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Mon Mar 31 23:00:00 2008 Carpe Seize! More talk of markets seizing up.
Wall Street Image courtesy of Eugene Zelenko (wiki) See my below. Basically, I'm seeing more references to markets "seizing up." I don't think most people know what this phrase means, particularly the people using it. For instance, this article says "everyone is affected when the financial markets seize up." He refers to the Savings and Loan bailouts and Long Term Capital Management, both collapses that, while painful, were not catastrophic to the nation's economy and cleaned out industries that had been poorly managed for a long time. In other words, they had it coming. The same article also mentions the Great Depression and Panic of 1907, but those aren't relevant since, again, they were before the FDIC. (Did you listen to FDR's speech on that page? Still relevant today.) Then this article gives a more accurate definition of a seize-up: "loans [are] costlier and harder to come by." That's right: once a bank realizes it has screwed up and made a bunch of bad loans, it has to start being more careful. I recently got another mortgage: it was harder than it was 3-5 years ago. No surprise. And this doesn't qualify as a meltdown, nor are Great Depression analogies appropriate. The bottom line? The big market seize up is apparently just the realization that it is harder to get loans. The Federal Reserve's action to reduce rates is a fine way to tackle this for now. I still think bailing out the investment firms that made bad mistakes is not justified. Comments	Related: > economics < Unrelated: books energy environment geopolitics lists mathematics predictions science

Wed Mar 26 23:00:00 2008 The Great Stagflation of 2008 Get ready for the next few years.
Well, the bad news keeps coming in. Nationwide housing prices continue to fall, with a staggering 11% drop in January alone. Oil prices keep going up, and aren't likely to stop going up for another year or two at least. OPEC can't raise production much since producing countries are running out of oil, and it will take a while for Americans to replace their existing cars and power plants with more efficient models. Gas prices are around $3.30 locally, and I predict we'll see over $4.50 for a gallon of regular gas before 2010. $4.50 is a big jump in gas prices. How can I be so sure? I'm sure because inflation is also about to make some dramatic jumps. Latest inflation rates are high, but they will probably get much worse. Multiple companies are reporting that they have to raise prices due to transportation and food costs. (And often food costs rise because of transportation costs--the nation's corn crop is at a high price because of increased ethanol production). This is the classic setting for stagflation, where growth is low, and moving interest rates doesn't help. If you lower interest rates you just stoke inflation, and raising interest rates just slows growth. Many people assume that monetary policy (the Federal Reserve's base interest rate, for instance) is the only economic lever. However, there are multiple other levers. Another good tool is fiscal policy. There is a classic way out of this situation: keep interest rates up (avoid inflation) and stimulate growth via public spending. However, we can't do that now because the government is already at historic debt levels. The government can't really spend anything more because like American consumers, the government owes too much. So we are pretty screwed. Even gold is a dubious investment, given its recent price rise. So my recommendation is to keep your money in somewhat inflation-free investments such as real estate or stock indices. A savings account is likely to lose value, and even bonds may not keep up with inflation. Comments	Related: > economics < predictions Unrelated: books energy environment geopolitics lists mathematics science

Mon Mar 24 21:00:00 2008 Seizing Up Apparently our financial system can seize up.
The government is now trying to figure out how to respond to the mortgage crisis. In particular, the Federal Reserve is bailing out Bear Stearns in an effort to keep the "financial system from seizing up." Gears all seized up. Image courtesy of Jared C. Benedict (wiki) That phrase has become very popular. Apparently, just like a big cranky engine without enough oil, the economy can suddenly grind to a halt with disastrous consequences. Most reporters and economists make comparisons with the Great Depression. It must be true, since so many reputable news providers use the phrase. But what does it mean really? In particular, what would have seized up? Would the nation's banks have stopped working? Millions would have pulled out their savings, leading to a nation-wide run on banks and financial meltdown? Not likely. Consumers are so tightly leveraged that odds are they owe their banks a lot more than is owed back. In 1929, the savings rate was close to 15%. In 2008, the savings rate is close to -1%. That's right, negative 1%. Most Americans spend more than they earn. Okay, so many people have no savings. But it is possible that a mass panic would have set in, and people with savings would have pulled them out. But how many? In 1929, we didn't have the FDIC, which now insures most Americans of up to $100K of their savings. I wouldn't run out and pull my insured money out. Would you? Where would you put it if you didn't trust the banks? And how much of your money is actually in banks versus stocks or properties? (Incidentally, check out FDR's radio address in that FDIC link, even just the first few minutes. What a wild situation. His description of the banking system is better than any I heard in school. Check out the description of bankers around 11:40. And do they still make Presidents like that?) So bank runs aren't a real risk. Is it the collapse of mortgages which could destroy bank funds to they point where they couldn't operate? Not at the national level. As bad as the mortgage problem is, it alone couldn't take down all the nation's banks. Again, the Federal Reserve is able to provide loans on assets if banks really needed it. So what would seize up? It isn't clear at all. So I think that if reporters use the phrase, they should explain what is seizing up and why. Because at the moment it sounds like a loaded phrase used to justify the bailing out of incompetent bankers at the public's expense. And I wonder if Bear Stearns should just be allowed to fail, as a warning to all other incompetent money managers. If taxpayer money should be involved, I'd say that should go towards the victims of bad lending practices and not the perpetrators. [Update on 7 April 2008: if you read the FDIC documentation, you'll see that $100K is the minimum insured amount. You can be covered for more if the account qualifies. And certain retirement accounts are covered up to $250K. Nothing like this was available to banking customers in 1929!] Comments	Related: > economics < Unrelated: books energy environment geopolitics lists mathematics predictions science

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