Monday, July 27, 2009

The Economists Made Me Do It!

Up front I am going to tell you that I had a hard time finding stories that caught my attention tonight. This post may be a little "all over the place" as a result.

Notes From Around the Web
If you were checking out the comments section on Friday, you may have seen the shout out Economic Disconnect was given on Friday form "The Automatic Earth". It seems my offer of a Friday night music choice to the author Ilargi prompted him to write what is my favorite TAE intro section ever, inspired by Bruce Springsteen's "My Hometown". No excerpts, as you would be well advised to read the whole thing!

You may want to check out guest writer "Will Profit" who is making some posts over at Capitalist Preservation in place of Lisa for a while.

There is Always a Bull Market Somewhere
A common market saying is that "there is always a bull market somewhere" which I guess is true in some way no matter what. When you consider the less than fundamentally sound underpinnings of the economic system today, it should come as no surprise that there is indeed a bull market, in fraud (hattip Jesse's Cafe Americain):
The Bull Market in Financial Fraud in the US
Does it, should it, surprise us that there is a bull market in financial fraud in the United States, to accompany the bubble economy and the deterioration in government and corporate financial statistics and accounting?

A society where the capital allocation in the bond and equity markets have become the domain of organized manipulation, theft, and insider trading? Where the major media is owned by a handful of corporations dedicated to selectively spinning the truth for their own benefit and point of view? A nation whose very money supply has become a thinly disguised Ponzi scheme?

A wise old hand of many years in government of our acquaintance told us once that he did not think there were more people of questionable virtue in the world today. Rather it is the tolerance of bad behaviour from the top down that emboldens those who are so inclined to lie, cheat, and steal in greater numbers than at other times.

Here is a chart that is in a strong uptrend:

Now all we need is an ETF for this thing, something like (FRAWD), and we can all make some money!

Fascinating Forecast of the Markets
While you all know I am not a chart lover ny nature, I do think technicals have plenty to offer any market observer. Today one of my favorite chartists, Tim Knight of "Slope of Hope", had the following a post up which covered an extrapolation he made on October 18th, 2008. I was unable to secure full image posting permission, but you can read the post here and view the hand drawn chart here.

If Tim's long term outlook should hold, we will be faced with the possibility of the indices giving back all the the current move up and then some. I have argued many times that if such a scenario does come to pass, many regular "investors" (401k contributors, small brokerage accounts) will take out that money from the markets and never return. I think that Wall Street and the FED/Treasury are very aware of thesis dynamic, so keep that in mind going forward.

With word filtering out that naked short selling will be permanently banned, and some rumblings that the 3X short ETF's may be next to be outlawed, we may not be far from the day when the ban of lower stock prices is put into effect. No, I am not kidding!

The Economists Made Me Do It!
I figured after I had posted on the hot button topic of health care, and the discussion was very clean and non political, I thought I would venture out again into the quasi political. Maybe my mistake, but there is a point I wanted to get out there.

As I was listening to the President's health care infomercial last week, I was struck by the the following line which was an answer to a question concerning out of control spending through TARP. I admit I had heard before but only now did it rankle me (I did not dig up a transcript, this is a paraphrase):
"The economists told us we had to pass TARP or there would have been a great depression, instead of a serious recession."

And with that line I think we saw one of the real problems with our government as it relates to all things economic.

Simply put, our elected officials (with a few exceptions) have no clue about finance. Which is fine, a prerequisite for government service need not include an MBA from Harvard (though how much good that would do is debatable!). What I was struck by was the total abdication of responsibility that statement infers.

Our elected officials are supposed to be protecting the best interests of the public (ok, stop laughing) and yet when it comes to an issue of central importance, policy is left in the hands of a select few, and those few have shown no ability to promote effective policy. If US economic policy will be left to "the economists" (just which ones I wonder?) then why even allow any fiscal measure to be on the Congress' plates? I find this very disturbing and welcome input in the comments.

Reappoint Ben Bernanke! Why? I Have No Idea
In the next installment of Nouriel Roubini's foray into ,making no sense, I wanted to highlight his defense for reappointing Ben Bernake as FED head. I have great respect for Mr. Roubini, but this treaty for Bernanke really has some holes:
The Great Preventer
Last week Ben Bernanke appeared before Congress, setting off a discussion over whether the president should reappoint him as chairman of the Federal Reserve when his term ends next January. Mr. Bernanke deserves to be reappointed. Both the conventional and unconventional decisions made by this scholar of the Great Depression prevented the Great Recession of 2008-2009 from turning into the Great Depression 2.0.

Right off the bat, the first rule of persuasive journalism is to appear to be impartial. Using a phrase like "this scholar" already sets this up as a puff piece. Continued:
To be sure, an endorsement of Mr. Bernanke’s reappointment comes with many caveats. Mr. Bernanke, a Fed governor in the early part of this decade, supported flawed policies when Alan Greenspan pushed the federal funds rate (the policy rate set by the Fed as its main tool of monetary policy) too low for too long and failed to monitor mortgage lending properly, thus creating the housing and credit and mortgage bubbles.

Now, after that section is seems impossible to climb out of the hole, but Roubini even ups the ante:
He and the Fed made three major mistakes when the subprime mortgage crisis began. First, he kept arguing that the housing recession would bottom out soon (it has not bottomed out even three years later). Second, he argued that the subprime problem was a contained problem when in reality it was a symptom of the biggest leverage and credit bubble in American history. Third, he argued that the collapse in the housing market would not lead to a recession, even though about one-third of jobs created in the latest economic recovery were directly or indirectly related to housing. Mr. Bernanke’s analysis was mistaken in several other important ways. He argued that monetary policy should not be used to control asset bubbles. He attributed the large United States current account deficits to a savings glut in China and emerging markets, understating the role that excessive fiscal deficits and debt accumulation by American households and the financial system played.

Great points made here. It seems Roubini is making a fair retrospective. So how do we get to an all clear for Bernanke? Next up:
Still, when a liquidity and credit crunch emerged in the summer of 2007, Mr. Bernanke engineered a U-turn in Fed policy that prevented the crisis from turning into a near depression. He did this largely with actions and programs that were not in the traditional toolbox of monetary policy. The federal funds rate was effectively pushed down to zero to reduce borrowing costs and prevent the collapse of consumer demand and capital spending by business. New programs encouraged skittish institutions to resume lending. For the first time since the Great Depression, the Fed’s role as lender of last resort was extended to investment banks.

Mr. Bernanke also introduced a wide range of other programs, like those to maintain the functioning of the commercial paper market (which makes short-term loans to companies so they can cover operating expenses like payrolls). The Fed was involved directly in the rescue of financial institutions like Bear Stearns and American International Group. It lent money to foreign central banks to ease a global shortage of dollars. The Fed even committed to purchasing up to $1.7 trillion of Treasury bonds, mortgage-backed securities and agency debt to reduce market rates. These are all radical actions that had almost never been undertaken before.

Roubini seems to think all this was a good thing. In the words of Dalton from "Road House", 'Opinions Vary'. Final push:
Some of these moves have raised important questions: Did the Fed help bail out institutions that should have been allowed to fail? Did it cause moral hazard as reckless lenders and investors were effectively bailed out? How and when will the Fed mop up the excess liquidity that its actions have created? Will these actions eventually cause inflation and a sharp fall of the value of the dollar? Has the Fed lost its independence as it has accommodated the fiscal needs of the government by bailing out banks and printing money to cover large fiscal deficits?

Still, the basic point remains: The Fed’s creative and aggressive actions have significantly reduced the risks of a near depression. For this reason alone Mr. Bernanke deserves to be reappointed so that he can manage the Fed’s exit from its most radical economic intervention since its creation in 1913.

I am lost.

Roubini correctly identifies poor FED policy as the culprit for what is wrong, yet offers his support for more of the same. This cannot be resolved logically.

In summation:
FED easy money policy after the tech bust and 9/11 was the direct contributor to the massive credit bubble which has no bust. The inability of the FED (amongst others) to regulate or monitor abuse of credit led to gross imbalances in debt allocation. faced with hard data which pointed to a collapse of the charade, the FED brushed it all off as minor and was not aware of the extent of the damage. After market implosion, the FED was quick to rush out THE SAME POLICY TOOLS that led to the bust, and thus Bernanke deserves reappointment.

I usually will not excerpt such a long piece, but I think it is clear Roubini's position is weak at best, and untenable at even a medium analysis.

What this all boils down to is this:
The FED will provide easy money and encourage risk taking backed by government backstop. They will then get out of the major role they are in because, wait for it, IT IS DIFFERENT THIS TIME.

I think you have heard that argument before, and I think you know where it ends.

Have a good night.


terry said...

Thanks for the nod. Roubini has turned into a cube...or a Rubik. Celebrity economists don't want to make a hard line call. Wouldn't look good the fans if they turn out to be wrong in the long run. Straddling the fence and flip flopping is their soup du jour.
Regards, Will Profit
p.s. Google has screwed up my account and wont let me have Will Profit back as my scree name. cest la vie.

getyourselfconnected said...

Will Profit,
I liked your work on the site over the past days. Thanks for stopping in. I think you said you play poker online at Pokerstars, what is their policy on US players right now?

terry said...

Thanks for the compliment. I've been a fan of your writing for a while.
If a U.S citizen funds a Poker Stars account (from here in the states ) with a credit card they get screwed with mercilessly cause of the regs, when they try to withdraw cash from Poker Stars account. Funding by electronic check there is no problem. I was really baffled at first because of the Draconian terms of using a credit card but I called Poker Stars and they gave me the skinny on funding with a check. I haven't had any problems.
Regards, Will

getyourselfconnected said...

Cool, thanks for the info.
I used to have my partypoker account via my checking account, but they cancelled that out. I guess I could play small ball (less than $300) in case the government takes it. I just miss playing poker, especially 6 man sit and go tourneys (I used to play 6 at a time on mutli windows).

getyourselfconnected said...

After everything I wrote, we get this tale of cluless members of congress:

This stuff would be funny if it was not so sad.

GawainsGhost said...

George W. Bush has an MBA from Harvard. You know why? Because he was rejected by the law school at the University of Texas!

Not that having a law degree would have served him any better than a business degree as a politician or executive--law degrees don't serve the numerous politicians who have them very well, or more accurately electing politicians who have law degrees doesn't serve us well at all--but the point is that the one President who actually did have an MBA from Harvard did not exactly manage the economy very effectively. Why? Because the Congress and the Fed are corrupt. They're run by lawyers and economists! And all from the Ivy League. Sheesh.

Constitutionally, it is the duty of government to 1) provide for the common defense, 2) promote the general welfare, and 3) protect the citizens from FRAUD. In all three duties, but especially the latter, this government run by lawyers and economists has utterly failed the American people. We need another revolution. The tree of liberty must occasionally be nourished with the blood of tyrants and patriots, and all that. Or, as Shakespeare writes, "First, kill all the lawyers."

Anyway, you know, as a feature of my license I get a subscription to Tierra Grande, which is a monthly journal published by the Real Estate Center at Texas A&M University. This month's issue has an article titled Red, White and Broke? Why America Will Not Go Bankrupt, by Ali Anari, some research economist at the center.

Basically, this guy claims that since US national debt as a percentage of GDP is not at a record high, the economy will rebound as it has in the past, because "in the case of US Treasuries, most of the interest is paid to US citizens because the bulk of the national debt is held by US citizens, companies and local and state governments." Yeah, right.

He begins by looking at Iceland's economic woes and the collapse of its banking system, in an attempt to demonstrate why that won't happen in the US. I was struck by this statement: "[Iceland's] currency, the krona, fell 50% in one week as foreign investors pulled out. Because foreign funds were used for mortgage loans, the currency collapse increased mortgage costs and led to falling house prices. Unlike the US financial crisis that began with decreasing home prices, Icland's financial crisis may end that way."

This is so stupid on so many levels, I don't even know where to begin. The question isn't why home prices decreased in the US. The question is why they got so high to begin with. And the answer is FRAUD! Lending fraud, appraisal fraud, brokerage fraud, accounting fraud, ratings fraud, regulatory fraud. But I wouldn't expect an Aggie, certainly not a research economist, to understand the obvious. I am a Longhorn, after all.

And I have an MA in British Romantic poetry, with a dual minor in medieval literature and the Humanities. Lawyers and economists, good grief.

Anonymous said...

Good Post. I just picked up on this thread from the weekend mention at Zero Hedge. I'm bookmarking ya!