Mish Solves the Credit Crunch
Commenting on the Paulson offer to big banks that couldn’t be refused, Mish says:
If the goal is to get LIBOR down, then I propose the following: Bank of America lends money to Citigroup who lends money to Wells Fargo who lends money to JPMorgan who lends money to Bank of America. We can have a big circle of all 9 banks forced at bazooka point to take money, to lend money to each other. LIBOR comes down and everyone is happy.
That is not a serious proposal of course, even though pretend lending makes far more sense than massive amounts of real lending.
New PPI Numbers: More BS from the BLS?
Earlier this year, the Bureau of Labor Statistics (BLS) came out with a report saying that gasoline prices had declined 4.6% from March to April. Now this seemed insane, since, well, gasoline prices had been breaking record highs (and continued to do so into the summer).
At first I suspected an outright lie, but then someone reminded me of “seasonal adjustments.” I.e., people start driving more, the refiners have to switch out of winter blends, etc., and so maybe gasoline prices always spike from March to April. Well, I spent a few hours trying to figure out the BLS’ calculations, and got nowhere. (To turn the government’s wiretapping rhetoric back on itself: If the BLS methods are above-board and scientific, why don’t they publish them, like any academic would do?) Here is my report on that sorry fool’s errand.
Well, it seems they are still in the smoke-and-mirrors game. Today the PPI numbers for September came out, and they show that producer prices in various categories fell from August to September, once you do the seasonal adjustment. Well, as I explain in the article I linked above, I don’t trust their seasonal adjustments, because they are basically asking us to take their word for it.
One way to get around the seasonal adjustments is to look at year/year increases; i.e., you compare the actual index value for September 2008 with the actual index value for September 2007. The BLS reports such figures as “unadjusted.” Well, if we look at Table B (which is actually the 3rd table shown) about halfway down this BLS release, we learn the following:
* From Sept. 07 to Sept. 08, the prices of “intermediate goods” went up 15.4%.
* From Sept. 07 to Sept. 08, the prices of “crude goods” went up 26.0%.
(Note: If you click on the link to see for yourself, don’t be thrown by the negative numbers in some of the cells of Table B. Those all refer to one-month changes in the seasonally adjusted indices, which I trust as far as I can throw 42 gallons of gas. Only two of the columns report year/year unadjusted changes in the indices, and as you can see, those numbers in both categories–intermediate and crude goods–have all been in the double-digits since March 2008.)
Also, if you look at Table A in the BLS link, there is a column for year/year unadjusted changes in “finished goods,” and that is showing an 8.7% increase from September 07 to September 08.
I’m still waiting for this alleged deflationary depression to hit us. Maybe it will–and I know a few very sharp economists who could tell a story to reconcile the above facts with low future price inflation. But so far I see no evidence of it, especially when you look at what Bernanke has done with the monetary base lately. Note that the below graph is of annual percentage change; it would be unfair of me to show you the levels, since that picture is just scary.
"The Government Is Contributing to the Panic"
This is a great WSJ piece from a few days ago. The author, Yale law professor Jonathan Macey, stresses a point that I haven’t seen elsewhere, namely that the SEC makes firms vulnerable to short-sellers:
For years the SEC has hampered companies’ ability to protect themselves from manipulation by short-sellers. The most effective way for a company to respond to an attempt to manipulate its share prices is simply to repurchase its own shares, simultaneously “squeezing” the short positions and sending a clear signal of financial health to the capital market.
However, companies have long felt vulnerable to being charged by the SEC with manipulation whenever they go into the market to make share repurchases. The SEC finally acknowledged this problem after the collapse of Bear Stearns and Lehman when it stated publicly that “historically, issuers generally have been reluctant to undertake repurchases” when faced with manipulative short-sellers because of the massive amount of uncertainty about whether the SEC would sue them for trying to manipulate the market.
Economic and Climate Models
I compare and contrast here. I’m going to go out on a limb and guess that some commenters here will wonder what business I have writing on this topic.
Some Specificity on the Involuntary Billions Going Into Healthy Banks
Robert Wenzel explains:
Citigroup and JPMorgan Chase were told they would each get $25 billion; Bank of America and Wells Fargo, $20 billion each (plus an additional $5 billion for their recent acquisitions); Goldman Sachs and Morgan Stanley, $10 billion each, with Bank of New York Mellon and State Street each receiving $2 to 3 billion. Wells Fargo will get $5 billion for its acquisition of Wachovia, and Bank of America the same for amount for its purchase of Merrill Lynch. So much for bailing out the mortgage market.
Here’s the kicker: The shares will not be dilutive to current shareholders, a concern to banking chief executives, because perpetual preferred stock holders are paid a dividend, not a portion of earnings. In other words, all current shareholders are protected, unlike Lehman, Bear Stearns, Fannie Mae and Freddie Mac shareholders.
I think I’m going to stop reading Wenzel’s website. I always feel queasy afterward. It must be his color scheme or something.
UPDATE: In my initial incredulity, I missed this ominous line from the NYT article: “The capital injections are not voluntary, with Mr. Paulson making it clear this was a one-time offer that everyone at the meeting should accept.”
"Biggest One-Day Surge in the Stock Market Since 1933"
So reads the headline at CNBC, after an 11% day. And we all know that 1933 was the light at the end of the tunnel.
Kashkari: Treasury Plan Will Inject Capital Into Healthy Banks
The storyline is changing so fast, that even expert conspiracy theorists like Robert Wenzel and me are having trouble keeping up with it. Now, ex-Goldman honcho Neel Kashkari (tapped by Paulson to distribute the $700 billion booty) explains that the Treasury plan to recapitalize banks will focus on healthy institutions.
Everyone got that? Remember, the official story is that the feds need a trillion dollars to unclog the credit markets, because everyone is afraid to lend to each other since they don’t know who is holding the Old Maid (i.e. mortgage-backed securities that are based on loans that will default at high rates).
First, Paulson was going to buy up the bad MBS. There were plenty of things wrong with this, such as (a) $700 billion wasn’t enough to make much of a difference, (b) it didn’t address falling house prices, and (c) the whole “Thou shalt not steal” thingie.
Second, the plan changed to injecting capital directly into troubled institutions, in exchange for socialization, er, taxpayer protection. The reason for this was that the first plan failed, even though it has not yet been tried.
Third, the plan changed to injecting capital directly into healthy institutions, because…I have no freaking idea. Even Tyler Cowen, who uses his incredible brain power to generate models of parallel universes in which Paulson isn’t a crook, had this to say about Kashkari’s latest announcement: “[O]f course recapitalization makes the most sense for unhealthy banks. One way to try to figure out what is happening is to work backwards from the lies but that can end up being very misleading.”
Irving Fisher on Fox News Tells Everyone Not to Panic
This is almost too good to be true, like how you could listen to Bill Hicks rip Bush’s invasion of Iraq even though Hicks was long dead.* (HT2 Tim Swanson.)
* Hicks’ comedy routine was based on the first Gulf War, but all the people were the same so it carried over almost seamlessly. The best line (paraphrasing): “Yeah, we know Saddam has stockpiles of incredible weapons…We just checked the receipt!” BTW in this clip it’s obvious that he’s talking about the first Gulf War, but it’s still the funniest stuff I found with a quick YouTube search.
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