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| Wed Sep 24 22:37:39 2008 Cure for our Ills |
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| Sun Jul 27 22:41:01 2008 The S-Word |
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| Sun Jul 20 22:06:30 2008 Fannie and Freddie |
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| Wed Sep 24 22:37:39 2008 Cure for our Ills The administration proposes a really big blank check. |
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| Wow, a lot has happened in the past 2 months! I used this photo before, but it is still relevant: the administration continues to find ways to throw money at the problem. In Fannie and Freddie I argued against bailing out Freddie Mac and Fannie Mae. Since then, the administration has nationalized the companies, and put billions of dollars of Federal funds behind those mortgages. Then, Lehman Brothers collapsed in a spectacular and (for investors and employees) painful bankruptcy. Now President Bush is proposing a $700 billion bailout of the financial industry, by having the Federal government buy even more of the distressed mortgages. Embarrassingly, I didn't see the speech. I was working. However, I have read a few summaries and other articles about the speech. And I have of course seen the plan in the press for the past several days. The net result? Bush's speech appears to be a concession that the plan will not be approved by Congress. He seemed more interested in preserving his legacy by presenting the plan as a way to assign blame. Perhaps that is an unfair assessment. But I think he is well aware that the plan has little chance of passing. At least, I hope it has little chance of passing! My goodness, why would we sign up to spend that much money? Paulson and Bernanke are right: the piecemeal approach isn't working. But I think a better solution is to leave things alone, rather than put more Federal funds at risk. Remember, there is a real chance that even if the $700 billion plan was approved, it wouldn't work. Then we'd have a serious recession anyway, no reserves to spend our way out of it, and we'd have scared away all of the creditors we'll desperately need to borrow more money. Then we are faced with Federal bankruptcy, or hyperinflation as the Fed has to print money to get out of the disaster. Inflation is definitely the more likely scenario. And in any case, we always have the option to start buying troubled mortgages later. Perhaps the markets will panic, and the financial system will "seize up". But that might happen regardless of the $700 billion Federal infusion, or might not. And there are chances that the overall economic collapse won't be that bad. I think Paulson and Bernanke are surrounded by frightened Wall Street executives, and they are picking up that panic. But there are large parts of the economy that are still rolling, many banks still lending to businesses that are not underwater in bad mortgages. So I think we should let the honest businesses have a chance to take advantage of the lower prices and collapse of overly-aggressive competitors. The risk-takers should sweat a bit longer. Comments |
Related: economics Unrelated: books energy environment geopolitics lists mathematics predictions science |
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| Sun Jul 27 22:41:01 2008 The S-Word Stagflation is back... |
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| In
The Great Stagflation of 2008 I talked about the coming of stagflation.
Well, now I know it's here! How do I know? I know because the Federal Reserve is now denying we are experiencing stagflation, which is a pretty sure sign that we are. What is stagflation? It is when an economy is hit with slow growth (or contraction) and rising prices. The combination presents a problem for policy makers. What do you do? If you lower interest rates to spur growth, then you stoke inflation that just causes prices to go up more. And sometimes the higher prices cut into growth again. So cutting rates just causes inflation without growth. But if you raise rates to stop inflation (price increases), then you hurt growth because it's harder for companies to find the cash they need to expand. So now the Federal Reserve is wringing its hands about what to do. Fortunately, the answer is simple: raise interest rates. Why do I say that? Because the Fed's main job is to protect us from inflation. If inflation gets out of control, it destroys peoples' savings, and that can have catastrophic consequences. Besides, the Federal Reserve isn't really supposed to be the safeguard of the US Economy: that's the Federal Government's job. The Federal Reserve should just be safeguarding the currency. What do I think will happen? Given the recent track record, I have a pessimistic outlook. I think the Federal Reserve will continue to drift for a while, and attempt to be all things to all people as it deals with the current recession. One example is its disastrous decision to insure investment banks, which is going to cost us all a lot of money in a few years. (Incidentally, that is a fairly biased article, but worth reading for the viewpoint). We will need to hope that the Executive or Legislative branches will eventually decide to sort things out without damaging the currency. Comments |
Related: economics predictions Unrelated: books energy environment geopolitics lists mathematics science |
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| Sun Jul 20 22:06:30 2008 Fannie and Freddie More seizing up! |
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| The latest US economic crisis is centered on
Fannie Mae and Freddie Mac, our hapless mortgage resellers. That article uses my favorite phrase,
noting that the entire mortgage industry could
seize up if the two companies aren't bailed out with taxpayer money.
As a relevant aside, read this great overview of Freddie and Fannie, written by a History News Network intern in 2003. One prescient quote:
What happened? Fannie and Freddie make a business out of lending money to people to buy homes, and then bundling and reselling most of the resulting mortgages. The idea is that investors will pay hard cash to the firms now, and then take the loan payments for themselves. Fannie and Freddie can then use that investment money to make more loans. That works great as long as very few people default. Investors will keep buying mortgage securities if they think they'll get most of the loan payments they are owned. With a low default rate, buying mortgage securities is like a bond: you invest a chunk of money, and then earn interest as mortgagees pay back their principal and interest. However, we are now seeing mortgage defaults on the order of 10% or higher--enough to wipe out any potential returns due to interest. Since interest rates for mortgages are low (less than 7%), mortgage securities are already lean returns. With a 10% default rate, they are guaranteed money-losers, and no one will touch them. That has spooked many people. Investors (shareholders in the two companies) think they could collapse, or at the very least, need to dilute shareholder value to raise cash. That has sent the stock price into a tailspin. Now international investors are worried because they hold large investment positions, all with the assumption that the US Government will bail them out if either institution fails. At the moment, the Federal Reserve is proposing that we spend untold billions to rescue the two companies. My take? Let them fend for themselves. There are two reasons for that. First of all, no one is sure how bad the situation really is. I admit: it could be as bad as some doomsayers predict. A collapse of Freddie and/or Fannie may trigger a large recession or worse. However, we don't know that for sure, and all a bailout will do right now is reward poor management of two critical companies. Secondly, this attitude that the US economy is very fragile and must be constantly propped up is dangerous and historically bogus. Dangerous because simple minds can be led to believe that minor financial sleight-of-hand can somehow fix massive structural problems. Historically bogus because the economy is a machine with many trillions of dollars flowing through it. Multiple governments tried to prevent the currency collapses of 1992 and 1997. In every case, the markets did what they wanted to do, and anyone that got in the way was run over--including the governments which lost billions in the process. The short answer? If you really have a system built on a house of cards, the earlier it collapses the better. Don't keep trying to prop it up. Comments |
Related: economics Unrelated: books energy environment geopolitics lists mathematics predictions science |
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