25 Sep 2008

Americans Oppose Corporate Welfare; Feds Agree to Disagree

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I wish the margin were higher, but it reassures me that the average Joe ain’t half bad: the American people oppose the Paulson Plan:

Americans oppose government rescues of ailing financial companies by a decisive margin, and blame Wall Street and President George W. Bush for the credit crisis.

By a margin of 55 percent to 31 percent, Americans say it’s not the government’s responsibility to bail out private companies with taxpayer dollars, even if their collapse could damage the economy, according to the latest Bloomberg/Los Angeles Times poll.

And yet, I am very confident that at least several hundred billion dollars will get siphoned out of our pockets and into Hank’s buddies’. This episode really gives new meaning (for me) to Bob Dylan’s lines from “Hurricane”:

Now all the criminals in their coats and their ties
Are free to drink martinis, and watch the sun rise.
While Rubin sits like Buddha, in a ten foot cell.
An innocent man, in a living hell.

24 Sep 2008

A Major Recession Seems Due–Just Look at the Pretty Picture

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Folks, I am not a “chartist,” because I wouldn’t want to go the John Nash route of spotting spurious causal connections. But, if you accept Austrian Business Cycle Theory, then the following graph of the levels of M1 is very interesting. (Click for larger image.)

Specifically, you can tell a little story that the Fed let the money supply grow quickly, then put on the brakes (no growth in M1) for a few years, and this led to a recession. Then the process repeats. (I admit it only jumps out during the last two recessions.) But with each repetition, the delay before the onset of the recession is longer. That could be because the central bankers learn more tricks, and/or the market gets better at adapting to said tricks.

If you trust the pattern in the chart, then we seem due for a recession. The worst is yet to come. We have yet to see the impacts on what the analysts call the “real economy,” but we will.

24 Sep 2008

Cramer Says Paulson’s Plan Will Stop Home Price Declines

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Help me out here folks. In the following passage, Jim Cramer has committed himself to predicting that house prices will stop falling if Paulson’s Plan gets approved. Right?

Opinions abound when it comes to Treasury Secretary Henry Paulson’s proposed $700 billion bailout plan for U.S. banks. And a lot of them are negative. But Cramer’s a strong supporter, and he used part of Tuesday’s Mad Money to clarify what he sees as people’s misconceptions about the plan.

It doesn’t address the real problems of people losing their homes.

Wrong. Declining home prices are the reason owners are either walking away or being forced out. Paulson’s plan puts a stop to the root cause of this: foreclosures. Other housing-related problems, from making mortgage money available to shrinking inventories, are being solved. This plan takes care of the last one.

The plan costs too much.

Actually, it might not cost anything. Once Paulson’s plan is put in motion, home-price depreciation should stop. That means the mortgage-related paper the government will then hold would no longer be worthless. Plus, the government can work with owners in any way necessary to keep them in their homes. And it looks like Washington will be taking an equity stake in any company that takes part in the plan, which means there’s even a chance to make money rather than lose it.

I haven’t thought it through too carefully, but I am surprised at the confidence with which the Mad Man says… Oh wait, he hosts a show with the word “Mad” in the title. Remind me again why CNBC features him, and he has such popularity that I feel the need to discuss him?

Don’t misunderstand, dear reader: Cramer’s prediction could be right. For example, the housing and capital markets are now so so so screwed up because of Hank “The Oligarch” Paulson, that home construction might be a relatively long-term investment project that no longer makes economic sense. So the supply of new homes entering the pipeline won’t come back to its pre-boom level, and once we burn through this glut of houses, they will become very scarce. Yet I don’t think that’s what Cramer has in mind when he says Paulson’s plan will stop home price declines.

24 Sep 2008

Why Hank Paulson Made Sprint Be Mean to Me

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Now this is going to start off on a wild tangent, but bear with me. We are working toward this thesis:

Resolved, Treasury Secretary Henry “I Love the Free Market (I Have a Thing For Weakness)” Paulson is directly responsible for the mean treatment I received at the hands of Sprint.

OK, so I just bought a Blackberry. The sales clerk was really trying to impress me, I got the sense.

(Screeeeeeeeeech! Sorry I have to take this Freudian cul de sac for a moment. I think I have a very intimidating persona with sales people; it’s something I picked up from my dad. Once we were at a car dealership, and after the sale the guy said, “You are the most intimidating customer I have ever had.” Now what’s funny is, I never thought my dad was upset, and he wasn’t. So I think my dad’s normal face must look like he’s really disappointed, to insecure outsiders.

In a future post I will relate how I scared the heck out of an exchange student, and again without trying to at all. But we must now end this Freudian digression.)

Anyway, the guy is truly taking about 20 minutes to explain my new Blackberry to me. And the guy really was knowledgeable; if I were Don Murphioni, I would ask him to come work for me.

So when all is said and done, and he’s truly sold me on how cool this Blackberry will be, he then explains that with the mail-in $100 rebate, you have to use blue or black ink. And that you can’t omit any of the questions, or else they’ll deny your rebate. He says that Sprint does everything it can to deny that $100 rebate to as many applicants as possible.

Now isn’t that crazy, that this guy felt the need to volunteer that? Have other people been told that?

Anyway, assume it’s true, and that this guy was really just looking out for me (as opposed to demonstrating his savvy). Then that means Sprint views me as a two year host to be parasitically drained as much as possible that won’t be bad enough to make me eat the early-cancellation fee. Is goodwill really so cheap in our culture, that a company like Sprint doesn’t find it profitable to treat customers very well, and have (say) a 5-year policy, with a $50 early-cancellation fee?

But I realized that Sprint can’t possibly assign much weight to such a long-term contract. That wouldn’t be enforced in any court; people would object to the “slavery” etc.

What Paulson has done is absolutely catastrophic to long-term business planning. You thought bankers were incredibly short-sighted during the last few years? Well, imagine how they’re going to act now–when they don’t even know if the US dollar will be in use five years from now.

Oh, and now on Wall Street as in other areas: It’s about who you know, more than anything else. I’m so glad that high school meritocracy has been transferred to the markets where capital flows are routed. Yeah, nothing too important going on there. It’s not the “real economy.”

(Sorry folks, if you’re new. I am being sarcastic in the above paragraph.)

In conclusion, I urge the judges to rule in favor of the proposition: Henry Paulson made Sprint be mean to me.

24 Sep 2008

Tyler Cowen Endorses (?!) Blowing Up Homes

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I have been good for a few days, and avoided my nervous tic of ridiculing Tyler Cowen’s blog posts. (This is mostly because I think he’s been good on opposing the Paulson Plan.) However, I cannot bite my tongue when he today writes this:

So I have a modest proposal. The Fed/Treasury can identify those parts of the country with the most foreclosures. They can buy or confiscate empty homes in those areas and destroy them. That will raise the price of the remaining homes. Anyone who is otherwise about to default could then sell the home at a high enough price (fingers crossed) to get out of the deal alive. This would stop home prices from falling and it would limit the number of future defaults.

You might think he’s kidding, especially with the Swift allusion, but in context I don’t think he is. And…how can I put this?…Tyler has said crazier things in his day.

Something is seriously wrong when one of the leading (and smartest) free market economists recommends that the government start destroying buildings in order to help the economy.

Another symptom of this general messed-up-itude: What is the deal with everyone contrasting the financial markets with the “real economy”?? In the real economy, financial markets really are important. If a strange virus suddenly killed off all the people working in advertising, would the analysts wring their hands over whether this would influence “actual output”? What about truckers? They don’t actually make stuff, they just move it around, right?

So who are these “real” producers? Farmers and entertainers? Hair stylists?

24 Sep 2008

"Free Market" Bush and Paulson Discredit Free Market

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The leftists have not missed the irony in the latest power grabs by Paulson & Friends. This is why it’s so annoying when mainstream Republicans run on a “small government” message and then do the opposite in office. From the article:

Of course, the ironies and the potential pitfalls of this administration enacting a socialist takeover can hardly be overstated. This is the political party that for decades has insisted on deregulation and free markets, has scolded Hugo Chavez for nationalizing the oil industry, and even now is attempting to tar and feather Barack Obama with the label of socialist. But if this bill is enacted at its advertised $700 billion price tag—and many people believe the price will ultimately prove higher—it means that the Bush administration has undertaken the single largest socialist investment in the history of mankind. The Bolshevik revolution of 1917 couldn’t dream of an economy worth $700 billion; the figure dwarfs anything ever attempted by Fidel Castro or the Sandinistas.

Focusing on ironies and hypocrisy is fun, but Paulson’s socialist prescription actually provides a rare opportunity to advance the state of American political and economic debate. During the Cold War, socialism became an especially unsavory idea because it was linked to the countries that pointed missiles at us. This was less the case in Europe, where democratic socialism grew to become the norm, with sometimes rocky but mostly successful results (you don’t see the Spanish having to take over their banking sector, at least not yet). Paulson’s relatively untainted socialism offers America a genuine Nixon-goes-to-China moment, a chance to have a more honest, less demonizing conversation about where, when, and how government intervention in the economy is effective and desirable.

I have been resisting the easy urge to label George Bush as “the worst president in US history,” as some of my exasperated colleagues have done. Partly I resisted because I knew that FDR expanded government more than Bush.

However, at least FDR had the decency not to label himself as a believer in laissez-faire.*

* I know that during his campaign against Hoover, FDR criticized Hoover’s reckless deficit spending, while Hoover talked about his unprecedented interventions against the advice of the crusty economists. But I’m assuming FDR wasn’t the economic “conservative” in his campaigns the way Bush allegedly was.

24 Sep 2008

Warren Buffett Invests $5 Billion in Goldman Sachs

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Warren Buffett apparently is a Free Advice reader. He has decided to invest $5 billion in Goldman Sachs, no doubt after reading my earlier blog post which contained the following analysis:

I heard a guy say on CNBC that it was crucial to save Goldman Sachs because it is a symbol of capitalism around the world. So that means no matter what, the Goldman shareholders know that they can’t possibly go bankrupt or even get bought out, especially by a foreign buyer. They are untouchable now.

23 Sep 2008

SEC Adds to the (Long) Short List, But Allows Firms to Opt Out

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The SEC added another 40 stocks to its “no short” list, but at least it is allowing firms to take themselves off the list:

Meanwhile, two companies JMP Group [JMP]…the parent of JMP Securities, and Diamond Hill Investments [DHIL]…have been removed from the list.

This is great. A libertarian writer (I want to say Boaz but not sure!) once discussed the idea of allowing vendors to sell things marked “UNREGULATED.” I.e. all of the government’s purity laws etc. would be the default, and only if a manufacturer clearly labeled something as unregulated, would those liability laws etc. not apply.

I am really curious to watch this play out. In the beginning it might just be a few purist firms who opt out–and our partner in exposing crime, Robert Wenzel, tells me that Diamond Hill did it for philosophical reasons as much as pragmatic ones. But if this trend picks up, then choosing to remain on the list will come more and more to be seen as an admission of weakness.