Postcards from the Bleeding Edge
Wednesday, October 01, 2008

  Cooking the numbers

Over the last two days my thinking has evolved towards this understanding, that the original idea conflated two different concepts - one - that credit was drying up due to incomprehensible derivative debts - and two - that the federal government buying that incomprehensible debt at some yet-to-be-determined-price and making it less incomprehensible over time was a way to fix the problem. The key figure to watch is the interbank lending rate (libor), not the DOW.

That doesn't make the House bailout bill palatable, however. A pig in the poke - even with lipstick - is still a pig in the poke. If the market can't figure out how much that debt is really worth, how can the federal government? Ever?

Update: I'm now at page 92 of the revised, 461 page act, and it is considerably better than the one in the House. I'm told my blood pressure will rise from here on out, however...

Update 2 - 7PM: Now at page 142, and need some medication... bad....

Update 3 - 1AM: Finished reading it all, and some of the associated acts, checking some dates of implementation now, some comments after I get some sleep. It passed the Senate long before I finished, there must be some speed readers on the Hill.....

Update 4 - 10AM: I have written a whole series on the events of the past week, trying to make sense of it, it is tagged banking.

back to this morning's rant:

And more centralization - of HOUSING? - in the hands of the federal government does not sound very good to me. Seeing the housing side of the problem devolve to the states strikes me as saner, and constitutional.

Suspending the Mark to Market accounting rule, as many have suggested, is nothing more than cooking the books until after the election. Real numbers are required to make real decisions.

Chart of U.S. Consumer Inflation (CPI)

As for fixing the credit crunch, raising rates would be a sane answer. Normal interest rates are too low. I am scared to calculate what financing the federal debt would be like if interest rates reflected the reality of risk in this market, but that is the market mechanism. Raising rates goes against the conventional wisdom of the proper thing to do in a recession, but with 44% of the federal paper held outside the US, there needs to be some mechanism to spur investment in the face of objectively evaluated risk.

Update 5: By saying the above I was not saying that rates needed to go up, but that rates going up would reflect the perceived risk in the economy. The classically "right" answer is to inflate the currency in times like these. I was pointing out that the size of the overseas holdings is something fairly new in Keynesian finance, and wondering what incentives those investors had to stay in an inflated currency. OK, back to the original post....

Anyone notice that the original - Paulson - proposal - was better than the House's in that it only reimbursed corporations BASED IN THE USA? Somebody had to lose in this shell game and Paulson picked the overseas investors and companies like Halliburton, in Dubai, to take the hit harder than the taxpayers. Congress "fixed" that after some pithy commentary from China - (of all the links I posted thus far today that was the most interesting) - and on the trade deficit.

The game is rigged to favor inflationary policies over taxation. I have a modest counter proposal - why not pay off all 962 billion of the usurious credit card debt under condition that the people holding that debt cut up their credit cards? Eliminating the interest payments on that alone would save at least 100b a year in interest payments, which many would use to make house payments, and the corresponding inflation would prop up asset prices. I realize that this makes about as much sense as the free silver movement, but I judge the benefits to the American people and hit on the banks to be more effective way of sharing the pain and moral hazard than what is currently on the table.

Note: I called this "A modest proposal". Some more out of the box thinking is needed.

Maybe we already are in a stagflation period like 1973.

Chart of Growth in U.S.Gross Domestic Product (GDP)

I still can't help but think, in the wee hours of the morning, this whole hoo-rah is a weapon of mass distraction unleashed by parties unknown for purposes as yet unknown. I keep searching out the corners of the internet for some sign there is something else going on - noting details like the 600+B budget resolution that passed without a whimper, the wimpy web broadcaster bill that also passed, and noting that the NORCOM 1st brigade has gone active in the US.

I can't help but think upon how Rome tried to control its legions, by banishing them to the outer provinces, and what Julius Caesar did....

I no longer have any real skin in this game. I took my last lumps last year, threw up my hands and left the country. All I have left is my freshly sharpened pitchfork. It must suck to be a sane, responsible citizen that still has a mortgage and kids. The day that people like Brian are fed up enough to sharpen their pitchforks and take to the streets has not come yet, but it will.

The national debt clock cracked 10 trillion dollars today, even before the vote. It is now at:



One of the things that really, really bothered me about seeing Sweeney Todd turned into a movie last year is that it became a story about two unlovable murderers rather than the scathing social satire of love, betrayal, and revenge on corruption that it was in the original stage version. By showing the corrupt classes Hollywood utterly ruined the song "A little Priest", and eventually, the movie. I highly recommend the stage version.

From "A Little Priest":

TODD:
Mrs. Lovett, how I've lived
Without you all these years, I'll never know!
How delectable!
Also undetectable!
LOVETT:
Think about it!
Lots of other gentlemen'll
Soon be comin' for a shave,
Won't they?
Think of
All them
Pies!

TODD:
How choice!

How
Rare!

TODD:
For what's the sound of the world out there?
LOVETT:
What, Mr. Todd?
What, Mr. Todd?
What is that sound?
TODD:
Those crunching noises pervading the air!
LOVETT:
Yes, Mr. Todd!
Yes, Mr. Todd!
Yes, all around!
TODD:
It's man devouring man, my dear!
BOTH:
And [LOVETT: Then] who are we to deny it in here?

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Comments:
Actually I'm in favor of a Bimetallic standard of both Gold and Silver. Free silver was a good idea, it's too bad the banking cartels won out over the working man. We have been hung on a cross of gold, which was then stolen and replaced with a "note".

Thanks for actually doing the reading of the thing... the only piece of it that makes any sense to me is the increase in FDIC limits, too bad that isn't permanent.

--Mike--
 
I have, somewhere around here, a piece about adopting the "Plutonium Standard", which has many advantages over a gold or bimetallic standard.

1) If used as currency, I guarantee you that the stuff will circulate. Holding on to large quantities would be hazardous to your health. A banker could be easily identified by the sallow complexion and the blood dripping from his eyes.

2) As supplies of plutonium are even more tightly controlled than gold by the major powers, the issuance of new currency for arbitrary reasons would slow, and power retained by those powers.

3) One thing that libertarians rail about a lot is that the US Dollar is a Fiat currency, backed by nothing. This is untrue. It is backed by a bunch of aircraft carriers, submarines and fighting forces which are all dramatically overextended right now.

4) Sitting in a vault - or rather a pressure vessel - plutonium generates energy all by itself without much additional investment, which can be turned into dollars. Earlier in the campaign McCain proposed building 45 new nuclear power plants at the cost of 450 billion - that money that was just swallowed by the financial beasts in a single week. But that is what compound interest buys you, more debt that has to be serviced at any cost. What will generate the "energy" for the next economy?

What does America have left as collateral?

It is deeply ironic - or possibly iconic - that today the Senate signed a deal with India allowing American firms (GE, Westinghouse) to build 7 or more nuclear reactors in India. This is on top of a similar deal to build many more in china (in timeframes of less 3-7 years each), while in the US, only 3 applications (not permits!) are outstanding, and the minimum time of construction closer to 17 years. I would be very interested to see capital flows in/out of the US from both of these countries over the last several months.
 
As for the increase in FDIC support, don't make me laugh.

The FDIC is insurance - paid for by the banks - for 100k in coverage. For 250k of coverage, premiums should also rise to cover it. Arbitrarily increasing the limit is at best a shell game. I look towards seeing the FDIC's annual report this year with some dread, especially after reading their financials for last year.

It would have made sense to increase the FDIC 100k cap along with inflation for decades - as well as the contributions from the banks - to adaquately cover the risk of default.

I finished reading the bill late last night and have many comments but I'm tired and don't think it matters. So few (including congress) have bothered to read it or debate a single point of it in public that I feel the same sense of despair as when I read the Patriot Act. I hoped for a filibuster last night, I really did.

There is some better oversight (an independent inspector general), but the fundamentals remain the same, and it includes an addition 110b in pork and at least 40b (rough guess) in unfunded changes to the AMT system - which, as I might add, doesn't do a whole lot of good for a whole lot of people that won't see a substantial positive change in their income to trigger the AMT provisions.

I really need to check some dates of implementation against events. What happened prior to Sept 20 that was so worth protecting then and not afterwards?
 
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