current predicament, but rather the subsidized market which protects the interests of the establishment, as it now stands.

That the DJIA fell today below 8000, led by banks, I consider a good omen of a return to sound fundamentals.

Friday, January 16, 2009

When BoA talks...

The second half of the TARP money, approved yesterday, is in play, with Bank of America [BAC] receiving $20B today. Moreso, $118B of toxic Merril debt has been Federally guaranteed. One wonders how much will be left when Obama steps in to office.

(Interestingly, it's being widely - reported that the Senate is giving the TARP money to Obama, who won't be President for another week.)

Thursday, January 15, 2009

Obama, TARP money, and Not-news

Lately, in the financial world, there has been a lot of talk, but not a lot of news. Since the ZIRP was instituted, not a whole lot of bailout-related action has taken place. Recently, though, the Bank of England dropped interest rates to 1.5%, which for historical perspective is the lowest it has been since the 1600s. It will be going lower still.

Anyway, lately Obama has been pushing for the passage of the second $350B TARP money now—before he takes office. Meaning that Bush and Paulson would have access to it in the last week of their administration. Both Obama and Bush have threatened to veto any legislation that rescinds the money, which there isn't the least doubt in my mind would fail. Nobody doubts Obama will get it eventually, but why now seems a little odd. Perhaps there is a politically unpopular intention for it that Obama does not want on his record. Since Paulson gave $250 million to major banks with no requirements that they use it to help solve the mortgage crisis, which was the intention of the bill—and then the rest of it went to AIG, and then more to Citigroup, with a small fraction left to the automakers—Congress has been leery of giving the Bush administration the second half of the money.

Along with a series of ever-worsening job reports that seems to have stunted a bear-run in the markets many were expecting, there has been talk in the news about both Citigroup and BoA coming for seconds (or thirds) in terms of bailout money. BoA's purchase of Merril and Citigroup being Citigroup are coming to haunt them. JP Morgan is buckling, no doubt related to it's acquisition of Washington Mutual, and one wonders when we will start hearing the same about Wells Fargo and buying Wachovia. (UPDATE [1/28/09]: ...and here it is.)

At the end of the day, a comparable amount of bailout money was handed to Citigroup in a couple weeks what took Bill Gates to amass over his career, and that has done almost nothing to prevent Citigroup's unraveling, and they still want more! After selling off one of their more valuable assets, Smith Barney, it appears further dismantling is soon to follow.

UPDATE: Well here's some news: today, after the above was posted, the Senate released the second $350B of TARP bailout money.

Friday, January 9, 2009

Obama: "Just Show Me"

Faced with criticisms from his own party about his $800B bailout plan, Obama's wants his critics to pony up to the table with their own, better plans for economic recovery.

Hey Barack, check this out: Human Action by Ludwig von Mises. This book will show you that the present crisis is not unique or even uncommon and came about by our own financial devices. The solution is to abandon those policies which brought us to this point. The free market will restore us to strong fundamentals.

Holiday Job Losses

Post-holiday job reports have been percolating through the news lately, which paint a grim picture consistent with a severe economic contraction—all despite the recent printing of dollars, and Keynesian bailout measures that when added up range into the trillions of dollars of credit available for the taking.

To really add it all up, all the bailouts, which I've thought about doing, seems a moot point because what matters is how much of the available credit the Fed and Treasury Department have been pushing has actually been borrowed, and that data has not been disclosed despite a lawsuit from Bloomberg for better transparency under the Freedom of Information Act.

Since the Fed dropped interest rates to 0%, new bailout measures seem mostly on-hold until Obama takes office.

UPDATE [1/13/09]: Fox Business News continues its lawsuits against the Fed and Treasury Dept, started in November along with Bloomberg, for more transparency in bailout measures.

Friday, January 2, 2009

Keynesian Rebuttal

The only solutions to the current economic crisis we've seen so far from Washington, and likely will see under the Obama administration, have been Keynesian ones, where we attempt to "spend our way to prosperity"—or in this case spend our way out of a recession; one that came about by overspending.

The Keynesian approach to reviving the economy is to increase credit injected in to the system. That has been the intention of nearly every bailout measure so far—to make it easier to borrow. Indeed if credit were increased, then overall money supply would increase, and then prices would rise (or stabilize).

What Keynesians seem to be disregarding is that credit supply is limited by what people can pay back, and if credit extends beyond borrower's ability to pay back loans, then eventually failures of repayment erode the capital base of the lending institutions, and then the whole Keynesian cycle of borrowing and spending grinds to a halt.

To Austrians, there is a limit by which an economic system cannot take on further credit, and worse becomes burdened by the repayment of old debt now spent, and at that point the only outcome is economic contraction regardless of how much the powers that be encourage us to borrow.