Who is Going to Rescue the Hundreds of Busted U.S. Banks? Don’t Count on Suckering Again the Foreign Governments (the Sovereign Wealth Funds). And the Biggest Fire Sale in the History of Humanity…

Author: Nouriel Roubini · July 25th, 2008 · 2531112008-07-25+13%3A57%3A31Nouriel+Roubini › Share This Print

Time International (the global version of Time magazine) has recently published an article that Rachel Ziemba and myself have written on sovereign wealth funds (SWFs) and their past and potentially future role in rescuing financial distressed U.S. and foreign banks and other financial institutions.

Here is the text of this articles followed by some additional remarks and observations on why the ability/willingness of SWFs (and the political constraints in the U.S. around their actions) to do another round of recapitalization of U.S. financial institutions – after the losses they bore in the first round – is very limited. So while U.S. banks and other financial institutions will need hundreds of billions of dollar of additional capital in the next year or so that money – for a variety of reasons may not be available to them.

Investing: That Sinking Feeling

Time International

Thursday, Jul. 17, 2008 By Nouriel Roubini and Rachel Ziemba

Early last winter, when the west was suffering the first casualties of the credit crisis, sovereign wealth funds (SWFs) rode to the rescue, providing over $40 billion in capital to some of the largest of the faltering U.S. and European banks. The U.S. government — reluctant to bail out banks directly — welcomed this infusion, even though SWFs are investment arms of foreign governments and American politicians are often suspicious of outsiders acquiring stakes in key domestic assets. So instead of a bailout of financial institutions by American taxpayers, we saw a foreign-funded bailout.

As mortgage losses continued to mount and the credit-crisis snowball rolled on, private equity, with some SWF support, took on the role of recapitalizing regional banks. Yet there’s still no end to the crisis in sight. On July 11, U.S. regulators shut down IndyMac Bank, the second-largest largest financial institution to close in U.S. history. If current estimates are right and more losses are coming — Goldman Sachs says U.S. and European banks may need another $200 billion — where’s the money going to come from to keep the financial system functioning?

One non-obvious answer is: the central banks of emerging economies. To keep their currencies from appreciating too much against the dollar, emerging nations continue to buy increasingly large amounts of U.S. debt. This provides the U.S. with an indirect funding source to prop up its banks and brokerages, but it’s a compromised solution. After all, the willingness of central banks to lend almost without limit to America helped create this mess. Cheap money from abroad suppressed U.S. long-term interest rates, helping to set the stage for the housing bubble and its catastrophic collapse. Continuing such inappropriate monetary and exchange-rate policies feeds more asset bubbles in emerging economies as well as global inflation.

SWFs, on the other hand, control more than $3 trillion, an amount that is growing rapidly. That money needs a home, and the weak U.S. dollar presents foreign investors with opportunities to put it to work by snapping up “bargains” like the Chrysler Building and Citigroup stock. But after turning to SWFs in their hour of need last winter, will U.S. and European officials be willing to do so again?

Possibly — but SWFs may want better deals. In the first round of recapitalization, SWFs took small (less than 10%) stakes in financial giants including UBS and Citigroup by purchasing preferred or convertible shares without voting rights. In return, the funds got fairly high interest payments and the chance to buy into institutions at what they thought were cheap prices. They’ve since suffered losses on the order of 30-50%. SWFs might be wary of coming back for more unless they get more control, along with greater opportunities for synergies between Western banks and their own domestic financial systems.

It remains to be seen whether U.S. authorities will be comfortable with SWFs taking larger stakes. Consider that while the U.S. is aggressively pushing China to open up its banking system and financial markets to U.S. companies, regulators have been reluctant to issue licenses for Chinese state banks to open branches on American soil. While this impasse may be resolved, Washington’s protectionist stance might make Chinese banks and sovereign funds less likely to invest in U.S. firms.

It is difficult for a borrower to set the terms of its lending, though the U.S. has been able to do this for some time. With the balance of economic and financial power shifting, it might be less able to do so in the future. Meanwhile, with so much money to invest and a reluctance to abandon currencies that track the greenback, the SWFs of China and other emerging countries have few other places to go — so mutual interests might allow this grand bargain to continue. Washington has so far skirted the complicated issues deriving from the need for further recapitalization of its financial system. But the wealthiest country in the world may no longer be able to afford to be so picky about who rides to its rescue and on what terms.

Nouriel Roubini is a professor of economics at New York University’s Stern School of Business and is chairman of RGE Monitor; Rachel Ziemba is a senior analyst at RGE Monitor

And here are ten additional observations and points that elaborate on the points that Rachel and I made in our Time International piece…

First of all, it is now clear that the U.S. will experience a most severe and systemic financial and banking crisis, including hundreds of small banks, many regional banks, some major money center banks and most independent broker dealers that will go bust. So the need to recapitalize those banks and financial firms that can be rescued will be massive and in the order of hundreds of billions of additional dollars. Indeed, this week one of the most leading and well respected US experts of the banking system, Chris Whalen, wrote: “preliminary work we’ve completed on our credit conditions index puts roughly 8% of all FDIC insured institutions in the stressed category as of Q1 2008 and roughly that same number headed in that direction. That 8% of all US banks translates into over 700 institutions as of Q1 2008. At the end of March, the FDIC had 90 institutions on its troubled institution list.” So 16% of banks potentially in trouble adds up to 1400 institutions.

Second, in the first round of recapitalization (or capital funding) of the major U.S. financial institutions (Citigroup, Morgan Stanley, Merrill Lynch, Blackstone) most of the recapitalization (about 50% of it) was done by sovereign wealth funds (and among foreign banks/financial firm UBS, Barclays, Standard Charter also received significant amounts of capital from sovereign wealth funds). Paradoxically, since the US government did not want to take over and nationalize most of the distressed institutions it threw to the wind all its concerns about their transparency and outsourced the job to foreign governments, i.e. the SWFs. So, instead of having a full domestic nationalization of our banks and broker dealers we got partial foreign nationalization of our major banks via the SWFs.

Third, of course to keep the political optics of this “foreign nationalization” acceptable to the US congress the first round was done via preferred shares (that don’t dilute for the time being common shareholders), no voting rights, no board membership, and limits of 5% to 10% to ownership to pretend there is no control and avoid triggering a formal review process.

Fourth, the SWF got literally shafted in the first round of this recap; they on average lost 40% to 50% of their investments
as they bought at too high prices that collapsed in the follow-up bust of the equity valuation of these financial firms. The first thing that CIC (the Chinese Investment Corporation) did with its $200 billion to put at work was to invest $3 billion in Blackstone; it then lost 50% on that investment in less than six months. And even in a non-democratic country like China the bloggers on their blogsphere are outraged and shouting: “You stupid idiots wasting our precious Chinese taxpayer savings in these U.S. financial losers!”

Fifth, of course while formally outsourcing part of the partial nationalization of the U.S. financial system to the foreign governments (SWFs) the Fed and Treasury have also been busy formally nationalizing (and/or bailing out) directly or indirectly the U.S. financial institutions: the Bear Stearns rescue and the $29 billion of toxic assets of Bear that the Fed bought; the TAF and TSLF that swap toxic illiquid asset backed securities of banks and primary dealers for safe U.S. Treasuries; the bailout of Fannie and Freddie and its effective nationalization; the use of the Home Loan Banks System (another effectively public GSE) to lend hundreds of billions of dollars to the illiquid and/or insolvent mortgage lenders; the most recent Frank-Dodd bill to provide relief to borrowers while guaranteeing the remaining balance for banks that reduce the face value of their mortgages; and so on.

Sixth, some of the rescue of busted domestic financial institutions was done by U.S. financial firms with massive government subsidies. JP Morgan took over Bear Stearns but only after the US government took off Bear’s balance sheet $29 billion of toxic securities and after the US government bailed out fully the creditors (including JP Morgan) of Bear and after the US provided JP Morgan and other primary dealers’ access to the TSLF and the PDCF. Bank of America (BofA) took over the bankrupt biggest mortgage lender Countrywide after the latter got $51 billion of liquidity from the Federal Home Loan Bank of Atlanta, and after BofA got access to the TAF, the TSLF and the PDCF facilities of the Fed. The only suckers that were not directly bribed into rescuing bankrupt banks/financial institutions – without the effective grease of dozens of billions of public money – were a few clueless private equity funds that shoved equity in some of the regional banks and already lost – like the SWFs – most of their investments. Of those 32 regional banks a good third or half look like the bankrupt Indy Mac (namely examples such as Wachovia and WaMu that just reported absolutely awful earnings results in spite of plenty of cosmetic accounting fudging).

Seventh, the U.S. government – White House and Treasury – has treated the Gulf states (the members of the GCC) as its own private imperial protectorates. While bashing China for not letting its currency appreciates it has sent marching orders – straight from the White House – to the GCC to not let their currency pegs appreciate as they have to indirectly pay for the security services that the U.S. provides them. This payment occurs via these economies accumulating hundreds of billions of dollars of low-yielding US Treasuries and/or agency debt; via maintaining dollar pegs so that oil remains priced in US dollars; and if the GCC governments really don’t want low-yield US debt they are welcome to buy – but not control – at high prices shares of distressed financial institutions (but not buy the management of the U.S. ports) and then lose 50% in six months on those investments. This U.S. imperial mentality is the reason why inflation and asset bubbles and property bubbles are running rampant and without control in the GCC area. It is also the reason why there is a massive commodity inflation around the world that is now leading to higher inflation in the U.S. and thus biting the hand of the Fed. Thus, the U.S. policy towards the currency pegs of the GCC is economically and financially self-destructive of the U.S. national interests and being justified by a national security argument – and real-politik – that does not makes sense even geo-strategically.

Eighth, the U.S. government would be most happy if the GCC (or China or Russia or Singapore) were to do the next round of the needed recapitalization of Citigroup or of any other U.S. bank or financial institutions at the super inflated equity prices of two years ago (or even at the inflated prices of the last round of recaps in 2007 and early 2008). The problem is that these U.S. financial duds are exactly duds and, if not outright insolvent, will soon not be worth more than the paper that represents the claims to these “assets” (where assets is in quotes as many of these “assets” look highly toxic). The trouble is that “you can fool some of the people all of the times and all of the peoples some of the time but you cannot fool all of the people all of the time”.

So to assume that the GCC or China or Singapore or Russia or any SWFs will go and buy again at inflated prices equity shares – and without control – in distressed U.S. financial firms is delusional. If these SWFs have to go and do another round of recapitalization of U.S. financial institutions at fair market value those investment will imply shares that are associated with controls; and this time around they will expect board membership, voting rights, common shares and effective corporate control/ownership. But will the U.S. government or Congress be comfortable with selling at fire sale prices most of the U.S. financial system to the GCC states, China, Russia, Singapore, etc.? The simple answer is no as the political economy of financial protectionism (see the CNOOC-Unocal case, the Dubai Ports case and a few other cases of this asset/FDI protectionism) implies that such foreign ownership of the gems (now even the duds) of the U.S. financial system is unacceptable.

Ninth, so who will rescue and recap the U.S. financial system if the foreign SWFs will not be allowed to control most of this financial system? There are not that many options out there. Large U.S. financial institutions (such as the Citi’s of this world) are in deep financial trouble and cannot domestically recap themselves, let alone rescue other major U.S. financial institutions. Institutional investors in the U.S. did a good share of the first round but they are now wary of putting more money as they had massive capital losses in the first round. Private equity firms already took a bath in the few recaps in which it participated and have serious restrictions – now being reexamined – on their legal rights to control U.S. banking institutions; also the dimension of the necessary recapitalization is so huge that now weakened private equity firms – that plunged in the recap of smaller regional banks and almost drowned into them – cannot be at the center of the rescue of the major U.S. financial institutions. SWFs have all the political constraints discussed above to doing another round of recapitalizations. Maybe the SWFs can invest – as they are starting to do – in private equity funds and, in turn, these funds can participate in the rescue of U.S. banks, thus creating a fig leaf that manages the political optics of financial protectionism. But this latter solution is not viable in the great size that hundreds of billions of needed recapitalization requires: it hard to pretend that SWFs forking billions and billions in private equity firms buying U.S. firms are not the ultimate owners of such assets.

Tenth and final point, so what is left as the only solution is the outright formal or informal nationalization of the U.S. financial system. That effective and creeping nationalization is already underway with the variety of actions that the Fed and the U.S. Treasury have taken and that we described above. So this is the paradox of this U.S. administration: it was so rabidly and ideologically free-markets oriented and averse to any sensible regulation and supervision of the fi
nancial system that its policies of being asleep at the wheel caused the biggest asset bubble and credit bubble (not just in mortgages) in U.S. history. And now the unavoidable bust of this bubble is going to force an effective nationalization of a good chunk of the U.S. financial system as no one else but the government can do the job. This is why the free-market ideologues at the Fed, Treasury and White House have now become – especially after the bailout of Fannie and Freddie’s shareholders, management and bondholders – Comrade Paulson, Comrade Bernanke and the Bolshevik Great Leader Bush. But then their whole approach and ideology has always been not one of free market capitalism but rather one of privatizing gains and socializing the losses; or socialism for Wall Street, the rich and the well connected. So they will now get what they deserve and worked so hard to achieve: a nationalization and bailout of the U.S. financial system.

And since the fiscal bill for this bailout will be at least $1 trillion and possibly more; and since in the last eight years 100% of the U.S. fiscal deficits has been financed by non-residents (mostly governments, central banks and SWFs that now hold about 55% of all the outstanding stock of U.S Treasuries and a good chunk of the agencies debt) the result will be that this nationalization of the U.S. financial system will be effectively financed and controlled by Saudi Arabia, the other Gulf states, China, Russia, Singapore and the other public financiers of the U.S. twin deficits.

And in due time when the U.S. government becomes borderline insolvent as it will not be able to service this debt we may end up with a nice debt-for-equity swap and foreign government formally taking over the ownership of most of the U.S. financial system and – given the large current account deficits and accumulation of foreign liabilities – of most of the U.S. corporate firms. Indeed, some of the few sensible proposals for fixing the mess in Fannie and Freddie – those by Bill Ackman and Josh Rosner – were to convert the unsecured senior debt of Fannie and Freddie into equity and thus formally pass the ownership of the two GSEs to China and other foreign government. In due time – via a debt for equity swap – not only the ownership of Fannie and Freddie will be in the hands of foreign governments but also the ownership of most of the U.S. financial and non-financial corporate system.

This will be the results of a eight years of the U.S. household sector spending more than its income and running negative savings, the U.S. spending more than its revenue and running large fiscal deficits and the country spending more than its income and running massive and unsustainable current account deficits. The ensuing fall of the U.S. will make this fire sale of the best U.S. private asset a true bargain basement deal: with the dollar price of these assets now imploding and with the U.S. dollar now in free fall non-residents will be able to buy most of U.S. Inc. for the cheapest bargain. This ideology of reckless free-market fundamentalist financial and public policies is what has led great empires in the past to become colonies of new emerging powers.

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253111375 Responses2008-07-25+13%3A57%3A31Nouriel+Roubini to “Who is Going to Rescue the Hundreds of Busted U.S. Banks? Don’t Count on Suckering Again the Foreign Governments (the Sovereign Wealth Funds). And the Biggest Fire Sale in the History of Humanity…”

Anonymous • July 25th, 2008 at 2:00 pm

First?

Bubba • July 25th, 2008 at 2:18 pm

Dos

Anonymous • July 25th, 2008 at 2:31 pm

The Professor is so right! There has to be an infusion of real money into the Ponzi Pyramid to prevent it from collapsing on itself. Debt for Equity swaps. Buying Banks with common stock control. The new shareholders will want to make sure that the financial institutions are not going to undertake another round of Ponzi after the equity investments are in. The routes may be different, but the destination is the same. Foreigners will have to fund this somehow! The system is a closed system with consequences. If we nationalize, it is inflationary.We either have foreigners bail us out, or the dollar will lose its reserve currency and oil pricing status. New debt cannot bail out old debt. The investment bankers will tell you (if they are honest),that the reason this happened is INTELLECTUAL ARBITRAGE(survival of the fittest). They would probably say that we deserve it, because we did nothing to stop them. Remember THE FROG AND THE SCORPION CROSSING THE RIVER. The Banks Stung us, because IT IS THEIR NATURE. We are at fault!!!We should not have bought the argument that deregulation without oversight was not a recipe for disaster. I am convinced that somewhere down the linethe FED SCORPION will sit on our backs and sting us a third time.

hlowe • July 25th, 2008 at 2:37 pm

What about the coming end to BW2 and yet in previous post the coming attraction to the US Dollar. Am I confused?

WAWAWA • July 25th, 2008 at 2:56 pm

Comrade Paulson, Comrade Bernanke and the Bolshevik Great Leader Bush.Pres. Bush has been a disgrace to say the least.Sad part is that ordinary Americans (I see it at my work) has no clue what so ever of what has been going on.

Gloomy • July 25th, 2008 at 3:02 pm

Nouriel, IMO the SWF’s cannot acquire significant portions of American banks without unleashing an American nationalistic backlash-Americans will not do business with these institutions and will bank at newly started American owned institutions. The only possible endpoints are:1. The government lets large numbers of banks go belly up with the result being a financial meltdown.2. The government effectively nationalizes the banking system with the result being a massive dollar selloff and skyrocketing interest rates and hyperinflation. Either way the New Depression is coming.

GMeli • July 25th, 2008 at 3:05 pm

Good thing AMERICANS ARE PACIFIED with ipods, iphones, itunes and ihomes.

Gloomy • July 25th, 2008 at 3:07 pm

Nouriel,Is it time to revise your estimates downward concerning housing price declines?"Fitch Ratings said Thursday that it had enhanced its U.S. residential mortgage loss mode … Fitch’s revisions suggest … a very bearish take on housing prices over the next five years: Fitch said in its report that it is expecting home prices to decline by an average of 25 percent in real terms [inflation adjusted] at the national level over the next five years, starting from the second quarter of 2008.And that’s the base case scenario."http://calculatedrisk.blogspot.com/2008/07/fitch-projects-additional-25-percent.html

Guest • July 25th, 2008 at 3:10 pm

Cuatro

Guest • July 25th, 2008 at 3:18 pm

@Guest: “Perhaps the most important development is not specifically the nationalization of housing but all the removal of privacy that is excused on the situation (similar to 9/11). Like the requirement on the housing bill, that all mortgage brokers are being fingerprinted… (previous thread)Are we who forget history forever doomed to repeat it?Immediately following the French Revolution of 1848, that period when France was rapidly turning to complete socialism, the great French economist and statesman Frederic Bastiat wrote thusly in the opening to his famous — “The Law”:“The law perverted! And the police powers of the state perverted along with it! The law, I say, not only turned from its proper purpose but made to follow an entirely contrary purpose! The law become the weapon of every kind of greed! Instead of checking crime, the law itself guilty of the evils it is supposed to punish!“If this is true, it is a serious fact, and moral duty requires me to call the attention of my fellow-citizens to it.”And thank you, Professor Roubini, for sounding the alarm these past many months warning this country of the financial excesses that are costing America her self-preservation and self-development.

Guest • July 25th, 2008 at 3:20 pm

In good times, few focus on such "mundane" issues as earnings quality and footnotes. However, this lack of attention to "detail" tends to come back and bite investors in the arse during bad times. There are notable exceptions to this generalization… Contrary to the silly populist backlash which sees short sellers as rumor mongers and conspirators, they are actually amongst the most fundamentally driven of all the investors I interact with. Rather than being some malignant force within the markets, in my experience short sellers are closer to the accounting police (something the SEC once purported to do!). Whilst companies often accuse short sellers of lying and conspiracy, it turns out that the accusers are often the guilty party. Owen Lamont from Chicago University has examined the battles between corporates and short sellers in the U.S. between 1977 through 2002. He found that ultimately it was the shorts that were right, the stocks underperformed the market by a cumulative 42% over three years after the start of the battle.James MontierMind Matters: Cooking the books, or, More sailing under the black flagJune 30, 2008

Guest • July 25th, 2008 at 3:22 pm

Russian stock markets plungeFriday July 25, 1:40 pm ET By Catrina Stewart, Associated Press Writer Mechel criticism rattles investors, heavy trading sends Russian stock markets down MOSCOW (AP) — Investors piled out of Russian stocks Friday after the abrupt departure from the country of a foreign oil boss and the prime minister’s unexpected severe criticism of a large steel firm.

Guest • July 25th, 2008 at 3:33 pm

@Guest: Contrary to the silly populist backlash which sees short sellers as rumor mongers and conspirators..”I think in this case, the populist is at last turning against the true “perpetrators” – Paulson, Cox, the SEC, Congress, et al. The “powers that be” blamed the innocent once too often for what they do.

Guest • July 25th, 2008 at 3:41 pm

Today’s Bloomberg “Breaking News”: Home Sales Beat EstimatesMaybe we need new “estimators.” Seems like missing estimates is getting to be a bad habit.I nominate Miss America.

iNnOsInZ • July 25th, 2008 at 3:44 pm

@AfAWritten by AfA on 2008-07-25 15:01:42"So to sum it up: ABOLISH THE TIME VALUE OF MONEY"Sounds like Islamic Banking? Maybe thats why their funds are more prosperous…….

Sigmund • July 25th, 2008 at 3:46 pm

Anybody know more specifically which "independent broker dealers" will go "bust" that professor Roubini referred to in point 1 following his Times article?

AfA • July 25th, 2008 at 3:51 pm

@ Outerbeltway et al, Re: Capital formation & InnovationI think I have been misunderstood. My point was that real innovation has been destroyed or at least distorted by credit and leverage. Both cheap credit and leverage create investment laxity. In this week’s edition (hat tip OR), Bill Gross says “Credit and debt finance is, in fact, the mother’s milk of capitalism: without it, entrepreneurs may transact, but economic progress would be most difficult with seashells or gold bars for mediums of exchange.”And in the WSJ Op-Ed posted above by Big Carbon “But for society as a whole, debt finance is a prime means of capitalizing production and growth.” This is, according to me, a big heresy. What keeps free-markets going and capitalism alive is CAPITAL not credit (this is why it is called capitalism).As an investor/creditor, even if you undertake underwriting/due diligence on the borrower, you are not motivated to “dig” very deep as you are interested only in whether the borrower can pay his interests (not principal) or at least the corresponding fees. As an entrepreneur when you have two projects one good and other less good, you don’t need to choose only one, you can pursue both. The decision to follow two projects instead of only one pushes you to underestimate the risk involved and to outsource. The mispricing of risk pushes others to offer you services cheaper than they can otherwise afford (this is an emerging issue for example in the PPP – public-private partnership) I think I didn’t make myself clear the first time so I give an example:Imagine you are an entrepreneur with an innovative widget. You need capital. You go to a business angel for equity and then a loan from a bank (it was very hard at the beginning but you succeeded). Now you are a medium sized company. Thanks to the efforts of your R&D, you have the prototype of Widget 2.0 which is the same as the first one but comes in different colors. Your bank offers you a credit line before you ask for one at low interests and with no collaterals (why? Because they trust you and for other unspoken reasons – their profit comes from fees and because of low short term rates …) In order to mitigate your credit risk, you decide to go public. A big investment bank underwrites your equity offering (using borrowed money) and sells your stocks in the secondary market to investors and brokers/dealers who are mostly levered and buying on margin (using credit). You get even bigger and you issue AAA-rated bonds that are bought by Chinese banks. Then you receive an offer from a Private Equity company which is itself financed by Arab SWFs. Both Chinese bank and Arab SWF, because of the peg of their currency to the dollar, have been indirectly leveraged using increasing reserves by their respective central banks. Thanks to all this financing, you are able to produce a huge quantity of widgets which you sell all over the world at cheap prices. Others see you are making good money and they decide to join the market to compete against you driving prices even lower. Thanks to cheap labor, transportation costs you decide to offshore your production, then you decided to outsource your accounting and IT and you only focus on R&D. All economic players, almost without exception, lose all interest in managing business risk and start managing credit risk, playing on the upward sloping yield curve, borrowing long and lending short.So here nobody see the risks because nobody cares about them up until all unsystematic risk becomes systematic while nobody is paying attention: Equity is financed through debt, debt is leveraged, diversification kills differentiation, specialization destroys integration and leads to commoditization– creating a rigid but fragile system. Rigid because it is enable to quickly adapt without major pain and losses and is inclined to perpetuate the status-quo only to avoid sunk cost loss (I guess the only reason keeping the Chinese from dumping dollars and US treasuries). And fragile because of the fact that transportation or labor costs (in China) will increase in the future (an inevitable result because of the big competition you draw to the market, huge excess production, resulting in cheap prices, which leads to more consumption waste by end-users, resulting in more supply, which results in more demand for raw materials, labor in outsourcing countries, transportation … all of which are limited in quantity) will squeeze your profits making you and your competitors inclined to raise prices (consumers will dump your products because they realize they don’t actually need them), putting more pressure and chain reaction on your lenders. All that because nobody wanted to assume the original business risk. Make no mistake, none of these is bad, it is their mass practice that is dangerous: the combination of free markets and cheap money. As I said earlier, it is the willingness to institutionalize an idea (free markets, capitalism, housing IS the American dream …) by politicians that ends up destroying the system. This is because most, if not all, ideas and strategies are self-defeating; they work only when they are narrowly practiced.Capital financing (e.g. equity) means assuming business risk. And as an investor, if you put all your saved capital (without any leverage or credit) to invest in a company, you are much more inclined to undertake full and deep due diligence (I think it is a problem of willingness rather than ability to do that that makes bank financing even more risky and creates risk underestimation). Capital through equity through saving creates a strict discipline on investments. In this week’s edition of Business Week, there is an article about “The Best Global Design of 2008” in which are featured, as examples, an ugly camcorder with a built-in USB key, an anti-bacteria earphone, a garbage can, and fire-fighter truck especially designed for airports. This is ridiculous and pathetic! Who would have put their savings, efforts, time to design products like these unless there was plenty of cheap credit? I am not advocating that debt should be abolished or that all investment has to be made debt-free, but leverage should never be allowed to exceed 1 (Debt=Equity) and that goes for the whole system and for all enterprises. I do not have exact solutions like those that have been proposed here and I don’t think that local-financing … are long-term solutions or generalizable, and even if they were, it won’t be long before we see their problems. Again, it is the institutionalization of an idea that makes it ideology and in this situation, all ideas are self-defeating. So to sum it up:ABOLISH THE TIME VALUE OF MONEY

Anonymous • July 25th, 2008 at 3:59 pm

dont worry im gonna help all, have enough money

Aleister Perdurabo • July 25th, 2008 at 4:02 pm

The eighteenth-century philosopher Richard Priceidentified this miracle of compound interestand observed, somewhat ruefully, that had hebeen able to go back to the day Jesus was bornand save a single penny—at 5 percent interest,compounded annually—he would have earnedhimself a solid gold sphere 150 million timesbigger than Earth.Abolishing the time money model might be a good idea.The system must change. The accumulated debt cannot be paid back with interest. Failure of any one area takes the whole system down. Let’s throw down the cards and figure a new set of rules. Barter commodoties – whatever. Buckminster Fuller said:Wealth = intelligence + energy

AfA • July 25th, 2008 at 4:04 pm

@iNnOsInZ"Sounds like Islamic Banking? Maybe thats why their funds are more prosperous…"Maybe but not exactly. It might be in the core of the idea, but not in the way it is done. The current Islamic Banking is designed to circumvent some issues with the traditional western banking but do not address the real problems. It is a good experiment though.Abolishing time value of money would erase most of inflation, reinvestment and duration risk, and significantly reduce any arbitrage between borrowing/ lending, short/ long term, consumption/ saving … made based on anything but yield curve.At that time, I think few biases will disappear from people’s investment, consumption, borrowing, donating decisions which will be made based on other real criteria (eg. profitabilty, viabilty & feasibilty of a project, the "real" need to consume,…) IMO

Alessandro • July 25th, 2008 at 4:05 pm

Nouriel,that was a heck of a post!You said it: the US is going to go broke and, at some point, it will need to surrender to its creditors. Reverse colonialism.And what is most amazing to me is that you described exactly the baseline scenario I’ve being slowly putting together! You (and a few others) turned this former physicist, now software engineer into a macro-economic maniac in less than a year!

RA • July 25th, 2008 at 4:06 pm

While considering any system, one relevant issue is the description of what is happening, and the other relevant issue is the prediction of happens from here. Description: The entire business model of the banking system and it’s secondary and tertiary lending/slicing/dicing models has been exposed to be a mistake, leaving the banks facing huge losses. This loss needs to be filled in by someone. Dr Roubini predicts this could be as high as 2T. IMF estimates are ~1T. I know no better, so I’ll take a mean: 1.5T. At the end of the day, Dr. Roubini says this 1.5T needs to come from some where. This article just says that the odds of getting this from SWFs is now lower.However, I read this interesting article today:http://biz.yahoo.com/cnbc/080725/25851253.htmlIt calculates, and by it’s own admission conservatively so, that ~1.5T of tax payers’ money is already on the line. Not that the tab is in, but we’ve already said that 1.5T will be picked up the US Taxpayer as and when the need arises. It looks like if the above 1.5T estimate is correct, the US govt isn’t really looking beyond it’s borders at all to work it’s way out of this problem. It’s done. The 1.5T will be paid, over time, by none other than your’s truly. However, the economy and, as a result, stock prices are dependent on growth, not on maintaining value. (Growth at 0 => stock price at 0 (simple forward PE calculations)) All we know is, bank balance sheets (and hence lending capacity) won’t dwindle; the 1.5T that they will be down by then time this is over has already been set aside for them. However, their money making mechanism is bust, and that’s what will drive these banks out of business, leading to many banks either folding, or combining to form huge, largely-nationalised banks. And the 1.5T that’s been injected into the system, will just find some other place to rest, some other non-performing asset, since the dream about a house being the perfect investment is gone. That’ll cause another bubble someplace else, my guess is commodity inflation. I mean, heck, who knows. Another very effective sink for money is a war. Start a war as a way of draining out the "fake" money you’re injecting into the system. The point is, there’ll be plenty of other problems with which the current problem can be replaced. And we’ll cross those bridges when we get to them.There’s really no escaping the high inflation and high taxes that are going to get baked into the system by the time this problem is over and done with. Making money in this system, then, is just betting with these 2 phrases in mind: High Taxes and High Inflation.

Anonymous • July 25th, 2008 at 4:13 pm

What is the financial "system"? In the minds of our "leaders", it is identically the big banks, especially the international broker/dealers and international money-center banks. Note the word "international". They aren’t particularly American, even if they are incorporated here; we should be deceived that they are. We should not protect them as if they were our own. They sure did not, do not and never will protect us!And what is a "systemic crisis"? Simply put, something that could hurt those banks.I wouldn’t mind a systemic crisis. Let the banks die!1. As for the money they owe us (deposits), we’ll have to print that anyway. Print it and let the FDIC pay it out.2. As for the money we owe them (bank loans, mortgages, etc.) you’re supposed to have a Jubilee every 50 years, it’s time.

AfA • July 25th, 2008 at 4:30 pm

@ Alessandro"And what is most amazing to me is that you described exactly the baseline scenario I’ve being slowly putting together! You (and a few others) turned this former physicist, now software engineer into a macro-economic maniac in less than a year!"You are absolutely right. This site is a wonderful learning opportunity. So next target: LET’S ABOLISH FORMAL SCHOOLING. Kiddin’I was guessing a couple of weeks ago:"I agree that foreigners are in a temporary disadvantageous position if they don’t want to lose their American demand or don’t want Americans to default on their debts, but they als have short, medium and long term powerful weapons (so to speak). In the short term, debtors/sellers cannot force Americans to pay or default, but they can (and suspect do) easily force them to pay increasingly higher prices and higher interests. In the medium term, the effects of the shorter term may not lead creditors to default, but most certainly, will lead them to dispose of their most valuable assets to foreigners at fire sale prices, leading to a greater leverage and foreign ownership. In the longer term, due to forces from the medium term, the marginal profitability to sell to Americans will substantially decrease and more importantly, the losses to foreigners from a possible defaults have significantly diminished since they own most valuable assets, and on the other hand, the ROW would have been able to build a much larger consumer base (with more disposable income to spend) in their respective economies. I still do not see what sustainable advantage does consumerism create."Thanks professor

K in TX • July 25th, 2008 at 4:38 pm

Hmmm…I seem to remember a guy who posted on here a while back in ALL CAPS. Prattled on about the nationalization of U.S. housing, liquidation of U.S. assets…dare I say it?

Gloomy • July 25th, 2008 at 4:46 pm

We all look like geniuses here at the Nouriel Roubini School of Economics. But the truth is he just lays down the premises so beautifully, its not hard to come to the correct conclusions.

WAWAWA • July 25th, 2008 at 4:53 pm

Fellow:Is US gov. going to monetize debt eventually?Would not that be hyper-inflationary?Thanks.

Anonymous • July 25th, 2008 at 5:14 pm

We will all be paupers if we let ourselves be bled dry to bail out the big banks and especially the broker/dealers. Let someone else bail them out and own them, let them fail, whatever. We must not give up or further encumber our houses, our infrastructure, our land to support those blood suckers.They may always be blood suckers but they will not be any worse than they are now.

Gloomy • July 25th, 2008 at 5:23 pm

THE ONLY DEFENSE LEFT TO AMERICAN CITIZENS IS TO SHORT FINANCIAL STOCKSIt’s a sad truth, and I wish there was an alternative, but there isn’t. At some point you just can’t let yourself be bullied anymore.

Mike C • July 25th, 2008 at 5:40 pm

I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs. Thomas Jefferson, Letter to the Secretary of the Treasury Albert Gallatin (1802)3rd president of US (1743 – 1826) How true this is. Thsi republic is rotten to its core now and I do not believe anything can save it.

Alessandro • July 25th, 2008 at 5:53 pm

@AfA on 2008-07-25 15:51:46interesting post. Gross take on debt/capital is really amazing (but he is know for being a smart guy who has to talk his book).I think you describe vividly the financial orgy that had become the US economy, but I don’t understand the conclusion. You appear to use the Austrian concept of the "time value of money", that basically is the market priced interest rate (as opposed to the rates set by a central bank). But the problem with interest rate is that they have been set too low for a long time, not to high, and you sure don’t want to abolish them! That would be ZIRP.IMHO suppression of interest rates is due to: * many forms of central banks manipulation (both the FED and the foreign central banks) * compulsory pension plans that force everybody to saveOnce you have that much savings being forced into an economy the savers don’t find enough productive investments (corporate innovation) and savings end up squandered into blowing asset bubbles or worse just consumed via consumer credit.Most of the savings glut is really the governments of the word forcing their people to save even if they would not do it because of lack of appealing investments.

Free Tibet • July 25th, 2008 at 5:55 pm

@ AfAI am so happy that I didn’t miss your last post on the previous thread. I could talk to you about those things for hours. And certainly learn a lot. And it’s very interesting in the context of moral hazard.But I was looking for something more practical too. I can’t change the yield curve. That’s up to Uncle Ben. And I can’t abolish the time value of money either. That’s already hard wired into my computer. Though there is a possibility that was a conspiracy! But, I am sensitive to the lack of innovation. The real innovation that you’re talking about. And I see so much opportunity that isn’t or can’t be realized because the system that we’ve got – bad as that is – is bent on either hitting home runs (high risk, stooped projects sold by silver tongues – wind farms come to mind) or “line extension” (no risk). The latter meaning those multi-colored widgets. We’ve had this same system for a long time now. You can call it credit system rather than capitalist system if you like. But I feel we’ve definitely entered an era of flatulence. It’s not doing what it could do. Nobody wants to design anything. Everybody’s sole focus is on attracting more capital (or credit, if you like). And you’re right. It’s all being used to sell more of the same products into the same already saturated markets. What I mean is that the bad system that we’ve got is capable of financing innovation – but it doesn’t. So, maybe the focus on credit risk is the reason for that – but it shouldn’t be. What has to happen to change it and can I be part of it?Roubini is staying on message, “it’s going to be bad, it’s going to be bad…” He’s not going to have to beat that drum much longer. The question today is what should we be doing? Some people here are getting started. Writing govt. Etc. We can’t wait for them to fix things.

Anonymous • July 25th, 2008 at 6:08 pm

@Gloomy:The solution is not to short financial stocks:1. They may go up and then you lose.2. The SEC will prevent you making much money at it via whatever it takes. Their job is to make sure we don’t win at the banks’ expense.The solution is not to play this rigged game. The solution is to take away the banks’ control and advantages, to create a playing field on which we can win. We deserve to win. We must talk about this, not let those within the system get away with stuff without exposure of each step of what they are doing.Outrage? They enjoy our outrage! (Look up the phrase "food for the moon" for one interpretation of this.) But exposure is very uncomfortable for them.

Gloomy • July 25th, 2008 at 6:17 pm

@Anonymous on 2008-07-25 18:08:50 I’ve been short for over 6 months and made a bundle. The notion that shorting is somehow "dangerous" is ludicrous claptrap put out by TPTB. Try it some time. "They may go up and then you lose." Financials rising- that’s the most humorous thing I’ve heard all day!!

Guest • July 25th, 2008 at 6:24 pm

"The Roots of Violence: Wealth without work, Pleasure without conscience, Knowledge without character, Commerce without morality, Science without humanity, Worship without sacrifice, Politics without principles: Mahatma Gandhi: Indian leader, 1869-1948"An entrepreneur in self-risk-motivated and self-risk-mitigated constrained; those of the financial industry (Les Grande Ecoles) are merely superficially designated and act accordingly; it is called irresponsibility and incompetence or elitism.The Law at the end of the cycle represents the fascist state.What is the most dangerous action, is when people relegate their sentience (thinking processes) to others.Desperation (of leadership) = incompetence + self-agenda (moral hazard) = cyclic disasterGood article Professor; you are nearing the time of the hanging tree now:)Ho humPeterJB

Anonymous • July 25th, 2008 at 6:32 pm

Written by Gloomy on 2008-07-25 17:23:45and what if your brokerage goes under. SIPC is not federalinsurance. do some due dillignce and the FDIC cn go insolvent. One money center bank goes under and the fdic is toast.

Anonymous • July 25th, 2008 at 7:09 pm

Gloomy:1. If you can time the market and make money being short, that’s fine. I thought you were saying to be short for some emotional reason, like hating the banks, and I think we can both agree that would be irrational.2. The government should print the money to allow the FDIC to pay all claims. The FDIC is truly "too big to fail" or at least too important. If the Fed won’t do it, there is still Kennedy’s Executive Order (11110 if I recall the number correctly) that allows the government to do it. Sure it’s inflation, but we will get that anyway, and giving the banks perfectly good money in exchange for their busted mortgage portfolios is at least as inflationary. At least we can bail out the little guys (living breathing human beings with souls) in preference to the banks!

Guest • July 25th, 2008 at 7:14 pm

@Anonymous: “We will all be paupers if we let ourselves be bled dry to bail out the big banks and especially the broker/dealers. Let someone else bail them out and own them, let them fail, whatever…”I heartily concur. Perhaps we could just give the Fed and its baggage away free, if someone would just haul it off.The typical American pays more in taxes than he does on food, shelter and clothing combined and spends 5.3 months working for taxes, or 43% of his income a year. And now Wall Street wants Joe to spend a bit more time at the wheel bailing out Freddie and Fannie and the “financial system.” http://mwhodges.home.att.net/tax.htmWhat does the average Joe get for it? Well, here’s a peek from columnist John Gapper, written on May 8, 2008, in the “Financial Times”:“If anyone doubts the problems of US infrastructure, I suggest he or she take a flight to John F. Kennedy airport (braving the landing delay), ride a taxi on the pot-holed and congested Brooklyn-Queens Expressway and try to make a mobile phone call en route. That should settle it, particularly for those who have experienced smooth flights, train rides and road travel, and speedy communications networks in say, Beijing, Paris or Abu Dhabi recently. The gulf in public and private infrastructure is, to put it mildly, alarming for US competitiveness.”

Gloomy • July 25th, 2008 at 7:35 pm

I’M MAD AS HELL AND I’M NOT GOING TO TAKE IT ANY MORE!!@Anonymous on 2008-07-25 19:09:27Actually I do hate the banks. Is it irrational to hate those reckless institutions whose greed has taken down our great nation? Every day the executives of these foul corporations stay in power, they continue to earn megasalaries. I, a taxpayer who have not behaved recklessly will be forced to pay for all of their greed through added taxes, runaway inflation, and squandered opportunity for my children. I am wronged and since no court will compensate me I will take compensation for my damages by shorting these institutions as they inevitably find their way to oblivion. It is justice and it is the moral right of every innocent citizen in this country to do the same. The sooner this Ponzi scheme is burned to the ground, the sooner we can try to rebuild our country from the ashes. I did not create this mess. I have no remorse.

Jason B • July 25th, 2008 at 7:35 pm

It pains me to say it, but Ryskamp saw it all coming.But he was so annoying.

Anonymous • July 25th, 2008 at 7:39 pm

@Free TibetAgree, the system has lost its soul, even its proper economic soul. It’s about nothing _but_ greed, and as a result we now see it’s time to replace it with something else, what follows will not be worse, because we have no control over what exists now.I am taking no position on Tibet in this post.

Anonymous • July 25th, 2008 at 7:48 pm

@GloomyI hate ‘em too. They’re easy to hate, and the more I know about them (which is a fair amount), the more informed my hatred and contempt becomes.I am concerned if you are investing emotionally, because it could hurt your results. You have certainly been right so far and congratulations on your profits!But one can hate the banks in other ways too. One can work against them effectively even during periods when their stock prices increase!

GLOOMY • July 25th, 2008 at 8:02 pm

DEFEND YOURSELF@Anonymous on 2008-07-25 19:48:31I agree that there are other things to be done in times of "peace". But this is not a time of peace. Understand that TPTB in the financial system have declared financial war against us by deciding to nationalize the insolvency of the financial system .They seek to destroy our assets, which some of us have taken a lifetime to accumulate. In a time of war you must pick up whatever weapon you can find, pick axes and pitchforks, and meet the enemy at the gates of your home and fight him with everything you have. TPTB hate shorts because through this weapon we seek to take down their crooked edifices and take back some of that which they seek to steal from us. Justice must be served.

Andrew Foland • July 25th, 2008 at 8:13 pm

Professor–you’ve said often this isn’t the Next Great Depression. I suppose as $1T is "only" 8% of one year’s GDP, I suppose I can see the point. But let me ask the question the following way. Roughly how great would the losses to the financial system have to be, before they might plausibly lead to a true depression?

AfA • July 25th, 2008 at 8:56 pm

@ Alessandro,I am not sure what I am saying is according to the Austrian School or not. I admit I moved a bit fast to the conclusion, but the thing is that I didn’t have that conclusion beforehand; it just became self-evident to me while trying to respond to prior posts. First, my idea was that the main cause of problems was excess leverage and risk underestimation, but it appeared to me those ware only a consequence of another root cause; the yield curve shape.I am not talking about abolishing interest rates, but only time value of money. Time value of money is, in my opinion, the only component that does not correspond to any type of risk, and because of that, it considerably distort financing decisions because it is the only one that can be manipulated by central banks and banks (when inflation was low, it was positive, now it is negative in the short end and positive in the long end). As an overview, any required rate of return R, includes, in addition to different business and credit risks, interest rates (i) – i.e. “risk free” treasury rates. Interest rate (i) includes time value of money (or real interest rate, being the main component) in addition to inflation rate and some liquidity and credit risk. Excluding time value of money from rates will flatten the RAW yield curve and lift it up (not down – see below), so that for any given project (ie same amount of risk) there will be no available arbitrage opportunity between financing with either long or short term funds. This will deprive the central bank from short term interest rate setting power (but not from lender of last resort status).Let’s start from bottom up. I thought to myself that abolishing the time value of money would encourage excessive consumption (now) and borrowing at the long end (since a person can borrow at the same rate either overnight or for 20 years). However, the flat RAW curve will constrain lending: as a lender/investor you will think twice before extending credit or making investment and drive you to undertake full due diligence. Imagine you’re a bank: you are not entitled to charge higher interests only because you will lend me money for 20 years instead of 1. Banks will have to make sure, before lending for long periods, that the borrowers will pay back, and will charge rates depending only on risk not the time frame (similar to required rate of return except it will be a little lower since the lender has less downside risk). Others will need very short term credit lines, and as before, depending on the risk, banks may charge higher rates. This will make banks (just like investors) faced with very different yield curves (depending on the risk profile of each project/ borrower), but I will guess that if there should be a general shape of the yield curve (although I prefer calling it rate of return curve), it would be a convex (bowl-shaped) where the minimum rate corresponds to aggregate duration (in fixed income meaning) of all projects/borrowers. This will make the rate charged or time frame by the lender of last resort irrelevant as banks will be always inclined to match their (medium-term) duration (borrow short, lend long will not be a winning strategy but rather lend to short, medium and long-term borrowers who really need the money by accurately assessing the risks and borrow at or a bit below their duration rate)We may argue that this creates a lot of competition for funding, but that is the point. Money is (or is supposed to be) a scarce “capital” too. The competition for funding will reinforce investment discipline, consumption prudence and borrowing rationing.@ Free Tibet,Sorry to deceive you. I am aware that it is a given and that time value of money is embedded in the whole system, no way to escape it. My implicit point was that the next financing generation should maybe go past that “small detail” in its investment/ lending decisions (even though central banking still distorts rates with that small detail). The reason I focus more on real assessment and assumption of risk is that I view innovation as a “rain dance” rather than a scientific process. We cannot really plan to innovate, but we can arrange the atmosphere for the dance, and the atmosphere in my opinion consists of full assumption & appreciation of BUSINESS risks, investment discipline (all lead to arbitrage, competition (for funding) which leads to higher involvement and motivation, the rest depends on serendipity). If the system cannot implement such atmosphere then the next round of investors/ lenders would/should. I am trying to find some criteria to assess whether ideas/innovations will be candidates for the new system. The reason why I didn’t give examples is that I don’t want to restrict the process to some type of idea: local investment, open source … pass the test. Any other idea that passes the test COULD be a good one too.

Guest • July 25th, 2008 at 9:38 pm

@Andrew Foland: “Roughly how great would the losses to the financial system have to be, before they might plausibly lead to a true depression?”The problem is, the financial insiders are spooning the news of losses to the public in measured doses, buying time, buying Congress, arranging cover. Every few months Roubini has to rachet up the losses, and he started high. I’ve noticed there are financial pundits already talking Great Depression measures to combat the country’s malaise. Perhaps we just skipped recession, and slid straight into depression.As Marc Faber said this week, the global synchronized boom was unprecedented, and the global synchronized bust will be unprecedented — brought on by the money printing institutions around the world that we call… central banks.One thing is for certain, the losses are too big for the U.S. Treasury to cover. It can’t be done. As for me, I hope the foreigners do buy up the financials at a fire sale for “a nice debt-for-equity swap” with foreign governments “formally taking over the ownership” of most of the so-called “U.S. financial system” along with the so-called “U.S. corporate firms” whose bases are offshore, whoseheadquarters are in tax havens and whose CEOs are living off slave labor.And I would give the foreigners 30 days to get them out of here and keep them out.

Tim • July 25th, 2008 at 9:53 pm

@Gloomy on 2008-07-25 15:02:48"IMO the SWF’s cannot acquire significant portions of American banks without unleashing an American nationalistic backlash-Americans will not do business with these institutions and will bank at newly started American owned institutions. The only possible endpoints are:1. The government lets large numbers of banks go belly up with the result being a financial meltdown.2. The government effectively nationalizes the banking system with the result being a massive dollar selloff and skyrocketing interest rates and hyperinflation."How about a 3rd, albeit far fetched solution.What if the US went to those SWF countries and said we’ll allow 1 million of your citizens to immigrate and be given US citizenship for the cost of 1.1 million per citizen. The only disclaimer is, no prisoners as we don’t want a repeat of Castro emptying out Havana’s jails and shipping them to Miami. Instead we’ll accept your political dissidents and/or private citizens who have the money and want to leave (ala Hong Kong in the late 90′s).The Upside for the USA:1) A million million’s are 1 trillion. Roughtly the cost of bailing out the system. This money goes directly to the government for the cost of the citizenship/paperwork etc.2) For 1 million of their 1.1 million each citizen would get a home. Surely there are probably 500+K foreclosed/partially built homes (I am assuming a good number of those would be families so you wouldn’t need 1 million homes). The government would pay off the balance owed on these homes from the 1 million. Thus the banks get a massive influx of cash and the removal of toxic/illiquid assents. Anything left over from paying off the mortgage the government keeps.3) Each new citizen would have 100K left over for living expenseses. Managed right that’s 2-3 years of living expenses, plenty of time to find or create a job.4) The housing market gets stabilized with the excess of unsold housing inventory removed. Local cities get tax revenue etc.5) The 100k each new citizen gets works out to an influx of 100 billion into the economy. The equivalent of a mini stimulus package.6) Most importantly, the tax payer is off the hook for bailing out this mess.The upside for the SWF Countries:1) A way to get rid of all their dissidents. They’ll even manage to sneak in some criminals. That should stabilize their own internal governments and send a message to the remaining people there.2) A roundabout way to bail out the USA and maintain Breton Woods II a bit longer or try to gradually get off the system instead of being forced off.Would the uSA even consider it? I can’t see any downside as the USA can easily add another 1 million people (that’s about 1/3 of 1% population increase).The US also gives foreigners a green card if they bring 1 million investment dollars. Hence my suggestion of 1.1 million per person price tag. If that large number of people scares anyone we could suspend normal immigration for a year to pull this off.Would the SWF even consider it? I dunno. It would be a costly way to get rid of their unwanted people but it might be better than just outright losing money in arecapitolization effort/stock aquisition etc.As a taxpayer I know I’d vote for it over option 1 & 2 or over NR’s prophecy of selling off our best corporate assets to those SWF’s.Tim

Guest • July 25th, 2008 at 10:05 pm

Excerpt from Fleckenstein’s “The repugnant bailout nation” posted for July 28The Fed’s money-printing apparatus has been checkmated by roaring inflation. None of Paulson’s cockamamie schemes, from super SIVs to bailing out Fannie and Freddie (after Bennie and the boys at the Fed bailed out Bear Stearns), will help the economy. Yet we must continually endure the cheering by stock market operators every time this country, the supposed bastion of free enterprise, "successfully" takes another step in its move to nationalize all losses that are inconvenient to those in power. As Jim Grant questioned in a brilliant Wall Street Journal article July 19, "Why no outrage?"A birth that saw Fannie come out firstThat brings me to an absolutely brilliant — though nauseating, for what it revealed about our government — article written by Paul Gigot in July 23′s Wall Street Journal: "The Fannie Mae gang." This ought to be mandatory reading for everyone in America. It detailed the hardball thuggery, arm-twisting and insidious interlocking relationships among, for example, former Fannie Mae Chairman Franklin Raines, former Countrywide Financial CEO Angelo Mozilo and House Financial Services Committee Chairman Barney Frank that have helped create the monsters called Fannie and Freddie:"I recount all this now because it illustrates the perverse nature of Fannie and Freddie that has made them such a relentless and untouchable political force. Their unique clout derives from a combination of liberal ideology and private profit. . . . The abiding lesson here is what happens when you combine private property with government power. You create political monsters that are protected both by journalists on the left and pseudo capitalists on Wall Street, by liberal Democrats and country club Republicans. Even now, after all the dishonesty and failure, Fannie and Freddie could emerge from this taxpayer rescue more powerful than ever…"http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/TheRepugnantBailoutNation.aspx?page=all

OuterBeltway • July 25th, 2008 at 11:07 pm

@AfA, Free TibetAfA first: time value of money isn’t a big factor in early-stage investing, unless you’re thinking of the incremental Jiffy-Lube. The notion of innovation is to make a material change in the cost or value structure of an existing process, one that far exceeds the wan impact of "time value", under most scenarios. Think internal combustion engine, transistor, the Web, the PC, the microprocessor. These are nuclear blasts, not, to use your words, "line extensions". Let’s hit this serendipity thing. Innovation is not serendipity. It is preparation intersected with need. Creativity is a measurable trait – it’s mainly associative and abstract thinking capacity. If creative people are equipped with both the technical training and the emotional training, e.g. to tolerate ambiguity, failure and stress, etc. – and confronted with a fairly well-defined problem, they will, perforce, innovate through it. It’s a cultural as much as technical thing…that’s why M.I.T. and Stanford and CalTech produce so much innovation. So, I assert that innovation isn’t serendipity. It’s intellectual preparation and immersion in a culture of innovation.Free Tibet:You have earned your pay today with the comment: "Roubini is staying on message, “it’s going to be bad, it’s going to be bad…” He’s not going to have to beat that drum much longer. The question today is what should we be doing?This is indeed the operative question, folks. The situation we all thought would certainly occur is now here. Our extant economy is technically bankrupt. Further discussion about "if" or "when" is moot. The path ahead lies somewhere between the two ends of the continuum between devolvement of the society on the one hand and re-inventing ourselves on the other extreme. Couch potato with TV .vs. the Man in the Laboratory. The next frontier of discussion, in my opinion, ought to be "what are the conditions we must inculcate which maximize the volume, velocity, and quality of innovation". If you’ve got substantive ideas, don’t hide them under a basket. outerbeltway@yahoo.com is as good a place to start the dialogue as any.

Guest • July 25th, 2008 at 11:12 pm

Take a look at the chart on Mike Shedlock’s blog today at this link (courtesy of Mr Shedlock and Mr Puplava).http://bp2.blogger.com/_nSTO-vZpSgc/SIosrkD8whI/AAAAAAAAC-E/eI2g3BvT2Cg/s1600-h/WaMu-CDS.pngNot only does it look like the credit market is giving the thumbs down for WaMu, but the outlook for Ford and GM is looking pretty rough too. Can the US Gov’t really bail out BOTH the banking industry and the auto industry together? Because it sure looks like we’re gonna’ be missing some major players – by the time that Dec rolls around this year.PeteCA

OuterBeltway • July 25th, 2008 at 11:14 pm

LB and Dr. Roubini:Banking is in shambles, the great edifices careening downward onto the astonished crowd, the people too shocked to even move out of the way.When is the right moment to declare it dead, and start anew?

Anonymous • July 25th, 2008 at 11:21 pm

Gloomy, for a smart guy like you certainly are, I don’t know why we are having such trouble communicating.All I said is that one should not short for emotional reasons. If people do as you say, I believe they would be susceptible to having their capital taken by sensationalistic manipulations. It’s not a matter of pitchforks. One can not get at them with pitchforks, and all the PPT (or whoever can move the market) has to do is make prices go up a little, and the pitchfork is pointing at you! I’m glad you’ve apparently never been short-squeezed; I hope you never are. But, wishing you successful trading, I think that is truly a distraction.We should keep our eye on the ball. Make the banks absorb the failure rather than the people. Shield the people from the banks’ failure, rather than using the people as human shields for the banks!

AfA • July 25th, 2008 at 11:30 pm

@ OuterBeltwaySorry, I didn’t mean or say innovation totally depends on chance. I expressedly said we have to prepare the environment and ground for ideas to grow and most importantly to become projects. For me, I don’t really worry about ideas (there always be) as I worry about the nurturing atmosphere. And I believe that involvement of both the entrepreneur and the investor/lender by assuming business risk will provide a much needed motivation to both to succeed and innovate.

2cents • July 25th, 2008 at 11:53 pm

@ NourielI think you are right. This is the inevitable result; we will soon enter foreign receivership! All I can say is people need to look ahead. WARNING! Objects in front of you are closer than they appear.

Au ToBann • July 26th, 2008 at 12:10 am

http://www.prudentbear.com/index.php/GuestCommentaryHomeHyperinflation & diminishing returns on incremental dollar debtBuy Gold?

Pseudothyrum • July 26th, 2008 at 12:24 am

Good article in the Asian Times called "Debt capitalism self-destructs":"The term "undercapitalization" for financial institutions is merely a sanitized euphemism for insolvency. The real source of the present market turbulence is more than just the waywardness of runaway GSEs sidetracked from their public purpose. It is another symptom of the failure of central banking. The world is now witnessing the slow but steady collapse of the central banking regime that came into being in the US in 1913, which has since failed to fulfill its mandate of managing the monetary system to maintain price stability and full employment. Dysfunctional monetary policies adopted by all central banks, led by the US Federal Reserve, have allowed the market to take capital out of free market capitalism to turn it into a gigantic Ponzi scheme."- http://www.atimes.com/atimes/Global_Economy/JG22Dj07.html

KJ Foehr • July 26th, 2008 at 12:27 am

Dr. Roubini wrote, “This ideology of reckless free-market fundamentalist financial and public policies is what has led great empires in the past to become colonies of new emerging powers.”I am curious about his statement: I wonder what great empires he is referring to. I didn’t study much history beyond high school, but I don’t recall any great empires that became colonies of other nations. Does anyone have any examples of where free-market policies led to such subjugation? If it did happen I would like to read about it to see how it compares to our current situation.Thanks.

AfA • July 26th, 2008 at 12:42 am

2cents:"WARNING! Objects in front of you are closer than they appear."Or maybe:WARNING! If you can read this, you are too close, and it’s too late.

AfA • July 26th, 2008 at 1:12 am

At least FDIC’s Sheila cannot blame these on bloggers. That what happens when the ones supposed to watch banks start to watch blogs: their week-ends are spoiled. Hopefully, they might learn something in the process before it is too late.http://www.fdic.gov/bank/individual/failed/banklist.html

fedwatcher • July 26th, 2008 at 1:42 am

Nouriel,In the model of "Denial , Anger , Bargaining , Depression , Acceptance" are you at "Anger".In the model of "Optimism, Excitement, Thrill, Euphoria, Anxiety, Denial, Fear, Desperation, Panic, Capitulation, Despondency, Depression, Hope, and Relief" are you at "Panic" or "Desperation"?

Bond investor • July 26th, 2008 at 1:43 am

Prof. Roubini, you have a mistake in your analysis under Additional Point 6: Bank of America first took a big stake in Countrywide in August 2007, then announced it was acquiring it in early January. You claim that BAC used the Fed’s TSLF and PDCF to fund the acquisition, but the TSLF debuted on Mar. 11 and PDCF in late March, after the BSC fiasco. So BAC cannot have used these facilities to fund its BAC purchase. Other than that, the discussion is cogent and fact-based.You suggest high foreign involvement in the recapitalization of banks. As I understand it, U.S law and regulation says domestic banks cannot be owned by foreigners. How long will the foreign investors be content with debt and preferred exposure? Ironically, this banking protectionism will likely cause the crisis to drag out. There are no doubt some deep-pocketed Canadian that would love a banking franchise in the Northeast U.S.

Guest • July 26th, 2008 at 2:32 am

Prof Roubini:Who is Going to Rescue the Hundreds of Busted U.S. Banks? Don’t Count on Suckering Again the Foreign Governments (the Sovereign Wealth Funds). And the Biggest Fire Sale in the History of Humanity…And this is not Armageddon? Hellooo?In fact this situation is just as bad as the great depression. The only difference is the government action. Back in 1930′s the government was not able to go billions of dollars into debt to support the system, as they are now.Look at the charts posted by JLC on 2008-07-25 00:21:34 in the last thread:http://research.stlouisfed.org/fred2/series/BOGNONBRhttp://research.stlouisfed.org/fred2/series/BORROWNo wonder WaMu was able to claim that it is funding all of their "business through its banking operations and does not rely on commercial paper sold in the credit markets":http://www.independent.co.uk/news/business/news/nerves-return-to-financial-sector-as-investors-dump-shares-in-wamu-876960.htmlThe "banking operations" that they are referring to must be "borrowing from Fed".In other banking news…U.S. regulators seize two more banks, engineer salehttp://news.yahoo.com/s/nm/20080726/bs_nm/banks_fdic_dcLooks like they will be doing these bank-overtakes on Fridays. It can give a new meaning to the expression TGIF:-)

Guest • July 26th, 2008 at 2:38 am

Actually a better article about Fridays bank overtake is this one:FDIC takes over 2 more banks, closing 28 brancheshttp://news.yahoo.com/s/ap/20080726/ap_on_bi_ge/bank_takeoverThe 28 branches of 1st National Bank of Nevada and First Heritage Bank, operating in Nevada, Arizona and California, were closed Friday by federal regulators.The banks, owned by Scottsdale, Ariz.-based First National Bank Holding Co., were scheduled to reopen on Monday as Mutual of Omaha Bank branches, the Federal Deposit Insurance Corp. said.

Psyops • July 26th, 2008 at 2:45 am

can’t see my post, reposting…@KJ Foehr The Byzantine Empire (or Eastern Roman Empire 330AD-1453AD) is a very good example of an empire succumping to its creditors. From the 11th century on, it increasingly began accepting economic and military aid from emerging, ambitious and flexible Italian naval city states like Venice or Genoa, in exchange for market access, tax exemptions and tax monopolies granted to its creditors. The result was a weakening of its tax and trade base, economic hardship and the eventual inability to defend itsself from Slavic and Turkish invaders. The empire’s capital Constantinople was sacked in 1204AD by european crusaders of the 4th Crusade and the empire dismembered into small dominions, governed by Venice, Genoa and other european statelets. An attempt to revive it to a shadow of its former self was shortlived and Constantinople, now Istanbul, finally succumbed to the Ottoman Turks in 1453. Venetian colonies of the former Byzantine Empire, like Crete or Corfu, remained under Venetian rule well into the 17th and 18th centuries. A very fitting example I believe. As for the more famous original Roman Empire, it is widely believed that economic instability, inflation and political chaos led to its demise at the hands of northern Barbarian tribes. In the twilight of the Western Roman Empire in the 5th century AD, emperors and goverments were forcibly brought to and distanced from power by Barbarian mercenaries that comprised the Roman military and imperial guards, with regard to who would grant them access to their pay or loot from the Roman treasury. The Roman political class and system were morally, practically and financially bankrupt, which inevitably led to the disentigration of the empire and its being gradually taken over by its neighbouring barbarian tribes. Given that the Pax Americana is commonly being compared to Pax Romana, I guess it’s not without consequence that Americans usually pay more attention to football rather than history at school.

Guest • July 26th, 2008 at 4:12 am

It is not in the interrest of the power to educate the slaves.Bread and games is enough.

Anonymous • July 26th, 2008 at 4:48 am

Well I can’t blame the schools for that. I learned this basic history in high school (granted, it was the academic track, I don’t know what other classrooms taught) and I believe it is still taught in high school.If people stop reading upon graduation, it’s not the schools’ fault and now with the internet available it is nobody’s fault but their own.

London Banker • July 26th, 2008 at 5:35 am

Wow! Great discussion here today. I’m tied up all day, but I wanted to shout out to PeterJB, Mike C and Guest on 2008-07-25 15:18:16 that I’ve lifted their quotes of Gandhi, Jefferson and Bastiat respectively over to my new blog as a self-standing entry. I love great quotes, and now I’ve got a place to highlight them as I see them. For those not around yesterday, I’ve finally got a blogspot address: http://londonbanker.blogspot.com. I’ll cross-post my Friday RGE posts there and interim content as I feel moved.Many thanks.

Nouriel Roubini • July 26th, 2008 at 6:05 am

LB,real great you have your own blog. I am not sure about the source of the rumor that my blog will soon be restricted to only paid users of RGE. That is incorrect and due to a misunderstanding of a message that was sent to folks who had temporary access to the RGE paid content; the blog is always free subject to free registration. But it is good you have your own forum. Many congrats. Best Nouriel

Jason B • July 26th, 2008 at 6:42 am

Mike C, Sorry to nitpic on TJ quotes, but this is a common misconception.This is cited as from a letter to Secretary of the Treasury Albert Gallatin (1802) in Flight to Financial Freedom – Fasten Your Finances (2007) by Nathan A. Martin, and earlier appears in How to Take Advantage of the People Who Are Trying to Take Advantage of You (2006) by Joseph Stephen Breese Morse, p. 51. It appears to be a concoction of some actual statements by Jefferson, and others that may not be. It has not yet been found to appear earlier in precisely this form. Interestingly, although Gallatin was Jeffersonian he was a supporter of the Bank of the United States.

Alessandro • July 26th, 2008 at 8:45 am

Nourielthanks for clearing out the rumor, many people including myself feel this blog as a friendly net neighborhood and the idea of having it shut down is a big fear.

Guest • July 26th, 2008 at 9:32 am

Speaking of the value of quotes:Before Alan Greenspan was appointed Chairman of the Federal Reserve in 1987, he had served on the board of the JP Morgan Company. Before that, however, he had been an outspoken champion of the gold standard and a critic of the System’s subservience to the banking cartel. In 1966 he wrote:“When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve’s attempt to assist Great Britain who had been losing gold to us… The “Fed” succeeded: it stopped the gold loss, but it nearly destroyed the economies of the world in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market – triggering a fantastic speculative boom… As a result, the American economy collapsed.”Perhaps Zimbabwe Ben forgot that part of his studies on the causes of the Great Depression. As apparently did Greenspan after his appointment to the Fed.

Guest • July 26th, 2008 at 9:33 am

"The "banking operations" that they are referring to must be "borrowing from Fed"."Fed as bank of last resort. Fed will be pumping into these banks, institutions, and wall-street firms with tons and tons of monetary dollar. no inflation? no destruction of dollar? who still think FED is not causing huge inflation via huge monetary pumping is delusional. stay away from dollar, USA treasury and USA debt (they are toxic waste because USA default indirect by debasing its currency). LOL

Hubbs • July 26th, 2008 at 9:42 am

Synthesis of loose ends:Sad part is that ordinary Americans (I see it at my work) have no clue what so ever of what has been going on.Written by WAWAWA on 2008-07-25 14:56:07Tim on 2008-07-25 21:53:09 re: allow immigration of 1 million foreigner millionaires, etcI keep revisiting my concerns of hyperinflation because there is no way US can repay debt without the FED pushing the “cancel/print” button. This runs countercurrent to the existence of simultaneous asset deflation in the value of housing, large SUVs, stocks and other financial instruments. Asset depreciation can never occur if it’s true value was inflated to begin with. This whole Ponzi scheme built on credit instead of hard assets invalidates any monetary metric.I remember several months ago reading a post about “how quaint” my discussion was with another poster on this Blog concerning the constitutionality of the FED, the issuance of fiat (the Founding fathers authorized STATES to issue money in gold or silver-but no mention of a FED…and any powers not specifically delegated to the Federal government are delegated to the states.)Hence my citation of WAWAWA’s post…American’s have no clue.. This is painfully, woefully true. Even as an “educated” American, I have gone through life in the US “fat, drunk, and stupid” (Dean Wormer’s characterization of Flounder’s academic performance in the National Lampoon classic “Animal House”) Through this Blog and others cited herein and Ron Paul’s unique message, (I consider him a statesman rather than a politician; my definition of a politician: “one who seeks re-election”…but I digress) Americans may wind up back tracking to 1913 where we took the wrong turn and look instead look again at this “quaint” Constitution as the framework upon which our country should be built.As far as those immigrants, I can’t remember where I saw the suggestion, but the idea of a US immigration agent attending each and every engineering school graduation ceremony and attaching a Green Card for US citizenship to each and every foreign graduate’s diploma was a good one. I think it is better than allowing millionaires citizenship. People with money are more likely to be part of the problem—i.e. financial chicanery, to do their work for them compared to an engineer or other trained tradesman etc who is starting from scratch financially.Hubbs

Guest • July 26th, 2008 at 10:04 am

if FED didn’t intervene, then many company like ABK, MBI, LEH, MER, FNM, FRE, and more will have falled already. the fact not many financial institutions failed, because of FED’s bailout and tsunami of liquidity and monetary pumping. –> very likely, FED will double, triple, and quadruple dollar print press workload to pump global financial system with tons of dollars to keep these companies alive (walking zombie).

Guest • July 26th, 2008 at 10:04 am

dont fight FED’s print press machine.

OuterBeltway • July 26th, 2008 at 10:28 am

@Hubbs. Good synthesis. Here’s an interesting sequence of events I’m pondering, e.g. the provenance of our money-supply regulation mechanism. Please help me perfect my understanding. Here goes:First, no money. Barter of goods. Inefficient because you had to take goods you didn’t need, and trade to someone else to get what you really wanted. You spent a lot of time "trading" and not enough time "using".Then came money. It’s role was universal-unit-of-exchange. You could trade all your goods (stack of furs) for a stack of money, then go buy each of the individual items you really need (knife, canoe, traps, bullets, whiskey) from people that didn’t want furs, but would gladly take money. It was efficient, so long as the value of the money didn’t decline between the time you got it and the time you spent it.That immediately introduced the problem of the "Money Supply". If there wasn’t enough currency in circulation, the amount of goods exceeded the amount of currency, and then you had to go back to trading furs (because nobody had any currency!). Plus people would start hoarding currency in expectation of its appreciation, and that made the currency shortage worsen. Enter the regional bank. Job one: regulate currency supply. Uh-oh! Now we have to "give" someone some money so they can inject it, without prejudice, into the general economy. How is this done? Let’s label this decision point the "decisive decision". Right now, the banks get the privilege of performing this money supply injection function. They also get the right to leverage that injection, and to create an increasingly large amount of money, in the form of credit (not currency…but willowy, billowy credit, masquerading as "money"). They also get to inject that money wherever they see fit (whatever sector), with almost no regard for the impact on the general economy. Economic policy is not a part of the regulation – regulation is restricted to reserve ratios and money laundering. The banks also get to have the state bail them out when their bad judgment causes their highly leveraged "injections" to go bust..to evaporate. This causes severe expansion-and-reduction whiplash on the economy’s money supply. That’s what we’re watching over the past decade – big credit (money supply) balloon, then sudden deflation in credit.Terribly disruptive.Now, go back to that "decisive decision", whereon the State picked the banks to be responsible for injection of new money into the economy. Why pick the banks? Why pick that particular mechanism for expanding the currency supply in proportion to the asset value of the economy (the money supply should vary as the underlying asset value of the economy, correct?). Isn’t there a better way to accomplish the goal of matching the money supply to the underlying assets of the economy?The mechanism for regulating the money supply is broken. For all you people that have watched the value of your investments, savings and hopes diminish because of the reckless behavior of others, maybe you should start considering new ways for the money supply to be regulated, and take it out of the hands of the people that have stolen from you.rejoinder and rebuttal is welcome at outerbeltway@yahoo.com.

JLC • July 26th, 2008 at 10:38 am

@ KJ,I think England is a good example. They free traded and fought their economic might away. Now they are a shadow of their former selves and have been the US’s lapdog fo quite some time.

Anonymous • July 26th, 2008 at 10:42 am

From the Wall Street Journal:Some Judges Stiffen Foreclosure StandardsBy AMIR EFRATIJuly 26, 2008; Page A3A cadre of state-court judges scrutinizing foreclosure actions in a string of recent rulings have discovered flaws in documents that borrowers may be able to use to keep their homes.The judges, including a committee from the Kings County Supreme Court in Brooklyn, N.Y., are highlighting shortcuts taken by mortgage companies in court filings, which borrowers might be able to exploit when facing foreclosure.The rulings show the critical role that judges are beginning to play as foreclosures mount in the most severe housing crisis since the Great Depression. The recent decisions build upon widely circulated opinions issued last fall by federal judges in Ohio who found trusts that hold the mortgages regularly begin foreclosure proceedings before they obtain the legal right to do so.Judges in states including New Jersey, Florida and Massachusetts have begun to dismiss many cases "without prejudice," meaning the plaintiffs can fix the defects and resume the process, but the ruling gives the homeowners more time. Meanwhile, some bankruptcy courts, where creditors may seek permission to foreclose if the debtor isn’t keeping up with the bankruptcy plan, have issued standing orders requiring creditors to prove ownership of loans. Other state courts, including in Ohio and Pennsylvania, have begun requiring owners of loans who have filed foreclosure suits to try to negotiate settlements with borrowers to avoid foreclosure….

Guest • July 26th, 2008 at 10:44 am

Looks like the housing bill with the credit card surveillance clause, and the unlimited help to Fannie and Freddie, has already cleared Senate. It is on its way to the President for signature. Too late to stop it now.Housing rescue bill heads to Bush for signaturehttp://news.yahoo.com/s/ap/20080726/ap_on_go_co/congress_housingCongress passed a housing rescue bill Saturday aimed at sparing 400,000 struggling homeowners from foreclosure. President Bush is expected to sign the measure quickly.The measure, approved by a 72-13 vote during a rare weekend session in the Senate…

Guest • July 26th, 2008 at 10:56 am

"72-13 vote"seems like every democrat and republican politician have their dirty hand on this.

kilgores • July 26th, 2008 at 11:08 am

I think we’re just managed to navigate the U.S. economy to a place between Scylla and Charybdis: we’re going to have severe consequences if we bail out and nationalize, and severe consequences if we don’t. SWK

Hubbs • July 26th, 2008 at 11:10 am

@OuterBeltway on 2008-07-26 10:28:29The reserve currency should be the barrels of oil in the strategic national petroleum reserve. Gasoline, according to the survivalists, has a shelf life of up to two years if properly stored…which is good, because this forces a constant inflow and outflow into/from the reserve, facilitating verification of actual reserves, and I don’t think anyone out there would dispute oil’s value. So Fort Knox, step aside. There’s a new kid in town!

Guest • July 26th, 2008 at 11:15 am

"This is what the free-market ideologues at the Fed, Treasury and White House have now become…Comrade Paulson, Comrade Bernanke and the Bolshevik Great Leader Bush."Become? BECOME?!Love ya, Nouriel, but wake up.COMRADE PAULSON runs the I.R.S., which is now and always has been Marxist, the second plank of the Communist Manifesto being "a heavy progressive or graduated income tax":http://www.vidiars.com/things/irsismarxistsmall.jpgCOMRADE BERNANKE runs the Federal Reserve Bank, which is now and always has been Marxist, the fifth plank of the Communist Manifesto being "centralization of credit in the banks of the state, by means of a national bank with State capital and an exclusive monopoly":http://www.vidiars.com/things/fedisredsmall.jpgThe "becoming" happened in 1913. Until both are dismantled brick-by-brick and the earth salted, our destiny is fixed, and Paulson and Bernanke are merely the latest socialists stinking up the executive chairs.You also left out a few of their CHIEF POLITBURO APPARATCHIK COMRADES, Dodd and Frank:http://www.vidiars.com/things/3221-is-Marxist-small.jpg

Guest • July 26th, 2008 at 11:18 am

@Guest (previous thread): “Perhaps the most important development is… the removal of privacy that is excused on the situation… Like the requirement on the housing bill, that all mortgage brokers are being fingerprinted…”This is the old shell game, in part, to divert attention from the real fraudsters in this great robbery — The Fannie Mae Gang and its facilitators, Hank alias Goldman Sachs and Ben alias Money Bags. The little guy who went around setting up mortgage loan shops – visible to all with his billboards along the highways – and who then disappeared when the jig was up, represents about .01% of the mortgage problem. He isn’t the real problem, of course. The real problem, the perpetrators of the fraud, won’t be fingerprinted… They’re being pardoned, at this exact minute, to cheat again.

Alessandro • July 26th, 2008 at 11:21 am

@OuterBeltwayyour quick origin of money is quite close to the Austrian hypothesis so I guess you might be interested in the following two article I fond interesting:http://mises.org/story/1333http://www.strike-the-root.com/4/baker/baker2.htmlA couple of subtle points not exactly Austrian in your quick recap:1. before a money emerge people cannot specialize and need to be able to produce most of the things they need by themselves, with barter as limited specialization/trading tool2. as money emerges naturally as the most tradable commodity in a given economy, it permits specialization and trading and thus a huge jump in productivity. This is the profound reason money is a good thing.3. money it is not a unit of value (you didn’t say it). As a matter of fact the value of money changes with time, it goes up (deflation) and down (inflation). A good money commodity (gold) will have a long term stable supply so that its value might fluctuate wildly on the short term due to velocity, but it is remarkably stable on the long term.4. due to this long term perceived stability money can be used a decent store of value and as the unit of measure in long term contracts, like a loan. So a good money commodity make also finance possible.5. with a good money commodity there is no such thing as to few money!! if demand for money goes up the value will go up (deflation) and the price of all goods will go down until equilibrium is reached. No need to go back to barter. (OK, during GD I people did go back to barter because money velocity had collapsed, but that was a local anomaly)6. Banking started its history as faking gold certificates. It has not changed much since then, it is just that fake money has been legalized. That was the "decisive decision" I agree! But… banking started manipulating the money supply via credit extension and fractional reserve lending (duration mismatch). Only with the the birth of the central banking and fiat money, banks were allowed to manipulate the fiat money supply. Fatal year is 1913 in the US.7. the problem with active regulation of the money supply is that someone has to decide how to inject and who gets the newly minted money (and the inflation advantage). That "who" historically has always screwed up.I hear your cry: "but how to fix it?". I’m not sure, going back to using gold seem very old style, but what had central banking done for us?Written by Alessandro

London Banker • July 26th, 2008 at 11:34 am

@ Professor RoubiniMany thanks for easing our minds about the e-mail sent around to some of the regulars. We all value the insights we gain here from following your writings and developing ideas of our own as a community of commenters. I’ll stop blog-whoring the new site now, being content to hang here and on my Friday page.

WAWAWA • July 26th, 2008 at 11:45 am

"WASHINGTON (Reuters) – Congress approved a massive housing market rescue bill on Saturday…"On this bill there is a provision of reporting all credit card transactions to the IRS.George Orwell is crying in his grave now. His fiction has become reality in the biggest so called democracy.What is next?Hyper-Inflation! Weimer Republic! Fascism !

Tim • July 26th, 2008 at 11:54 am

@ KJ,Another good example is the Ottoman Empire pre-WWI. All of their debt was held by France, Germany and England. Eventually they were forced to sell off public assets like the Suez Canal to meet payments.WWI completed their collapse and of most of their former territory of Egypt & Middle East became colonies of Britain.Tim

kilgores • July 26th, 2008 at 12:06 pm

@ Guest on 2008-07-26 11:15:17>COMRADE PAULSON runs the I.R.S., which is now and always has been Marxist, the second plank of the Communist Manifesto being "a heavy progressive or graduated income tax">COMRADE BERNANKE runs the Federal Reserve Bank, which is now and always has been Marxist, the fifth plank of the Communist Manifesto being "centralization of credit in the banks of the state, by means of a national bank with State capital and an exclusive monopoly":This line of reasoning is patently absurd. Just because the concepts of a progressive income tax and of cental banking is embraced by Marxism doesn’t make these ideas exclusively Marxist, any more than the adoption by Scientologists of the symbol of the cross means Christians are really Scientologists. You are committing a logical fallacy of generalization to suggest that the Internal Revenue Service and the Federal Reserve Bank are Marxist. SWK

Guest • July 26th, 2008 at 12:25 pm

@ Tim on 2008-07-26 11:54:19surrendering foreign assets such as the Suez canal or foreign territories in the name of debt? Isn’t this simply victors claiming the spoils of war? The Ottoman Empire and then England never really owned the colonies through legitimate buy and sell transactions, such as US purchase of Alaska from Russia or Louisianna Purchase from France, to begin with did they? (I’m certainly no history expert)In the US, we are talking about the foreigners hollowing out the US by buying up our companies, land, and other hard assets -here within our own geographic boundaries.Hubbs

Kerk • July 26th, 2008 at 1:20 pm

SWK,I don’t see what you are trying to rebut with regards to Tim’s argument. I took his argument to be that the actions don’t match the rhetoric with regards to the folks he referenced. His point is that a progressive income tax and centralization of credit are the anithesis of the pricinciples of a market economy, which is touted as a belief of many in elite political, legal, judicial, and economic positions – even though they use the term "free market" which is a contradiction by itself. There is no such thing as "at no cost" – which is the connotation implied in most cases by those who say "free." There is obviously a cost. The question is simply who is paying.

OuterBeltway • July 26th, 2008 at 1:41 pm

@Alessandro, couple points:First, thanks for the links. I’ll read them right away. Next, you said: "7. the problem with active regulation of the money supply is that someone has to decide how to inject and who gets the newly minted money (and the inflation advantage). That "who" historically has always screwed up.". Can you please cite the various types of "who" that you’re aware of? I can only cite the Federal Reserve. Next, I want to make a point about banking. It has in the past, and generally does serve the important function of allocation of capital. When banking works right – even fractional reserve / leveraged banking, it serves as a generator to develop wealth. I have said in this forum, and elsewhere, that "debt is not necessarily bad". It isn’t. If we’d spent that $2T on advanced alt energy plant and equipment, or on advanced technical training (mandatory) for 9-12th graders, etc., we’d be in great shape. But the bankers have let us down.There’s more to this, though. There is a complicity of stupidness that traverses Wall Street, the Fed, the so-called GSEs, and the financial oversight committees of Congress. The reason things are so bad is that there’s complicity at each major check-and-balance gate. That’s why raw, blanket outrage and wide-brush-painting is called for and ought to be fanned until some fundamentals change. Disclaimers aside, let’s go back to your point, Alessandro, and let’s ask "what other methods are available to inject / withdraw credit from the money supply?"The mechanism must be:a. Transparent and measurableb. De-centralizedc. Automatic and immediate self-correctStarting with a) above, what index or reliable measurement of the degree/size of the asset pool that the U.S. money supply represents (ala stock shares) is available?b. Decentralized. I’m thinking that we need a mechanism that is actuated by the individual (citizen, taxpayer) to inject new credit into the money supply. The individual gets to decide where and to whom to inject liquidity. Yes, this is vague. I’ll work on it. The good news is that the decision is decentralized, that motivation and means to pervert the large-scale aggregate decision is eliminated. This is necessary.c. Automatic and self-correcting. If the credit injection decision was made once a year, maybe at tax-time, or voting time, or some regular, known point in time, and that was the only time when liquidity could be injected. The self-correcting issue I’ll have to think on some more…there needs to be a feedback loop that’s automatic, and attached to a known, reliable, and non-fudgable metric. I’d be interested to hear from the bloggers what metrics are available, and how bad the fudge-factor abuse is currently. If we can nominate a metric to use as the f(x) independent variable, the only thing left to decide is how to delegate to the individual the means to inject or withdraw credit from the system.

Gloomy • July 26th, 2008 at 2:19 pm

MARK TO MARXMark to market has become mark to Marx.Welcome to the USSA (United Subprime States of America)

Anonymous • July 26th, 2008 at 2:28 pm

Would it not be possible for the US Banks ( like Citi) etc to hive off the international pieces of their business ( which should be profitable) and sell these to SWF and other financiers? They could raise significant amounts , yet without having to worry about " control" going to non US entities.

Guest • July 26th, 2008 at 2:53 pm

I think that National Debt Clock on New York Times Square, if it is still there, needs a turbo booster.

Guest • July 26th, 2008 at 2:57 pm

@Anonymous on 2008-07-26 14:28:22Would it not be possible for the US Banks ( like Citi) etc to hive off the international pieces of their business ( which should be profitable) and sell these to SWF and other financiers? They could raise significant amounts , yet without having to worry about " control" going to non US entities.Knowing U.S. companies, any profits would probably soon be gone, and what would be left would be just the U.S. branches of the business…so the companies would be doomed. Or wait, they seem to be doomed anyway…

kilgores • July 26th, 2008 at 3:04 pm

@ Kerk on 2008-07-26 13:20:31Thanks for your post.>His point is that a progressive income tax and centralization of credit are the anithesis of the pricinciples of a market economy…I suppose I would disagree with those conclusions. The notion of a pure free market is an illusion, every bit as much as the idea of a communist utopia. The world is not black and white. Having a high level of market freedom is a laudable goal, but I think government has a legitimate role to play in defining and enforcing the fundamental rules by which markets operate.The government has to tax citizens in order to carry out its legitimate purposes, and a progressive scheme of taxation is fundamentally more equitable than a flat tax (like a sales tax) or a regressive tax (as the State of Alabama has adopted), and thereby helps to promote, rather than diminish, democratic processes and a sense of civic responsibility. As for the Fed, this country adopted the notion of a central bank in response to the Panic of 1907 so as to ensure greater stability and less volatility in a free market system that left many impoverished and kept down others who were already impoverished and disenfranchised. If those are Marxist or socialistic or anti-free market, then count me in.SWK

kilgores • July 26th, 2008 at 3:07 pm

@ Gloomy on 2008-07-26 14:19:19>MARK TO MARX>Mark to market has become mark to Marx.>Welcome to the USSA (United Subprime States of America)Priceless! Gloomy, I think if you lose your day job, you can always get a comic speaking gig at the annual meeting of the American Bankers Association and a host of other financial groups. SWK

Guest • July 26th, 2008 at 3:22 pm

"The U.S. Congress approved a massive housing market rescue bill on Saturday"first wave of bailout is here. wait for consecutive waves of bailouts, rebate check, free credit, socialists welfare program to come.

kilgores • July 26th, 2008 at 3:22 pm

@ Kerk on 2008-07-26 13:20:31> I took his argument to be that the actions don’t match the rhetoric with regards to the folks he referenced.I would tend to agree; however, this just underscores my point that however much some folks may advocate for "free market" principles, the harsh reality is that a purely free market is a pipe dream, just as is the notion of a communist utopia in which each contributes fully according to his means and takes only according to his needs.SWK

Guest • July 26th, 2008 at 3:28 pm

"The notion of a pure free market is an illusion, every bit as much as the idea of a communist utopia. The world is not black and white. Having a high level of market freedom is a laudable goal, but I think government has a legitimate role to play in defining and enforcing the fundamental rules by which markets operate."sounds like you are china political, social, and economic lover. while at it, why dont you attack pure democracy is an illusion. bottom line, free market and democracy is best for a society. not the other way around. USA is steping into wrong direction.

AfA • July 26th, 2008 at 4:10 pm

@ Kerk"There is no such thing as "at no cost" – which is the connotation implied in most cases by those who say "free." There is obviously a cost. The question is simply who is paying."The "free" in free market does not refer to "costless" but to liberty. Every this has a cost and a price to pay including the system itself. But you are right; it might be that this is the amalgam politicians are making.@ SWKI agree with you that the world is not black OR white, nor black AND white but rather multicolorful. However, what is worse than sticking with only one ideology (free market) rather than others (communism) is picking the worse disadvantages of both. We should strive to improve our society by picking the best of each idea and make sure that that mix optimizes our utility (so to speak).@ OuterBeltway,These are excellent ideas. However, I stick to my conviction that designing a system that balances motivation using a quadratic function [f(x) = – x^2 where x represent resources/inputs/costs and f(x) represent utility function) would be less costly to implement and more productive. Banks, corporation and even individuals cannot plan (as a group) beyond tomorrow, nor do they care what are the consequences of their actions will be as long as the action maximizes short term payoff. And it does not matter how much centralization, decentralization, regulation or deregulation, transparency or reporting is given to the system, they will always find ways to circumvent all these as long as they are motivation to do so. For example, and as you said, debt is not necessarily bad, but if the system was designed so that beyond a leverage of 1, banks and corporations are not motivated to engage in more debt (and turn to equity) because their payoffs and profits will decline then we might be able to keep things close to balance. Similarly, if the system was designed to not making it always profitable to borrow short and lend long, then we might have something close to medium-term lending/borrowing equilibrium.

kilgores • July 26th, 2008 at 4:12 pm

@ Guest on 2008-07-26 15:28:35Another argumentum ad hominem? Surely you come up with a LOGICAL argument to try to refute what someone says, rather than responding with a logical fallacy, can’t you?>sounds like you are china political, social, and economic lover.I didn’t say anything about china. Or crystal stemware, either.>while at it, why dont you attack pure democracy is an illusion.Well, I couldn’t very well do that. The Athenians practiced something close to pure democracy, I guess. I don’t know of many other societies that have. Last I checked, the United States was a republic (following a short experiment with confederacy before the Constitution was adopted).> bottom line, free market and democracy is best for a society. not the other way around.You mean a society is not best for a free market and democracy? Perhaps you could explain to me how a free market and democracy operates in the absence of a society.>USA is steping into wrong direction.I think the USA has long since stepped in the wrong direction, i.e., buying into the notion that if only government declines to regulate free markets, everything will turn out wonderfully and all boats will rise. Well, as Dr. Roubini stresses, this fundamentalist free market ideology is bankrupt, and the wholesale failure of the government to regulate market abuses is precisely why we’re in the mess we’re in now.SWK

kilgores • July 26th, 2008 at 4:15 pm

@ AfA on 2008-07-26 16:10:08>[W]hat is worse than sticking with only one ideology (free market) rather than others (communism) is picking the worse disadvantages of both. We should strive to improve our society by picking the best of each idea and make sure that that mix optimizes our utility (so to speak).I agree wholeheartedly. I think that’s what’s always made the U.S. such a great country.SWK

Wave Ride • July 26th, 2008 at 4:27 pm

According to my elliott wave forecast the major indices have entered the third wave down. I would not be surprised to see the SPX at $950 and the DOW at $9500 before the end of August…. Arch Crawford who has an excellent track record of calling crashes in the markets has issued a warning for August. The dates that he says could have significant implications for the markets are August 1st, 6th and 16th. He says to pay close attention to the 16th as there will be an event that will make oil and gold shoot higher..Arch is a little out there sometimes, but I thought I would pass it along..

K in TX • July 26th, 2008 at 4:41 pm

Former Senator Fritz Hollings says America is going out of business…BILL MOYERS: You write–FRITZ HOLLINGS: Yeah.BILL MOYERS: Your country and mine, that’s the United States of America, is going out of business?FRITZ HOLLINGS: Oh yeah. What hasn’t been outsourced is being bought with that cheap dollar. Vodophone is gone to the Germans. Bell Labs is gone to the French with all their research and everything else. Westinghouse Nuclear with all of their research and technology and everything, is going to Toshiba, Japan. And Anheuser-Busch, the Belgians. Anheuser-Busch is beholden to the stockholders but nobody’s beholden to the people other than the congressmen and senators. And they’re not doing their job. ***************BILL MOYERS: But when you were chairman of this very powerful Commerce Committee, here in the Senate, you’d make these cases.FRITZ HOLLINGS: Yeah.BILL MOYERS: They would call you protectionist, they would call you–FRITZ HOLLINGS: Yeah, I am a protectionist. You– you got Social Security to protect you from the ravages of old age, Medicare to protect you from ill health. You got food and drugs and clean air, the water we drink, the food we eat, antitrust to protect the openness of the market and everything else. Before I open up Moyer Manufactory, you gotta have clean air, clean water, Social Security, Medicare, Medicaid, plant closing notice, parental leave, safe working place, safe machinery, antitrust. You can go to China for 58 cents an hour. They’d get you the plant, they own the workers, and you don’t have any investments so you don’t have to worry about it.BILL MOYERS: You say all we need to do to make the country work, is follow the lead of the forefathers to compete in globalization. To build the country’s economy Washington, Hamilton, Jefferson, and Madison, made sure the first bill to pass the Congress in its history on July 4th 1789–FRITZ HOLLINGS: Seventeen eighty nine.BILL MOYERS: Was a–FRITZ HOLLINGS: Protectionist bill, tariff bill on 60 articles. We financed the country’s development with tariffs. That’s how we–that’s the Treasurer’s Building is the best building here in Washington. The best building in Charleston is the custom house. The best building in Brooklyn is the custom house. Treasury had the money. Teddy Roosevelt said, "Thank God I am not a free trader." Oh, Lincoln, everybody says, I’m either for Roosevelt, I’m a Lincoln Republican. He was a big protectionist. Oh, he raised tariffs. They were gonna build a transcontinental railroad on the Abraham Lincoln. And they said we could get the steel cheap from England. He said, ah – wait a minute, we’re gonna build our own steel mills, and then we’ll have not only a steel capacity, but we’ll have the railroad. And so he was a builder. Everybody was a builder. Eisenhower, he protected oil. Jack Kennedy, I went to him, and he protected textiles. Ronald Reagan, he protected computers and Harley Davidson. He saved it. I saw George W. the other day about three weeks or a month ago, he was at the Harley Davidson plant, but protectionism saved it. That’s why they were making money at Harley Davidson. Oh, he got–BILL MOYERS: That’s because of–FRITZ HOLLINGS: Voluntarily restraint. Reagan got on steel, computers, machine tools, and automobiles. He got voluntary restraint and that’s the only way to do it. Sober up.http://www.pbs.org/moyers/journal/index-flash.html

Alessandro • July 26th, 2008 at 4:45 pm

@AfAit is not financially viable to forcibly flatten the yield curve. Lending money for 30 years is higher risk that 1 year, I might get fired 10 years from now or develop a illness. This is the time value of money. It’s natural and if you manage to forcibly keep the yield curve flat (by law?) I’ll not lend you with 30 year maturity, period. Forget your 30 year fixed mortgage, and be ready to scramble to refinance every year. Viable?IMHO what has caused this mess are the political tricks (fiat money, compulsory pension plans, etc) to keep the yield curve artificially low and artificially steep. That is what caused the monster malinvesment we see.

Guest • July 26th, 2008 at 4:52 pm

America is headed into third world country soon unless she throws out this financial web of international bankers. She has no elasticity left to endure more years of flagrant injustice and corruption and economic disaster. Is more proof needed? She is bankrupt.Lenin recommended government origination and control of the medium of exchange. But even Marx would be shocked at the larceny and nerve of these guys.We are losing our manufacturing, becoming a debtor nation and a superpower that can’t back up its claims, a nation bogged down in wars, a nation of corrupt investment bankers using the U.S. Treasury as their personal bank account. Is the middleclass just to lie back and say life is over, we’ve lost our country; we need to go into slavery mode? I say no.Let these bankers go. Investment bankers are not working for America, anyway. They never have, not since the Bank of England. They have always worked for themselves only. When J.P. Morgan and those people approached Teddy Roosevelt, it wasn’t to help the country out. They went to the government to get access to the taxpayer.They live like kings and royalty, fly private jets, arrive at work in limos and off helicopter pads, vacation every other month at Lake Como or the islands of Thailand. own houses all over the world. They steal like Al Capone. And they are ruthless. Ah, the wonder of America’s standard of living if she had not had these parasites.Privately owned corporations have money to lend and invest. Let local check banks honor check withdrawal on demand, retaining a 100% reserve. Let loan banks lend from their own money and from customers’ savings and from money repaid on maturing loans. Let the lending of money be completely divorced from money origination.Destroy this supra-government that is usurping our lawful government — with total disregard for the common good.

kilgores • July 26th, 2008 at 4:59 pm

Exerpt fom tomorrow’s New York Times:July 27, 2008Can Hank Paulson Defuse This Crisis?By STEVEN R. WEISMAN and JENNY ANDERSON“It wasn’t just the Treasury; it was a problem throughout the federal government that everyone was asleep at the wheel,” said Nouriel Roubini, an economics professor at the Stern School of Business at New York University. “They let the subprime market and housing bubble expand without any controls. They believed in risk-management models,” he said, thinking that “market discipline would be better than regulation. But the lesson we have learned is that self-regulation means no regulation.”___Couldn’t have said it better myself…SWK

Guest • July 26th, 2008 at 5:03 pm

Bloomberg video: "Poole Says Fannie, Freddie Should Be Private Firms"http://www.bloomberg.com/apps/news?pid=20601087&sid=anauTTTfrPR8&refer=home

OuterBeltway • July 26th, 2008 at 5:32 pm

@AfA: this is interesting, but I don’t understand it:"However, I stick to my conviction that designing a system that balances motivation using a quadratic function [f(x) = – x^2 where x represent resources/inputs/costs and f(x) represent utility function) would be less costly to implement and more productive.". Can you walk me thru this slowly? Please provide an example…I’m intrigued by this, but since I am not real swift with math, I can’t visualize what that curve plot would look like, or how it would vary across a set of inputs – and especially – how would one translate that equation into policy. Can you help me out?@Alessandro: you also got my attention with: "IMHO what has caused this mess are the political tricks (fiat money, compulsory pension plans, etc) to keep the yield curve artificially low and artificially steep. That is what caused the monster malinvesment we see."I think I get "fiat money" and "compulsory pension", e.g.: "Fiat money" to me is just another word for "somebody can (and does) manipulate the supply of money to take it out of equilibrium with the underlying asset base". Compulsory pension plans is a way to force the population to buy securities that aren’t really worth what they’re priced at, e.g. GSE issues, of which most pension plans carry plenty. But can you explain the expression "artificially low and artificially steep?" This seems an oxymoron to me. Thanks!

Alessandro • July 26th, 2008 at 5:35 pm

@OuterBeltway om money supply1. "Can you please cite the various types of "who" that you’re aware of?"Following history: goldsmiths, bankers, churches, governments and central banks. They all created money for self interest and screwed up "their" people.2. "a point about banking. It has in the past, and generally does serve the important function of allocation of capital."I agree.3. "When banking works right – even fractional reserve / leveraged banking, it serves as a generator to develop wealth."I don’t see how lending non existent money (that is what fractional reserve is) can increase wealth. It sure increases the money supply to the advantage of the borrower and of the bank, but how can the society get any advantage by allowing banks to fake savings?OTHO an investment bank that analyzes a business plan and acts a broker between a pool of savers and a business willing to expand is something that produces wealth. The IB has the right to ask a fat fee and doing a transaction without leverage and with matching maturities you don’t even grow the money supply.4. "what other methods are available to inject / withdraw credit from the money supply?"I don’t see why people want the money supply to grow at all. More money doesn’t mean more wealth (except the lucky ones who get their hands on the fresh bucks), on the contrary it means inflation, so less wealth for everybody.The best argument in favor of central banking is that with the gold standard in spite of a very good long term stability, you’ve got some wild mid term inflation/deflation cycles, that could be smoothed out by the superior oversight of modern central bankers. What have we got instead? Some smooth mid term cycles during the good times and insane bubbles and crashes when times are not so good. And for a worse mid term management we gave up long term stability. Ouch!I would leave perfectly well with the weak deflation produced by stable money supply and growing population and productivity, especially if in exchange I have to surrender the power to print money to someone and historically all the someones used that power to get rich quick screwing everybody else.Why not just keep the ****ing money supply alone!

Kerk • July 26th, 2008 at 5:36 pm

SWK,The US was created to be an entity that would interact within a market economy, speaking in an economic manner as there were other reasons as well. Generally, the market economy refers to individuals establishing the "rules" by either purchasing or abstaining from purchasing the available goods and services. Of course there are governments in any state. The question is what system of governance will set the rules, and what areas are they allowed to set rules. Is there going to be any established set of rules that won’t consistently change on a whim? Sports coaches realize the importance of rules that won’t change during the course of a game or even a season. Paraphrasing Lombardi, he said that competitors know the rules when they get into the game. The objective is to win, fairly, squarely, by the rules, but to win. Who wins when the rules change continuously throughout the game? Probably only the referee, and they aren’t supposed to be the competitors. The US rule of law was based on specific authorities granted in the constitution. Based on this rule of law, individuals could make economic decisions and allocate capital with the knowledge that the rules of the game wouldn’t be suddenly changed by legislation, executive orders, or judicial rulings – thus wiping out their capital due to a rule change . Looking at the circumstances today, it is becoming increasingly difficult to allocate capital with any reassurance. Many people must be asking themselves what will be done next. As the market economy attempts to work, the federal government continues to make dramatic shifts to the rules of the game. When individuals make the rules (after the basic rules have been set and an assurance given that other areas won’t be affected), I am responsible for my actions. It may still be painful, but I can accept the fact that I used a flawed analysis of the economic situation. When central planning agencies have the ability to change rules midstream due to arbitrary influences, it can/will frustrate the honest/original rule abiding players dramatically.

Wild Bill • July 26th, 2008 at 5:43 pm

Please, fellow bloggers. Don’t be so quick to count the U.S.A.out. We need across the board decentralization of our banking system, our energy generation systems, our food production and distribution and our political system. The executive branch has garnered too much power and has upset the system of checks and balances. The diversity and flexibility that has always been our strength, is now being suffocated under the weight of self-perpetuating, self-serving burocracies. We need positivism in the face of the current crises. We need ideas and innovation to create wealth rather than printing increasingly worthless currency. Milton Friedman said: "If you put the government in charge of the Sahara desert, there would soon be a shortage of sand." Louis Rukyser said: "Never underestimate the United States when making your economic decisions." You may find my comments panglossian, but I am 65 years of age and still I am optimistic.

AfA • July 26th, 2008 at 5:57 pm

@ AlessandroThanks for addressing that, I am not for a flat yield curve, because I am sure it is not viable. I am for a flat RAW yield curve that once other risks are incorporated into it, the "rate of return" curve will be convex with minimum rate corresponding to medium term (or in fact, each market players will be confronted with different yield curve, which in aggregate, would keep the economy from moving in the same direction). 30 years financing is surely more risky than 1 year financing. However, overnight financing SHOULD also be more risky than 1 month financing (I will have more time to work and collect the money to pay back). Moreover, the additional risk in the 30 year financing compared to 1 year does not correspond to the time value of money (this is not risk source) but to duration & reinvestment risks.Fiat money, compulsory pension plans, fractional banking, and leverage are not necessarily bad or causes of current problems but simply concurrent environment. The current problems would probably not occur if market players (banks, corporations and individuals) were not indefinitely motivated to take on more credit, more leverage, borrow short and lend long. The great depression occurred while US was still on gold standard and no compulsory pension plan (to the best of my knowledge). I do not think there is another system than paper money (probably backed by some commodity) where even if leverage ratios are formally and strictly established, market players will soon find ways to circumvent these regulations as long as they find it profitable (in the short term). I was thinking that if we design a system that does not necessarily/always motivate players to take on more debt to aggregately play on the same yield curve, then maybe we can have some kind of stable economy. So my thinking led me to the idea that if the lender of last resort lent money to bank according to the convex yield curve, banks will be inclined to borrow more in the medium term and less in the short and long term and as a result they will lend short and/or long indifferently from the period of time but they will be more sensible to risks relative to short and long term borrowers, they will be inclined to accurately assess and price these risks higher than medium term (which will make them also subject to convex yield curve) but lower than required rate of return of financing through equity, which using arbitrage by market players, lead them to restrain from using high leverages and look for optimal D/E ratio. The question of course is what should be the rates charged by the central banks. I believe using some models will give the answer (answer that will be subject to market rate of returns and optimal leverage ratio).The curve is upward sloping because the lender of last resort lends only on short term basis (repo) to banks which then banks completes the rest of the curve; as the short term rate is a given, they are free and motivated to lend and charge more on the long end, giving the curve its current shape.

Guest • July 26th, 2008 at 5:57 pm

"We need ideas and innovation to create wealth rather than printing increasingly worthless currency"under current two extreme parties system (extreme left and extreme right system), i doubt it. you can just count USA out period.

Alessandro • July 26th, 2008 at 6:11 pm

OuterBeltway: "can you explain the expression "artificially low and artificially steep?" This seems an oxymoron to me."My pleasure (but then I’ll go to sleep).Historically people didn’t save as much as we do in the industrialized world, because everybody’s main pension plan was "die young" with the fall-back plan "hope your kids will care". So the huge amount of savings coming from compulsory individual pension planning is a modern time economic anomaly and in my opinion it is one of the reason there has been so much cheep and dumb credit available (the other reasons are the dollar pegs).So what happens when a pension fund has to "invest" billions of dollars every month? It buy securities (right you are), among others fixed-income of all maturities, so it drives the yield down across the curve.This is what I mean for ‘artificially low’ across the curve. The time value of money is distorted by the government forcing the people to save even if yields are pathetic.Obviously this mountain of cheep credit tend to flatten the curve taking some out of bank earnings, but fear not, the central bank come to the rescue of the financial system by manipulating short rates lower (ultimately via printing). This way the ‘artificially low’ yield curve gets ‘artificially steeper’.Hope it clearer.

Joe 6Pack • July 26th, 2008 at 6:20 pm

Just about in a panic here folks. Not looking for investment advice, but a place to Stash some Cash until this mess blows over. Please don’t say under the mattress like grandad! Need to keep it safe and simple. Any suggestions greatly appreciated.Joe

OuterBeltway • July 26th, 2008 at 6:28 pm

@Alessandro:Yes, indeed, that cleared it up nicely, and many thanks for the extra effort. I’ll look for a chance to return the favor.

Alessandro • July 26th, 2008 at 6:40 pm

@AfAeven removing credit risk and interest rate risk factors (I’m sure the borrower will pay in full and the central bank will not mess with the FFR) I still want a higher yield on longer maturity because I cannot be sure I will not need the money sooner than expected. I might get hit by a bus tomorrow and if that happens having lent overnight of to 30 years make a big difference. This is the time value of money as I understood it. Looks like you call it duration risk, if so, then I don’t understand what you mean as "time value of money".BTW: from the point of view of the fundamentals looks like GD I was much less of a mess than today, and maybe more similar to the dot-com crash. We might be facing crash of the bigger bubble that staved off what should have been a replay of the ’30s.

AfA • July 26th, 2008 at 7:09 pm

@ OuterBeltwayA parabolic/ quadratic/ parabolic/ convex(concave) function is a force of nature, and in practice, it is the manifestation of many laws (the law of diminishing marginal utility, optimum size, …) Depending on the sign, if the quadratic function is positive (negative), it means the output increases (decreases) as long as input increases, up to a certain point where the output reach the maximum (minimum) and then starts to decrease (increase) if input continues to increase beyond that point.Examples are everywhere. A company may be motivated to hire more people, because each additional employee increases revenues faster than costs (more profits, or higher productivity) up to a certain size where every additional employee costs more than the additional revenue he generates (less profits or lower productivity). The law of supply and demand also is an example (if you only consider intersections of both curves). Leverage is also an example, the more the leverage the higher the profits up to a certain level where interest eats all profits. This mechanism applies to almost everything including stock market and the economy as a whole and ensures the tendency of the system towards equilibrium. The only problem with this natural force is that it is a long term process and equilibrium is only momentary (the system is always tending towards equilibrium but NEVER in equilibrium during any extended period of time). Take the level of sugar in the blood or blood pressure, because of counteracting body mechanisms, your blood pressure is never in equilibrium but it is always bouncing around it.Back to economy. As I said, this process is only long term process. And economists (at least the ones that taught me economics) usually forget that although the economy and markets tend toward equilibrium, the deviation from that point means slack, dead weights, collateral damages, injustice … for REAL people in the medium term (which may mean a life time for some).Here is an example, leverage as I explained earlier follows a quadratic function (P = f(L) = a.L^2 + b where L is leverage ratio and P is profit and a & b are coefficients). Let’s assume that the optimum leverage ratio (the one at which the company maximizes profits) is 1 (D/E=1). It means that the company, at any given time, will not be interested in taking on more debt beyond 1. That is in theory. Because of abnormally cheap (adjustable) long term rates and/or with no interests for the first 3 years, it might be possible that a company (or to be more correct, the current CEO of the company who would be gone after 4 years) to take on much more debt than 1 (say D/E=4). This leverage would allow the company to make more profits in the short term, probably be able to reduce its prices to sell to more people. Ultimately, the long-term leverage ration equilibrium level will "force itself on the system". If and when long rates adjust higher to reflect higher inflation for example or that the 3 year "forgiveness" period, interest payments will shoot up, significantly squeezing profits and leading new customers to pay higher prices, next CEO/employees to get less pay or be fired and new shareholders to lose on their stock prices. It is sure that everything went back to equilibrium, but new customers, employees and stockholders all suffered the consequences of old customers/ CEO/ shareholders. My point therefore is to try to shorten the correction; make the swings smaller and closer to the equilibrium point (stability) but faster (dynamism). That is what led me to what I explained in the earlier post.

Guest • July 26th, 2008 at 7:21 pm

"However, I stick to my conviction that designing a system that balances motivation using a quadratic function [f(x) = – x^2 where x represent resources/inputs/costs and f(x) represent utility function) would be less costly to implement and more productive."@ AfA on 2008-07-26 16:10:08Big mistake. Any / all economic systems should be designed in physics and not mathematics, especially the quadratic which normally cannot be solved.Mathematics are rigid descriptors and should always come after the fact, not before. The dynamic chain from Cause to Effect does NOT equate to – an equal and opposite reaction to the applied force – as that initiating force acts upon something of similar characteristic and hence, there is resistance; a small force yet still an expenditure of energy (vivre la difference) please note that the noun is cathodic hence creative.Use mathematics for creativity at your peril. Physics is the heart of creativity. Understand this and you will comprehend what "systemic" means.Ho humPeterJB

AfA • July 26th, 2008 at 7:23 pm

@ AlessandroCredit card & other companies still charge absurdly higher rates for short term "cash flow" need than for any other duration. They do so, in part, because they know these short term needs are much riskier.

OuterBeltway • July 26th, 2008 at 7:25 pm

AfA:While I am very impressed by the thoroughness and lucidity of your explanation, I am more impressed by the effort you put into doing it. You are an asset to this blog.Thanks. I actually understood most of what you said, and now I can go back and re-read your prior post and get the full yield from it.Alessandro, this praise applies equally to you, too.

AfA • July 26th, 2008 at 7:31 pm

@ PeterJB"Big mistake. Any / all economic systems should be designed in physics and not mathematics, especially the quadratic which normally cannot be solved."I used the quadratic function to illustrate a point not to give a rigid design to the system. I used the example of the quadratic function, as an approximation, specifically because it reflects the dynamics of some of the most powerful laws in nature and "physics". IMO.I agree with you, and hope you agree with me with the message I was passing (cf. explanatory post above). And thanks for calling for "intellectual" discipline.

OuterBeltway • July 26th, 2008 at 7:39 pm

Ahhhh! PeterJB, *(&*!^*(. I am not ready for more mental freight yet. At least give me 5 mins to assimilate the lesson already on the board before erasing it, and scribbling new Greek over the old Phoenecian. But now that I’ve got your attention… "Use mathematics for creativity at your peril. Physics is the heart of creativity. Understand this and you will comprehend what "systemic" means."If ever there was a "dangle"…that would be one. Care to elaborate on:a. Physics is the heart of creativity. That seems a bit of a sweeping generalization that probably doesn’t include the function of the human brain – are you going that far with this assertion?b. How are you separating mathematics and physics. Isn’t math the language of physics? I don’t remember physics symbology that wasn’t math symbols…except maybe Feynman diagrams… and, of course…c. So what does "systemic" mean, in the context you’re using here?Looking forward to this answer. Machine’s tilting back and forth, good ride…

Guest • July 26th, 2008 at 8:32 pm

"I used the example of the quadratic function, as an approximation, specifically because it reflects the dynamics of some of the most powerful laws in nature and "physics". IMO."@ AfA on 2008-07-26 19:31:16My turn to agree with you (with pleasure) the quadratic does indeed reflect the dynamics of some of the most powerful laws in nature – due to the fact that it is uniquely irrational as such is the nature of all life phenomena.@ OuterBeltway on 2008-07-26 19:39:18"Systemic": From physics we know that life phenomena – which include most decidedly economics – builds ‘structure’ and upon structure organization is built. A ‘systemic collapse’ is the erosion of the structure which collapses itself and then its organizations. WTO 911 was a systemic collapse. Civilization is where structure builds organization and then that ‘whole’ morphs to structure upon which new organization is built.Now, human beings are a life phenomenon that have the capacity to learn from the past via written record and various other methodologies and hence we do have the capacity to build civilization. Unfortunately, we empower "leadership" generally from the unlearned and unread (no need for an example here) which makes the same errors and mistakes en automata (IRM – innate response mechanism) which leads to protective collapse and the start-again mode – this is physics – humans need / must er have the gift to empower intellect – this is what being human means! This is what we do not do! So, we chain ourselves to the cyclic repeats, over and over again.The Mind is not only human it is Universal – but where is it?Physics is life phenomena and the Universal Laws of its Cause and Effect through emergence, structure and organizations, and civilization (culture) – a verbe to a noun.Mathematics has falsely captured physics and now physics is all downhill. Mathematics is a rigid "descriptor" of relationship visually seen as geometry, which is the Universal Language. Philosophy is the seat of the soul.Enjoyable:-)Ho humPeterJB

denriddy • July 26th, 2008 at 9:14 pm

@kilgores>Just because the concepts of a progressive income tax and of cental banking is embraced by Marxism doesn’t make these ideas exclusively MarxistNobody said it made them "exclusively Marxist," so beat your straw man on your own time.Marx called for the progressive income tax in "The Communist Manifesto" in 1848, and exactly 20 years later it was introduced as law the United States. The sequence is inarguable. The source is inarguable. It is a Marxist doctrine.Marx called for the central "State bank" in 1848, and exactly 21 years later—the year after the income tax was legislated into being here—the first system of national banks was instituted by the National Currency Act. The sequence is inarguable. The source is inarguable. It is a Marxist doctrine.Now go read the other ten planks of "The Communist Manifesto" and see if you think we have any missing here and now in this country. There’ll be a test.

ptm • July 26th, 2008 at 9:20 pm

Anybody happen to notice that three banks failed on Friday?http://www.fdic.gov/bank/individual/failed/banklist.htmlDo you hear that rumble? Something starting to crumble!

denriddy • July 26th, 2008 at 9:21 pm

@Guest>bottom line, free market and democracy is best for a societyNot unless and until there are I.Q. requirements for voting. You know, like the "Are you taller than this line?" entrance requirements for roller coasters. I think The America Experiment has proven that conclusively. After all: here we are with this mess.

ptm • July 26th, 2008 at 9:37 pm

Internal Suspicion less Border Patrol Checkpoint July 18th 08This may seem off-topic, but given the way the economy is going, I guarantee all of we will be subjected to these unlawful road stops in the name of homeland security. I cannot tell you how this video got my blood boiling. I was literally shaking by the end of the video. As clarification, the people in the car should have repeated two simple questions: "Officer, am I under arrest?" and "Officer am I free to go?" That would have forced homeland’s hand and lead to a false arrest lawsuit.http://youtube.com/watch?v=UrFRObbSDDo

Jeff • July 26th, 2008 at 10:04 pm

@ Joe 6Pack:Though I’ve followed this blog for a while, this is my first post. I don’t know if I’m breaking any etiquette giving this advice. If I am, I hope members here will forgive me for trying to help.Joe, in my opinion, the best place to stash some cash is by buying gold or silver bullion coins or bars — they will both at least double in value over the next 3 to 4 years. And silver will probably do better than gold. (I don’t know what your timeframe is for stashing this cash.) Now is a very good time to buy both, since gold and silver are taking a bit of a breather before starting to move up powerfully again — probably soon.If you choose coins, I would suggest the 1 oz. American Buffaloes (not Eagles), since they’re the same price as the Eagles but have a higher gold content. The 1 oz. Canadian Maple Leafs are also very high quality. For silver coins, the 1 oz. American Silver Eagles are best. If you decide to buy bullion bars instead, buy only those that have the hallmark "Johnson Matthey." A good dealer that I have used is Colorado Gold. (Please Google.) If you want a large precious metals dealer, I would recommend A-Mark in L.A.Put your money into these tangibles, and then hide some at home, and put some in safe deposit boxes at the 2 or 3 strongest banks you can find. The highest quality gold stocks will also do well. Goldcorp (GG) is the best. Eldorado Gold (EGO) is a smaller stock that has a very strong chart. Agnico Eagle Mines (AEM) was also very good (moved up the most in the last big rally), but they just turned in a pretty disappointing earnings performance last week and got whacked, so I don’t know if they’ll move up as strongly in the future as they have in the past. Kinross Gold (KGC) is also good, then Newmont (NEM), Barrick Gold (ABX) and Yamana (AUY), all in that order. Of course, there are the gold ETFs: GLD and IAU. But I prefer what is in essence a gold AND silver ETF: Central Fund of Canada (CEF). The silver ETF is SLV. The best silver stock is Silver Wheaton (SLW). Another decent one is Pan-American Silver (PAAS), but I would stick with the gold stocks if I were you. Even though silver has been doing better than gold recently, for some reason, the best gold stocks have outperformed the best silver stocks.All of these stocks have been moving counter to stocks in general since last October (most stocks down, these stocks up). Again, now is a very good time to buy. They started a correction on March 17, and will be breaking upward again soon.I hope this helps. And if you can pass this information on to others so they can protect themselves, I hope you will.Good luck to you,Jeff

kilgores • July 26th, 2008 at 10:29 pm

@ denriddy on 2008-07-26 21:14:57No straw man fallacy is involved on my part. I don’t think I misrepresented the poster’s argument at all, which didn’t have to use expressly the phrase "excusively Marxist" to convey the idea that a progressive income tax or a central bank means Marxism is necessarily afoot.Exhibit A: >>"COMRADE PAULSON runs the I.R.S., which is now and always has been Marxist, the second plank of the Communist Manifesto being "a heavy progressive or graduated income tax"The IRS is now and has always been Marxist? Really? Because it enforces a progressive or graduated income tax authorized by the U.S. Constitution? That’s the only reason suggested by the post, and this conclusion is a fallacy of generalization. A progressive income tax alone does not make an organ of our democratically elected government Marxist, but the post clearly implies that it does, i.e., that a progressive income tax equates to Marxism.Exhibit B:>>COMRADE BERNANKE runs the Federal Reserve Bank, which is now and always has been Marxist, the fifth plank of the Communist Manifesto being "centralization of credit in the banks of the state, by means of a national bank with State capital and an exclusive monopoly":Now the claim is that the Fed "is now and has always been Marxist." Why? Because it is a central bank? Frankly, it really doesn’t meet all of the criteria of the fifth plank, but again, any reasonable mind would the post to be suggesting that to have a central bank means Marxism is involved, i.e., that the fifth plank is a principle which is "exclusively Marxist."As for your points:>Marx called for the progressive income tax in "The Communist Manifesto" in 1848, and exactly 20 years later it was introduced as law the United States. The sequence is inarguable. The source is inarguable. It is a Marxist doctrine.Yes, a progressive income tax was introduced at that time, as you must know, to raise money for the War Between the States, and was terminated when the war debt had been paid off. It was not introduced in connection with a desire to establish Marxism or a Marxist state or because the Congress of the United States ran out and read the Communist Manifesto. The sequence may be inarguable, but it is not meaningful. Just because one event preceded the other does not imply that the first caused the second.You claim the source is inarguable, too, but I would be surprised if you could provide a scintilla of evidence that would support that assertion. One thing I do know is that in The Wealth of Nations, the great god of free market economics, Adam Smith, wrote, "The necessaries of life occasion the great expense of the poor. They find it difficult to get food, and the greater part of their little revenue is spent in getting it. The luxuries and vanities of life occasion the principal expense of the rich, and a magnificent house embellishes and sets off to the best advantage all the other luxuries and vanities which they possess. A tax upon house-rents, therefore, would in general fall heaviest upon the rich; and in this sort of inequality there would not, perhaps, be anything very unreasonable. It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion." Seems Mr. Smith, then, came up with the idea of a progressive income tax way before Marx and his Communist Manifesto. Could it be that when the U.S. government began to implement a progressive income tax, the idea had come from Smith, and not Marx? Gee, I think so. In fact, it appears Marx may have co-opted the idea for Marxism. What a copycat!What else was it you said? Oh, yes:>Marx called for the central "State bank" in 1848, and exactly 21 years later—the year after the income tax was legislated into being here—the first system of national banks was instituted by the National Currency Act. The sequence is inarguable. The source is inarguable. It is a Marxist doctrine.You are really big on this "inarguable" sequence and source nonsense, aren’t you? Well, allow me to suggest why it is every bit as ineffective as the first time you used it. The Swedish Riksbank was opened in 1668. At the request of the English government, the Bank of England opened its doors in 1694 (through the efforts of a Scot, I’m proud to say) to help pay for a war. The Communist Manifesto was first published in 1848, and 65 years later, yes, the Federal Reserve System, as I have noted previously, was created by the democratically elected U.S. Congress in 1913. I defy you to offer any credible evidence that the genesis of the Fed was in any way tied to Marxism. You can’t.I don’t think I’m the one that needs a test here, and I’m certainly not going to go through the remaining planks of the Communist Manifesto to make up for your own lack of knowledge of history and in particular, economic and monetary history. To suggest that the venerable institutions of this great country or the dedicated public servants who run them are in any way truly dominated by a Marxist agenda is sheer paranoid fantasy. My advice is to avoid allowing your political and economic predispositions to get in the way of the facts when responding to comments with which you do not happen to agree.SWK

Guest • July 26th, 2008 at 11:04 pm

@K in TX: “FRITZ HOLLINGS: ‘What hasn’t been outsourced is being bought with that cheap dollar. Vodophone is gone to the Germans. Bell Labs is gone to the French with all their research and everything else. Westinghouse Nuclear with all of their research and technology and everything, is going to Toshiba, Japan. And Anheuser-Busch, the Belgians. Anheuser-Busch is beholden to the stockholders but nobody’s beholden to the people other than the congressmen and senators. And they’re not doing their job…’”The chief beneficiaries of America’s central banking system and her 1980s corporate mergers and reorganizations have become the decision makers over virtually every segment of our culture and body politic. This is no secret conspiracy. It can be traced daily in The New York Times business section.To paraphrase former U.S. Senator James Abourezk: That is the state of American politics today – we are daily witnessing U.S. senators and representatives bowing down low to the money power. Make no mistake. It has nothing to do with the legislators’ love for this power: it has everything to do with the money that is fed into their campaigns by the lobby…In that this money power is loyal only as it benefits from a nation interconnected to the global chain, I do not see how we the people, without Congress, can stop it from further takeovers of US corporations, a process easily done with 12% of voting stock, and then removing those companies — lock, stock and barrel– to foreign governments utilizing slave-like labor (or devaluing the dollar and making foreign buyouts attractive per se). Of course, companies left on shore must then go elsewhere in search of cheap labor or go out of business.Without a Congress that represents the people and is loyal to the United States of America, the trend does not look good for Americans.By the way, some people might have missed it, but 2007 was a record year for mergers and acquisitions. http://www.financialweek.com/apps/pbcs.dll/article?AID=/20080114/REG/823162866/1036

kilgores • July 26th, 2008 at 11:13 pm

@ Written by Kerk on 2008-07-26 17:36:23>Looking at the circumstances today, it is becoming increasingly difficult to allocate capital with any reassurance. Many people must be asking themselves what will be done next. As the market economy attempts to work, the federal government continues to make dramatic shifts to the rules of the game. I agree, there is no question that this is a problem. Tax planning, for example, is really hard when every time you turn around, somebody running for office insists that we need "reform." Unfortunately, that’s just a messy fact of governments of any stripe, and it is here to stay, I’m afraid.>When individuals make the rules (after the basic rules have been set and an assurance given that other areas won’t be affected), I am responsible for my actions. It may still be painful, but I can accept the fact that I used a flawed analysis of the economic situation. When central planning agencies have the ability to change rules midstream due to arbitrary influences, it can/will frustrate the honest/original rule abiding players dramatically.You seem to assume that private players don’t arbitrarily change the rules when it suits them, but that really happens all the time in the market and in other social contexts because "some animals are more equal than others." The adhesion contract, in which a party with superior bargaining power (e.g., a big company with a monopoly in a market) offers contract terms to a party with disproportionately less bargaining power (e.g., a poor person) on a "take it or leave it" basis with no opportunity for negotiation, and which may sometimes unilaterally change the terms of the contract after its execution, is an example. Rule-changing is not just a facet of government behavior.Now, the government in the U.S. does have some powerful constitutional constraints already on its ability to change the rules of the marketplace. For instance, the Constitution prohibits Congress from enacting laws that would impair obligations of private parties under contract, and that helps provide stability and prevent volatility in the free market (imagine how difficult it would be for a baker, e.g., to enter into a private contract with a supplier to provide the flour he needs for his products, and then have the government pass a law that allowed the supplier to ignore the obligation to supply the flour at a particular price, or at a particular time, or in a particular quantity, etc.). There is clearly a lot of dynamic rule-changing going on now with the Fed and the Treasury and so forth, but this is a predictable reaction to unprecedented conditions in the private sector which, unfortunately, arose because (as Dr. Roubini has pointed out) of this crazy notion that virtually any regulation of the free market or private transactions or institutions by the government is tantamount to government interference that is always bad for everyone. To quote the good professor, "[S]elf-regulation means no regulation.” Our government is now trying to cope with a situation in which no reliable rules are present in the marketplace because the government didn’t put any in place and the private sector did not adequately regulate itself. This has created the chaos now unfolding that Mr. Bernanke and Mr. Paulson and others are doing their best to get under control. Yes, it may be an example of free markets for the poor and socialism for the rich, and I can’t say I don’t find that distasteful and perhaps even hypocritical, but I’m not sure they have any really good options one way or another. There are terrible potential consequences to any course of action they take. We should all be glad we’re not in their shoes.SWK

goldorcash • July 26th, 2008 at 11:18 pm

@ Joe 6Pack:Gold is good. GLD is easy since you don’t have to worry about actual storage. Many people are happier to have the actual metal in their hands.You might also consider foreign currency exposure via the ETFs FXE (Euro), FXY (Yen), and FXF (Swiss Franc) just to mention 3 possibilities.If you have access to FOREX trading you might also consider converting USD directly to various foreign currencies.

AfA • July 26th, 2008 at 11:30 pm

@ PeterJB"life phenomena builds ‘structure’ and upon structure organization is built"Interesting … I would argue though that there is nothing irrational in nature/ physics. Chaotic yes but not random. And if there is any it is only in our heads due to lack of perfect knowledge and other cognitive biases. I said somewhere else that "I also see the market/economy as subject to both chaos theory and closed-systems theory (both improperly defined by me). Chaos theory applies to stable (although overwhelming) set of rules and laws (regulating cause to effect relationships). Closed (but big) systems operate as open systems, which allows growth and predictability as long as the system is far from it’s saturation point. If we reach saturation in a closed system, the set of rules and laws change". However, the last point may be defined as unstability or irrationality, or if I understood what you said earlier, something close to your "protective collapse and the start-again mode"@ SWK on 2008-07-26 22:29:08That’s a heck of an argument. Bravo!@ ptm"Anybody happen to notice that three banks failed on Friday?"There are only two banks that failed friday, or to be more accurate only one, since both are sister banks.

denriddy • July 26th, 2008 at 11:41 pm

@kilgores>The IRS is now and has always been Marxist? Really? Because it enforces a progressive or graduated income tax authorized by the U.S. Constitution?Codswollop. The Supreme Court correctly ruled that it was unconstitutional—but that was shortly before the original Constitution was overthrown by the Sixteenth Amendment in order to allow the Marxist mandate to take up residence as a permanent parasite.Citing Adam Smith’s modest proposal for a consumption tax and calling that an "income tax" is too ludicrous to entertain—although apparently not too ludicrous for you to attempt to argue. Given that you don’t even know the difference between the two, I’m afraid you’ll have to find an idiot to waste time arguing it with you.

Guest • July 27th, 2008 at 12:17 am

"However, the last point may be defined as unstability or irrationality, "@ AfA on 2008-07-26 23:30:43"irrational" in physics has no relationship to ‘unstable’ but I need to apologize for not explaining clearly. The true state of life phenomena ‘appears’ irrational to us so we try to make it appear rational – which of course, is irrational and thus, makes it unstable. That is what is going on with the global economic systems; it’s just that we don’t understand and don’t want to understand the physics involved and prefer to make invalid emotional and consensual assumptions. Its a human thingy.Chaos is merely a breakdown in order – but here I am not speaking of what is incorrectly called Chaos Theory. And, there is actually no "closed systems" per se, as if they were really closed, the center would be unsustainable.Saturation normally or typically leads to differentiation which occurs through transmutation via resonance and volumetric expansion. It leads to structure and its organizations reverting to a higher level of structure.No, you are correct, in physics there is no irrationality; it is all in the mind that comprehends not physics. The fundamentals need to be known.Ho humPeterJB

JLC • July 27th, 2008 at 12:31 am

HI Joe,I think gold is good right now, but no one can make guarantees that it will rise or fall in value. But given the propensity of our politicians to print their way out of this mess, and given gold’s history as a store of value especially during chaotic times, I have some gold. Silver is also a good way to go, and more affordable.In an age of systemic threats to the financial system, I personally do not feel comfortable owning precious metals in the ETFs, I like the physical. I recommend allocating your storage between several secure locations, so that if one goes down you are not wiped out. I often waiver between safe deposit boxes, which can be subject to government intrusion quite easily, and good old fashioned creative hiding places.I also like foreign currency, especially MERKX and MEAFX mutual funds, and you can open foreign currency acounts at Everbank. I’ve been especially fortunate with Aussie, Brazilian, and Renminbi.There is much uncertainty right now, and I’m not totally convinced that the dollar is going to collapse. I think it is likely that when the contagion fully spreads to the rest of the world, the dollar may look good in comparison. It all depends on the reaction of foreign central banks to our continued efforts to print our way to solvency. If TPTB can hold things together while the rest of the world catches up, then the dollar may survive and even strengthen. But in the long run, given the structural imbalances and insane obligations of the government, the dollar is certainly doomed. I’m just not sure if that day is upon us yet.Until I am convinced of a definitive medium term move, my foreign currency and precious metals are somewhat hedged with dollar cash. And some short ETFs.The two places I would NOT put my money in right now are stocks and real estate . . .

kilgores • July 27th, 2008 at 1:16 am

@ denriddy on 2008-07-26 23:41:59Codswollop! Great word! Too bad you otherwise didn’t have much to say in response to my remarks concerning your weak (more properly baseless) arguments.I’m afraid I must decline to embrace your vacuous historical revisionism. I must admit, though, that this is the first time I have ever heard a duly adopted amendment to the United States Constitution referenced as an "overthrow" of the original text. Yes, a real Marxist coup, that was.I stand corrected as to my inadvertent mischaracterization of the subject of the quote from Adam Smith as an "income" tax. The point was that Smith found reasonable the general principle that taxes should be progressive, rather than flat or regressive. If your real beef is with the adoption by the federal government of an income tax (oh, how unfair to take YOUR money to pay for the government services in the public interest), and you are suggesting that this somehow is of Marxist origin (again, harkening back to the second platform of the Communist Manifesto), I would again beg to differ with you. I don’t suppose the movement to adopt an income tax arose from its imposition in the year 10 A.D. by the then-sitting Chinese Emperor, but it certainly doesn’t strike me as beyond the realm of imagination that it likely found its inspiration from the income tax adopted in England in 1798 under Prime Minister PItt (sadly, like the first U.S. income tax adopted in 1861 and repealed in 1972, that tax was enacted as another war funding effort, this time for the campaigns against Napoleon). As for your remark about my having to find an idiot with whom to argue, well, I guess I’ve already had that pleasure this evening. It’s been wonderful debating you in this forum.SWK

kilgores • July 27th, 2008 at 1:21 am

@ AfA on 2008-07-26 23:30:43>That’s a heck of an argument. Bravo!Thank you! Hopefully, somewhere in all this adversarial discourse, the Truth will emerge for someone! SWK

Guest • July 27th, 2008 at 1:24 am

Main Core: New Evidence Reveals Top Secret Government Database Used in Bush Spy Programhttp://www.democracynow.org/2008/7/25/main_core_new_evidence_reveals_topSalon.com has published new details about a top secret government database that might be at the heart of the Bush administration’s domestic spying operations. The database is known as "Main Core." It reportedly collects and stores vast amounts of personal and financial data about millions of Americans. Some former US officials believe that "Main Core" may have been used by the National Security Agency to determine who to spy on in the immediate aftermath of 9/11.hmmm…if the "Main Core" was used to determine who to spy on immediately after 9-11, it must have been populated with names already at that time. It does not seem plausible that they would have started gathering names first at that time. However, every time we are told about the reason behind domestic spying, it is with a reference to the situation at 9-11. But in order for a database to be available in the aftermath of 9-11, domestic spying must have started before 9-11 as it takes time to fill this type of a database with right "candidates".Therefore, if domestic spying started already before 9-11, what is the real reason for it?Original Salon article about the database:Exposing Bush’s historic abuse of powerhttp://www.salon.com/news/feature/2008/07/23/new_churchcomm/

AfA • July 27th, 2008 at 1:42 am

@ PeterJBI think we agree on the heart of the idea despite my sometimes inappropriate use of some technical words (and for my weak defense it is often because I have personal definitions/theories which often differ from "formal" ones, like closed (big) systems which for me means quite different thing than theoretic definitions made up until now – as far as I know – and/or because I am lazy to read and look them up)

Denriddy • July 27th, 2008 at 3:47 am

@kilgoresFirst, please allow my ‘umble acceptance of your honorable stipulation that Adam Smith indeed spoke of a consumption, not an income, tax.>I don’t suppose the movement to adopt an income tax arose from its imposition in the year 10 A.D. by the then-sitting Chinese Emperor…Next, please allow me to thank you for invoking the early Chinese income tax folly. My ethical dilemma as a result is whether to point out forcefully that China is the last bastion of communism on this rather pathetic planet, or to allow the readers to come to that realization on their own. At your expense.I fear *your* dilemma, on the other hand, is to point the reader to even one functionally socialist/communist nation that ever has existed (whether "Marxist" or not, pre- or post-Marx) that has NOT had an income tax. If you could, that would rather exonerate the income tax, wouldn’t it. Unfortunately, you can’t.>If your real beef is with the adoption by the federal government of an income tax (oh, how unfair to take YOUR money to pay for the government services in the public interest)…I think Thomas Jefferson covered this subject rather well: "To take from one, because it is thought his own industry and that of his father has acquired too much, in order to spare to others who (or whose fathers) have not exercised equal industry and skill, is to violate arbitrarily the first principle of association, ‘to guarantee to everyone a free exercise of his industry and the fruits acquired by it.’" —Thomas Jefferson>it certainly doesn’t strike me as beyond the realm of imagination that it likely found its inspiration from the income tax adopted in England in 1798 under Prime Minister PIttNow in your defense of the income tax, you’ve gone from invoking the last bastion of communism (China) to invoking the world leader in socialism: what’s left of the British Empire (which isn’t much).Thank you, also, for pointing out that the excuse used for implementing an income tax always and invariable is "for funding a war."I’m beginning to think I should just step aside and allow you to make all my arguments against the income tax for me. You really are doing a magnificent job.

Medic • July 27th, 2008 at 6:03 am

@ Joe6packI would have to agree with the others here who suggest metals. I had ETF’s for a while, but have sold all as I am much happier holding the physical assets. I concur also with the suggestion that you keep some close at hand, most in a strong, local bank safe deposit box and even some with trusted family. I do anticipate crime rates to rise if this downturn is prolonged or becomes more severe, so try not to make public in your area that you have gold on hand and tell anyone holding it for you to do the same. I have both gold and silver – gold for wealth storage and silver to buy things with if it gets ugly. Silver coins should be easier to trade / barter with if it comes to that.I have also done some "alternative" investing in planning for a prolonged downturn that has included investment in a pellet stove for heat, solar panels for hot water, a large chest freezer and following my wife’s lead in shopping sales. We are not hording food, but when we find good deals, we now have the space available to take advantage. We also have been taking advantage of sales to "stock up" on everyday items like toilet paper and toothpaste. Again, not going nuts, just buying cheap when we can so we won’t have to spend more on it later and thus have more cash available down the road.I would also note that we have stopped all deposits to retirement accounts. Again, I feel safer knowing that my money is in my hands and being put to good use for us.Good luck,MedicPS – @ DenriddyJust an observation – while it is clear you have an agenda and would like to invoke debate, prodding people here with insults and taunting them is likely to earn you the disrespect of most posters here. Thus, your points will be almost immediately discredited and you will simply be wasting your time (and ours). It’s our sandbox and you are welcome to play, so long as you behave.

Daltoni • July 27th, 2008 at 6:06 am

Denriddy, your bullying, condescending tone is not welcome here. You’re a good example of a common Internet phenomenon: smart guys with axes to grind who argue mean, dirty, and sneaky. When people like you appear in a forum, unless you’re ignored, much time is wasted in unwinding your fallacies. OK, so we get your point. We’ve heard it before. No need to repeat yourself now that you’ve had your say.As I pointed out in an earlier thread, as this calamity unfolds, propagandists will be working overtime to try to claim that "socialism" is the cause of all this. When the propagandists want to throw rhetorical grenades, they’ll say that "Marxism" is the cause of all this. But in spite of all the sly lies and distractions, even dumb American voters can understand this: The shifting of elites’ capital losses onto the backs of common taxpayers is not socialism or Marxism. It is the opposite of socialism and Marxism.It’s unfortunate that we have the usage "socialization of losses," because it blurs the point badly. Propagandists love to step into blurs like because it makes deceit so easy.Anyway, Denriddy, propagandize elsewhere. You’ll get no traction here.

OuterBeltway • July 27th, 2008 at 7:41 am

Summarizing previous posts on money supply, etc:A. the money supply must be expanded/contracted in proportion to the ebb and flow of the underlying asset base of the nation in order to keep the currency value stable. A stable currency is preferable to an unstable one.B. money is not just currency, demand deposits (checking account balances, CDs, etc.) and also credit – that is, loans or promissory notes like bonds.C. Credit is the aspect of the money supply that is most changeable over time, and is most difficult to measure, as it originates from so many sources, whereas currency originates from very few (legal) sourcesD. The mechanism by which the money supply grows and shrinks is a vital topic. There are two key issues: 1. Whether the flow (inject or remove money) is accurately corresponding to the growth or shrinkage of the underlying asset base the money is expected to represent, and 2. What the injection of money is used for (what sector, and to what effect)Alessandro, I think I heard you argue yesterday that the money supply should stay static. Did I hear you correctly? Does that mean as the underlying asset pool enlarges, each dollar would be worth much more…like Berkshire Hathaway shares…so as to quickly become "unaffordable", or at least unwieldy. Do we simply issue 1/10th of a cent bills, etc. as necessary? I’m not joking…this would be a perfectly appropriate, if the rule is "print no new money". Alessandro, can you fill us in on your idea of how a "no new money" economy and currency system would work?Also, I’d like to assert that "easy money" (low interest rates) spurs investment, and that can be quite good if it’s used for the right purposes. Please comment on this – are you saying the problems of easy credit outweigh its advantages, or is there a different way to get ready credit that can be channeled to the proper places, without manipulating the money supply?

OuterBeltway • July 27th, 2008 at 7:55 am

@AfA and PeterJB, and Alessandro:What I got from your posts was that systems, as physical entities operating in a physical environment, behave according to a set of partially-understood laws, that can sometimes (post-facto) be expressed using mathematics. These systems tend to oscillate or vary around some equilibrium zone, and that zone is characteristic of the system, and the environment the system is in. When the system hits the edges of the environment its in, the system destructs, or mutates, and the cycle of varying around a behavioral norm continues again until the space the system is becomes a constraint, and the cycle starts anew.How do you both see that pattern of adaptation and equilibrium as it applies to the last, say, 30 years of the U.S. economy’s behavior? Of course, there are many levels / concurrent circumstance that exhibit these behaviors, but which ones have the most impact, and where are we in the life cycle of the pattern?AfA, you made some points about doing something to insure that the yield curve is gently convex, which would tend to make the money supply more self-regulating. I didn’t understand it fully. Would you please go into a bit more detail? I heard the notions of "self-regulating" and "efficiently-administered" go by, and I think those are two key requirements. The requirement you didn’t address is the notion of directing the credit flow (Alessandro, should I say instead, "investment flow"?) toward the most productive sectors of the economy. Do you say this is not a valid requirement, or is it addressed somehow by your plan?

kilgores • July 27th, 2008 at 9:12 am

@ Denriddy on 2008-07-27 03:47:52>Now in your defense of the income tax…Once again, you have intentionally mischaracterized what I have said. The object of my argument with respect to an income tax I was not to advocate for, or defend, such a tax, but simply to refute the assertion that the U.S. adoption of an income tax necessarily originated with Marx. Personally, I happen to support a progressive income tax and I am certainly in a position to defend the concept of such a tax on its merits, but I’m not going to be provoked by you or anyone else into doing so in this forum so that you can attempt to further whatever personal agenda you may have.>I’m beginning to think I should just step aside and allow you to make all my arguments against the income tax for me. You really are doing a magnificent job.For what it’s worth, I am a professional advocate, and I argue for a living. If my rhetorical skills were comparable to yours, I’m afraid I’d be out on the street in no time looking for a new career because I couldn’t convince anyone — other than those who might already happen to agreed with me — that something is true. Merely trumpeting victory is not an effective way to persuade others that your position has any merit. You seem like a fairly smart fellow, but you couldn’t argue your way out of a paper bag.SWK

Aleister Perdurabo • July 27th, 2008 at 9:54 am

Michael Hudson: The discussion of WHAT to tax should take precedence over how much to tax. The main source of taxation should be unearned income, defined as land rent, monopoly rent, other forms of economic rent — income extracted without playing a role in production. If government could tax the free lunch of economic rent at its source, I would prefer not to tax corporate profits or income at all. Real estate is our largest sector; most of its market price consists of the land’s site value. The first income tax fell mainly on the wealthy, and specifically on real estate, mining and monopolies. Those were the main sources of wealth then, just as they are today. Most wealth is gained by special tax privileges, and the financial sector is the largest contributor to political campaigns, followed by real estate. The Democrats traditionally have been based in the large cities. As Thorstein Veblen pointed out in Absentee Ownership, urban politics is essentially a real-estate promotion project. Raise the income tax to 100% and you’d still not capture the actual cash-flow of real estate, monopolies, and multinationals. They plow back their sales proceeds into buying more assets; this is what the great majority of wealth-holders do. Then they charge off interest as a tax-deductible expense and depreciate their buildings, despite property prices rising long-term. Foreclosures are an age-old problem. If a creditor made a loan without having a realistic idea of how the debtor was to pay it back, the transaction would be deemed to be fraudulent and the debt would be declared null and void. The mayor of Cleveland went further. He brought public nuisance charges against banks whose mortgage lending has led to foreclosures leaving homes vacant; they’re being stripped by robbers and used as crack houses. Junk mortgage lenders should be liable to pay the clean-up costs of the debt pollution they’ve created. Another way to keep people in homes is to assess what a realistic market price for the property would be, and write down the mortgage to that price. The high cost of housing — mainly the cost of carrying a mortgage — plus non-mortgage debt is onerous. Wage earners cut back consumption. Debt, plus exorbitant management remuneration and legal fees, is one reason employers have not invested as much in new equipment, research, and development. State, local, and federal governments cut back on maintaining infrastructure or improving services. These cutbacks shrink the domestic market, leading to lower investment and hiring. Creditors turn around and lend out their flow of debt service to yet new borrowers. This involves finding more and more risky markets, while the debt becomes heavier and heavier. As debt breeds inflation, dollar-denominated stocks, bonds and real estate are worth less and less in terms of euros, sterling, or other harder and foreign currencies. This doesn’t provide much incentive for foreigners to invest here. And if we go into a recession (not to speak of depression), there will be even fewer profitable opportunities to invest. http://www.progress.org/2008/unearned.htm

Gloomy • July 27th, 2008 at 10:56 am

Nouriel, 16% of financial institurions in trouble makes it sound somewhat better than the actual situation. Maybe Mr. Whalen could answer the following question: Of the 50 largest banks in this country, how many were on each of his lists?

Denriddy • July 27th, 2008 at 11:54 am

@Medic>Just an observation – while it is clear you have an agenda and would like to invoke debate, prodding people here with insults and taunting them is likely to earn you the disrespect of most posters here.While I appreciate your reasonable point, and your position as spokesperson for "most posters here," your message is misdirected. It was kilgore who opened the exchange with the following vitriol on the subject at issue: "This line of reasoning is patently absurd."Do you mean that brand of "prodding people here with insults and taunting them"?

Denriddy • July 27th, 2008 at 12:07 pm

@ Daltoni>When people like you appear in a forum…There are no "people like me." I am a unique individual, not a representative of a falsely generalized class. I think for myself, I speak for myself, and I reject your unfounded profiling out of hand.>OK, so we get your point. We’ve heard it before.Mark Twain observed, wisely: "Only presidents, editors, and people with tapeworm have the right to use the the editorial ‘we’.">As I pointed out in an earlier thread, as this calamity unfolds, propagandists will be working overtime to try to claim that "socialism" is the cause of all this.Mm. Does this mean that you view Dr. Roubini as a "propagandist"? Let’s revisit together his own statement from the article above that gave rise to this exchange:"This is why the free-market ideologues at the Fed, Treasury and White House have now become – especially after the bailout of Fannie and Freddie’s shareholders, management and bondholders – Comrade Paulson, Comrade Bernanke and the Bolshevik Great Leader Bush. But then their whole approach and ideology has always been not one of free market capitalism but rather one of privatizing gains and socializing the losses; or socialism for Wall Street, the rich and the well connected." —Dr. Nouriel RoubiniMy sole and only point, at all relevant times, has been that this systemic socialism has not sprung suddenly upon us, but has been in place for quite a long time.If you consider Dr. Roubini a "propagandist," I’m afraid you’re taking it up with the wrong person.

Denriddy • July 27th, 2008 at 12:14 pm

@ kilgore>I am a professional advocate, and I argue for a living. …You seem like a fairly smart fellow, but you couldn’t argue your way out of a paper bag.Then I will take what comfort I can from the fact that you have completely abondoned the facts at issue and resorted to 100% ad hominem.> Personally, I happen to support a progressive income tax…Now there’s a news bulletin.I will say this and only this: the conflagration of government bailout consuming us at this moment has one, and only one, fuel: the income tax. By all means, pour it on.

Daltoni • July 27th, 2008 at 1:10 pm

@ DenriddyWhat distinguishes your type is your reliance on fallacious argument to grind an ax. Almost every point you try to make contains a fallacy. Anything anyone says in rebuttal you warp in a fallacious way so that you respond not to what the person actually said but to your distortion of what they said. If anyone engages you, your distortions try to make that person seem vile.I’m sure that everyone but you understood what I meant by the two opposite senses of "socialization" in spite of your attempt to distort it and turn it into an insult.That’s the essence of why you are not welcome here. You seek to distort and to vilify, not to clarify. I have an ad hominem for you too. You’re a bully.

kilgores • July 27th, 2008 at 1:13 pm

@ denriddy 11:54:57 & 12:14:40Attacking an argument made by a poster is not the same as attacking the poster in an effort to discredit his argument. Contrary to your mischaracterization, I have neither "abandoned the facts at issue" nor engaged in ad hominem attacks to rebut an argument. Perhaps you are just not accustomed to anyone standing up to you and contradicting with sound facts and argument the positions you espouse? Go ahead and have the last word now. I’m through responding to your boorish and predictable, mean-spirited comments. You remind me of the Black Knight in Monty Python’s "Holy Grail," who doesn’t understand he’s been thoroughly licked.SWK

Alessandro • July 27th, 2008 at 1:25 pm

@OuterBeltwayyour summary looks quite good to me, I need to nitpick a few details because I feel they are important and my best guess is that you will concur."A. the money supply must be expanded/contracted in proportion to the ebb and flow of the underlying asset base of the nation in order to keep the currency value stable. A stable currency is preferable to an unstable one."I think consensus is that the money supply should be proportional to the amount of goods and services produced in an economy (think real GDP), not to the asset base. The objective is to keep the prices of goods and services stable on average. In this case the prices of assets depend on the rate of expansion of the asset base (think land with build permit), that is an independent variable."B. money is not just currency, demand deposits (checking account balances, CDs, etc.) and also credit – that is, loans or promissory notes like bonds."Be careful with what you put into your definition of money supply. You cannot spend a CD (exchange it for goods), you need to sell it first in exchange of credit in your checking account balance, then you can use that credit in exchange for real goods. For an example on how big the difference is think auction rate securities, they were booked as cash equivalent until suddenly the market disappeared and investors learned that they were really long term bonds with no way to be exchanged for cash, let alone real goods.I think Mish has a number of good posts on this subject, google for "mish money supply" or "mish m prime". In particular M3 is a useless measure of the money supply because includes all sorts of securities that cannot be exchanged for goods directly.All sorts of consumer credit might need to be included (I’m not sure how). My reasoning for example is as follows. In order to buy a $1000 widget you have the following alternatives: 1. pay with paper dollars out of your pocket (money) 2. pay with any kind of wire transfer out of your demand deposit account (you may use a credit card and then pay the full amount as soon as needed) (demand deposit credit) 3. pay with a credit card and leave it on your rolling balance (credit card credit) 4. use some other kind of consumer creditWhat you cannot do is: 1. pay with a bond or a note 2. pay with a money market fund share 3. pay with a CDI would put in the money supply the money outside of the banks, demand deposit credit, the available credit on your credit card (this is my personal heresy, note that this is not your rolling balance, but your cap minus your balance, that is what you can still spend)."C. Credit is the aspect of the money supply that is most changeable over time, and is most difficult to measure, as it originates from so many sources, whereas currency originates from very few (legal) sources"Agree."D. The mechanism by which the money supply grows and shrinks is a vital topic. There are two key issues:1. Whether the flow (inject or remove money) is accurately corresponding to the growth or shrinkage of the underlying asset base the money is expected to represent, and2. What the injection of money is used for (what sector, and to what effect)Alessandro, I think I heard you argue yesterday that the money supply should stay static. Did I hear you correctly? Does that mean as the underlying asset pool enlarges, each dollar would be worth much more…like Berkshire Hathaway shares…so as to quickly become "unaffordable", or at least unwieldy. Do we simply issue 1/10th of a cent bills, etc. as necessary? I’m not joking…this would be a perfectly appropriate, if the rule is "print no new money"."I’m not sure this would be the best solution, I just note that all historical alternatives have been used for looting the productive part of an economy in favor of the money printers.An almost fixed money supply (credit would be taken in check by reserve requirements) should produce a small long term deflation. Looking at the gold price of commodities this seem a reasonable expectation. A small constant deflation is perfectly ok for me. You will need smaller denomination, but is this a problem?I see problems with a quasi-static money supply and the constant small deflation, but I need to stop here. I’ll elaborate one day.To be continued.

RedCreek • July 27th, 2008 at 1:52 pm

I believe that by now this blog and RGEMonitor in general are widely read and followed (see for instance also how the FT has a link on its website to RGE). I wonder whether Bernanke, Paulson, Mervyn King etc read this blog – and if they do, I wonder how they feel while doing so. They are smart people and must understand better than most people on this blog how dire the situation is. I assume that their stomachs must turn every morning when they get up to go to work.

Guest • July 27th, 2008 at 2:38 pm

@denriddy: “I will say this and only this: the conflagration of government bailout consuming us at this moment has one, and only one, fuel: the income tax.”Good for you, denriddy!The Sixteenth Amendment (Amendment XVI) of the United States Constitution was ratified on February 3, 1913. This Amendment overruled Pollock v. Farmers’ Loan & Trust Co. (1895), which greatly limited the Congress’s authority to levy an income tax. This Amendment allows the Congress to levy an income tax without regard to the States or the Census. (wikipedia) Text:The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.The tax passed in February of Woodrow Wilson’s first year in office. Then, eleven months later, on December 23, 1913, Wilson signed the Federal Reserve Act into law, establishing the most gigantic trust on earth.Our man from Princeton “often spoke in glowing terms about the rise of vast corporations, and had praised J.P. Morgan as a great American leader.” He had also come to acceptable conclusions about the value of a controlled economy: “The old time of individual competition is probably gone by. It may come back; I don’t know; it will not come back in our time, I dare say.” (The Papers of Woodrow Wilson -1966)Wilson was a political captive of Wall Street bankers and had agreed to the hidden agenda of establishing the Federal Reserve System before his election, writes Fed historian G. Edward Griffin.To guarantee him the presidency, the banking cartel orchestrated a three-way race in the 1912 election, persuading Teddy Roosevelt to run as the “Bull Moose” candidate to split President Taft’s Republican support and put Wilson into the White House.Morgan and Company was not the only banking firm on Wall Street to endorse the three-way election as a means of defeating Taft for his opposition to the Aldrich plan for a Federal Reserve System because it “didn’t offer enough government control." Within the firm of Kuhn, Loeb & Company, Felix Warburg was dutifully putting money into the Republican campaign as expected, but his brother, Paul Warburg and Jacob Schiff were backing Wilson, while yet another partner, Otto Kahn, supported Teddy Roosevelt. Other prominent Republicans who contributed to the Democratic campaign that year were Bernard Baruch, Henry Morganthau, and Thomas Fortune Ryan. The Rockefeller component of the cartel was just as deeply involved; Cleveland Dodge, director of Rockefeller’s National City Bank and scion of the Dodge copper and munitions fortune, personally contributed one-fourth of the total raised by the Wilson campaign.The plan worked. Roosevelt split Taft’s support and Wilson won. Hence, a one-two punch: income tax and fiat money, all at the same time – the wedding of the IRS and the Fed.Writes Ron Chernow in the House of Morgan: “By 1924, the House of Morgan was so influential in American politics that conspiracy buffs couldn’t tell which presidential candidate was more beholden to the bank.”Wrote Wilson’s national campaign vice chairman who became his Secretary of the Treasury: There is a serious danger of this country becoming a sham republic with the real government in the hands of a small clique of enormously wealthy men, who speak through their money, and whose influence, even today, radiates to every corner of the United States…. (McAdoo, “Crowded Years” 1931)

AfA • July 27th, 2008 at 2:53 pm

First, I’d like to point that the conclusion I came to was not by any means preconceived. It appeared to me in a flash of a moment while trying to build some kind of arguments to respond to few posts here. This conclusion couldn’t have thought about it one week ago. Now back to your question, I’ll try to make it simple and clear this time, starting with a …. (from conclusions to premises to implications). First, try to imagine that we are starting the monetary system from scratch.The lender of last resort (and for that matter depositors) lend money to banks according to that gently “convex” yield curve (a)  Banks will be interested in borrowing more at the mid-term and less at the short & long-term  Banks, having medium term borrowings, would be more inclined to lend indifferently to short-term AND long-term borrowers/entrepreneurs  This will lead them to charge higher rates at the short and long end  At some point of course, at the long end, the longer the period the higher the yield, but at some point it will be higher than the highest short term yield (b) But banks will still not be inclined to borrow short (except in emergency) because there is a medium term rate that is lower Because banks want to maximize their profits, they will be inclined to correctly assess and assume risks their borrowers (inc. entrepreneurs) are subject to and charge high rates on the short end, higher rates on the very long end and somewhat lower rates in the medium term)  The higher rates banks can charge will be subject to many constraints (c) such as supply and demand and the market rate of return charged by equity financing  As an aggregate, and as I imagine it, equity financing rate of return curve is also convex (but much flatter) (d) and in my mind it crosses the hypothesized borrow/lend yield curve in 2 points; (1) somewhere between short & medium term and (2) between medium & long term, so that before point (1) and beyond point (2) borrowing is more expensive then equity while between the two points (medium term) equity financing is somewhat slightly more expensive than borrowing  These IMO have enough self regulating mechanisms (e) that will make equity investors more inclined to invest in the medium term and lender more inclined to lend in either short or long term BUT entrepreneurs more inclined to look for equity financing in either short or long term and borrowers inclined to borrow in the medium (i.e. Not all people are inclined to behave similarly all the time)  This will lead equity and credit financiers to properly assess and assume risks in their preferred duration (aggregately medium term) they will charge higher rates across the board which means more competition for the part of entrepreneurs (and innovators) for scarce resource (capital; financing) AND investors/lenders to be more exigent and somewhat more concerned about the viability of projects they are financing (and put constant check and I hope positive stress on the entrepreneur)  This is what I think one of the most favorable environment for innovation and entrepreneurship (assess and assume risks) (f)(a) Try to imagine that we are starting the monetary system from scratch. (b) The convex yield curve, as I imagine it, will not be asymmetric but rather skewed (something like a square root sign (√) or, better, a check symbol ()(c) Some other constraints might be some kinds of regulations(d) Equity on the short end may be thought of as deals made recently by issuing preferred stock at advantageous rates, emergency equity underwriting through IB who can sell them fairly fast in the secondary market(e) Don’t get me wrong, I am sure other ideas will make the system better such as regulation of leverage ratio requirements or money supply control, but I am trying to find and propose solution to the “original sin” being motivation. If the flow of my thinking is correct the mechanism will significantly decrease excessive demand for liquidity by banks from central bank. The theoretically better monetary system would be one that is backed, not by some fixed or scarce commodity, but by the aggregate production and assets of a country. If we assume GDP/GNP was (or made to be) a fairly accurate and valid indicator of aggregate wealth and production of a nation, then the money supply should be tied to production growth or contraction (central bank increases money supply by 3% when the GDP (is predicted to) increase by 3% and vice versa). A much better monetary system would direct the additional money supply towards industries that has grown and withdraw liquidity from industries/market by the same percentage their production/value contracted. However, as Alessandro said earlier, we need the “who” will be in charge of all this, and like him, I do not trust the who. Also, the second point is almost mission impossible and probably penalizes the slow industries and creates bubbles and excess consumption in the growing ones.(f) When investors/ lenders accurately assess and assume risks, they will find they are already taking risks they didn’t realize they are currently subject to (think of millions of individual investors who have no idea about the risks they are taking when they enter equity markets). If they did, most of them would “escape the market” (less demand for stocks) and others will gladly take the risks but by requiring higher rates. Both these effects will significantly decrease the money available to entrepreneurs/companies, make them design and come up with their best and bester investment ideas and innovations to attract funds, make investors more picky. Accurate risk assessment leads to higher risk assumption and higher risk assumption leads to more accurate risk assessment … etc (although we hear a lot of talking about risk assessment since a while most of it lacks real motivation rather than ability to be performed). This mechanism is also similar to lending/borrowing decision. The question is how to trigger the first mechanism of “accurate assessment of risk”. I believe, as I made clear earlier, through real motivation of economic actors to do so, by taking off the motivation not to do so (kind of self evident) if it was more expensive and less often profitable for them to continuously play on the yield curve.“The requirement you didn’t address is the notion of directing the credit flow (and "investment flow"?) toward the most productive sectors of the economy. Do you say this is not a valid requirement, or is it addressed somehow by your plan?”“How to direct credit and investment flows towards the most productive sectors, the most stable sectors and the craziest ideas” was my first concern and premise. Based on which you can read my not so logical flow above backward by using the phrase “we need [idea (n)], therefore, we need [idea (n-1)]”. Again for me it is the motivation of economic players that creates dynamism (not regulations, requirements, laws, self-regulation, floors, ceilings …) and more importantly it is the conflicting motivations of economic players that creates stability and close to equilibrium status of the system (they keep each other in check). We clearly don’t want all people behaving very similarly – totally centralized (that would be very plain society and ultimately destructive) nor totally different – totally decentralized (that would be very chaotic and unstable society).Again, it might be a stupid idea, but in all cases it is not a sufficient one.

Guest • July 27th, 2008 at 3:06 pm

at beginning of this year, M3 is around 12%. now it is around 18% and prepare to breach above 20%. Fed has almost doubled liquidity workload within a year. will M3 go up to 30% by end of this year?http://www.nowandfutures.com/articles/20060426M3b,_repos_&_Fed_watching.html

AfA • July 27th, 2008 at 3:26 pm

Aye … I messed it up, the ’s in the second paragraph are arrows and in point (b) it is a check mark symbol.@ AlessandroWhile I agree with you that "All sorts of consumer credit might need to be included (I’m not sure how) [in the money supply]… What you cannot do is:1. pay with a bond or a note2. pay with a money market fund share3. pay with a CD"The problem is that the bonds/ money market/ CD’s became "liquid" sources of fund for others who borrowed the money, with which they can buy the $1,000 widget TODAY and, worse, through new leverage, investment and consumption "multipliers" they created even more liquidity they it is supposed to. And the fact that a lender loses on the face or nominal value afterwards is, I think, only the manifestation of this "liquidity transfer". You may lose liquidity as a person, but the economy didn’t lose that liquidity (ceteris paribus). From this perspective, we may think of it as an intra-spatial inter-temporal transfer of liquidity and consumption. Whether this "transfer" should be accounted for now, in the past or in the future is a metaphysical and rhetoric question on which not all people would agree.

Medic • July 27th, 2008 at 3:34 pm

@ DenriddyI did not state I spoke for others here, nor implied it. I speak only for myself and my words to you were merely ones of caution. Like all advice I have ever offered here, feel free to take it or leave it.

Guest • July 27th, 2008 at 3:55 pm

"When the system hits the edges of the environment its in, the system destructs, or mutates, and the cycle of varying around a behavioral norm continues again until the space the system is becomes a constraint, and the cycle starts anew."@ OuterBeltway on 2008-07-27 07:55:41You may like to refer to: Autopoiesis: See herehttp://verbewarp.blogspot.com/2006/09/autopoiesis-naming-universes.htmlAll life phenomena action is at the surfaces and, er, Oh, do you cook at all?Have you ever made gravy? Or, a stew or a casserole?Making a good gravy, soup, curry, casserole and or stew is being human (of intellect): it is using the human intellect at its finest and it is culture, which after all is the foundation of civilization. Intellect, the application and construct thereof, is also like the preparation of these foods; qualitative NOT quantitative; volumetric.One must have the big picture, the temperature, the smell, the mixtures, the right timing for each component, the hunger, the consistency, and the composition that transmutes each component / ingredient and each variant change into a whole, over time. It is yes, alchemy. This is what intellect is about.Intellect is not about superficial, maintaining the status quo because your status demands it, plugging holes.I was partly educated in the USA and left in 1959; I would say that the USA has been in slow decline since and before that time (hindsight); the collapse has been coming for a long time, but as I have always maintained, the USA will be the first country to bounce back. The Laws of Potency appear to had their day with this entrenched "ruling elite" and it is time to turn the omelette. There a no chefs on the World stage at present, except perhaps Ron Paul (USA).Knowing how much to burn the flour in the gravy before adding the cold water, is an exacting knowledge that cannot be written or spoken; it is a human thing.Ho humPeterJB

Anonymous • July 27th, 2008 at 4:04 pm

Can we fast forward to about two – three years from now and can anyone reasonably portray that economic landscape? How will this chaos now affect our everyday lives in the future? How can (or can it) this chaos be fixed? What should we be doing now to protect ourselves?

Guest • July 27th, 2008 at 4:08 pm

It’s looking more and more as if the rise in financials and bank stocks during the week July 14-21 was a deliberately planned squeeze on short positions – targeting major hedge funds with large shorts on these sectors. But it’s too early to say if the tactic will work, or if the hedge funds will be tenacious, ignore their short-term losses, and hold on. No surprise really, in this crummy fiasco we used to call a free market.PeteCA

Guest • July 27th, 2008 at 4:33 pm

“The Real Meaning of Inflation” by Ron PaulStatement before the US House of Representatives Financial Services Committee, Full Committee Hearing on "Implications of a Weaker Dollar for Oil Prices and the U.S. Economy," July 24, 2008:The root of our current economic malaise, the weak dollar, the high price of oil, and the collapse of the housing market, comes about because almost no one understands what inflation is. Inflation is an increase in the money supply, which occurs by various methods, the printing of currency, low reserve requirements, Federal Reserve open market operations, etc.In Germany in the 1920s, South America in the 1980s, and Zimbabwe today, everyone recognizes that inflation was caused by the government running the printing presses non-stop, with the resulting exponential rise in prices being the necessary result of monetary growth. Yet somehow, both the empirical and theoretical reality of inflation as a rise in money supply is ignored in this country. Inflation is conflated with price inflation, the increase in the overall price level, and is viewed as something both endogenous to the market economy while at the same time influenced by exogenous price shocks.Because no one understands that inflation is growth in the monetary supply, no one is able to combat it effectively. We hear all sorts of hand-wringing about increasing inflation, and all sorts of explanations about how rising oil and food prices will make inflation worse. At the same time, the fact that MZM, the closest approximation to total money supply that still is reported by the Fed, is still rising by almost 15% per year and that M2 is rising significantly as well is quietly ignored. The pundits have causation backwards: it is inflation that leads to rising prices of oil and food, and not vice versa.Until the cause of inflation is understood, no effective strategy can be undertaken to combat it. The problem, however, is that the government does not want inflation to be done away with. Inflation benefits debtors and harms creditors, and the United States government is the biggest debtor of all. The United States government, the banking monopoly under the Federal Reserve System, and politically-connected firms and industries are the first entities to take advantage of new money injected into the system, before prices increase. As the increased supply of money begins to chase the same number of goods, prices rise, and the average American suffers. Poor and middle-class Americans are always the hardest hit by inflation, as the weakening dollar makes the imported goods that many Americans depend on more expensive.As Chairman Bernanke admitted last week, inflation is a tax, and it is the most pernicious because of its hidden nature. It taxes the very purchasing power of money, and because the inflation rate in recent years has generally been low, its effects often take a while to manifest themselves. Now that inflation is beginning to rise, more and more rhetoric is being spun to hide the government’s role in creating inflation. I applaud Chairman Frank for holding this hearing, as hearings such as this one investigating the link between the weak dollar and the high price of oil are more important now than ever.

Guest • July 27th, 2008 at 4:37 pm

I once saw a rhyme on a bathroom stall. I’d like to put it on Paulson’s:No matter how you dance and prance,The last two drops go down your pants!

RedCreek • July 27th, 2008 at 5:10 pm

KKR announced that it will reverse merge with Amsterdan (NL) listed investment vehicle KKR PEI. I only read one thing in this: with PE firms being unable to IPO in current markets, and with many mega-buyouts to underperform (cannot recap, cannot IPO, very difficult to do a trade sale because valuation multiples will be lower for years to come, cannot sell to another private equity fund because they cannot arrange the lbo debt financing), the TOP EXECUTIVES AT KKR WANT OUT – a public listing means that they can get paid in liquid shares rather than in long-term deferred carry that will be much much much lower anyhow for the next few years. Call it the private equity squeeze – a squeeze that will be much harder than the public (40% according to NR) squeeze.

AfA • July 27th, 2008 at 5:11 pm

@ OuterBeltWay:“How do you both see that pattern of adaptation and equilibrium as it applies to the last, say, 30 years of the U.S. economy’s behavior? Of course, there are many levels / concurrent circumstance that exhibit these behaviors, but which ones have the most impact, and where are we in the life cycle of the pattern?”This is a very difficult question to answer. Assuming that all variables behave according to the “oscillator equilibrium” explained earlier. First, cycles are simply the manifestation of the “quadratic function behavior” (not in its rigid mathematical meaning). If you take a small ball and throw it in a bowl, it will oscillate through the bowl in all different directions but always around the bottom of the bowl. If you map the coordinates of the positions taken by the ball, it will look like a quadratic function. If however, you plot the positions against time (time as x), you will get the shape of cycles (or if you plot them on 3D, it will look like a spiral). The problem is that, like in optics, every variable has a different wavelength (lambda), amplitude (y) and frequency (but differently from optics, none of these need to always be static nor stationary). The overwhelming number of variables does not make it easy to know where we are because they are not all in-phase with each other. What makes things more problematic is that variables have different levels of impact on each other making it difficult to predict where we are and where we are heading – the ball may stop oscillating at some point, or if an external force is applied, jump out of the bowl into a differently shaped and sized one (if you take the DOW for example, a 2-year view will show we are reaching a bottom, whereas if you zoom to the maximum view, the downturn is barely noticeable and suggests more downside risk) If you want to picture the overall effect of all variables plotted against the 4 dimensions, you may think of the shape of a chromosome (formed by Genes, formed by DNA sequences which are formed by base-atoms) i.e. it is as if you take a very long and tiny spiral and distort it to form a bigger spiral to form an even bigger spiral …. http://www.dnatesting.biz/Basic_Genetics/DNA-of-life.jpghttp://www.terrapsych.com/dna.jpgInfinity can be created inside a finite “space” because each time a bigger spiral is entered, it creates new (at least subjective) dimension with it, and this is when the rules of the game change, where we experience second life (or new reality), or when we can escape the destruction of previous cycle. This is how I envision things at least. At the heart of all these built-in cycles (infinitely differentiable sinusoidal function), saying where we are all depends on perspective. As Gloomy said “keep your eyes on the ball” but do not forget the next trajectory.

Alessandro • July 27th, 2008 at 5:23 pm

AfA: "The problem is that the bonds/ money market/ CD’s became "liquid" sources of fund for others who borrowed the money, with which they can buy the $1,000 widget TODAY"This doesn’t affect the money supply.I have $1000, I can buy the widget today if I wanted, but I don’t need it so I judge a wise move to lend you the money by subscribing one of your high yield 1 year AfA CD.Now I have a piece of paper (and the hope that you will give me back $1050 one year from now), you have the money and go buy the widget. You see, you can, I cannot. If I change my mind I need to find someone with $1000 in hand and convince him how great the AfA CD are. If I manage to sell your debt I have the $1000 the buyer gave me, and he doesn’t have them anymore.The reason demand deposits on banks are different depends on fractional reserve landing, and on the fact that most credit transaction are done within the banking system. For almost anything else for every borrower you need a lender, money (demand deposit credit) is not created it just changes hands.

RedCreek • July 27th, 2008 at 5:35 pm

@ Written by Guest on 2008-07-27 16:37:55That’s the best thing I have read all weekend!

AfA • July 27th, 2008 at 7:11 pm

@ AlessandroThis is why I agree with you. If you deposited the money in a safe or if you directly lent it to me, in the form of a bond, there would be no effect on money supply, because you give up today’s consumption so that I can consume/invest, while interests can be paid back with my future work.The problem is with intermediaries who use leverage and fractional reserves (not only banks). We all create money into existance by buying on margin or through derivatives. The bank to which you lend the $1,000 will give me $2,000 of lending. I believe though that only part of that $1,000 can be described as "temporary" money supply, which will disappear as soon as or as long as I can pay back the $2,000 to the bank (at the expiration date of a derivative contract or when an insurer either honors a CDS contract or that the insured against company does not default). However, that "temporary" money supply may become imbedded when I default (inflation) but before you right down the value of the loan (deflation).

Jason B • July 27th, 2008 at 7:41 pm

Afa -Thanks for that gestalt moment. "that "temporary" money supply may become imbedded when I default (inflation) but before you right down the value of the loan (deflation)."and banks/ IB’s are doing everything in their power to avoid writing down the value of the loan. (putting it in level 3, mark to model, etc) When the value of the loan or loan security is written down then we will suffer deflation, but until then deflation. This is making more sense to me now.

Hubbs • July 27th, 2008 at 7:42 pm

From down under via http://www.survivalblog.com Letter Re: Australian Bank Move Exposes the Magnitude of the Global Credit CollapseJames,This afternoon, The National Australia Bank (biggest in Australia, by assets) let the cat out of the bag: They have decided to just fess up and mark down every US mortgage CDO, SIV, and so forth in their portfolio by 90%.What that means is they are coming flat out and saying that all this re-bundled, repackaged, looks like a bond but it ain’t, US real estate paper that was being carried "Off Balance Sheet" and gumming up the works in banks around the world is worthless and they are making it official. (The loans that they represent will not, in their estimation, ever be repaid, hence, loan paper = worthless.)The world has been tip-toeing around this for the better part of a year. (Off Balance Sheet is bank speak I believe for "It’s here, we paid for it/lent it out, but it’s not really here so don’t count it on our financial statement." You try that with your friendly IRS guy! Ha! Funny, though, how they magically appeared when the Fed said they would take it as collateral for loans…) That means that all these "Write-downs" we’ve been seeing (i.e; saying that the paper certificate you bought at $10 is now worth $8, $7, $6, $5…etc) the banks have been slowly dribbling out have been understated.I don’t know if Wall Street will simply ignore this and dish out spin, but I can bet you that the international banks holding large quantities of this stuff denominated in US dollars will not. I’d also bet that large entities overseas who don’t hold this stuff will take it as writing on the wall for other entities that do…and they’ll sell to save their own skins.That could quite possibly touch off a selling-storm in US dollar denominated assets or firms they fell are at risk from either their own holdings or their vulnerability to downside economic risk come monday, at least in the Asia Pacific markets, if not before.A wave of bank bankruptcies or "failed banks" could get thrown into the mix as well. This is because these paper "things" being declared more or less worthless effects the overall value of a bank–i.e. the ratio of it’s "Assets" against the amount of debt it is carrying. (leverage) Banks are already leveraged up to their eyeballs, way beyond what Joe citizen would be allowed to do. (which they’ve been trying to delay the inevitable news that this stuff is not an asset any longer.)I do not know precisely what effect this will have, but I believe it could spark a sell off in US denominated securities and other assets, which will flood the market with US Dollar stuff and the dollar will be in very deep trouble as far as a piece of paper that has value.Real things of value, like metal and other tangible goods (as opposed to imaginary IOU paper, which is what most securities are) will take on a whole new life. In addition to what I have already done, I am going to endeavor to get my hands on more, soonest. (Not like it will go down in price anyway, no matter what happens.)I hope that whoever is in charge at the top can keep this under control. I’d say we’ll have a clearer picture by mid-next week where this may be going. – Jim D.Permalink – Email This

Chimerical Jeremiah • July 27th, 2008 at 7:51 pm

We rail against the purported extravagances of Wall Street. But instead perhaps we should pity them. They rise to such great heights. They engage in moral play that requests honor from them. They refuse to honor honor and choose instead quick profit. But as playing both sides against middle eventually the physics of life demands payment. Their lofty positions are undercut with return of financial judgement. If they escape, they escape with material booty, sullied reputation, and a moral scar to carry forever. If their conscience ever return, they will be plagued for the remainder of mortal life with knowledge that they have sought personal provision to the detriment and denigration of their fellows. Society trying them in its mouth will spew them out. Like craven men who adopt female dress and carriage in order to achieve lifeboat placement over their better moralled yeomen. Their fortune is but for a day, and withers in the hard view of pure light. They will skulk through life. They will eat bread and drink wine everyday that they know was not of their own undertaking. Pity them. Truly have men in this dispensation traded their souls for meals of porridge. In a fraction of the eternal enervation, they have short-sightedly sought the temporary relief of riches but scoured their souls of any salvatory or redemptive features. To buy a meal and forfeit futurative life.We are all now ensconced in a hardship coming. Men will be tried like metal in the forge, metal upon the anvil. Stone thrown against hard ground and tried in sound to gauge whether they are fitting to be assembled in the wall of heaven. Will man (will you?) by buying and selling, by financial enterprise, display the hard and true deeds of good men? Will the profit motive be that of pure selfish, or to slipstream through life in good moral grace?WE still talk just black and white and the discrimination of the variance between. All life is but a choice. Choose to invest long or short. But in larger sense choose your life’s investment! What will be written in the stars about your 3 score and ten walk-about on this blue globe? If it were a possibility that your endeavors be preserved and restored unto you after the brief time of mortality, what would your future’s inheritance be?We gainsay the absurd efforts of gov’t to counteract decades of decadence for it affects our portfolios. But if man be the storehouse of his efforts, thoughts, desires, intents and no material thing can not rust or moth corrupt, what is his final takeaway? After filling his belly? After satisfying his creature comforts? Wherein lies his transcendence? And what can make of a man (who seeks only fortune his whole days long) a true jewel and precious article? Where one creates and acquires and fulfills a destiny, what is the final destination? The perimeter of a land does not define true wealth, but that which lies within the confines of common man. What do you wish to hold to make unadulterated store of your life’s wealth? Fiat money? Covered bond? MBS? WE have come to this where we must choose between eroding means of exchange. How to navigate when the stars fixed in the firmaments become unfixed? And constancy becomes inconstant?

daniel • July 27th, 2008 at 8:27 pm

@ Bond investor on 2008-07-26 01:43:25"You suggest high foreign involvement in the recapitalization of banks. As I understand it, U.S law and regulation says domestic banks cannot be owned by foreigners. How long will the foreign investors be content with debt and preferred exposure? Ironically, this banking protectionism will likely cause the crisis to drag out. There are no doubt some deep-pocketed Canadian that would love a banking franchise in the Northeast U.S."So change the law, duh. Or change the rules to let private equity groups do the deed in proxy for foreign owners.http://www.bloomberg.com/apps/news?pid=20601087&sid=ayuCGEGBjZUM&refer=home"Bernanke also said the Fed is looking at ways to make it easier for private equity companies to invest in banks, as lenders seek to raise capital to repair their balance sheets. Private pools of capital are limited in how much of a bank’s shares they can buy, and how they can structure their investments, under bank regulatory rules."

wormyboy • July 27th, 2008 at 8:28 pm

This is a very good article if you have the time to read it. I have not seen Henry Liu mentioned on this site before, but he has some interesting ideas.http://www.henryckliu.com/page163.html

kilgores • July 27th, 2008 at 8:51 pm

@ Guest on 2008-07-27 16:33:10Point well taken about the role of the money supply in generating inflation. I haven’t followed these metrics closely, but I was curious about one of your statements:>At the same time, the fact that MZM, the closest approximation to total money supply that still is reported by the Fed, is still rising by almost 15% per year and that M2 is rising significantly as well is quietly ignored.Ambrose Evans-Pritchard of the Telegraph (London) reported recently, contrary to your statement above, that "The key measures of US cash, checking accounts, and time deposits – M1 and M2 – have been contracting in real terms for several months." He also noted that M1 has been falling in the UK and the EU generally, and stated that "Monetarists are increasingly worried that the entire economic system of the North Atlantic could tip into debt deflation over the next two years if the authorities misjudge the risk." Evans-Pritchard went on to cite Paul Kasriel, chief economist at Northern Trust, who said that lending by US commercial banks contracted at an annual rate of 9.14% in the 13 weeks to June 18, the most violent reversal since the data series began in 1973, and that M2 money fell at a rate of 0.37%. According to Kasriel, "The money supply is crumbling in the US. There was a very sharp lending contraction in the second quarter lending. If the Federal Reserve is forced to raise rates now to defend the dollar, it would be checkmate for the US economy," he said.The piece further quoted Paul Ashworth, US economist at Capital Economics, who said that "US lending is shrinking dramatically in real terms, and we know from the Fed’s survey that banks want to tighten further. People are clamouring for higher rates but we think deflation is now the biggest threat. The idea that the Fed should tighten with unemployment soaring is preposterous," he said. http://www.nakedcapitalism.com/2008/07/does-m1-and-m2-contraction-signal-debt.htmlI don’t know whether you are correct or these folks are correct about recent trends in the money supply in the U.S. On what sources did you relay in coming to your conclusions about MZM and M2 continuing to rise?Thanks,SWK

Kerk • July 27th, 2008 at 8:58 pm

SWK,Of course individuals change the rules. They change the rules by suddenly no longer buying my good or service. If they sign a contract to do something however, then they shouldn’t/don’t have the right to do so anymore. The same goes for the government with the contract they signed – the constitution.

K in TX • July 27th, 2008 at 10:06 pm

@PeterJBKnowing how much to burn the flour in the gravy before adding the cold water, is an exacting knowledge that cannot be written or spoken; it is a human thing.You’re a bit of a poet PeterJB. Lovely sentiment…reminded me of my grandmother…she was born in 1915 and only had a 5th grade education, but, oh, how that woman could cook.

Average Jane • July 27th, 2008 at 10:24 pm

To the People of this Blog: If I may, I heartily recommend reading Naomi Klein’s book, “The Shock Doctrine: The Rise of Disaster Capitalism.” I’m halfway through it and it should be required reading for all of you most erudite folks. In it, she quotes M.K Gandhi from “Non-Violence—the Greatest Force” (1926) in which Gandhi states: “An armed conflict between nations horrifies us. But the economic war is no better than an armed conflict. This is like a surgical operation. An economic war is prolonged torture. And its ravages are no less terrible than those depicted in the literature on war property so called. We think nothing of the other because we are used to its deadly effects. . . . The movement against war is sound. I pray for its success. But I cannot help the gnawing fear that the movement will fail if it does not touch the root of all evil—human greed.”

kilgores • July 27th, 2008 at 10:25 pm

@ Kerk on 2008-07-27 20:58:02>The same goes for the government with the contract they signed – the constitution.I understand what you’re saying, Kerk, but if the government has violated the Constitution, then there is redress for that in the courts, just as when a party to a private contract violates its terms. The legislative and executive branches of the federal government have pretty broad latitude within our constitutional framework, however, to take actions deemed to be in the public interest. Thus far, to my knowledge, there has been no court challenge mounted to the constitutional authority of the Fed or the Treasury Department or the Congress as to any of the actions recently taken in response to the crisis. I do note, as a point of correction, that the a constitution is not a contract to which the federal government is a party, although I appreciate the nature of your attempted analogy. The federal government hasn’t signed the Constitution in the same way that a party signs a contract. Rather, the Constitution is an instrument which effectuated a limited conveyance of sovereignty from the States and the People to the federal government. This is why the federal government can be constrained by the courts when it exceeds the authority granted to it by the States and the People. By contrast, a contract amounts to a promise which the courts will enforce between the parties to that contract, whether they be private persons, natural or corporate, or governmental bodies or agencies. There are no promises in the Constitution, which is simply a delineation of powers granted and powers retained by the States and the People.SWK

JLC • July 27th, 2008 at 10:43 pm

@Average JaneI’m reading Shock Doctrine now and I mentioned it on the last thread. The parallels between are current crisis and past crises are stiking, yet isn’t it ironic that we are not taking the medicine that we forced on developing nations in their respective crises? Instead of eliminating subsidies and government support for certain markets, we are increasing them.Nevertheless there will certainly be a fire sale coming up, and we will take our own medicine eventually. The United States of America – once the unquestioned economic engine of the world – soon to become the biggest garage sale and flea market in history.Got cash? (And lots of gold)?

Ponder • July 27th, 2008 at 11:57 pm

@everyonePlease allow each and everyone a voice whether we agree with them or not. I believe it is called free speech. Feel free to "destroy" a posters arguments or fallacies but I think it is wrong to ask them to leave since we are all guests here.I believe strongly in freedom of speech particularly in ideas that I disagree with for this re-affirms to me that freedom of speech is alive and well.@denriddy welcome to the blog. As long as the professor allows us here. I see no reason why you cannot post.@everyone. I have welcomed denriddy because of his freedom of speech right.

Gamma • July 28th, 2008 at 12:00 am

Anyone familiar with Gordon’s Paradox care to weigh in on gold in a deflationary bust?

Guest • July 28th, 2008 at 12:18 am

ponder, agreethe more the merrierim picking up all the info’s i can getthe larger pool of ideas/informationthe better,contradicting views are good

Pseudothyrum • July 28th, 2008 at 12:46 am

denriddy: I agree with your assertion that the American macroeconomic system has become hyper-centralized, corporatized, bureaucratized, etc., and thus is eerily reminiscent of a Marxist economic system. Most perversely though, it seems that the extraordinarily distorted U.S. economic system exhibits all of the disadvantages of a Marxist-esque economy with none of the associated advantages.I’d also urge you to keep fighting back against the shrill voices of the censors who are trying to silence you and your views, including the parasitic bureaucrats, "professional disputants," and faux businesspeople who contributed to building this economic monster and who have a vested interest in keeping the current racket afloat because they have the most to lose when it all comes crashing down and honesty can begin to reign again.

Little Saver • July 28th, 2008 at 1:49 am

Another Paulson "expert statement" (or may we think willful deception?):"The Congressional Budget Office and Treasury Secretary Paulson suggested that probably only $25 billion in emergency funding will be required. They estimated that chances are even that none of the funds will be required, with less than a 5% chance that the companies would need $100 billion."Hussman on this:"These estimates threw the needle of our BS meter so violently into the red zone that we’re still trying to pry it loose."(http://www.hussmanfunds.com/wmc/wmc080728.htm)Finance reading can be amusing if you forget for a moment that your savings (and taxes) are at stake.

chairman Mao • July 28th, 2008 at 2:45 am

I can conclude that the function of the usa governemnt is to operate the printing machine.

Guest • July 28th, 2008 at 2:46 am

little saver, there’s a lot of other things at stake herehttp://en.rian.ru/russia/20080727/115004797.htmlRussia to have 5-6 aircraft carriers in Northern, Pacific Fleets 13:01 | 27/ 07/ 2008 ST. PETERSBURG, July 27 (RIA Novosti) – Russia will create 5-6 aircraft carrier groups in the Northern and Pacific Fleets, the Navy commander said on Sunday. Admiral Vladimir Vysotsky said the Navy command had decided to build sea-borne aircraft carrier systems for these fleets instead of simply aircraft carriers. "Everything must work in a system, including aircraft carriers. We have called them sea-borne aircraft carrier systems, which will be based in the Northern and Pacific Fleets. The construction of such systems will begin after 2012," Vysotsky said before reviewing a military parade on the occasion of Navy Day in Russia. Vysotsky said new sea-borne aircraft carrier systems will operate in close contact with Russia’s orbital group of military satellites, and also with the Air Force and air defense. At present, Russia has only one operational aircraft carrier, the Nikolai Kuznetsov, which was commissioned in the early 1990s and has recently re-entered service after a prolonged overhaul. The ship, also known as Project 1143.5 heavy aircraft carrier, is currently deployed with Russia’s Northern Fleet and has recently participated in a two-month tour to the Mediterranean as part of Russia’s plans to resume its continual presence in different regions of the world’s seas.

Guest • July 28th, 2008 at 3:05 am

QUESTION!Let’s say that the U.S. government provided money to the banks by, not printing money, but by creating digital transactions from the Fed to the banks computers. In other words, someone at the Fed simply types in numbers at a terminal on their side, and send an amount of funds to a bank somewhere else. The funds sent would not correspond to actual cash anywhere. As long as people in general would not know of this, it would not be a cause of any inflation, for two reasons:1. inflation always has to start in peoples mind (if people do not know that money is worth less than they think it is, there is no inflation).2. the additional funds have to be available for buying items people on the street buy. But for most Americans, there has not been that much ‘additional money’ available lately.Is this correct, and if not, why not?

Alessandro • July 28th, 2008 at 3:06 am

@AfAI don’t want to seem stubborn, but I cannot agree and if you don’t mind going on on this basic concepts I’ll keep countering the arguments I don’t buy. We could also stop here if you think it is not productive enough."This is why I agree with you. If you deposited the money in a safe or if you directly lent it to me, in the form of a bond, there would be no effect on money supply…"Minor nit-pick, if I put the money in a safe and don’t use it for a year this reduces the velocity of the money supply (producing temporary deflation). When I’ll take the money back into circulation I’ll give a small bump to velocity and to inflation. This is important because it is exactly why a money with a quasi-fixed supply (like gold) may have violent deflation/inflation cycles in the mid term. If I lend it to you both money supply and velocity do not change."The problem is with intermediaries who use leverage and fractional reserves (not only banks). We all create money into existance by buying on margin or through derivatives."I’ve heard that, but I have never see a decent proof that ‘leverage’ (outside demand deposits on banks) can create money-equivalent credit. Remember you want to put into the money supply only what can be exchanged immediately for goods and services. As far as I can tell none of your examples hold water.Leverage and fractional reserve are not enough for creating money, you need that everybody accepts your credit notes as good money. This happens only for bank wire transfers, checks (as a matter of fact in Italy not everybody consider checks as good as money), credit card transactions and very few other things.If you allow me to give you a suggestion, I find much clearer thinking of ‘money’, ‘credit’ and ‘debt’, than ‘leverage’ and ‘liquidity’."The bank to which you lend the $1,000 will give me $2,000 of lending. I believe though that only part of that $1,000 can be described as "temporary" money supply, which will disappear as soon as or as long as I can pay back the $2,000 to the bank"That’s ok. you consider the balance on your demand deposit account as good as money and everybody else does. This is money (money-equivalent credit actually) and it has been created out of the thin air via fractional reserve."(at the expiration date of a derivative contract or when an insurer either honors a CDS contract or that the insured against company does not default)."The time you or your employer accept a CDS contract as the mean of payment for your hard work and you can go to the car dealer and pay for your new SUV with it, I’ll capitulate and add CDS contracts into the money supply. Until then any security need to be sold to someone for money (or money-equivalent credit) or used as collateral for borrowing money (or money-equivalent credit).IMHO the end line is: the easy credit madness in the US comes from a lot of people (in the US and Asia) being forced to save and lend to unproductive borrowers.

Alessandro • July 28th, 2008 at 3:13 am

@Guest on 2008-07-28 03:05:24"Let’s say that the U.S. government provided money to the banks by, not printing money, but by creating digital transactions from the Fed to the banks computers."It’s already like that, as far as I know. Fed funds are mostly digital money.This will create inflation (monetary inflation to be precise), because inflation is the expansion of money and credit."1. inflation always has to start in peoples mind (if people do not know that money is worth less than they think it is, there is no inflation)"This is crap propaganda. It’s what the operator of the printing presses (and the digital terminal!) want you to think. By the time inflation ends up in people mind the robbery has been long past.Start at http://www.mises.org/ if you want a different take on money, but it ain’t quick.

Little Saver • July 28th, 2008 at 5:00 am

Guest on 2008-07-28 02:46:11: To put things in perspective: US defense budget in the range of 500 billion $, Russia’s where? Somewhere in the range of 50 billion? With numbers like these, the greater risk for the US may be to be crushed by its own military spending, rather than by any other country. Home bubble, military bubble, Wall Street bubble, any bubble is good enough for those who can get away with the profits made out of them. Time to expose and to end these bubbles, I would say. And, yes, to hold the responsible ones responsible for the negative effects on society as a whole. Just a simple dream of course, nevertheless sometimes interesting to look at things from another perspective.

Matthias • July 28th, 2008 at 5:59 am

@ Little Saver on 2008-07-28 05:00:25Its not so easy.The whole system is build on military spending.Please read:http://jtaplin.wordpress.com/2008/07/26/permanent-war-economy/

Matthias • July 28th, 2008 at 6:03 am

Oh and by the way as an "fawning German" I like to say to both candidates:F… you.You are only another bubble,both.

Jason B • July 28th, 2008 at 6:11 am

Daltoni • July 28th, 2008 at 7:01 am

@Ponder: "I believe it is called free speech."A good-faith expression of ideas is one thing. Distortion of what others say, vilification of others, and grinding one’s ax through a muck of fallacy is something else. When these bad-faith things happen, it is time for others to exercise free speech to express contempt and to remind the transgressor what the standards are for a good-faith exchange of ideas.

kilgores • July 28th, 2008 at 8:05 am

@ Daltoni on 2008-07-28 07:01:33I would add that guests of this privately run blog, including I, post their comments here at the pleasure of Dr. Roubini who, has every right to censor comments or ban abusive participants in his discretion. The First Amendment right to freedom of speech is a right held by individuals against the federal government and (through the Fourteenth Amendment) the States. It is not a right that can be exercised against any private persons. That being said, Dr. Roubini has made it clear that he welcomes and invites a diversity of views from those who care to express their opinions here, but that there are certain standards of decorum to which posters are expected to adhere. One may maintain a suitable level of civil discourse and respect for one another, even while challenging vociferously an opposing view or argument. I don’t think anyone here has said that denriddy or anyone else is not welcome to post here because his ideas are unacceptable; rather, the point has been made that some degree of etiquette is necessary if we are going to have productive and meaningful discussions of the important economic topics presented here. Folks who are here just to advance an agenda and pick a fight with those who express views contrary to theirs, rather than to engage in an open exchange of ideas and to learn something from the many intelligent participants to this blog, are wasting everyone’s time and diminishing the value of this forum for all.SWK

Anonymous • July 28th, 2008 at 9:00 am

On the short selling ban.With the risk as reported in the WSJ that the naked short selling ban could be extended to all stocks and forever its worth noting a couple of effects.(i) The majoirty of borrowable collateral will be held by Prime Brokers, allowing the authorities at leisure to engineer rallies and squeezes controlling short base to a small group of stock lenders.(ii) They have removed all the bids from the market. With no short base and no short cover bid, the only buyers you have left of stock are unlevered cash. I think maybe the authorities may have sealed the fate of the stock market in attempting to prop it up.The invisible hand of the market will always work against the forces imposed on it.Incidentally the Japanese tried this, it didn’t work.

Guest • July 28th, 2008 at 9:31 am

So why arenn’t US bank stocks getting creamed this a.m. with the truth being exposed in Australia over the weekend?

Guest • July 28th, 2008 at 9:49 am

Little Saver (quoting John Hussman): "These estimates threw the needle of our BS meter so violently into the red zone that we’re still trying to pry it loose."Total book value for Fannie and Freddie is something like $5 trillion (or higher at this time). So if you assume that these guys take a 5% loss that gets transferred to the US Gov’t, we’re already looking at $250 billion added to the national debt. Personally, I wouldn’t be surprised to see a total loss that is more like 20% … i.e. an extra $1 trillion transferred to the US taxpayer. Fiscal policies under the Bush administration have become a complete travesty. All American taxpayers should be up in arms about this, no matter what their political affiliation.PeteCA

Guest • July 28th, 2008 at 10:01 am

11:00 a.m. IMF sticks to one trillion dollar loss estimate from turmoil11:00 a.m. IMF Bottom of U.S. housing crisis ‘not yet visable’11:00 a.m. IMF sees downward spiral of weaker economy, weaker banks11:00 a.m. IMF sticks to one trillion dollar loss estimate from crisis11:00 a.m. IMF European banks not yet disclosed ’08 crisis impact

Guest • July 28th, 2008 at 10:21 am

As Fleckenstein says, “when you combine private property with government power…you create political monsters [Fannie and Freddie} that are protected both by journalists on the left and pseudo capitalists on Wall Street, by liberal Democrats and country club Republicans…”Continues Fleckenstein, “That is a truly disturbing prospect because the same incompetence and greed that brought us this mess will lead to further troubles if the cabal that surrounds Fannie and Freddie gets more powerful, which appears to be the case from the legislation just foisted on U.S. taxpayers.“To Paulson, one of the cabal’s powerful members, who last week described the legislation as sending ‘a very strong message to the markets,’ here is my interpretation of that message:Yeah, we’re willing to do anything to keep the status quo, as rotten as it is, because reform is too painful to contemplate.”For the “status quo,” I read the “cabal’s powerful members.” Ain’t “representative government wonderful in the “land of the free"? Oh, yes, and the "home of the brave."http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/TheRepugnantBailoutNation.aspx

randy • July 28th, 2008 at 10:23 am

Everyone:I just read this under the latest posting on the RGE home page…."Roubini: Plan will prevent further decline in home prices and loss to lenders, banks, neighborhoods and fiscal cost to govt from foreclosure – cost of debt reduction via debt restructuring much lower than cost of liquidation"Am I confused or is NR saying the housing crisis is now going to be over because of the F&F bailout bill? It sounds insane to me……But that’s how I read this……Please someone wake me up from this madness…………….

Guest • July 28th, 2008 at 10:25 am

11:19 a.m.White House sees record deficit in 2009: reports

Randy • July 28th, 2008 at 10:27 am

should the banks be under pressure this am because of what happened with NAB? I don’t understand. Did I wake up in a parallel universe today?

kilgores • July 28th, 2008 at 10:50 am

@ Guest on 2008-07-28 10:21:21>Yeah, we’re willing to do anything to keep the status quo, as rotten as it is, because reform is too painful to contemplate.You have hit the nail on the head. I suspect it’s the principle that the bad stuff you do know is better than the bad stuff you don’t know…SWK

Guest • July 28th, 2008 at 11:01 am

Ahhh, the truth is starting to leach to the surface…12:00 p.m.Fed’s Mishkin: Economic shocks may last longer than 3 years

Guest • July 28th, 2008 at 11:04 am

The US is now run by a bunch of circus shills…they rig everthing anytime they want. I can’t beleive the US citizenry isn’t up in arms…idiots!

Guest • July 28th, 2008 at 11:06 am

Don’t worry, the circus carnies will step in and rig US stocks to day…

Guest • July 28th, 2008 at 11:13 am

@Guest >11:00 a.m. IMF sticks to one trillion dollar loss estimate from turmoil..,Ah, the International Monetary Fund and her sister, the World Bank, established by the world’s most prominent socialists in 1944 as mechanisms for eliminating gold from world finance. As Fed historian G. Edward Griffin puts it:“The game began at an international meeting of financiers, politicians, and theoreticians held in July of 1944 at the Mount Washington Hotel in Bretton Woods, New Hampshire…referred to today as simply the Bretton Woods Conference. Two international agencies were created at that meeting: The International Monetary Fund and its sister organization, the International Bank for Reconstruction and Development – commonly called the World Bank…The announced purposes were admirable…the World Bank was to make loans to war-torn and underdeveloped nations… The IMF was to promote monetary cooperation between nations by maintaining fixed exchange rates between their currencies… But the method was less admirable:It was to terminate the use of gold as the basis of international currency exchange and replace it with a politically manipulated paper standard. In other words, it was to allow governments to escape the discipline of gold so they could create money out of nothing without paying the penalty of having their currency drop in value on world markets [i.e. exchange ratios of the various currencies would no longer be set by supply and demand]…The method…was exactly the method devised on Jekyll Island to allow American banks to create money out of nothing without paying the penalty of having their currencies devalued by other banks. It was the establishment of a world central bank which would create a common fiat money for all nations and then require them to inflate together at the same rate…a kind of international insurance fund which would rush that fiat money to any nation that temporarily needed it to face down a ’run’ on its currency…”The theoreticians who drafted the plan were John Maynard Keynes and the Assistant Secretary of the U.S. Treasury, Harry Dexter White.

Guest • July 28th, 2008 at 11:15 am

we need several consecutive rebate checks of non-taxable $600 per person. congress should act now and inject more money into economy.

Anonymous • July 28th, 2008 at 11:22 am

The only thing that could save this country would be a constitutional convention. You don’t wear the same coat you did as a child, so why should a country now 220 older use the same piece of paper? Keep the parts we like, add more that we don’t. But put the power in the hands of the people via referendum. Why everyone is so adamant to live the dream of those long dead I have no clue. Maybe, just maybe, because they have figured out this system and know how to profit by it. The system is rigged so that no matter what happens, wealth is funneled to the top. The banking crisis is a symptom of a government that has mutated into an oligarchy bent on accretion of wealth. You can get a haircut here, a write down there, a restructuring some where else, but such problems will continue to be manifested regarding the common folk because the government which is suppose to work in their interest doesn’t. The US citizenry has been convinced to defend the past by neglecting the future… just look at the irrational credit escalation and its mirror image in the irrational escalation of the wars in the middle east…

Guest • July 28th, 2008 at 11:33 am

“The Fannie-Freddie Fraud” by Ron PaulEXCERPTs from Statement before the US House of Representatives on HR 3221 July 24, 2008: The provision giving the Treasury Secretary a blank check to purchase Fannie and Freddie stock not only makes the implicit government guarantee of Fannie and Freddie explicit, it represents another unconstitutional delegation of Congress’ Constitutional authority to control the allocation of taxpayer dollars. While the Treasury Secretary has to file a report with Congress, the lack of any effective standards for the expenditure of funds makes it impossible for Congress to perform effective oversight on Treasury’s expenditures.HR 3221 also takes another troubling step toward the creation of surveillance state by creating a Nationwide Mortgage Licensing System and Registry. This federal database will contain personal information about anyone wishing to work as a "loan originator." "Loan originator" is defined broadly as anyone who "takes a residential loan application; and offers or negotiates terms of a residential mortgage loan for compensation or gain." According to some analysts, this definition is so broad as to cover part-time clerks and real estate agents who receive even minimal compensation from "originators." Additionally, this database forced on industry will be funded by fees paid to the federal banking agencies, yet another costly burden to the American taxpayers.Among the information that will be collected from loan originators for inclusion in the federal database are fingerprints. Madam Speaker, giving the federal government the power to force Americans who wish to work in real estate to submit their fingerprints to a federal database opens the door to numerous abuses of privacy and civil liberties and establishes a dangerous precedent. Fingerprint databases and background checks have been no deterrent to espionage and fraud among governmental agencies, and will likewise fail to prevent fraud in the real estate market. I am amazed to see some members who are usually outspoken advocates of civil liberties and defenders of the Fourth Amendment support this new threat to privacy.Finally, HR 3221 increases the federal debt limit by $800 billion. We are told that CBO has scored this bill at a cost of $25 billion, but this debt limit increase belies that. The Federal Reserve has already propped up the housing and financial markets to the tune of over $300 billion, and this raising of the debt limit indicates that the cost of this newest bailout will likely be even more costly. I am dismayed that my colleagues have not learned the lessons of the Patriot Act and Sarbanes-Oxley. Massive bills passed in knee-jerk reaction to crisis events will always be poorly written, burdensome and expensive to taxpayers, and destructive of liberty.http://www.lewrockwell.com/paul/paul469.html

kilgores • July 28th, 2008 at 11:49 am

@ Guest on 2008-07-28 11:01:10>Ahhh, the truth is starting to leach to the surface…12:00 p.m.Fed’s Mishkin: Economic shocks may last longer than 3 yearsThat is one heck of an admission…SWK

Guest • July 28th, 2008 at 11:49 am

OTTAWA — The Bank of Canada says it is prepared to accept some of the riskiest assets on the market, giving it more power to fight the credit crisis.For the first time, the central bank will accept as collateral for emergency loans asset-backed securities of the type at the heart of the crisis of confidence that has seized financial markets for the past year.Governor Mark Carney revealed yesterday in the Canada Gazette how he intends to use new powers granted him by Finance Minister Jim Flaherty in legislation that cleared Parliament in June. It was left up to Mr. Carney to decide which assets would be acceptable to the central bank.The change aligns the Bank of Canada with other major central banks, including the U.S. Federal Reserve and the European Central Bank, and clears the way for Mr. Carney to more forcefully attack a problem that he says has subsided in Canada for now.

Guest • July 28th, 2008 at 11:53 am

@PeteCA: “Total book value for Fannie and Freddie is something like $5 trillion (or higher at this time). So if you assume that these guys take a 5% loss that gets transferred to the US Gov’t, we’re already looking at $250 billion added to the national debt. Personally, I wouldn’t be surprised to see a total loss that is more like 20% … i.e. an extra $1 trillion transferred to the US taxpayer.”Looks as if you and Ron Paul are in agreement. Says Paul of the Freddie/Fannie bailout:"HR 3221 increases the federal debt limit by $800 billion. We are told that CBO has scored this bill at a cost of $25 billion, but this debt limit increase belies that. The Federal Reserve has already propped up the housing and financial markets to the tune of over $300 billion, and this raising of the debt limit indicates that the cost of this newest bailout will likely be even more costly…”$800,000,000,000 = $1000000000000000 or whatever.

Denriddy • July 28th, 2008 at 12:07 pm

@ Ponder>denriddy welcome to the blog.Thank you, Ponder, for your welcome.

Guest • July 28th, 2008 at 12:08 pm

Highly recommendable:Two Federal Agencies Are Culpable in Oil Price ManipulationsA Secret Oil Gusher Inside CitigroupBy PAM MARTENS http://www.counterpunch.org/martens06212008.html

Guest • July 28th, 2008 at 12:11 pm

So Citi is recapitalizin at the pump(worldwide)

London Banker • July 28th, 2008 at 12:16 pm

A while back I said that one of the things to watch for was contraction of commercial and trade credit as that would signal the contagion of the financial crisis from the financial economy to the real economy. Here is more evidence that it is going to be ugly out there – and definitely deflationary in due course:U.S. banks sharply reduce business loansBy Peter S. GoodmanBanks struggling to recover from multibillion-dollar losses on real estate are curtailing loans to American businesses, depriving even healthy companies of money for expansion and hiring.Two vital forms of credit used by companies — commercial and industrial loans from banks, and short-term "commercial paper" not backed by collateral — collectively dropped almost 3 percent over the last year, to $3.27 trillion from $3.36 trillion, according to Federal Reserve data. That is the largest annual decline since the credit tightening that began with the last recession, in 2001.The scarcity of credit has intensified the strains on the economy by withholding capital from many companies, just as joblessness grows and consumers pull back from spending in the face of high gas prices, plummeting home values and mounting debt.http://www.iht.com/articles/2008/07/28/business/28credit.php

AfA • July 28th, 2008 at 12:27 pm

@ Alessandro,You should know that I highly respect and enjoy your posts and above all that I am with you that we are POISED for a deflation and that I messed up with my example with the putting money in a safe for the velocity thing you mentioned.You said “The time you or your employer accept a CDS contract as the mean of payment for your hard work and you can go to the car dealer and pay for your new SUV with it, I’ll capitulate and add CDS contracts into the money supply. Until then any security need to be sold to someone for money (or money-equivalent credit) or used as collateral for borrowing money (or money-equivalent credit).”Do not underestimate the ability of the Wall Street to reliquify illiquid and long term “money” and “debt” into money market instruments (the whole financial securitization innovation thing). My point is that I see reasonable circumstances when this happens, and the simple reason is that the value of the money-equivalent credit from a contract is greater than the “economic” value of the CDS contract. Banks and bank-like corporations are the only entities that can create an illiquid and overinflated contract and turn it into money market instruments with which you and I can buy and sell. Take this example:http://www.ft.com/cms/s/0/5042070a-47d1-11dd-93ca-000077b07658.html?nclick_check=1“A dispute between UBS and a hedge fund that sold it protection on a complicated mortgage security highlights why banks are still having a hard time figuring out the total amount they will have to write down such debt.”UBS knew that Paramax would never be able to honor its $1.3bn CDO contract payment. That is not money supply per se, I admit. However, because of this contract, which has never had to be that big, both UBS and Paramax where able to expand their balance sheets, UBS to not raise capital against the risky subprime mortgages in its portfolio that they would have had to otherwise, and due to this UBS has been able to devote the capital requirement on other projects or buying other securities and more importantly, people working for both firms have been paid salaries that have no economic reason to exist. IF and I say if Paramax was able to pay the CDO protection to UBS in the event of a default of insured securities and/or if the securities (mortgages) just didn’t default, then everything would have gone back to normal with no noticeable impact on money supply.On the other hand, I would like to remind you that “reliquification” of assets should be somehow integrated into the money supply formula if for the simple reason that reliquifying an illiquid asset, if you wish to look at it this way, increases the velocity of money (think of when we turn a house into a quasi money market instrument) – and leverage through credit as a reliquification of future labor.As soon as the future labor actually takes place or a contract matures or goes sour, money supply contracts to its original value (but with a wealth redistribution effect): i.e. NAB written down the value of its US conduit loans by 90% last week. Of course it is impossible that these securities have lost almost all their value overnight, it means that these securities have been overvalued 9 times for quite some time. When they were overvalued the NAB balance sheet, earnings, employee salaries have also been overvalued (inflated) but as NAB written down their values, balance sheet, earnings and salaries should also go down (disinflation) – or think when you buy a stock on margin, the loan most certainly is only partly backed by someone else’s credit, because of the margin you make more profit, in dollar terms, then you are supposed to, but I consider this only temporary inflation which will disappear as soon as you (CAN) pay back your loan. However, if you are economically insolvent but you do not default on your loan (by using a Ponzi Scheme or if your lender does not want to write down the value of the loan for a long period) that temporary inflation becomes imbedded in the system (you are making money you shouldn’t have even been able to) so long as your lender do not write down the value of the loan – at which time disinflation will happen – remind you too that deflation cannot happen without a prior inflation – except of course that you cannot do this (Ponzi scheme) on your margin account, but banks, investment banks, hedge funds et al do.I was hoping to find an reconciliation or an explanation of why prices and perceived inflation are currently high even in a disinflationary environment (the answer is covered and sustained technical insolvency due to overvalued future contracts but not actual or full corresponding writedowns/ defaults)@ SWK, I hope this also partly answer your question about the inconsistency of and mixed messages given by M’s. There is a disconnect between the liabilities side (high) and assets side (M2, down), so to speak

kilgores • July 28th, 2008 at 12:29 pm

@ London Banker on 2008-07-28 12:16:50>…definitely deflationary in due course…Guess we all need to start reading up on Irving Fisher’s theory of debt deflation, eh? SWK

kilgores • July 28th, 2008 at 12:31 pm

@ AfA on 2008-07-28 12:27:01Thanks. Every little bit helps. Surely gets complicated trying to evaluate the metrics here…SWK

AfA • July 28th, 2008 at 12:39 pm

@ Randy"Am I confused or is NR saying the housing crisis is now going to be over because of the F&F bailout bill? It sounds insane to me……But that’s how I read this……"I don’t know where did you read that, but I think when professor talked about the "Plan" he was refering to the $300bn FHA mortgage refinancing plan, to which he clearly previously declared he supports in at least 2 posts (provoking a bubble of disagreement posts) and he is not meaning the FF bailout.

AfA • July 28th, 2008 at 12:39 pm

Guest • July 28th, 2008 at 12:46 pm

EXCERPTS TAKED FROM: Rising Oil Prices and the Falling Dollar by Henry C.K. Liu on June 28,2008http://www.henryckliu.com/page163.html Celebrated New York Times columnist Thomas L. Friedman, a flat-earthling, …admits that “we’re going to need oil for years to come” …but “wants the president to tell the country an allegedly much larger truth: “Oil is poisoning our climate and our geopolitics, and here is how we’re going to break our addiction: We’re going to set a floor price of $4.50 a gallon for gasoline and $100 a barrel for oil. And that floor price is going to trigger massive investments in renewable energy…Does Friedman not know that with $4.50 gas and $100 oil, a large number of working people will not be able to make ends meet with their current income, or retirees on social security will not be able to heat their homes this winter? Airlines and other transportation companies would face bankruptcy? Does he not know that in a democracy, sustained $100 oil translates into a serious political problem? The oil problem does not lend itself to simplistic solutions. Yet that is precisely what our flat-earthling proposes. Even multinational corporations are being forced to raise prices to ward off losses from high energy costs. For example, Dow Chemical (NYSE: DOW) has just announced it will raise the price of its products by as much as an additional 25% in July, on top of the 20% increase in June, in an effort to offset the continuing relentless rise in the cost of energy and hydrocarbon feed stocks. The Company also will implement a freight surcharge of $300 per shipment by truck and $600 per shipment by rail, effective August 1, 2008. Furthermore, Dow is temporarily idling and reducing production at a number of manufacturing plants, having reduced its ethylene oxide production worldwide by 25%, and idled 30% of its North America acrylic acid production. Dow also will idle 40% of its European styrene production capacity, and has reduced its European polystyrene production rate by 15%. In light of a sharp decline in auto sales, Dow’s Automotive unit is announcing a series of cost reduction measures covering facilities, people and external spending, divesting its paint shop sealer business and is implementing plant consolidations resulting in the closure of three production units. In addition, Dow Building Solutions temporarily idled 20% of its European capacity for producing STYROFOAM insulation. Earlier this month [June], Dow announced plans to idle three Dow Emulsion Polymers plants representing 25% of North America capacity and 10% of European capacity related to declines in the housing and consumer sectors, as well as rising costs. Andrew N. Liveris, Dow chairman and CEO, described the steps as “extremely unwelcome but entirely unavoidable” as the global cost of oil, natural gas and hydrocarbon derivatives surge ever higher, despite company efforts to improve energy efficiency by 22% from 1995 to 2005, and to target another 25% by 2015, to cut costs significantly, and with an array of efforts around alternative energy and alternative feed-stocks. Over the past five years, Dow’s bill for hydrocarbon feed stocks and energy has surged four-fold, from $8 billion in 2002 to an estimated $32 billion-plus this year. General Motors announced plans to close four plants manufacturing trucks and SUVS, citing decreased sales of large vehicles in the wake of rising fuel prices. Ford took similar actions. Yet about 65% of oil consumption is related to transportation, a sector where alternative fuel technology is relatively easy to tackle, with alternatives such as electric and substitute fuel engines. In China, steelmakers were forced to agree to a record increase in annual iron ore prices in a move likely to boost the cost of cars, machinery and other products globally…Within Liu’s ten facts of oil-related issues he states in Fact 10 that “a case can be made with ease that the United States cannot drastically reduce its trade deficit without paying the price of a sharp recession that could trigger a global depression.”Another point made by Liu in his carefully argued research is: “Yet if the Fed is really concerned with fighting inflation expectation, $135 oil and 2% Fed funds rate target simply do not mix, even with a falling money-supply growth rate. There is strong evidence that instead of worrying about inflation expectation, the Fed is really more worried about the economic debris from the burst debt bubble, which stealth inflation through asset appreciation is expected to help clean up with less pain. If high oil prices are the handiwork of speculators, the Fed is the speculator-in-chief. But there is very little speculation in the oil market because hedging is not speculation as all competent market analysts know. The rise in oil price is the direct result of a debasement of money coordinated by the world’s central banks led by the Fed.”

Anonymous • July 28th, 2008 at 12:48 pm

http://www.youtube.com/watch?v=zeo0_3gN190

randy • July 28th, 2008 at 12:51 pm

@ AFA:Thanks.go to RGE monitor home page under spotlight issues. Top one…."US Congress….." open it. 11th bullet down is NR comment.I’m still confused.

Guest • July 28th, 2008 at 12:55 pm

@Denriddy: “Thank you, Ponder, for your welcome.”Ditto, Denriddy!

Gloomy • July 28th, 2008 at 1:14 pm

A MUST READ"Has Deleveraging Even Begun? (Not For the Fainthearted)"http://www.nakedcapitalism.com/2008/07/has-deleveraging-even-begun-not-for.htmlSome excerpts"The chart comes courtesy Frank Veneroso’s June 18 report, "Why a Second Wave is Inevitable." (no online version, but if you ask nicely, I can e-mail you a pdf). The line is Total Credit Market Debt/GDP. As you can clearly see, the steepness of the vertical ascent of the has not eased in the last year or two. If anything, it may have gotten worse.We will return to discuss the implications of how big the debt level is, but the graph itself should serve to focus the mind. The March 31 level was 350% of GDP. The previous peak occurred in 1933, during the Great Depression, at just under 270% of GDP. Note that the peak was reached due to the start of the rapid fall in GDP taking hold faster than debts were written off, a dynamic not in operation now. So the comparable level to our situation is in fact lower than the 270% peak. An additional bit of cheery news comes from reader Bjomar: Japan’s total debt to GDP in 1990 was roughly 250% (it took some triangulating among this, this, and this source, his interpolation of corporate debt at 100-140% of GDP, household at 65%, and government at 60%). And unlike us, Japan had a very high saving rate, so its net debt would have been less alarming." "This chart shows something that has gone vertical, something that is on a moon shot. If it were the GDP of Argentina in pesos I would agree that the moon shot could go on and on. But it is not the Argentine economy in domestic money terms. It is a macroeconomic ratio of total debt to GDP. Macroeconomic ratios cannot go on unending moon shots. They are basically mean reverting series. In many cases, such as an economy’s investment ratio or its profit ratio, these values tend to be more or less the same on average over long periods of time. There are some such ratios that exhibit an upward bias or a downward bias; the ratio of service output to GDP and the ratio of industrial production to GDP are examples. But even though there may be a secular “tilt” to the mean, the shift in that mean is always gradual. Over short periods of time like a decade or so mean reversion tends to bring you close to where you came from. For the above ratio of credit market debt to GDP there is no gradual tilt to this ratio over the last two decades…How can that be, given that it is a macroeconomic ratio? …If we look back in history, we see one prior vertical takeoff in this ratio – the period from 1930 to 1933. In that episode economic agents did not want to increase their aggregate debt to GDP….. A very bad recession from mid 1929 to mid 1930 started to take the denominator – nominal income – down rapidly….The resulting financial and economic carnage was so great that all economic agents wanted mean reversion. But debt is a stubborn thing to dislodge. It took a generation encompassing a wartime inflation to revert to the mean and eventually overshoot it to the downside.""

AfA • July 28th, 2008 at 1:26 pm

@ Jason B"and banks/ IB’s are doing everything in their power to avoid writing down the value of the loan. (putting it in level 3, mark to model, etc) When the value of the loan or loan security is written down then we will suffer deflation, but until then inflation. This is making more sense to me now."Thanks, nyaah, maybe, it is difficult to put names on what is going on. We are definitely experiencing deflation (cf. LB’s post above) or if you wish "struggflation" (inflationary mechanisms not working properly = contraction of commercial and trade credit) which is the trigger to make everyone realize how much inflation we accumulated since years and before the real process of disinflation.It is like if we were riding a high speed train. Despite the high speed nobody realizes how fast we are traveling as long as nobody looks through the window and as long as the speed is steady. Now that we are heading and dangerously approaching a mountain the drivers hit the brakes we suddenly realize that we were traveling too fast and that the brakes would not save us from being wrecked.Some focus on the accident. Some are astounded by the image of the nearing mountain. Some break their nose due the deceleration. Others regretfully think the high speed and lack of vision as the root cause. Few jumped off the train hoping they would survive the shock. Certain still enjoy the natural scenery through the window…

RedCreek • July 28th, 2008 at 1:40 pm

Yeah – paulson doing hanky-panky, creating a new financial instrument (again)!!!

economicminor • July 28th, 2008 at 1:40 pm

Ridiculous! It is hard to imagine what our lifestyles would be with out the use of credit on a regular basis as we use it without thinking regularly. Some examples, the gas station, the toll roads, the airports (try to fly with cash) and increasingly at grocery and most retail stores, even fast food. Why I am writing about this is because as the financial crisis unfolds, there will be millions of people cut off from access. This is inevitable because giving money to people who have no hope of repaying it, will cease. My version of Stein’s Law, when something is ridiculous, it eventually stops. But as this happens, the economy declines another notch. Drying up more consumer spending which is income for others. We are in a contraction while interest on the debts we have accumulated grows as does the debts we use to fund consumption. Consumption is not only rediculous houses that can neither be paid for nor maintained but food and fuel for the population but also consumption is war and armies which do nothing towards repayment of the debts funding their existence. (No we are not funding them with tax revenues!) Yes there is good debt and bad debt but mostly the US has been efficiently creating the bad useless kind which is unproductively eating of our seed for the future. Ridiculous! It is ridiculous that people thought that money borrowed didn’t have to be repaid. If it is not expected to be repaid then it was a gift but when gift givers have to borrow to give, there is a point when the ridiculousness of all this just stops. Either that or why should anyone work? Just exist on borrowing. Oh! Yeah, that is what the US has been trying to do. Get someone else to produce and we just buy from them with borrowed money. Ridiculous! At this point, no one wants to work when others get all they want by borrowing or just by sitting around being taken care of. The US is in trouble not only because of Wall Street, but because we lost the work ethic and gained the gamble and free ride ethic. And the reality is that there is no free ride, payment is just postponed and we are passing the toll booth right now. Things are looking pretty grim for the US right now with rising prices for many things, food shortages starting and looking like they will actually become a reality, bank failures with the probability of many more to come, home values declining, water shortages in some areas and a government that pretends that being an ostentatious Ostrich is a good way to deal with problems. If this country elects McCain, we deserve all that he brings with him. He is way to dumb and corruptible to do anything other than lead on towards the cliff with all the lemmings following. I feel sorry for Obama if he is elected. He doesn’t seem to have a real clue as to what is coming down the tunnel towards us. That bright light isn’t the opening to a new and bright future, it is a big train coming loaded with bad shit that no one wants. One thing we can say about Roubini, he has been bold in his assessments, even if he has been on the light side. I don’t blame him, even if he thinks things will be worse, he doesn’t want to be considered a contributor to the fear or worse, yelling fire in a theater. The best you can say about America is that we do have spirit. But the sports coliseums and recreational vehicles we have won’t be enough this time to divert our attention from the biggest attack on our future yet. Our lifestyles are under attack yet our coach or leadership is still partying in the end zone oblivious to what is happening to most everyone else’s standard of living and future hopes. What is coming will be the biggest challenge the US has ever faced and how we face it will determine whether the US remains a great country or falls into the category of has been once was. Many will get their feathers all ruffled up about this statement. Denial works until fear takes over. Sorry, there really has been no free ride, just postponement. We’ve arived at the Toll booth, pay up. Now!

AfA • July 28th, 2008 at 1:41 pm

@ Randy"I am still confused"Yes, the Housing Bailout Bill contains many plans and bills among them are the FF backstop and the FHA plan. Roubini’s comment was exclusively concerning the $300bn FHA plan part ("cost of debt reduction via debt restructuring much lower than cost of liquidation"), not the whole Bill. These are the same arguments he presented previously, no change in position.

RedCreek • July 28th, 2008 at 1:48 pm

Cramer : "rather than creating covered bonds they should make sure that we don’t get a run on our bonds".

RedCreek • July 28th, 2008 at 1:48 pm

CORRECTIONCramer : "rather than creating covered bonds they should make sure that we don’t get a run on our BANKS".

RedCreek • July 28th, 2008 at 1:50 pm

covered bonds = just another way to avoid having to write down mortgages????

randy • July 28th, 2008 at 2:13 pm

@ AFAThanks. I think I feel better now. Now I just have that typical sinking feeling I’ve had for a while since I learned what our leaders are/have done to us. God help us all!

Guest • July 28th, 2008 at 2:15 pm

Here come da PPT, right on time!

randy • July 28th, 2008 at 2:39 pm

can someone with more knowledge about this than I help me. What are covered bonds and how are they going to help the mortgage market?

RedCreek • July 28th, 2008 at 2:41 pm

@ Guest on 2008-07-28 14:15:18Da PPT came, saw, got scared and ran.

economicminor • July 28th, 2008 at 2:43 pm

All this discussion of what should be done or could be done is interesting but not really productive as human nature will not allow those who have the power to do anything different than they are already doing, which is to privatize profits and socialize the losses. Until there is nothing more they can do and natural forces take over. The law of dimishing returns or gravity, which ever you like. Debt has to be serviced or defaulted on. We are past the ability to service all the debts we have taken on as a nation. Period! After Zero Hour has been passed, or now that it has been passed, the toll booth, there really is little to do other than try and protect yourself from the oncoming train wreck. As debts created in federal reserve notes have to be repaid in federal reserve notes, all asset classes will be sold to service debts by the majority of borrowers. Diminishing returns. It makes little different that the FED bails out or transferres FRNs to their cronies or co-conspirators depending on how you look at them. The FRNs that matter are the ones in circulation among the population and unless there is some magic way to add a few hundred billion of them to the accounts of the pions, who have been made responsible for the servicing of the debts, great and small, without a corresponding increase in the cost of goods, then all the digital transfers are pretty much meaningless. There is NO fix! Just stalling tactics. The fix is a melt down and massive defaults and then picking up the pieces and rebuild to greater heights. The natural way of capitalistic markets. Stalling just makes the hole deeper and the climb out more difficult and continues to distort real production and reward but that will continue to happen because humans don’t change without much pain and suffering which is then forgotten until the next episode.

Anonymous • July 28th, 2008 at 2:51 pm

To the poster @ 2008-07-28 14:15:18 above, would you please give the PPT comment a rest? Right now it looks like "da PPT" is not coming today. I suggest you read the fable The boy who cried wolf. These kinds of comments are meaningless, of no predictive or explanative utility. If you wish to comment on the PPT, please cite a source/example by which money is being diverted from the govt to prop up the stock market.

tutterfrut • July 28th, 2008 at 2:54 pm

@Randy"The Treasury’s guidelines spell out a formal definition for covered bonds. The bonds should have maturities of at least one year and no more than 30 years. Home loans in covered-bond pools would have a maximum loan-to-value ratio of 80 percent."http://www.bloomberg.com/apps/news?pid=20601087&sid=atbMkMpczfpA&refer=homecovered-bond pool=undercover CDOhno with new lipstick on

Guest • July 28th, 2008 at 3:01 pm

Paulson scheme after schemes. "as long as the bank remains solvent." LOLhttp://biz.yahoo.com/rb/080728/usa_financial_bonds.html

Anonymous • July 28th, 2008 at 3:07 pm

Can a portion the ecomomy (assets)deflate while another portion (commodities) inflate? if so how long before one dominates the other? The Austrians would say that inflation will dominate due to increasing money supply. Can we have debt deflation without money supply contraction? or is the credit crunch and lower velocity of money the same as contracting the money supply?

AfA • July 28th, 2008 at 3:12 pm

"NEW YORK, July 28 (Reuters) – The amount of U.S. investment-grade bonds trading at distressed levels has risen close to an all-time high, a sign that a wave of mega-bankruptcies is likely on the way, a veteran high-yield strategist said."http://www.reuters.com/article/bondsNews/idUSN2839442420080728

kilgores • July 28th, 2008 at 3:14 pm

@ Anonymous on 2008-07-28 15:07:26>Can a portion the ecomomy (assets)deflate while another portion (commodities) inflate?I believe London Banker has predicted as much…SWK

Guest • July 28th, 2008 at 3:17 pm

@ Anonymous: “To the poster @ 2008-07-28 14:15:18 above, would you please give the PPT comment a rest? Right now it looks like "da PPT" is not coming today."In other words: We have never intervened and we’re not going to stop now. As Alan Abelson probably would say, if all this pushing and pulling going on is non-intervention, I would hate to see intervention – and anyway, Reagan, Rubin, Reich and Paulson have all admitted to it. Check it out.Don’t give it a rest on my part, poster. I love it. And don’t opt for monotonous, Anonymous. Let’s live! And who says “da PPT” didn’t come today — down 239 could have been down 339. Hmmmm?

Anonymous • July 28th, 2008 at 3:20 pm

@SWK Part A was the easy one. Part B is a little tougher. Which one (inflation or deflation) wins and when? Thanks for your thoughts.

Guest • July 28th, 2008 at 3:24 pm

I should have qualified my version of PPT-sorry. It is the "Piss Poor Traders"

Guest • July 28th, 2008 at 3:25 pm

I think US stocks are actually ripe for a serious plunge…get your life vest ready.

Gloomy • July 28th, 2008 at 3:26 pm

WHAT A GORGEOUS BEAR MARKETAnyone who is short with a long time horizon and is careful to not overleverage (so they can survive powerful sucker rallies) can make a fortune in this market. Approached in a carefully planned way, this is the EASIEST money you will ever make, because future market moves have never been so predictable, and likely never will be again in our lifetimes.

Guest • July 28th, 2008 at 3:26 pm

Paulson, Bush and Bernanke are going to go down as three of th ebiggest idiots of modern times.

Guest • July 28th, 2008 at 3:41 pm

Already forced to use almost 10% of its stash to repay depositors at now defunct IndyMac, the FDIC will cough up another $860 million from its deposit insurance fund after seizing two more banks over the weekend. On Friday, regulators took control of First National Bank of Nevada and First Heritage Bank of Newport Beach, California. Both are units of First National Bank Holding Company, headquartered in Scottsdale, Arizona. The FDIC, however, was able to avoid an IndyMac-style bank run by selling the failed institutions to Mutual of Omaha, a Nebraska bank.

Anonymous • July 28th, 2008 at 3:51 pm

economicminor said: "After Zero Hour has been passed, or now that it has been passed, the toll booth, there really is little to do other than try and protect yourself from the oncoming train wreck. As debts created in federal reserve notes have to be repaid in federal reserve notes, all asset classes will be sold to service debts by the majority of borrowers. Diminishing returns. It makes little different that the FED bails out or transferres FRNs to their cronies or co-conspirators depending on how you look at them. The FRNs that matter are the ones in circulation among the population and unless there is some magic way to add a few hundred billion of them to the accounts of the pions, who have been made responsible for the servicing of the debts, great and small, without a corresponding increase in the cost of goods, then all the digital transfers are pretty much meaningless."I appreciate your comments. So what should we be doing to protect ourselves financially? Load up on gold while it’s still on sale? Any thoughts?

kilgores • July 28th, 2008 at 4:25 pm

@ Anonymous on 2008-07-28 15:20:28>Which one(inflation or deflation) wins and when?I’m a rank amateur as an economist, but my gut feeling, based on all I’ve read and for what it’s worth, is that deflation will dominate and that this will become readily apparent by the end of this year or the early part of next. The saturation we see in housing inventories will become generalized to other goods, and consumers will hold off buying for longer and longer periods in order to conserve cash and in the hopes (and the expectation) that prices will drop even further the following week or month. I suspect the lag that has given rise to the illusion that inflation will dominate has been caused by the last gasp of available credit being maxed out, and when that is gone, there will be no credit left and insufficient cash left to buy anything. Prices will begin to plummet suddenly and catch folks unawares, just as has happened in the housing market. The general price level cannot be sustained if demand drops across the board. The bottom to all that may be two or three years out. The only way I can see to prepare for all this is to pay off debt, cut expenses, and put away as much cash as possible. SWK

economicminor • July 28th, 2008 at 4:39 pm

Anonymous on 2008-07-28 15:51:55Protecting yourself? Ourselves… isn’t easy. Here is what I think. 1/ Don’t have all your eggs in one basket and do not have more than $100,000 at any bank or institution. I know this is a pain in the ass but the only prudent thing to do under current situation. 2/ Have as much food stored as you can, a year or more if possible3/ Have access to water. 4/ Assets to hold are ones that are useful, like soap and toilet paper and repair parts for any equipment you hope to be able to use. This may get critical as the US doesn’t make much any more and most tools change all the time so when you buy something you need, like a generator or water pump, buy what ever is likely to break or wear out or better yet, buy two so you can scavenge the parts from one to keep the other working. 5/ A large sack of silver coins. Better for everyday than gold. 6/ GOLD (easy to hide but don’t tell anyone you have it) 7/ have a motorcycle and a bicycle for transportation with panniers for carrying goods and good shoes. A couple pairs. 8/ move to the country where good soil and water are available and learn how to grow a large garden and chickens and or sheep or cows. Nothing big, just survivable. Complete with solar panels for pumping water and running your radio and TV and if you are wealthy enough to run a refrigerator. I’m not kidding. The cities could easily become unlivable with the cut back in revenues to them as the recession deepens. Where is all the money going to come from to pay the existing overhead of police who rely on gasoline to function. Cities are in or will be in trouble as they have way to many expenses already and their incomes will be diminishing while the cost don’t. Or at least move to a smart city like Portland Oregon where they have set aside land in and around the city for growing food and have good public transportation and an International, although small, harbor. As for investing ideas, shorting financials may have some more upside but there is so much manipulation of shorts, market data and news that has many risks. There can be rallies and rapid declines and unless you are really good at reading stock charts, it might not be a good idea to even be into stocks until this mess bottoms out. Then no one will want to be in either stocks or bonds and that will be the time to buy, if you can keep from losing to much on the way. Gold and Silver is real money that isn’t easily leveraged but holding it is risky or expensive. The Gold and Silver ETFs are just paper. There is suppose to be real assets being held but can you trust those who are holding it. Good plays until the markets and the institutions really do melt down. PM stocks? Cost going up and many are in foreign countries? Good idea but also risky unless you are a great stock chart and company reader. Most solar stocks still don’t make a profit. Tech? Maybe but declining incomes mean declining demand and declining markets to me. Lots of questions and lots of guesses but no great absolutes from me. Good luck! I hope it doesn’t get this bad but this credit cycle was expanded way beyond ridiculous and now will contract much further than most can imagine. Everything is leveraged and all that leverage is credit that has to be serviced. We are and have already been selling our food to cover that cost and now Noriel writes about our other assets. What’s next our National Parks and forests? We already sold our factories…

Ken • July 28th, 2008 at 4:50 pm

Written by Gloomy on 2008-07-28 13:14:14Would you be so kind, and email me the report you suggested was a must read @ "Has Deleveraging Even Begun? (Not For the Fainthearted)"http://www.nakedcapitalism.com/2008/07/has-deleveraging-even-begun-not-for.html I hope I can make it up in the future with good contributions to NR site.Thanks a million!

randy • July 28th, 2008 at 4:56 pm

@gloomyalways appreciate your posts. on the short market stuff, I’m short using IVV LEAPS. However, they have only (until very recently) been available thru DEC 08. Do you know of any way to leverage the S&P going down using LEAPS other than IVV? Thanks……….:>

Guest • July 28th, 2008 at 4:57 pm

"Folks who are here just to advance an agenda and pick a fight with those who express views contrary to theirs, rather than to engage in an open exchange of ideas and to learn something from the many intelligent participants to this blog, are wasting everyone’s time and diminishing the value of this forum for all."SWK@ kilgores on 2008-07-28 08:05:11Your opine is appreciated but there is plenty of time; if you don’t like something, ignore it and move on; after all, it is Roubini’s Blog and I am sure he can take care of himself. It was a sad day that we lost RYSKAMP; I liked his inputs very much.Respectful means that you don’t get in every bodies face.Ho humPeterJB

Gloomy • July 28th, 2008 at 5:07 pm

@KenThat notation about the report was from Yves Smith who runs the Naked Capitalism website. Go to the website and get her email address to get it.@RandyLeaps on the S&P 500 (SPX) and financials (XLF) have expirations out at least to 2010.

Denriddy • July 28th, 2008 at 5:21 pm

@ Pseudothyrum>it seems that the extraordinarily distorted U.S. economic system exhibits all of the disadvantages of a Marxist-esque economy with none of the associated advantages.Without stipulating that there are any actual "advantages" in the Marxian model, I quite agree; I only find amusement in arguments that the most important and pervasive planks of the Communist Manifesto are otherwise than firmly entrenched in America.All the hand-wringing and complex analyses over the actions and inactions of the Fed, and over the infinite creativity exhibited in the criminal squandering of tax dollars, ignores the startlingly obvious fact that the problems at issue—of which there will continue to be an endless supply (stay tuned)—arise only and exclusively because of the very existence of the Fed and of the income tax.I’ll reprise what said earlier: There is one fuel, and one fuel only, for the conflagration that is consuming us—and the Treasury has now been given an unlimited supply of that fuel: income tax. And it is Marxist. It is the cornerstone of all socialism.It is the one fuel. It is the only fuel. There is no other fuel feeding the fires that are burning down this house.We are a bucket brigade that lines up to pour bucket after bucket after bucket of fuel on the fire—then stand back and marvel and fret that a fire is raging out of control and burning down our house. We run for teaspoons and teacups to splash something else on it that might quell it, we spit and curse at it ineffectively, then run back to the fuel bucket line and pour another bucket of fuel on the fire, only to run back for a teaspoon or campaign slogan again, wondering desperately what ever might put it out.We analyze the fire in great detail, calculating its burn rate, pontificating about who might have started it, debating about what should be done about it, arguing whether there are more blue flames than red flames, pointing fingers, and shouting that there is a fire.Then we run and throw another bucket of fuel at it."Fire sale," indeed.

Kerk • July 28th, 2008 at 6:23 pm

SWK,I apparently chose words poorly. The people say "we do" in their statement creating the US. Those required to take the oath (and there are many per the constitution) say "I do." It is a contract between the people and those in positions within the federal and state gov’t who are required to do exactly what they said they would, no more, no less.

kilgores • July 28th, 2008 at 6:51 pm

@ Kerk on 2008-07-28 18:23:06Again, I understand what you are trying to say. Technically, there is no contract, legally speaking, between the citizenry and those who swear to uphold the Constitution. That doesn’t mean, however, that those who take the oath are any less obligated to adhere to the duties imposed by the offices they accept, or that the citizens of this country do not have a reasonable expectation that those who take such oaths will conform to the requirements of the Constitution and the law, and faithfully execute the duties of their offices.SWK

Denriddy • July 28th, 2008 at 7:01 pm

@ kilgores>Technically, there is no contract, legally speaking, between the citizenry and those who swear to uphold the Constitution.Then on what basis is consideration paid by the citizenry to those who so swear?

kilgores • July 28th, 2008 at 7:01 pm

@ PeterJB 2008-07-28 16:57:02>…if you don’t like something, ignore it and move on…After a point, that’s exactly what I do. I’m content to agree to disagree with others, especially where there seems to be little common ground for productive dialogue. Wasn’t it Mark Twain who said, "It is probably not best that we should all think alike?" SWK

kilgores • July 28th, 2008 at 7:08 pm

@ Denriddy on 2008-07-28 19:01:37Glad we’re still on speaking terms, Denriddy! Well, a tax is, by definition, not consideration, even as to the salaries paid to those who hold office. Rather, it is a levy by a sovereign. The States and the People ceded a portion of their sovereignty to the federal government when they enacted the Constitution, including its duly adopted amendments. A levy of tax is different than consideration conveyed by parties to one another under the terms of a contract, because the latter is voluntary, while the former is not.I’m sure you’ll have any number of reasons to disagree with me… SWK

Guest • July 28th, 2008 at 7:11 pm

economicminor:Thanks for the reply. I have most of those bases covered, and I live in the country on acreage. Because of all of the additional obligations the Treasury is going to take on, I wonder how Treasury bonds will fair? It sounds like we could have both deflation and inflation at the same time. BTW, you make more sense than most economic "majors" I’ve lately read!

kilgores • July 28th, 2008 at 7:12 pm

New thread.SWK

Denriddy • July 28th, 2008 at 7:19 pm

@ kilgores>The government has to tax citizens in order to carry out its legitimate purposesThe government of the United States grew and prospered in freedom for ~137 years without income tax. In fact, at all relevant times the income tax correctly was viewed as illegitimate and unconstitutional, and correctly was declared so by the United States Supreme Court.The income tax demonstratively is not necessary to life or to government.>As for the Fed, this country adopted the notion of a central bank in response to the Panic of 1907…

kilgores • July 28th, 2008 at 7:24 pm

@ Denriddy on 2008-07-28 19:19:18I agree with you that an income tax is not necessary to life or to government, so I won’t even ask you to demonstrate why it is not so.Your other comment was cut off..SWK

Denriddy • July 28th, 2008 at 8:01 pm

@ kilgores>The States and the People ceded a portion of their sovereignty to the federal government when they enacted the ConstitutionThat is a very peculiar parsing of the Constitution—particularly when the verb "cede" is not anywhere in the Constitution in any form.According to Black’s Law Dictionary, "cede" means: "to yield, to grant, to surrender." It is used to designate a transfer.The verb actually—and correctly—used in the Constitution is "delegate." It has a completely, and pertinently, different meaning than "cede." In its every sense, it means that the delegatee (in this instance the federal government) is acting as a deputy, agent, or representative of the delegator (the people) to carry out the will and intent of the delegator.A delegator does not "cede" power or athority to a delegatee. To "cede" such power, rather than delegate it, would be to invert the master/servant relationship, and to pervert entirely the very purpose of the Constitution. (Not that this isn’t "business as usual" in Washington and with vested interests using the power—and funds—of the people for their own selfish purposes.)>A levy of tax is different than consideration conveyed by parties to one another under the terms of a contract, because the latter is voluntary, while the former is not.This argument runs like a cyclotron: ’round and ’round and ’round. (Not to mention that it also is based on the earlier false premise of "cede," already disposed of.)Since it’s so circular, it’s difficult to pick an entrance point to deconstruct it, but for the same reason, any will do:First, the consideration paid to all public servants is specified quite clearly in the Constitution as "a Compensation for their Services" (caps in original), to be paid by the Treasury—the Treasury itself being an agent or representative of the people from whom their powers derive and are delegated.Second, the consideration paid to all public servants as "a Compensation for their Service" is not a levy. A levy of taxes is not the payment of consideration to a servant as "a Compensation for their Services." The collection of taxes is merely a means of putting revenue into the Treasury so the Treasury, as a servant and agent of the people, can pay the consideration to the public servants as "a Compensation for their Service."Third, at the time the Constitution was written there was no income tax at all.It matters not one whit by what means the people’s money gets into the people’s Treasury to then be paid by the Treasury (as an agent of the people) as consideration to any public servant: the consideration comes from the people, and the consideration clearly and unequivocally is paid as "a Compensation for their Service."Ipso facto, a contract exists.

PhilT • July 28th, 2008 at 9:19 pm

@economicminor on 2008-07-28 14:43:10"There is NO fix! Just stalling tactics. The fix is a melt down and massive defaults and then picking up the pieces and rebuild to greater heights. The natural way of capitalistic markets."Well articulated … will you go the next step and paint a picture of the future as you see it at the picking up the pieces point. Who will pick up the pieces?Looking forward to your thoughts …

kilgores • July 28th, 2008 at 10:57 pm

@ Denriddy on 2008-07-28 20:01:46>…the verb "cede" is not anywhere in the Constitution in any form.Admitted.>According to Black’s Law Dictionary, "cede" means: "to yield, to grant, to surrender." It is used to designate a transfer.I hate Black’s because it is usually not particularly helpful in understanding legal terms; however, I will admit that the word ‘cede’ can mean to yield or to grant or to surrender or to transfer. >The verb actually—and correctly—used in the Constitution is "delegate." The verb ‘delegate’ does appear once in the Constitution, in the Tenth Amendment, which reads, "The powers not delegated to the United States by the Constitution, nor prohibited by it to the states, are reserved to the states respectively, or to the people.">It has a completely, and pertinently, different meaning than "cede." In its every sense, it means that the delegatee (in this instance the federal government) is acting as a deputy, agent, or representative of the delegator (the people) to carry out the will and intent of the delegator.Excellent point. The People can always change the Constitution, which derives its authority from their mandate. The word ‘cede’ clearly implies something in the nature of a permanent transfer, and this is certainly not the case. I would note, however, that when I stated, "The States and the People ceded a portion of their sovereignty to the federal government when they enacted the Constitution, including its duly adopted amendments," I was using the term ‘sovereignty’ in the legal sense of the exclusive jurisdiction transferred to the federal government by the States and the People, such exclusivity being expressed in the Supremacy Clause. It may not be a permanent transfer, but it’s pretty darn difficult to change.> A delegator does not "cede" power or athority to a delegatee. To "cede" such power, rather than delegate it, would be to invert the master/servant relationship, and to pervert entirely the very purpose of the Constitution.Well done. I agree with you.> First, the consideration paid to all public servants is specified quite clearly in the Constitution as "a Compensation for their Services" (caps in original), to be paid by the Treasury—the Treasury itself being an agent or representative of the people from whom their powers derive and are delegated.I agree that public servants in the federal government are paid compensation for their services. The source of the funds used to pay that compensation is clearly derived from taxes levied pursuant to the Constitution. I would suggest, however, that these public servants are not in privity of contract with the People, as you seem to suggest, but exclusively with the People’s delegate (being the United States). The People didn’t reserve the power (see Amendment X) to contract with public servants, so money paid by the People pursuant to the authority of delegated to the United States to levy taxes cannot be construed as consideration to public servants, even though that’s how part of the taxes are used, because it is not the People that are in privity with the public servants who receive the compensation.>Second, the consideration paid to all public servants as "a Compensation for their Service" is not a levy. Agreed.>A levy of taxes is not the payment of consideration to a servant as "a Compensation for their Services." Agreed.>The collection of taxes is merely a means of putting revenue into the Treasury so the Treasury, as a servant and agent of the people, can pay the consideration to the public servants as "a Compensation for their Service."Agreed that the taxes collected are used for the payment of compensation to public servants and for other purposes, and that this compensation is consideration for their services. This does not, however, transform the taxes into consideration, because consideration is a function of contractual privity.>Third, at the time the Constitution was written there was no income tax at all.Absolutely true. No question about it.>It matters not one whit by what means the people’s money gets into the people’s Treasury to then be paid by the Treasury (as an agent of the people) as consideration to any public servant: the consideration comes from the people, and the consideration clearly and unequivocally is paid as "a Compensation for their Service."Agreed that taxes are used to pay compensation to public servants, which is consideration for their services, but that doesn’t make mean the taxes themselves are compensation or consideration.>Ipso facto, a contract exists.Yes, perhaps, but not between the People and the public servants who are paid compensation for the reasons I have cited above. Any such contract would be between the public servant and the United States government, to whom the People have delegated the exclusive power to enter into such contracts. The United States may well be acting for the People when it contracts with public servants, but this doesn’t mean the People are in privity of contract through that delegate (as could be the case in a private principal-agency setting). Without being in privity of contract, any payment of taxes by the People cannot be deemed consideration.Taxes must be paid because the People have delegated authority to the United States to levy taxes against them. There is no question that for over a century (except for the 1861-1872 income tax funding the War Between the States), the Constitution did not authorize an income tax. This is why the Sixteenth Amendment, a duly authorized amendment to the Constitution, was required in order to render the income tax constitutional. The People didn’t reserve any right to "opt out" because they didn’t like a particular form of tax, so the income tax must still be paid because it was authorized by constitutional amendment. There are only two ways for the People to change this state of affairs: 1) using the ballot box; 2) amending the Constitution.Very good argument this time. Well thought out and generally well supported by reference to facts. I quite enjoyed it. Have a good evening, Denriddy.SWK

Denriddy • July 29th, 2008 at 9:05 pm

@ kilgoresIf you keep agreeing with me, kilgores, I’m afraid people will start to talk. >>Ipso facto, a contract exists.>>Yes, perhaps, but not between the People and the public servants who are paid compensation…If that statement even could be true (and it can’t—stay tuned), then usage of the term "public servants" is fraud on its face. But do go on…>Any such contract would be between the public servant and the United States government, to whom the People have delegated the exclusive power to enter into such contracts. The United States may well be acting for the People when it contracts with public servants, but this doesn’t mean the People are in privity of contract through that delegate (as could be the case in a private principal-agency setting).Dear me. It’s unfortunate that you sought privity as the last refuge for your position, because there is no refuge in it.In reading your bold, declarative assertions I sometimes wonder if you are wittingly being disingenuous merely to spark a debate, or if you believe the things you say.No student has to wait for Civics 101 to learn that the lawmakers of our form of government are called "Representatives"—it’s taught as early as elementary school. And I doubt very seriously that you are ignorant of the legal definition of the word "representative."REPRESENTATIVE: One who represents or stand in the place of another. One who represents others or another in a special capacity, as an agent, and term is interchangeable with "agent."The founding fathers inalienably welded the principal-agency relationship into the Constitution, and the privity that inalienably accompanies it.I also shouldn’t need to remind you—but perhaps I do—that "No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law." Such appropriations made by law can only be made by the people’s *representatives.*>>Ipso facto, a contract exists.>>Yes, perhaps…Perhaps? No: in fact.

kilgores • August 1st, 2008 at 12:14 pm

@ Denriddy on 2008-07-29 21:05:29I get your point that the People are, by constitutional design anyway, ultimately in charge of our government. Who could possibly argue with that? Certainly not me.Notwithstanding that marvelous principle, if I work as, say, an Assistant Treasury Secretary, my contract is with the U.S. Government. "The People" can’t sue to enforce the terms of that agreement in the ordinary way that parties do in the context of a private contract. Their means of redress is confined to: 1) electing different Representatives (or as you characterize them, "agents"); or, 2) suing the government in court in the event they believe there has been a violation of the constitution, statute or regulation, but only if they have recognized capacity to do so (which can get into some pretty complicated legal questions for a court to decide). That’s because the People agreed to submit themselves to the scheme of governance set forth in the Constitution, in which they did not reserve to themselves those powers to contract that they delegated to their lawful Representatives and those public servants who work under the authority of those Representatives.Bottom line: it may be the case that public servants owe a duty to the People who pay their salaries, but this duty ultimately arises out of the Constitution, which is not, per se, recognized in the law to be a form of contract, and the remedies available to the People to remedy any perceived breach of that duty have been self-limited. Apart from your McCarthy-like fixation on Marxism and your aversion to income taxes, Denriddy, I suspect we probably share a lot of the same basic beliefs and fundamental values. We have a wildly different manner, however, of expressing those values.One thing is for sure: it’s difficult to argue with anyone when you can’t agree on the underlying predicates. I’m glad we both agree that the People should be in charge of their own government. "Supreme executive power derives from a mandate from the masses, not from some farcical aquatic ceremony!" — Peasant to King Arthur Monty Python and the Holy GrailSWK

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