Whiskey Ring

2008-02-18T23:14:00.000-05:00

The Danger of Government Banking Control

Notice the spikes up of inflation...
...is it by chance that the cost of living went up following the goverment financed wars of 1812, the 1860s (the Civil War), World War I (around 1918), and againg in the 1940s (WWII), then again in after Vietnam (1960s).....and then the last point...1973, when the US left the gold standard.

The two duties of the Fed are to 1) retain a stable value of our currency, and 2) keep prices stable....how have they done?....if you look at the same chart but of the value of the dollar during this time period, it is about the same but the opposite direction....since the creation of the Federal Reserve in 1913....the value of the dollar is down about 90%.

2008-01-23T23:52:00.000-05:00

The worst market crisis in 60 years
By George Soros
Published: January 22 2008 19:57 Last updated: January 22 2008 19:57

The current financial crisis was precipitated by a bubble in the US housing market. In some ways it resembles other crises that have occurred since the end of the second world war at intervals ranging from four to 10 years.

However, there is a profound difference: the current crisis marks the end of an era of credit expansion based on the dollar as the international reserve currency. The periodic crises were part of a larger boom-bust process. The current crisis is the culmination of a super-boom that has lasted for more than 60 years.

Boom-bust processes usually revolve around credit and always involve a bias or misconception. This is usually a failure to recognise a reflexive, circular connection between the willingness to lend and the value of the collateral. Ease of credit generates demand that pushes up the value of property, which in turn increases the amount of credit available. A bubble starts when people buy houses in the expectation that they can refinance their mortgages at a profit. The recent US housing boom is a case in point. The 60-year super-boom is a more complicated case. Every time the credit expansion ran into trouble the financial authorities intervened, injecting liquidity and finding other ways to stimulate the economy. That created a system of asymmetric incentives also known as moral hazard, which encouraged ever greater credit expansion. The system was so successful that people came to believe in what former US president Ronald Reagan called the magic of the marketplace and I call market fundamentalism. Fundamentalists believe that markets tend towards equilibrium and the common interest is best served by allowing participants to pursue their self-interest. It is an obvious misconception, because it was the intervention of the authorities that prevented financial markets from breaking down, not the markets themselves. Nevertheless, market fundamentalism emerged as the dominant ideology in the 1980s, when financial markets started to become globalised and the US started to run a current account deficit.

Globalisation allowed the US to suck up the savings of the rest of the world and consume more than it produced. The US current account deficit reached 6.2 per cent of gross national product in 2006. The financial markets encouraged consumers to borrow by introducing ever more sophisticated instruments and more generous terms. The authorities aided and abetted the process by intervening whenever the global financial system was at risk. Since 1980, regulations have been progressively relaxed until they have practically disappeared.

The super-boom got out of hand when the new products became so complicated that the authorities could no longer calculate the risks and started relying on the risk management methods of the banks themselves. Similarly, the rating agencies relied on the information provided by the originators of synthetic products. It was a shocking abdication of responsibility.
Everything that could go wrong did. What started with subprime mortgages spread to all collateralised debt obligations, endangered municipal and mortgage insurance and reinsurance companies and threatened to unravel the multi-trillion-dollar credit default swap market. Investment banks’ commitments to leveraged buyouts became liabilities. Market-neutral hedge funds turned out not to be market-neutral and had to be unwound. The asset-backed commercial paper market came to a standstill and the special investment vehicles set up by banks to get mortgages off their balance sheets could no longer get outside financing. The final blow came when interbank lending, which is at the heart of the financial system, was disrupted because banks had to husband their resources and could not trust their counterparties. The central banks had to inject an unprecedented amount of money and extend credit on an unprecedented range of securities to a broader range of institutions than ever before. That made the crisis more severe than any since the second world war.

Credit expansion must now be followed by a period of contraction, because some of the new credit instruments and practices are unsound and unsustainable. The ability of the financial authorities to stimulate the economy is constrained by the unwillingness of the rest of the world to accumulate additional dollar reserves. Until recently, investors were hoping that the US Federal Reserve would do whatever it takes to avoid a recession, because that is what it did on previous occasions. Now they will have to realise that the Fed may no longer be in a position to do so. With oil, food and other commodities firm, and the renminbi appreciating somewhat faster, the Fed also has to worry about inflation. If federal funds were lowered beyond a certain point, the dollar would come under renewed pressure and long-term bonds would actually go up in yield. Where that point is, is impossible to determine. When it is reached, the ability of the Fed to stimulate the economy comes to an end.

Although a recession in the developed world is now more or less inevitable, China, India and some of the oil-producing countries are in a very strong countertrend. So, the current financial crisis is less likely to cause a global recession than a radical realignment of the global economy, with a relative decline of the US and the rise of China and other countries in the developing world.

The danger is that the resulting political tensions, including US protectionism, may disrupt the global economy and plunge the world into recession or worse.

2007-12-22T12:55:00.000-05:00

The Credit Crisis Grows
By Mortimer Zuckerman
Posted December 13, 2007
www.usnews.com
Yes, there are weapons of mass destruction. They are "financial weapons of mass destruction," to quote the famous investor Warren Buffett as he surveyed the morning-after wreckage of the subprime mortgage lending crisis. The continuing destruction can now be called a credit crisis—a significant escalation because credit has been the high-octane fuel powering the American economy for the past half dozen years.
A whole galaxy of credit instruments has now been downgraded to the tune of hundreds of billions of dollars of paper losses. If those losses were incurred by individuals it would be bad enough. But leveraged lenders have a different problem. Many of them, such as commercial banks, have to maintain capital in reserve to protect against unexpected losses. If banks wish to maintain reserves equal to 10 percent of their assets, they either have to bring in new capital or shrink their balance sheets and reduce their lending accordingly. A dollar of real losses would mean scaling back lending by $10. Translate that to the whole financial sector, where the aggregate credit losses are estimated at $200 billion as of now. Ten times those losses could result in lending cutbacks of as much as $2 trillion. Such a huge hit to the credit supply will have a dramatic macroeconomic effect and could well produce a severe recession. Some major banks have literally shut their lending windows until they can repair their balance sheets.
Vicious cycle. The repair effort is further complicated because even the most sophisticated financial institutions do not know how to price many of the securities they hold and therefore cannot predict how much they will have to cut back on their loans, as the giant bank UBS said last week. This uncertainty compounds the credit crunch. So, too, does the decline in net worth of many borrowers due to a drop in house prices. In some markets, prices are down 20 percent from their mid-2006 highs. The average 10 percent drop in home values already incurred is tantamount to a $2.1 trillion loss in home equities. This threatens a vicious cycle with falling homeownership lowering house prices and forcing more defaults, causing ownership and prices to decline even more. Research suggests that for every dollar decline in home equity, spending will go down by about 9 cents, so this could lead to a $200 billion hit to consumer spending.
Another immediate effect has been a collapse in cash-out borrowing from home equity from about $700 billion in 2005 to $100 billion to date. At the same time, tighter lending and mortgage standards have contributed to a dramatic decline in residential construction from a high of over 2 million units to about 800,000 predicted for next year, with a concomitant decline in employment. A slowdown in consumer spending seems inescapable.
What is now seriously in question is the capacity of our financial system to provide enough credit to support the scale of investment that has maintained our long economic expansion. Coming at a time of soaring oil prices, we may have a simultaneous decline in consumer spending, residential investment, and business investment. The economy was strong in the third quarter but clearly dropping off by the end. We may be at the finish of not just the long-term borrowing bubble but the long-term spending bubble.
What should our economic policy be? The Federal Reserve must get ahead of the curve. Its priority must be to maintain the viability of the credit system and the flow of credit; our postmodern economy is dependent on an ongoing flow of credit.
A start—and it is no more than that—is the proposed federal effort to help the mortgage industry deal with subprime mortgages. It will help if the banks forgo their higher "reset" rates in the coming months. Banks would have to accept the lower income stream, but that of course is better than taking a write-off from the foreclosures with all the legal costs and the downward effects to the value of abandoned homes.
The problem for the Fed is that monetary policy may be no match for the deep structural contradictions that plague the financial system. We are dealing here with a whole new set of credit instruments that are little understood and therefore extremely difficult to price.
The economy is clearly transitioning to much slower growth, sharply tighter lending standards, a declining housing market, and pressure on consumer spending. People and companies are trying to cope with the debt accumulated during several years of profligate lending and spending. The real danger from a credit crunch is that everyone, from banks to corporations to households, may retrench simultaneously.
The collapse of values and the risks of the credit squeeze are the worst since the Great Depression. We are going to put the economy's resilience to a severe test.

2007-11-01T15:55:00.000-04:00

The Growth of Cities in the Fourth District
by Tim Dunne

When the boundaries of the Fourth District were drawn in 1914, three district cities— Cleveland, Pittsburgh, and Cincinnati—ranked among the top 20 most populous cities in the United States. Today, none of these cities ranks in the top 35, and the only district city in the top 20 is Columbus. Including the surrounding suburban areas along with these cities (the so-called metropolitan statistical area, or MSA), doesn’t change the picture much: Population growth in these areas has also lagged, with Pittsburgh, Cleveland, and Cincinnati all dropping out of the top 20 largest MSAs over the last half century.

A number of factors are behind the decline. For starters, cities in the Fourth District have been affected by the same broad trends that have influenced the population growth of other large, older cities across the United States. Recent research also suggests that population growth is linked to the educational attainment of residents, and this link is especially strong for cities located in the Northeast and Midwest.

Trends in Population Growth
The decline in the population of many Fourth District cities is part of a broader national trend that represents a shift in the population from the Northeast and Midwest to the West and the South. Figure 1 illustrates this point. The figure plots city population growth from 1950 to 2005 for the 100 largest cities in 1950 against the average January temperature of the city. One can think of the January temperature as a proxy for the location of the city within the United States. The colder cities are in the Northeast and upper Midwest. The pattern is unmistakable—colder cities grew, on average, much more slowly than their warmer counterparts over the period. Even cities such as Minneapolis and Boston experienced population declines of almost 30 percent over this period. This pattern is true for colder metropolitan areas and colder suburban areas, as well.

The different patterns of population growth for warm and cold regions reflect a long-term trend in the movement of the population away from the original core population centers in the Northeast to the West (see Edward Glaeser and Jesse Shapiro, 2003, for a description of the basic developments that have influenced population growth in U.S. cities across regions). When the country was expanding into the Midwest, this aided Fourth District cities. But as the population moved further west, growth in Midwest cities slowed. More recently, southern cities have experienced higher growth, and it is argued that technological changes, such as the invention of air-conditioning and the eradication of malaria, allowed for the successful expansion of these locales.

An alternative view is that the economic advantages that fostered the growth of the older Northern cities have waned. In particular, low transportation costs and access to raw materials offered by proximity to the Great Lakes or navigable rivers such as the Ohio became less important as trucking became the dominant shipping mode. New transportation technologies allowed manufacturing and distribution firms to consider sites away from traditional water and rail transportation hubs as feasible locations. This is not to say that transportation costs have become unimportant in determining firm location. There are still benefits to being near customers, suppliers, and other firms in an industry. It is just that the particular transportation advantages offered in the Great Lakes region have become less important as transportation technology and networks have evolved and the economy has shifted away from manufactured goods that are natural-resource intensive. The decline in manufacturing-intensive cities is shown in figure 2. Cities that had a high share of manufacturing employment in 1970 have experienced low subsequent population growth. Except for Columbus, the other large Fourth District cities are found toward the lower middle and right-hand corner of the chart, with Cleveland, Dayton, and Youngstown having very high manufacturing shares in 1970.

Clearly, all these stories play some part in explaining the recent population growth histories of Fourth District cities, but there is more to the story than location or industrial specialization. Another broad trend influencing the growth of older cities is a general fall in population densities. In 1950, the population density of 13 out of the top 20 most populous cities exceeded 10,000 persons per square mile; this list included Cleveland and Pittsburgh. Only 5 cities in the top 20 today are this dense, and fast growing, large cities such as San Antonio and Phoenix have densities of about 3,000 persons per square mile. The drop in density is due to a number of factors. Household size has fallen: In 1950 households used to average 3.4 persons; now they average 2.6. Access to cars has allowed workers and firms to move outside the central city. As transportation networks evolved, especially ring roads and highway systems, the cost of moving people within and around most cities fell.

Moreover, cities experiencing population inflows in the South and West often expanded their borders, lessening density. This was not the case for many of the large Fourth District cities, where city boundaries have remained relatively fixed over the last half century. One exception is Columbus, a city that has grown from 39.4 square miles in 1950 to 210.3 square miles in 2000. Although cities such as Cleveland and Pittsburgh had relatively fixed boundaries, this did not result in above-average population growth in the surrounding suburbs over the period. Cleveland’s suburbs grew weakly compared to other major cities, and Pittsburgh’s suburbs actually contracted from 1970 to 2000. In fact, cities that had relatively high population growth rates from 1970 to 2000 tended to have relatively high suburban population growth rates, as well, and cities with low growth rates tended to have low suburban growth rates.

Education and City Growth
Many analysts identify the education level of the populace as a key factor in city and metropolitan growth. Figure 3 depicts the relationship between city population growth and the share of a city’s adult population that had four or more years of college education in 1970. Two striking patterns emerge. Population growth is generally higher in cities with a greater initial share of college-educated residents, and the college shares of some Fourth District cities are extremely low. This is especially true for Cleveland and Youngstown. College shares in these two cities were less than 50 percent of the average in 1970. In contrast, Columbus, with its more highly educated workforce, experienced solid population growth over the last 30 years. The patterns observed in figures 2 and 3 are related—cities that had high manufacturing shares in 1970 tended to have low college shares, as well.

However, not all Fourth District cities fit the standard story. In 1970, Pittsburgh’s share of college graduates was roughly twice that of Cleveland’s, and over the last 30 years, it has risen markedly. In 2005, Pittsburgh had the highest share of college graduates of any large Fourth District city with the exception of Lexington, Kentucky. Nonetheless, Pittsburgh has had roughly the same relative decline in population as Cleveland over the past 50 years. One possible reason for the difference in growth patterns between the two cities may have to do with the geographical distribution of educated people within the respective metropolitan areas. In the Pittsburgh area, the city has a slightly greater college share than the suburbs. In the Cleveland metropolitan area, the opposite is true—the suburbs have a much larger college share than the city. In fact, the share of college graduates in Cleveland’s suburbs exceeded the city’s share by 2.4 times in 2000—one of the largest differences in the nation, and this gap has existed for decades. These differences in suburb-city shares balance out at the metropolitan level, and the Pittsburgh and Cleveland metropolitan areas each had college shares of about 27 percent in 2005, which is slightly under the national average for large metropolitan areas.
While the overall share of college graduates rises when one incorporates the suburbs into the calculations, the same general story regarding education and growth occurs when the unit of analysis is the metropolitan area. Populations grew faster, on average, in more educated metropolitan areas.

There are a number of theories as to why a city with a more skilled populace may grow faster than a less skilled locale. Robert Lucas argued in 1988 that cities with high human capital generate significant knowledge spillovers. In this theory, cities facilitate the interaction of skilled workers, and such interactions foster new ideas and new innovations, which lead to higher growth. The physical proximity of skilled individuals to other skilled individuals is central to this story. Recent empirical work by Enrico Moretti supports this view. He shows that firms located in cities with skilled workforces have higher productivity, even after controlling for the skill level of their own workforces, suggesting such spillovers exist. However, the overall importance of such human capital spillovers is still an open question.

Edward Glaeser and Albert Saiz also consider the possibility that cities with more skilled inhabitants are more flexible and, in their terms, can “reinvent” themselves in response to negative shocks. They argue that older northern-city growth is more closely linked to education because of a greater need to reinvent in these cities. In particular, these cities and metropolitan areas experienced particularly severe shocks to their manufacturing sectors beginning in the 1970s. Cities with relatively skilled workforces adapted better than those with unskilled workforces. This point is illustrated in figure 5, which plots population growth and education separately for warm and cold cities (here a cold city is one where the average January temperature is below freezing). In the case of cold cities, the share of college-educated adults is positively correlated with growth, and initial education explains a significant share of the variation in cold-city growth rates. For warm cities, the correlation between education and growth is much weaker, and education explains little of the difference in growth rates in the warm-city sample. Glaeser and Saiz report that the same patterns apply for metropolitan areas, as well. The implication for Fourth District cities is clear. Fourth District cities had few of the growth advantages offered by the warmer locales but, at the same time, many were poorly positioned in terms of workforce skills to take advantage of the technological shifts that occurred in the last two decades of the twentieth century.

Although many analysts believe that a highly skilled workforce is an important factor in the city-growth equation, it may also be the case that cities and metropolitan areas on a high growth trajectory or poised to grow simply attract more educated workers. That is, the causality could be reversed. It is reasonable to think that the relationship between city growth and education runs both ways. Educated workforces lead to higher growth, but high-growth cities also attract educated workers.

Research that attempts to sort out these confounding effects finds support for the idea that an educated workforce leads to higher city growth. It is probably safe to conclude that cities and metropolitan areas looking to foster long-term growth should consider policies that increase educational attainment and attract and retain educated workers as important tools for local economic development.

2007-10-01T16:26:00.000-04:00

Wile E. Coyote Economics, by Christopher Bounds

It is amazing to me how the intertwined world of politics and economics work. They lack of economic insight by the Congress and Bush Administration, evidenced by both the Federal and State Governments…further by the Federal Reserve…printing money until the world runs out trees, illustrates that bad centralized (or near-socialist) economic policy leads to political failure. The Republicans managed to lose power of the Congress not by being out witted or scandalized by an intelligent, aggressive opponent, rather, by losing power de facto to the only group there to take it. Now as the next election comes about, the democrat frontrunners probably would have been a shoe in if it wasn’t for them making the old political mistake of talking too much.

As when you play the board game Monopoly, America has been buying properties, but then reaching back into the bank for more money to replenish it’s coffers. Only in reality the player pays interest, but in Government, when the interest comes due, they print more money to pay it. Next year the Federal Government will need to pay well over $1 billion per day in interest alone, before even touching the $8 trillion of debt. How do they afford that? They print money. What does that mean to us? Just as in Monopoly, when so much “fake” money is floating around the board, landing on Boardwalk with a Hotel does not have a big impact on a player if they can reach into the bank for new money to pay their rent. Eventually so much money is around the table; players will offer thousands of dollars to by hundred dollar properties. Why? Because who cares, if you can borrow the cash from the bank, overpay for a property and still make money because the other players borrow from the bank to pay their rent, you are better off, than having your opponent doing the same against you. And what if you mess up, and almost go bankrupt? The Monopoly Man…the Chairman of the Federal Reserve or the President…will come and either buy your hundred dollar property for the thousands you paid for it or they will lend you even more money to pay your debts.
The same as when a person lives above their head by paying for everything with a credit card, when the card is maxed out, they get another one, and then another and another. Eventually your financial state will be so strain with debt, and your credit options exhausted, a day of reckoning will come. Although history shows it does not happen in one day, usually over several years. So what is a sign of the reckoning? Just as in the Monopoly game, eventually players will use cash to overpay for the properties. Sound familiar…the Tech boom, the housing boom, higher oil & gas prices, metals, grains, meats, stocks, electricity, soda, chewing gum, etc. Why? Are we driving our cars 10 times as much as we did in the late 1990’s? No. Is their 90% less gas than in the late 1990’s? No. Well, why is the price up so much if the demand is not up and the supply not down? Because when centralization (government) interferes in a market, the pricing mechanisms change. As in Monopoly, the game changes when the bank hands out new money to everyone. Oil was seriously underpriced during the 1990’s given the upcoming growth of China & India. The market chose to use its funds to finance the tech boom, forgetting the fundamentals, of less “promised performance” investment opportunities. Had the government then not printed money like water coming out of a hose, who knows, the market may not have seen the cheap opportunity in oil & other sectors. But, likely it would have, as it finally did around 2002, coincidentally at the trough of the market bust, when most of the weak players also went bust and only skilled “real money” players were there to make new investments. Alan Greenspan of the Federal Reserve, who had the sole power to arbitrarily print new money, unfortunately has not had his actions demonstrate belief in the Monopoly or credit card analogies of the impact money & credit has on the economy. The Fed may have an argument that their chart and data reading abilities are sufficient, but the fundamentals and history do not support them.
Had the democrats done nothing, said nothing, and only changed in not supporting the finances of the Republicans & the Federal Reserve. He or She would easily have won…or more likely accepted…the Presidency do to the default of the other party. But instead, the democrats went the other way in promoting even worse, off the wall, centralized schemes, to “better” the nation and win support. Hillary Clinton’s Baby Bonds and Universal or Socialized Health Care, depending on the terminology you choose, and the dictated tax policies of Obama & Edwards will prove to be problem making mistakes for the trio. The ups & down of the rollercoaster markets are just the people preparing the economy and sharp eyed politicians for what is to come if the Greenspan-Bush policies are continued, and now to a greater extent, if the absolute economic disaster that is to come through further centralization of industry by government is realized.

The Russians, the Chinese, & the people of India, have proven to the world that centralization does not work well. After all, is democratic-capitalism coming back to those nations because socialism worked well for them? You can go back further in time, the communists & imperialists, feudalism, the Romans, the power of Catholic Church and now the embrace of Islam, why did these institutions fail? The arching opinion of history illustrates is that the failure was caused by too much power in the hands of a few, centralization. Sure in times centralized power is good, but only in through the structure of freedom. Not when the mass public is dependent on its government or its monopoly industry. The one who accepts the Presidency will do it easily if they reject the ways of the last 70 years and demand a fundamental restructuring of government activity. Otherwise they will end up like Bush, Clinton, & Greenspan to name a few, in having continued economic & political disasters happening because of (in) action. Just remember that like when Wile E. Coyote runs off a cliff, he doesn’t fall immediately, usually floating in mid air awaiting a response. Right now America is the Coyote flying into the sky on a rocket with enough fuel to last maybe at most another 5 years, as if we are back in 1925. If changes aren’t made, we know the outcome 1929 produced, the similarities to that time are scary, but then again, a real crash, more than a 10% pull back won’t mean it’s over, as the Great Depression was largely caused by the actions and inactions of the Federal Reserve & the Government.

2007-09-17T13:09:00.000-04:00

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2007-08-29T12:02:00.000-04:00

The Golden Age Is Ending
By Mortimer B. Zuckerman
Posted 7/29/07
http://www.usnews.com/usnews/opinion/articles/070729/6edit.htm

We have been enjoying a golden age. In the latter part of the 1990s and the first part of the 21st century, every indicator of economic health that should be up has been up: employment, income growth, stock market profitability. And everything that should be down has been down: inflation, interest rates, and unemployment. Inflation in the United States was contained by a fortuitous combination of a glut in global productive capacity, foreign competition, technological innovation, and the soaring dollar, which made imports cheaper. Everything that China exported went down in price (and everything that China imported went up in price). So we had more productivity here, more jobs, more growth, and pay rises without inflation.

Today, many of these benign forces are still in play—but to a much lesser extent. The dollar is no longer soaring but slumping, as the world engine for growth moves from the United States to the East. To get a sense of how critical Asia has become, consider that our economy is expected to expand by $526 billion this year. The Chinese economy, which is a fraction the size of the U.S. economy, is expected to grow by $420 billion. That divergence will persist as China, as well as India, grows at a 10 percent annual rate.

This is the story virtually everywhere in the developing world-tightening markets for labor and product, with inflation pressures waxing. Central banks in Europe, China, and Japan are responding with rate hikes and hawkish rhetoric. Stronger growth around the world will portend even higher interest rates.

Prices rise. A collateral result of tighter money and higher interest rates is that the currency exchange rates of these booming countries have appreciated. The dollar has plunged roughly 4 percent just in the past few months and on a trade-rated basis compared with a basket of major currencies is now down some 30 percent from its 2002 peak. Import prices have risen, which now adds rather than abates inflationary pressures here. Wage costs in foreign countries have given another twist to the spiral, not dramatic yet but noticeable: In the past several months we have been paying about 2 percent more for consumer imports, excluding autos, the fastest such advance in more than a decade. This time last year, these prices were falling.

There is no prospect of these global inflationary pressures easing. Emerging nations are enjoying rising aspirations, higher living standards, and rising incomes. Demands for food, consumer goods, automobiles, and trucks are increasing, and so are the demands for improved education and labor training. The result is increases in costs that are rising more rapidly than technology can reduce them.

Our ballooning trade deficit is a function of these global forces. Fortunately, foreign investors have been happy to underwrite our red ink by pumping nearly $800 billion into our financial markets annually. Asian banks especially have been buying large quantities of dollars and dollar-denominated securities. The big question is how much these accumulated savings will be siphoned off by our trading partners for their own domestic growth. Clearly, rising global real yield will put a floor under U.S. interest rates, limiting our ability to manage our monetary policy.

The "golden age" has therefore resulted in an immense rise in foreign ownership of all American securities. Foreigners own more than half the federal debt, about a third of corporate bonds, and 13 percent of the U.S. stock market. This represents an accumulating claim on the future output of the United States and foretells an increasing flow of dividends and interest payments abroad.

It doesn't help that Americans save so little. Personal saving rates over the past 15 years have gone down from 7 ½ percent to zero. The aggregate national saving rate, which includes the public sector and private corporations, has dropped from 13 percent in the 1960s to 0.8 percent last year. The average American with an income of about $40,000 saves virtually nothing, while the average Chinese, earning somewhat above $2,000 a year, puts away about 20 percent of his income. Compound a low savings rate with a trade gap that has nearly doubled to 7 percent of gross domestic product over 20 years, and we can understand why the net international investment position of the United States has declined from what was a modest plus-5 percent of GDP in the mid-1980s to its current minus-20 percent.

In short, we are no longer as dominant in the world's economy as we were. Everybody's lives will be affected by that. That includes both national and individual rates of growth, as well as inflation and interest rates. The trend of gradual disinflation here and around the world that we have enjoyed for the past 25 years under the pressure of price competition from imports is drawing to an end. We are now looking at a period of rising inflation driven in good part by the economic successes around the world.

2007-08-22T00:51:00.000-04:00

Anatomy of the Bank Run
by Murray N. Rothbard

This article, from the September 1985 Free Market (that is, the Age of Volcker), is also timely for the Age of Bernanke.

It was a scene familiar to any nostalgia buff: all-night lines waiting for the banks (first in Ohio, then in Maryland) to open; pompous but mendacious assurances by the bankers that all is well and that the people should go home; a stubborn insistence by depositors to get their money out; and the consequent closing of the banks by government, while at the same time the banks were permitted to stay in existence and collect the debts due them by their borrowers.

In other words, instead of government protecting private property and enforcing voluntary contracts, it deliberately violated the property of the depositors by barring them from retrieving their own money from the banks.

All this was, of course, a replay of the early 1930s: the last era of massive runs on banks. On the surface the weakness was the fact that the failed banks were insured by private or state deposit insurance agencies, whereas the banks that easily withstood the storm were insured by the federal government (FDIC for commercial banks; FSLIC for savings and loan banks).

But why? What is the magic elixir possessed by the federal government that neither private firms nor states can muster? The defenders of the private insurance agencies noted that they were technically in better financial shape than FSLIC or FDIC, since they had greater reserves per deposit dollar insured. How is it that private firms, so far superior to government in all other operations, should be so defective in this one area? Is there something unique about money that requires federal control?

The answer to this puzzle lies in the anguished statements of the savings and loan banks in Ohio and in Maryland, after the first of their number went under because of spectacularly unsound loans. "What a pity," they in effect complained, "that the failure of this one unsound bank should drag the sound banks down with them!"

But in what sense is a bank "sound" when one whisper of doom, one faltering of public confidence, should quickly bring the bank down? In what other industry does a mere rumor or hint of doubt swiftly bring down a mighty and seemingly solid firm? What is there about banking that public confidence should play such a decisive and overwhelmingly important role?

The answer lies in the nature of our banking system, in the fact that both commercial banks and thrift banks (mutual-savings and savings-and-loan) have been systematically engaging in fractional-reserve banking: that is, they have far less cash on hand than there are demand claims to cash outstanding. For commercial banks, the reserve fraction is now about 10 percent; for the thrifts it is far less.

This means that the depositor who thinks he has $10,000 in a bank is misled; in a proportionate sense, there is only, say, $1,000 or less there. And yet, both the checking depositor and the savings depositor think that they can withdraw their money at any time on demand. Obviously, such a system, which is considered fraud when practiced by other businesses, rests on a confidence trick: that is, it can only work so long as the bulk of depositors do not catch on to the scare and try to get their money out. The confidence is essential, and also misguided. That is why once the public catches on, and bank runs begin, they are irresistible and cannot be stopped.

We now see why private enterprise works so badly in the deposit insurance business. For private enterprise only works in a business that is legitimate and useful, where needs are being fulfilled. It is impossible to "insure" a firm, even less so an industry, that is inherently insolvent. Fractional reserve banks, being inherently insolvent, are uninsurable.

What, then, is the magic potion of the federal government? Why does everyone trust the FDIC and FSLIC even though their reserve ratios are lower than private agencies, and though they too have only a very small fraction of total insured deposits in cash to stem any bank run? The answer is really quite simple: because everyone realizes, and realizes correctly, that only the federal government – and not the states or private firms – can print legal tender dollars. Everyone knows that, in case of a bank run, the U.S. Treasury would simply order the Fed to print enough cash to bail out any depositors who want it. The Fed has the unlimited power to print dollars, and it is this unlimited power to inflate that stands behind the current fractional reserve banking system.

Yes, the FDIC and FSLIC "work," but only because the unlimited monopoly power to print money can "work" to bail out any firm or person on earth. For it was precisely bank runs, as severe as they were that, before 1933, kept the banking system under check, and prevented any substantial amount of inflation.

But now bank runs – at least for the overwhelming majority of banks under federal deposit insurance – are over, and we have been paying and will continue to pay the horrendous price of saving the banks: chronic and unlimited inflation.

Putting an end to inflation requires not only the abolition of the Fed but also the abolition of the FDIC and FSLIC. At long last, banks would be treated like any firm in any other industry. In short, if they can't meet their contractual obligations they will be required to go under and liquidate. It would be instructive to see how many banks would survive if the massive governmental props were finally taken away.

2007-08-16T13:42:00.000-04:00

Hayman Capital
2626 Cole Avenue, Suite 200
Dallas, TX 75204

July 30th, 2007

Dear Investors,

Over the past few months, we have seen the exacerbation of the Subprime problem accelerate at a precipitous pace. Wait a minute…I thought the Subprime problem was neatly contained in a nice little box of risk that the Fed had put it in? After many meetings and conversations with the various leaders of brokerage firms and asset managers, I don’t think the Subprime problem is as contained as many would like for you to believe. To understand the massive ripple effects of the Subprime problem, you have to look deeply into who owns the eventual risk and furthermore, how it will affect their behavior going forward.

The Greatest “Bait and Switch” of ALL TIME
I recently spent some time with a senior executive in the structured product marketing group (Collateralized Debt Obligations, Collateralized Loan Obligations, Etc.) of one of the largest brokerage firms in the world. I was in Roses, Spain attending a wedding for a good friend of mine who thought it would be an appropriate time to put the two of us together (given our shared interests in the structured credit markets). This individual proceeded to tell me how and why the Subprime Mezzanine CDO business existed. Subprime Mezzanine CDOs are 10-20X levered vehicles that contain only the BBB and BBB- tranches of Subprime debt. He told me that the “real money” (US insurance companies, pension funds, etc) accounts had stopped purchasing mezzanine tranches of US Subprime debt in late 2003 and that they needed a mechanism that could enable them to “mark up” these loans, package them opaquely, and EXPORT THE NEWLY PACKAGED RISK TO UNWITTING BUYERS IN ASIA AND CENTRAL EUROPE!!!! He told me with a straight face that these CDOs were the only way to get rid of the riskiest tranches of Subprime debt. Interestingly enough, these buyers (mainland Chinese Banks, the Chinese Government, Taiwanese banks, Korean banks, German banks, French banks, UK banks) possess the “excess” pools of liquidity around
the globe. These pools are basically derived from two sources: 1) massive trade surpluses with the US in USD, 2) petrodollar recyclers. These two pools of excess capital are US dollar denominated and have had a virtually insatiable demand for US dollar denominated debt…until now. They have had orders on the various desks of Wall St. to buy any US debt rated “AAA” by the rating agencies in the US. How do BBB and BBB-tranches become AAA? Through the alchemy of Mezzanine-CDOs. With the help of the ratings agencies the Mezzanine CDO managers collect a series of BBB and BBB- tranches and repackage them with a cascading cash waterfall so that the top tiers are paid out first on all the tranches – thus allowing them to be rated AAA. Well, when you lever ONLY mezzanine tranches of Subprime RMBS 10-20X, POOF…you magically have 80% of the structure rated “AAA” by the ratings agencies, despite the underlying collateral being a collection of BBB and BBB- rated assets... This will go down as one of the biggest financial illusions the world has EVER seen. These institutions have these investments marked at PAR or 100 cents on the dollar for the most part. Now that the underlying collateral has begun to be downgraded, it is only a matter of time (weeks, days, or maybe just hours) before the ratings agencies (or what is left of them) downgrade the actual tranches of these various CDO structures. When they are downgraded, these foreign buyers will most likely have to sell them due to the fact that they are only permitted to own “super-senior” risk in the US. I predict that these tranches of mezzanine CDOs will fetch bids of around 10 cents on the dollar. The ensuing HORROR SHOW will be worth the price of admission and some popcorn. Consequently, when I hear people like Kudlow on CNBC tell their viewers that the Subprime problem is “contained”, I can hardly bear to watch.

The Moral Hazard of HOT Potatoes
The key reason the Subprime problem exists as it does today has to do with the wanton disassociation of risk inherent in the machine that churns out Subprime loans. Unlike the S&L crisis of the 1980s, the mortgage lenders of today aren’t taking their own balance sheet risk when underwriting loans. These brokers get paid for quantity REGARDLESS of quality. The balance sheet risk is transferred through three entities in less than 90 days from origination. The originator will originate ANYTHING he can sell to a whole loan buyer to pass the hot potato on. Whole loan buyers are simply the aggregators of loans at the Wall St. firms that aggregate, package, tranche, and sell as quickly as they possibly can to the clueless buyer. This transference of risk is the crux of the Subprime situation. Just think about it…if you were a 20-something making mortgage loans in California using someone else’s balance sheet and being paid per loan (with no lookback to performance of the loan), how many dubious loans would you underwrite?

Buyers are now BEWARE
During and after the rout these investors are about to shoulder, how excited do you think they are going to be to purchase the next “AAA” rated piece of structured finance paper?!!?!?!? These same investors and global pools of liquidity have been funding the Leveraged Buyout (LBO) boom by purchasing the debt that funds the Collateralized Loan Obligations (CLOs) which in turn, buy 60%+ of the LBO debt used to finance these transactions. I also recently spent some time with one of the largest CLO issuers in the world. They had just returned from Japan where they were marketing a new CLO in order to be one of the buyers for new LBO debt. Needless to say, their marketing efforts fell on deaf ears. They were told by the Japanese investors that they have lost confidence in the ratings agencies (you think?) and that in an election year there is too much uncertainty. They basically said, “No more.” If there is not a CLO bid from Asian and Central European banks, where do you think the $290 billion in announced LBOs will go to sell their debt? I actually have no idea how to answer that question myself. We have seen the bank-loan index drop from 100.5 to 90.5 in 5 short weeks, and a widening in investment grade as well as non investment grade credit. In the immediate absence of liquidity, there will be many casualties of levered funds and firms. There will be a “re-pricing” of risk on a global scale that will mean more credit funds being carried out the door feet first.

Latest Casualties
Just today, the latest firm to suffer the wrath of too much leverage and mis-priced risk was Sowood Capital. What is truly remarkable about this particular situation is the fact that Jeff Larson, the former manager of the $30 billion Harvard Endowment, is the principal Manager at this firm. Sowood was renowned as being a “best-in-class” fund. If the former manager of the Harvard endowment managed to lose 57% of his fund (more than $1.7 billion in losses) in just 30 days, how are the “other” credit funds out there doing? How are they calculating Value-at-Risk? This afternoon, brokerage firms were sending collateral calls to other funds positioned similarly to Sowood. They joined the ranks of the two Bear Stearns funds managed by Cioffi, Australia’s Basis Capital, Absolute Capital, and Macquarie Fortress Funds as well investments by Korea’s Woori Bank, and London’s Caliber Fund by liquidating and eventually returning what is left to investors. Not to mention the downfall of the poster child of the levered “positive carry” industry, United Capital Market’s Horizon Fund – managed by John Devaney, owner of the aptly titled 142ft yacht, the Postive Carry (which is incidentally now for sale, all enquiries can be directed to http://www.iyc.com/featured_yachts.cfm?mn=1).

I have recently discovered the insightful writings of someone with whom I have not had the pleasure to speak or meet in person. Howard Marks is the Chairman of Oaktree Capital Management and he recently sent a letter to his clients entitled, “It’s All Good”. Mr. Marks had a most astute observation with regard to the recent investing environment:
“…investors’ recurring acceptance that it’s different this time – or that cycles are no more – is exemplary of a willing suspension of disbelief that springs from glee
over how well things are going (on the part of people who’re in the market) or rationalization of the reasons to throw off caution and get on board (from those who have been watching from the sidelines as prices moved higher and others made money). In this way, the bullish swing of the investment cycle tends to cause skepticism and risk tolerance to evaporate. Faith, credence and open-mindedness all tend to move up – at just the time skepticism, discrimination and circumspection become the qualities that are most needed.”

Credit Markets and Where we are today in Subprime
Last week, I spent some time in the “Inland Empire” of California on a diligence trip to survey the actual damage. As many of you already know, 55% of all Subprime loans were made in California and Florida. The inland empire of California can be described as the central valley that extends from the southern part of the state all the way to the northern part of the state at least 1-hour inland from the coast. Let me start by saying it is MUCH WORSE than even I thought it could be. I met with various mortgage lenders, originators, economists, and capital markets professionals. The overriding theme that I got from them was that “Everyone committed fraud and everyone is responsible for the problem”. They told me that they believe that 90% of all Subprime loans that were made contained some kind of fraud. Either borrowers lied about their incomes or mortgage brokers fudged numbers on the applications to make them pass muster with the needed ratios in order to get loans approved. They also said that of the borrower frauds, 50% of applicants overstated their income by MORE THAN 50%!!! As Kindleberger put so well in his book, Manias, Panics, and Crashes:
The implosion of an asset price bubble always leads to the discovery of frauds and swindles. The supply of corruption increases in a pro-cyclical way much like the supply of credit. Soon after a recession appears likely the loans to firms that were fueling their growth with credit declines as the lenders become more cautious about the indebtedness of individual borrowers and their total credit exposure. In the absence of more credit, the fraud sprouts from the woodwork like mushrooms in a soggy forest.

In California today, home prices are down between 25%-40% in the central valley. From San Bernadino to Stockton, home prices are in free-fall and their physical condition is actually worse than their price decline. The borrowers are locked out of the financing market and there is no logical buyer for these homes outside of the original borrower. The foreclosure wave will hit these neighborhoods like the Asian Tsunami. If you plug in 15% depreciation in housing prices and 50% loss severities into our Subprime model, the capital structure is wiped out all the way to the “AA” tranches.

In the Subprime Credit Strategies Funds, we continue to hold our initial positions and have not taken any profits yet. In Hayman, we are short credit in the US (both Subprime RMBS and corporate credit) and long non-US equities and debt. We are short US consumer based equities, preferreds, and debt. I think the world is going to begin to decouple from the US and realize that currency appreciation coupled with the globe’s best growth is an attractive alternative to fraudulent ratings, US dollar depreciation, and financial inventions used to export risk.

Sincerely,

J. Kyle Bass
Managing Partner

2007-08-14T12:06:00.000-04:00

The best news of the year...the implosion of quant funds! Headlines this week are all about the implosion of quantitative hedge funds, investment funds that pay no attention to underlying fundamentals but focus their trading strategy on statistics...technical analysis. A Goldman Sachs quant fund managed to loose over $1 billion in just a week, 30% of its value, leading Goldman to bail it out with a $3 billion investment. Several others have blown up this week as well, having us real investors laughing at the old tale of "technicals work until they don't work anymore" coming true. Here is an article regarding what these funds are up to today and how we should react...

How Speculators Exploit Market Fears
by Ben Stein

Here's a fact: The speculators and hedge fund managers who run today's stock market need market volatility in order to make money.
They can't make enough money if the market stays flat or moves only a bit, so they like extreme and unexpected price movements. They especially like sudden, surprise movements down, when they can make money off stocks they borrow and sell -- or, as they say, "sell short."

Money Lust Satisfied
That's what's been happening the past couple of weeks. But it's not interesting to say that the speculators are whipping the market around to satisfy their money lust. So the speculators themselves make up reasons for why the market is fluctuating, flog those reasons to the media, and then profit if some other speculators believe the jive reasons and jump in the way the manipulators want them to.
Supposedly, the market is "correcting" because of worries about the housing slowdown, and also because of fears that the debt markets that support mergers and acquisitions is drying up.

These are interesting theories, and people who don't know a lot about the stock market or the economy might find them beguiling. What follows are a few truths that show how shallow these "reasons" for the stock market moves are.

Housing a Theory
Yes, the housing market has slowed from a spectacular bubble level to a simply pretty good level. Housing sales and starts are now about what they were in 2002, and no one thought we were in a housing depression then. In any event, housing is only about 5 percent of the economy. If it falls by 15 percent, that would represent a fall-off of about .75 percent. That's not trivial, but it's also not the stuff of which recessions are made.

The fact is that there is no recession. The economy is suffering from a labor shortage, not a surplus of unemployment. The Fed is worried about excess demand, not slack demand.
Corporate profits set new records every day. Whatever's happening in residential sales and building is simply not slowing down the economy. Why should a Boeing or a Merck or a Pfizer have any reaction to housing at all? Because the speculators sell everything they can when nervousness sets in -- and for no other reason.

A Minor Major Mess
Subprime is a mess. But it's a small mess. Subprime mortgages account for roughly 20 percent of mortgages even in the most heavily exposed states. About 20 percent of them are delinquent in some way. That's 4 percent of mortgages. Of these, maybe half, or 2 percent, will go into foreclosure. There will be roughly 50 percent recovery on sale of these. This is a loss of 1 percent in the mortgage market -- a sum the lenders have already made many times over because of the hefty fees on those deals. In the context of the size of the U.S. financial sector, it's nothing.

And why should a crisis in subprime drive down stocks in Mexico and Thailand? Again, because the speculators seek to create panic to make money by selling short, and they sell short everything. There's simply no connection between subprime and developed or developing nations' stocks. This by itself shows the thin context of the selling wave late last month.

Money's Still Cheap
What about the supposed drying up of loans for mergers and acquisitions by private equity firms? Well, here's a good, simple test of just how valid that explanation is for stock market moves: The majority of private equity takeovers are financed with junk debt.
If there really were a major shortage of funds for these deals, the interest rate on the junk would skyrocket. Instead, while the rate has risen by about 150 basis points in the past month, the spread between junk and investment grade is now about 290 basis points, according to leading junk analyst Martin Fridson.

This is a lot lower than the year-end average of the spread from 2002 to 2006, and far below the almost 800 basis point spread during a true interest-rate crunch like the one after the tech meltdown in 2000-2002. So that's phony, too. Interest rates have risen, but not anything like what they've done in real crises. And besides, the Dow fell by about 550 points the week before last, yet not one of the Dow stocks is involved as either acquiror or acquiree in a private equity deal.

In short, money is no longer virtually free the way it was for private equity deals in the past year. But it's not expensive by historical standards, either.

Spreading the Fear
In other words, it's all the speculators trying to panic us so their sell programs will make money. And they'll make money as long as they can spread their panic. When they can't do that any longer, they'll work the long side -- and make up reasons for that, too. In the meantime, the economy is strong. Profits are great, and interest rates are low and will stay that way. Don't sell. With all the shrieking about the market, it only fell to what it was about five weeks ago -- and we didn't think we were poor then. So let the speculators shout "fire." As of right now, they're not blowing anything but smoke.

2007-07-26T12:00:00.000-04:00

Oh almighty Schumpeter, what ye say is wrong with our markets?

by Christopher Bounds

To find an answer to the roller coaster ride the major indices gave us this week, we will look to the writings of Joseph Schumpeter (pictured) and the other Austrian School economist.

First, this week a long awaited announcement was made by the S&P Credit Rating analysts that over $1 TRILLION of AAA-rated outstanding debt may not be AAA-rated. This mishap will spell problems for all of us. Friday's news release of new home sales being down "substantially" is nothing new to anyone. Yet little is understood regarding the implication of this fact, at least as reported in the media.

What I call "The Greenspan Push", names the most profound series of events this century will endure. While Chairman of the Federal Reserve, Mr. Greenspan set the financial markets on a new course of action. Historically when banks make loans they have to protect themselves against the risk of loss those loans bring. This was done by holding sufficient reserves of gold, then when the gold standard was dropped in the early 1970's, it was accomplished by holding sufficient reserves of cash and "risk free" U.S. Treasury bonds. Then came Mr. Greenspan's Push. Under his regime, the banking industry changed in the way that they account for that risk of loss. By "Pushing" the risk out of the banking industry and into the Investment market, the banks were be able to substantial lower their liabilities...as they issued the loan and sold (or bought against) the risk of loss. By creating derivative instruments, what you may have heard in the news as "Mortgage-Backed Securities (MBS)", "Collateralized-Debt Obligations (CDOs)", "Default Swaps", "Credit Swaps", etc, all of which are essentially insurance policies against loan losses. The same as when you buy a car and purchase auto insurance coverage to "Push" the risk of loss away from you and to the insurance company. And in freeing up the reserve ratio required by banks to hold...a percentage of assets to liabilities...the banks are able to write more loans, because they "Eliminated" the prior liability while holding the asset.

No way, how is that possible? Why would the investment industry cooperate? Well as you know it is not legal to use borrowed money to invest in the stock market. Because the markets are to risky for the use of bank funds, you must use margin to accomplish leverage and that level is limited to $0.50 on the $1, allotted to certain types of securities. When added to all of your marginable assets, your leverage ratio is 1.5 to 1. Meaning you can buy $150 of something per $100 of marginable assets. When banks create derivatives they are rarely "pure" instruments, meaning that if a bank writes a $10 million loan to GE, which would typically be syndicated meaning that the bank would put up $4 million, another bank $4 million, $1 million from another bank, and $500,000 from two others. The GE loan would rarely be sold in full, the bank would "strip" the GE loan into 1000 equal parts ($10,000 each) and add each part with other "stripped" loans made to other clients. Typically the basket of loan strips would contain a high level of high grade debt...such as U.S. Treasury bonds...by combining T-Bonds with loans to customers with good credit and to those with bad credit the rating on the basket would be relatively high. When a basket of this type, a MBS or CDO, is marketed to the investment industry, typically to hedge funds and Mortgage Real Estate Investment Trusts, the leverage ratio is sky high so long as the basket credit rating is high. It is standard to borrow 15 to 1 when buying AAA-rate derivatives, meaning a fund can borrow $15,000,000 per $1,000,000 of assets. And because the basket holds a large number of U.S. Treasury bonds, the risk of default is artificially low, as the ratings are dependent on the "odds" of default and not the odds of partial default. An average spread on a loan might be 3%, the difference between the Fed Funds Rate (5.25%), which banks borrow from the Federal Reserve, and the Prime Rate (8.25%) at which banks lend to their best customers. When you strip down, combine, and sell the risk of losing that 3% spread to a fund borrowing 15 to 1 to buy it, they (the funds) earn 15 times 3% = 45% on their money.

Where does the 15 to 1 money come from? The banks. By originally writing risky loans to sub prime borrowers, then stripping and combining them with enough low risk debt that the total earns a AAA-rating, the bank sells the original loans to the investment funds by writing them (the funds) new loans secured by the basket of loans. Since the basket is of a good credit rating, the banks can write bigger loans for these instruments as they are rated higher even though, collectively, they are the same (baskets containing) good and bad loans. Plus, since banks make much higher fee's underwriting loans than just collecting the interest on them, they have a great incentive to quickly get ride of low risk loans and sit on the high risk, high interest rate ones, while selling enough stripped loans to lower their risk, and getting back the higher rated basket as collateral to keep the process going. All of this possible because of the never ending printing press of money at the Federal Reserve. It also brings up political questions as to whether the government should continue manipulating the economy, by printing money at will and adjusting interest rates artificially. As the loan market starts to overheat, the bad loans begin to default, and all of those baskets start "leaking" value, as their streams of income drop due to the defaults, their ratings will drop. And when a system so dependent on the process of fluidity...lots cash transferring hands rapidly...the banks will realize that they have far too many risky loans, either as assets or as collateral, even to the point of their obligations to depositors outnumbering their dependable assets. At this time a shiver will be sent through the world in the sense of the nineteenth century bank run. As people realize that their money in banks, and their retirement (because pension funds are the largest investors in hedge funds) have been recklessly managed, they will demand withdraw. At that point people will learn of the fact that, by definition, the bankrupt banking industry's use of fractional reserves...only holding a small percent of assets to liabilities...will be unable to pay the people's due money, unless the Federal Reserve prints that much more, diluting to value of all the cash already present...and raising our costs as most commodity markets are priced in US dollars...giving great discounts to foreigners.

This should serve as a wake up call to our political and economic leaders. Because, of the fact that the Greenspan Push was likely not intended to be deceitful, it was more likely a symptom of "elitism". The old argument of does higher income bring prosperity or does prosperity bring higher income, is in full effect. As Schumpeter wisely stated that Capitalism will serve as the source of its own demise, entrepreneurship is the only element to prevent the destruction of capitalism and the onset of socialism. This is proved by virtually all of the gains and new money printed by the push, being retained by the wealthiest or most productive individuals. The "creative destruction" of the economy, as required by Schumpeter, evidenced by new industry creating new services and employing new groups of people...destroying old industrial lines and employment sectors...has not been effectively present. Blockades in the economy in terms of minimum quotas (labor unions, government spending, minimum wages, etc) and preferential treatment (government spending, taxes, licensing, government printing money, etc) adds difficulty to entrepreneurship.

What elitist would believe, that a retailer could earn more money by focusing on the poorest of consumers? Well look at Wal-Mart. That is the focus politicians should have, eliminating political blockades. Because once again the belief of money creating its own demand fails, only the use of money will determine the demand. As the economy moves away from productive use...giving too much to those who waste it or wont pay it back...it will not create a sustainable appreciating demand. Resulting in the process needing to correct. No matter if its in the form of loans to sub prime borrows, taxes paid to wasteful elitists, or whatever...I say that the people earning the money should have the decision to waste it or not, rather than the banks and politicians doing it for us. Leave the economy with as little centralization as possible, so parts of it can respond to the parts with ailments, while earning reasonable profits...Adam Smith's "Invisible Hand". Otherwise, socialist Hillary Clinton-type economic centralization will continue to build momentum in effort of solving the problems associated with socialist economic centralization.

2007-07-17T12:22:00.000-04:00

HAIL TO THE CHIEF

Former presidents cost U.S. taxpayers big bucks; tab from 1977 to 2000 is pegged at $370 million

By BENJAMIN ALEXANDER-BLOCHBLADE STAFF WRITER

http://toledoblade.com/apps/pbcs.dll/article?AID=/20070107/NEWS09/70107004

The presidency of Gerald Ford was unlike any other in U.S. history. He was the only president never elected to the office, and he was the only president to pardon another president.He held another distinction after he left office — he received the biggest federal pension of any former president.Besides the $183,500 he received last year from his presidential pension, Mr. Ford also received $120,247 in a congressional pension. Former Presidents Jimmy Carter, George H.W. Bush, and Bill Clinton each received presidential pensions of $183,500 last year.Mr. Bush also received a congressional pension estimated at $65,000 a year.Presidential pensions are rising to $186,600 this year.Including the cost of Secret Service protection, ex-presidents’ personal allowances totaled $370 million from 1977 to 2000, according to a 2001 federal report.The federal government began paying former presidents an annual “allowance” in 1958 after Congress decided former President Harry Truman should not have to answer his own mail and buy his own stamps. Because of his financial limitations — he had an Army pension that paid him $112.56 a month — Mr. Truman was unable to staff his office, according to the Library of Congress.The Former Presidents Act of 1958 was established to help ease former presidents back into private life and was retroactively applied to the two living former presidents at the time — Truman and Herbert Hoover.

Congress set a pension of $25,000 a year for former presidents in 1958, but that has grown steadily over the years. The General Services Administration reports presidential pensions will reach $188,000 in 2007. They are now pegged to the salaries of current cabinet officers.Pensions for former U.S. presidents are comparable to the pensions for former leaders in Great Britain, while Canada’s elder statesmen get substantially less.Prime Minister Tony Blair reportedly will receive about $343,000 annually as an allowance, which includes costs to maintain an office.In Canada, former prime ministers’ pensions are tied to the amount of time served. If they were in office for at least four years, they are given an allowance of two-thirds their annual salary — or about $90,000.In addition to pensions, former U.S. presidents receive annual office allowances to pay staff salaries and benefits, office rents, printing, stationary, local and long-distance telephone service, travel funds, and of course free use of the mail.Mr. Ford, who died on Dec. 26, spent $17,000 on office supplies in 2006, more than any other former president.In addition to his love for pens, pencils, and stationery, Mr. Ford did his fair share of traveling. He tallied up $45,000 in travel expenses, more than Jimmy Carter, but less than George H.W. Bush’s $54,000 and Bill Clinton’s $63,000.In 2006, Mr. Clinton also ran up quite a phone bill — $75,000. This topped any other former president by $60,000.And despite all the office supplies, Mr. Ford evidently wasn’t using them to write letters, spending the lowest on postage at $9,000.But none of this compares with the cost of Secret Service protection for former presidents, estimated in 2000 at $24 million a year, according to the 2001 federal report.In 1985, former President Richard Nixon terminated his Secret Service protection. According to a 2002 Saturday Evening Post article written by his daughter, Julie Nixon Eisenhower, her father gave up the round-the-clock protection because of his concerns about the costs to taxpayers.

But questions are being raised about whether today’s ex-presidents need the government funds they receive.Now multimillionaires, many sitting on corporate boards and receiving more than $100,000 for speaking engagements, ex-presidents are no longer in the Harry Truman mold.Pete Sepp, spokesman for the National Taxpayers Union, wonders about “the exorbitant level of presidential pensions in an age where ex-presidents are solid gold.” “The presidential pension system is probably the only system of perks that outdoes the cushy benefits for members of Congress,” Mr. Sepp said. “In an age where ex-presidents can rake in millions of dollars, it seems pointless to guarantee them a system of extremely lavish lifetime benefits.”Yet President Ford received about $304,000 in pension money from the federal government in 2006, according to the taxpayers union, a nonprofit organization based in Alexandria, Va., that works for lower taxes, restrained federal spending, and accountability.Mr. Ford’s congressional pension stems from his representation of Michigan’s 5th District in the House of Representatives from 1949 to 1973. He was House minority leader for eight years before being appointed vice president in 1973 after Spiro Agnew resigned. Mr. Ford then became president when Mr. Nixon resigned Aug. 9, 1974.While Mr. Ford was in office for only 2½ years, Larry Sabato, director of University of Virginia’s Center for Politics, said Mr. Ford deserved his full pension because “these weren’t easy years.” But he says one day the allowance system may run into problems.“One day we will have someone that serves [as president] for just a week or two… and then what are you going to do? Does that monthlong tenure entitle him to all these perks?” Mr. Sabato asked.George H.W. Bush is now the only ex-president to receive a congressional pension. Based on his four years as a Texas congressman, two years as United Nations ambassador, two years as chief of the Central Intelligence Agency, and eight years as vice president, he will receive about $65,000 this year in a congressional pension, on top of his presidential pension, according to the National Taxpayers Union.The U.S. Office of Personnel Management said the specific amount of a congressional pension — not presidential pensions — “is protected information under the privacy act.”Mr. Sabato said that while “presidents are being paid so lavishly” there are reasons for the federal expense.“We saw a six-day funeral for Gerald Ford. Presidents are obviously very significant people long after they have served in office,” he said. “We don’t have a royal class in the United States, but presidents come close.”
Presidential offices

The federal government provides former commanders-in-chief with office staff and “suitable office space, appropriately furnished and equipped, at a location within the United States designated by a former president, for the rest of his or her lifetime,” according to a report by the General Services Administration.By law, staff salaries are capped at $96,000 a year, but former presidents can pay for additional staff out of their own funds or through foundations they set up.According to a 2001 federal report on former presidents’ spending habits, offices of former presidents had anywhere from 6 to 19 employees.Although staff members are not considered federal employees, they are eligible for federal retirement and health insurance.Both Mr. Ford and Mr. Bush maintained primary offices in addition to summer offices in other locations, according to the 2001 report. Mr. Ford’s primary office was located in Rancho Mirage, Calif., and his summer office was in Vail, Colo.Mr. Bush’s primary office is in Houston and his summer office in Kennebunkport, Maine. Mr. Carter’s only office is at the Carter Presidential Center, in Atlanta.The federal government pays the highest office rent for Mr. Clinton’s lease on a Harlem penthouse suite. He was initially considering a Manhattan apartment that would have topped $800,000 a year, but, after a media frenzy, he looked elsewhere.Mr. Clinton’s office rent will cost taxpayers $498,000 in 2007. The next highest office rent is Mr. Bush’s at $175,000.In 1994, the Former Presidents Act was amended to only permit staff and office allowances for former presidents to last up to five years. But, in 1998, just before the provision would go into effect, lifetime staff and office allowances were restored.Mr. Ford lobbied Congress to reinstate this lifetime allotment so he could keep his office in Rancho Mirage, Calif.

A matter of protection
In addition to federal pension and retirement allowances, former presidents receive, Secret Service protection, medical expenses, and state funerals and burials with military honors.The Secret Service does not disclose protection costs for former presidents for reasons of security, but a 2001 federal report said Secret Service protection for former presidents cost a total of about $24 million in 2000.In 2000, the Secret Service was protecting former Presidents Nixon, Carter, Reagan, and Ford, their spouses, and Lady Bird Johnson, widow of former President Lyndon Johnson, who died in 1973.Lifetime Secret Service protection for former presidents and their spouses began after President Kennedy was assassinated in 1963. But the protection is now limited to 10 years by federal law for former presidents who began their presidential terms after 1996 — meaning that as the law stands today, Mr. Carter, Mr. Bush, and Mr. Clinton have lifetime Secret Service protection, but that protection will end for President George W. Bush at the start of 2019.In 1994, the Former Presidents Act was amended to authorize the federal government to give each former president up to $1 million annually, and his spouse up to $500,000 annually, for security and travel-related expenses if needed after the 10-year term of Secret Service protection expires.
After death Federal law does not treat former first ladies nearly as well after their husbands die.A presidential widow is provided a $20,000 annual lifetime pension plus “franking” privileges, to send mail free of charge.Ms. Johnson, 94, is the only former first lady receiving a presidential widow’s pension.To receive a pension, a presidential widow must waive her rights to any other federal pension.For this reason, Betty Ford likely will refuse the presidential widow’s pension and instead choose her other option, 55 percent of Mr. Ford’s congressional pension, or about $65,000 a year.

The libraries
Besides presidential pensions and other postpresidential expenses, the federal government pays to maintain and operate presidential libraries.They must be built with private funds, but the National Archives spent about $97 million in 2006 to operate the 11 presidential libraries. And the archives likely will add a 12th library this year, taking the currently privately funded Nixon Library in Yorba Linda, Calif., under its federal embrace.Contact Benjamin Alexander-Bloch at: babloch@theblade.com or 419-724-6168.

2007-07-10T11:44:00.000-04:00

"The dollar is a basket case," said Peter Schiff, president of Euro Pacific Capital Inc. "We are going to pay the piper for years of having the underlying fundamentals of our economy disintegrate beneath our feet."

Euro Hits New High Against U.S. Dollar

...So, call your banker and ask if you can convert your deposits to Euros or British Pounds! Buy select stocks that are based in Europe, select (international-non US) commodity stocks, futures contracts, or very short term treasuries...3-month.

2007-07-03T14:11:00.000-04:00

**Click on chart for larger view

Artificial Money Supply Inflation with the USE OF REPOs (Repurchase Agreements), very similar to the Federal Reserves purchase of Acceptances during the 1920s...And its effect on the markets.

M3=M2+CDs+Eurodollars+REPOs (the biggest portion by far)
M2= M1+Savings Accts+Money Mkt Accts+Small Time Deps+CDs (under $100,000)

M1= M0+bank "vault cash"+demand "checking" accts

M0= physical currency+accts at FRB

*This chart is the proportion of M3 to GDP

* And GDP

* 1971, Nixon officially drops Gold Standard in the US allowing gov to print money at will. Note M3 (from chart No. 2) jumped from 60 to 70% of GDP during the prior 2 yrs. Nixon blames the change on unmanageable inflation even though the money supply to GDP increases 17% within two years. Alan Greenspan is an Advisor to Nixon, on the Council of Eco Advisers 1974-77 and Fed Chair 8/11/1987-2006. Bond market has biggest one day drop in 5-yrs after he is confirmed.

* A debt financed revolution, 1980-2006 total debt in US to GDP goes from 140% (in 1980) to 285% (in 2006), approx. Of which federal gov proportion drops from 20% to 13%, meaning the Federal Reserve member banks benefit from very fast growing consumer (and therefore other financial sector) indebtedness

*The extra money supply created brings down interest rates on both the 3-month TBill and the 10-year Note

* The excess money finds its way to the "far from consumer" industries making up the "High Order sectors of production", in this case the S&P 500 index compared to the 10-yr Note interest rate. 9/22/1985, The Plaza Accord is signed=5 major industrialized countries agree to depreciate the Dollar v. the Yen & Mark (causes the Japanese asset price bubble of the late 1980s (& helped with the US's in the 1990s))

*Here is the Dow Jones industrial average, Note Chart number 1 (above) shows M3, well the private equity and hedge fund industries used REPOs to finance their stock market activities...increasingly after 1999' crash, Greenspan stated is objective of "spreading liquidity", and look at the volume portion of this chart following its employment.

In 2006 the Federal Reserve stopped publishing (and measuring) M3 because they said it's cost out weighs its benefit, saying that the velocity of money, the rate at which money transfers hands, takes precedence over needing to maintain the money supply to the time preferences of the public, i.e. the savings-consumption rates of the economy. Regardless to the fact that the Federal Reserve and its 21, hand picked, primary dealers make up nearly all of the velocity. As did the Federal Reserve and member banks did in the 1920s and 30s.

2007-07-02T14:19:00.000-04:00

In the Austrian theory of the boom-bust cycle, monetary intervention, specifically the expansion of bank credit, causes a “cluster of errors” in business investment throughout the “orders or production”. In the economy some of the money is spent on consumption with the remainder being saved and invested throughout. The proportion of consumption to savings and investment is based on the population’s time preferences, the less present preference the public has, i.e. the less consumption, the lower will be their time preference rate and therefore the lower will be the pure interest rate. This low preference will reflect a greater proportion of investment to consumption, a lengthened structure of production (in terms of the furthered allocation of funds in industries far from the consumer), and a buildup of capital with lower loan interest rates. As new money created by banks via the Federal Reserve’s expansion pours into the loan market, it lowers the loan rate of interest, because the supply of funds in relation to the rate of profit in business and the purchasing power of the currency is raised, business takes advantage of the cheaper money and invests in what they believe to be more profitable production lines.

But if the increase is due to credit expansion instead of a change in time preferences; as the new money streams through the economy and trickles down to the consumer by way of higher wages, rents, and basic inflation. Business will need to gamble on whether the new excess of funds were due to a real change in time preferences, which will result in justified credit expansion, or artificial money growth resulting in the public allocating their newly inflated money base into their old time preferences, thereby creating “clusters of errors” of business investment that’s not justified by time preferences. The Federal Reserve under Alan Greenspan claimed that the economy can absorb the expansion by using the funds to further productivity and raising the rate of profit and thereby the purchasing power of the dollar. However as the banks allocate their newly inflated monetary base into areas of the economy with higher rates of return…to riskier recipients…the flow of capital would neglect the lower orders of production, i.e. commodity markets.

Under the direction of the Fed, and with the use of derivatives, banks transfer the increased loan risks throughout the economy, however the risk is just that…transferred not eliminated…and it comes to a question of who is it transferred to…stronger hands or weaker hands? As time passes by and the economy realizes that time preferences have not changed enough to justify the broadened allocation of funds…reflected by the lower (neglected) orders of production receiving inflationary pressures by the inflated “higher orders of production” and the consuming public.

Today it looks as if the “higher orders of production” receiving the excess funds are the financial markets itself. The private equity & hedge fund industries are inflating the stock market by bidding up companies to quickly extract years worth of value and future earnings. Several sectors of the stock market are overvalued…reflected by its capitalization rates vs. the yield curve. “Low order sectors” such as consumer goods, commodity, and food and beverage providers (close to consumer sectors) are so highly valued that not only is there no risk premium but there is in some cases what would appear to be risk discounts, relying on earnings growth in the near future or higher interest rates. On the other side of the pivot, if the fed raises interest rates or cuts the money supply, it would put recessionary pressures on the economy as tightening an already weakening and bloated economy is troublesome. That is not to say every sector or every stock is bloated. But the amount of debt created liquidity that has propped up the financial markets is in my opinion unsustainable unless Schumpeter’s creative destruction ever steps up to the level that the Fed believes our businessman should be at, or if foreign time preferences shift to much higher levels, to where they will step up the acquisition of capital goods from us, without so, the over-priced sectors of the market will need to adjust for reality…the bust part of the cycle.

A unique situation to our chapter in history is the leadership derivative exchanges have on general prices. The Crude Oil market at the NYMEX currently has listed, or open interest of, about 955 million bbls of oil for the front 12 months, and in which time the consumption of oil in the US alone is almost 10 times that figure. Yet the industry uses the quotation as its basis. One contract of Crude Oil is 1,000 bbls at around $66/bbl, but margin requirements are only about 10% or $6,600 per contract. So for a mere $660 million one can control 100,000,000 bbls of oil or over 1 day of world consumption. This is similar to what the hedge fund Amaranth Advisors accomplished, before they imploded. Amaranth controlled enough Natural Gas to supply the entire United States for several days. The price inflation, while building up that massive position, heavily impacted the end users of Natural Gas, as did the deflation after their demise. The volatility adds risks and businessman respond by accounting for them with price hikes or market avoidance. Once the error in the market reveals itself…either that the large budget for inputs were artificially high, and an excess in corporate profits are present, or that the futures market proved to be incorrect (in its pricing), following more of a momentum based technical trade pattern than the realistic relationship of supply and demand the market compensates the owners of capital with higher wages, that are invested through different time preferences…confusing as to whether they’re one time wage gains or recurrent payroll increases. Also, this is demonstrated by a speech Greenspan gave in 2005 praising the financial markets for “opening up credit” to the sub-prime mortgage market and that the extension of financial services to that sector will benefit all…as it did with higher house prices and equity buildup, yet when the market realized that the extension and price inflation was overdone…by way of sub-prime borrows being sub-prime borrows unable or unwilling to service their debt, the market pulled back.

The bottom line is this, in my opinion, it’s not a sign of strength that the credit cycle is peaking at 5.25% or around that, and with capitalization rates so low, basically no risk premiums, T-Bills discounted to the Fed Funds rate, and continued talk of policies that should increase risks…ethanol is more risky than petrol as agricultural production is more volatile and weather dependent than petroleum’s volatility based mainly on transportation risks. More and more inefficient centralization through government or patrons of the stock market will mark more errors that will need to be liquidated at some point in the future. Yet as history shows, more of it has to do with perception rather than reality. Recession and depression could be a good thing…it liquidates the inefficient participants in the economy, while deflation lowers the cost of living, cost of business, opens up opportunities, fixed income groups are ruined during inflationary times…and so they receive a total benefit during deflation. On the other hand, people can exaggerate reality and cause panics and stints of unwarranted ruin, resulting in a question of time preferences.

Boston Properties (BXP) serves as a fine example of time preference. The company is a real estate investment trust that I bought in August 2001 to take advantage of strong fundamentals in the high end office market. Today the capitalization rate on its FFO (funds from operations) is about 3.8%, illustrating that either time preferences have lengthened, that the market will demand much more office real estate and if not built rental rates will go up. Or that credit expansion caused an abundance of liquidity in the debt markets, allowing for inflation and leaving investors wanting tangible assets for protection, meaning market demand does not warrant an inverted cap-rate to treasurys and the disequilibrium (“error”) will need to correct one day.

2007-07-02T12:45:00.000-04:00

The Prisoner's Dilemma (in PDF)
Blind Faith (in PDF)

2007-07-02T12:39:00.000-04:00

Origion of the Whiskey Ring

Not the same specifics, but the ideals imposed on today's financial/political scene