Current Commentary

How to solve our nation's problems:
more money, less housing

I just watched a clip on CNBC that made me want to beat my head against the wall.  They had on the owner of a large national mortgage company (nobody seems to care what us small local guys think) who suggested BULLDOZING RECENTLY BUILT HOUSING to help fix the housing market.  He also enthusiastically supported the Fed's latest announcement to buy 500 billion dollars worth of mortgages over the second quarter of 2009. (That's a rate of 5 BILLION DOLLARS A DAY!)  The Fed will facilitate this purchase by increasing their balance sheet.  That's "Fed Speak" for print money.  He also supported a measure being tossed around to waive appraisal requirements on refinances, thereby transforming mortgages from secured loans into partly unsecured loans, which would increase their natural market rate and increase the deficit/inflationary cost of using central planning to force rates down. (Does anyone remember anything about natural market forces?)

The definition of financial engineering is when Wall St. uses guys with degrees from Harvard and MIT to come up with a highly complex plan to make your money their money.

Friday, December 19, 2008

4% mortgage rates:
Good for mortgage brokers, refinancers, and buyers; bad for everyone else

The real cost is not the $700 billion dollars of tax money diverted to bailout Wall St. The real cost will not be felt immediately, maybe not until after 2009. The real cost is the inflation that is almost unavoidable at this point, and the only question is exactly when it will spike, and exactly how bad it will be.

One of the reason rates are so low is that the Fed is buying mortgage-backed securities now -- securities that the free market won't buy. But what is the Fed buying these securities with? Money it prints from thin air. From the time the initial money supply is increased to the time its inflationary effects are felt always takes at least six months, sometimes longer. How much longer depends on how slow the economy is and how little lending activity there is to serve as a multiplier effect. In the current climate, it could take over a year before we feel the effects of high inflation, but don't mistake inflation's late arrival with avoiding it entirely. It's common sense supply/demand applied to money: You can't create tons of it without significantly reducing its value; it defies the natural laws of the universe.

Most people think economics is about money; it's not. Economics is about "stuff." To put it simply, the biggest problem the US faces is that we consume too much "stuff" and produce too little of it. Based on consumption and production of "stuff," we are running about a 7% deficit. The only way to get back on the path to long term prosperity is to close that deficit and start running a surplus. There are a few ways to do that, and inflation is one way. I don't know if our central planners are aware of this effect that inflation will have or if it will be an unintended consequence. When you must work more hours to acquire the same amount of stuff (inflation), you are forced to either work more hours (increase production), or to acquire less stuff (reduce consumption).

Here's where it starts to get ugly. Inflation doesn't impact all incomes the same. The lower your income, the higher a percentage of it is spent on necessities. Therefore, the more sensitive you are to inflation. If we need to trim consumption 7% across the board to close the gap, people with lower incomes (who are least able to cut consumption) will be cutting a lot more than 7%, while people with upper incomes will be cutting consumption much less, or possibly not at all. You'll have a society where the bottom 5th or maybe even bottom two 5ths won't own a car, will have two or more families living under one roof, don't acquire anything but food and fuel, while the top 5th of the economy will live life unchanged.

Our central planners are risking the destruction of humanity's greatest achievement so they can avoid realizing reckless, fraudulent investment losses. 

"America is great because she is good.  When she ceases to be good, she will cease to be great."
-Alexis de Tocqueville

Tuesday, December 16, 2008

FREE MONEY!!!!

The Fed just lowered the federal funds rate to "a range of 0-0.25%."  It marks the lowest level EVER.  Their policy statement also boiled down to this: "We've decided to throw everything and the kitchen sink at this problem."  What does this mean?  At this point, in and of itself, it means not much.  There is very little interbank lending happening now, and interbank lending is what the federal funds rate covers.  What is important is the clear message that the Federal Reserve is willing to do whatever it takes to fight natural market clearing forces, specifically falling asset prices, and all methods to fight it are inflationary.  In addition to printing money, the Fed is now seeking to issue its own debt, something that only the Treasury Department can do with authorization from Congress right now.

Sound complicated?  That's probably because it is, but it is IMPERATIVE that the voting masses start to understand these concepts because it is becoming obvious that they will serve as the defacto method of taxation to pay for bailouts and to shield the investor class from losses for years to come.  Do you think Congress could raise taxes to save Citibank, AIG (American International Group), the big three auto makers, Bernard Madoff's millionaires, and countless other Fortune 500 companies?  Of course not!  Congress would never have the political support.  But monetizing, printing, or inflating to get the same result is a method that the common man and the average voter do not grasp to a level that it affects their voting behavior.

Finally, keep in mind that inflation is a REGRESSIVE tax; that is, it taxes lower incomes disproportionately more than it taxes higher incomes.  To put it simply, we are witnessing a coordinated effort to transfer losses from the investor class to the working class, and to transfer wealth from the working class to the investor class.

Thursday, December 11, 2008

Gas is going back up.
Ever wonder where money comes from and how it affects gas prices?

Oil's up 12% just today. From its low of $40 last week it is up approximately 25%. This is in the face of continued predictions of downward global demand. If demand is falling but the price is rising, there can be only one reason: the value of the dollars we are using is falling. Why is the value of our dollar falling? BAILOUT NATION.

Investors are fearing the end result of all this bailing with money that we don't have. Here's a quick explanation of where money comes from: Essentially, the Federal Reserve prints money from thin air and gives it to "member banks" (like Wells Fargo, Bank of America, or Chase). The member banks then use that money as reserves to make loans against at a rate of 10 to 1. Example: The Fed gives Wells 1 million dollars. Wells can now loan 10 million against that 1 million. It makes loans (car loans, student loans, mortgages, consumer loans) in the form of cashiers checks or bank wires. Let's say you want to buy a car. You get a $10,000 loan from Wells (for which Wells is only required to maintain reserves of $1,000 to cover). You then take that check to the seller to get your car. The seller then takes your check and deposits it into Baltimore Local Savings Bank. A different reserve requirement applies to BLSB, but BLSB can still loan $9,000 against that, which another bank then loans $8,100 against, and it keeps repeating until eventually $1,000 created by the Fed from thin air puts $100,000 into circulation.

Since the money supply increases from the creation of loans, what happens to it when loans go bad? The same 100:1 multiplier effect that creates money works in reverse to destroy money as banks call in outstanding loans, reduce lines of credit, and are forced to not make any new loans. What is happening now is that the trillions of dollars being printed by the Fed and sent to member banks is coming with encumbrances that prevent it from being loaned out to anyone. That is why in recent weeks/months the dollar has gotten stronger (because there are fewer dollars in circulation) and the price of oil/gas has fallen (because we've been buying oil/gas in stronger dollars). But there is a limit to how much you can print and inject to member banks even if you are encumbering those dollars out of circulation without creating inflation, and we appear to have hit that limit. God forbid these dollars make it into circulation because that will make for hyper-inflation. Contrary to what any central planner tells a camera, the worst thing that could happen for the US right now would be for normal lending activity to resume. But with the money already out, what do we do? Stop the bailouts, and let some member banks fail. The results will be ugly, but the alternative would be ugly times 10.

Tuesday, December 09, 2008

Would you work for a dollar a year?
The smoke and mirrors of executive pay at AIG

Baltimore's own Congressman Elijah Cummings is skeptical and critical of how bailout money is being spent at AIG (American International Group).  Cummings initially voted against the bailout but changed his vote the second time around and voted for it.  Gotta wonder what the man would do now and if he regrets selling out.

So you've heard about the big three CEOs (auto makers) offering to work for a dollar a year if they take public money.  AIG's top guy said the same thing.  Is anyone else thinking, "What's the catch?"  Ever see those Columbia House 12 CDs for a penny deals? What about those free cell phones (with a new two-year lease agreement), or the free alarm system (if you sign a contract for two years of monitoring).  How about "buy one get one free"? (You must really be getting hosed on the first one).  In my industry, it was the "no cost refinance loan"; it just came with a much higher interest rate.

Turns out that AIG is paying "retention bonuses" to 168 employees (surely not the kids in the mail room), and those bonuses range from $94,000 to $4 million.  They are paying these bonuses with your taxes.  I'm not sure if anyone who'll read this even makes $94,000 a year, but I'm sure that most people who will read this paid taxes to be sent as bonuses to someone who makes more than $94,000 a year.

Let me get this straight:  First, these companies were trusted with tons of money, and they abused that trust.  Now we think they can be trusted with even more money, and we are surprised when they can't be?  The first go 'round they committed fraud; this second go 'round they are committing fraud again, and our government is an accomplice to it by providing the force necessary to take the money from those who work for a living and give it to those who scam for a living.

Monday, December 08, 2008

5 times the Chrysler deal, even when adjusted for inflation, and it only gets us to the inauguration?

It's not a done deal yet, but it's looking highly likely that Congress will pass a 15 billion dollar bailout for automakers within the next few days.  The alarming news is that figure is only expected to tide them over until the next administration.  The chief economist at Moody's (one of the ratings agencies that rated pools of loans made up of people with bad credit, no money, and no income as AAA -- the same rating that companies like GE or sovereign nations receive when they need to raise money) estimated the total cost at $75-$120 billion.

Now, if they really need 75-120, why did they first ask for 25, and now only 34?  Did they figure on getting us involved and then holding our feet to the fire by saying, "Look how much you've already invested; certainly you don't want to lose that, and the only way you'll make it back is to give us more now"?  Does this example give any kind of a hint at how much more will be asked to be thrown into the sinkhole of the banking bailouts?

But everything's going to be OK because Obama has another 500-700 billion dollar spending plan in the works and has already gone on record as saying "deficits shemeficits."  Sometimes I am accused of oversimplifying things, but often in matters as complex as this the only way major points can be made is through over-simplification:  We are in this bind because we spent too much and produced too little.  How will doing more of the same fix it?

Friday, December 05, 2008 

Does anyone think these guys can run 3 multi-level, multi-billion dollar multi-national companies?

So who pays when big government (now 37% of GDP) bails out big business?  Did anyone else notice that the 25 billion dollar request has already ballooned to a 34 billion dollar request?  Did anyone else do the math and realize that even when adjusted for inflation the 1979 Chrysler bailout was only 3 billion dollars?  Is anyone else mystified by the two wrongs make a right logic of "if Wall Street got bailed out, so should these guys"?

Does anyone really think any of this is to help the little guy?  If so then try these numbers on for size: 

• $15,000 -- that's the amount of tax dollars per tax payer that have been redistributed by big government to big business. 
• $65,000 -- that's the amount of money per tax payer that has been printed out of thin air by the federal reserve and sent directly to member banks (big business). 
• $80,000 -- that's the total per tax payer that has either been redistributed via taxes or created out of thin air and given to the heads of various big businesses. 

How much individual personal debt could those figures retire?  How many months of living expenses could those figures cover for the unemployed, underemployed, or underwater?

These moves are about protecting those with the most to lose.  They are about protecting those who are in power, both in public power and in private power.  They are about forceably fighting back the will of the people as expressed through the free markets.  That will of the people is for lower housing prices, lower CEO pay, less wasteful companies, fewer corporate jets and spas, more localized banking and risk management, less consumerism.

Our central planners are fighting for more consumerism, for higher CEO pay, for the continuation of inefficient wasteful companies that fly around their eight-figure-income executives in private jets, and for globalized banking where a saver in Shanghai loans money to a debtor in Baltimore to buy a new house with granite counter tops.  The attitude of the central planners is this: God forbid you don't buy a 42" plasma screen that was made in China this Christmas. God forbid GM breaks their 50 million dollar five-year deal with Tiger Woods. God forbid Citi can't have naming rights at a cost of 400-500 million dollars to the new Mets stadium.