01 Oct 2008

Market Thinks Much More Likely Uncle Sam Will Default

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According to this Fortune article, the premium on a credit default swap–basically an insurance contract against bond default–for the US Treasury has more than quadrupled since January, though Treasury debt is still considered the safest in the world.

01 Oct 2008

Bailout: Karl Marx’s Comeback?

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So argues Martin Masse in the Financial Post:

In his Communist Manifesto, published in 1848, Karl Marx proposed 10 measures to be implemented after the proletariat takes power, with the aim of centralizing all instruments of production in the hands of the state. Proposal Number Five was to bring about the “centralization of credit in the banks of the state, by means of a national bank with state capital and an exclusive monopoly.”
If he were to rise from the dead today, Marx might be delighted to discover that most economists and financial commentators, including many who claim to favour the free market, agree with him.

Later in the article Masse explains the position of the Austrian economists, a third way besides the Keynesians and Friedmanites.

30 Sep 2008

I’m Pulling Out Some Extra Cash

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The FDIC has asked for an increase in the size of accounts it can fully insure, presumably to forestall bank runs. I encourage everyone to have larger cash balances than normal; at least a few days’ worth. It’s true that an FDIC-insured account is “safe,” but Robert Wenzel explains that the FDIC purposely makes you wait in line for hours to get your “safe” money at a failed bank. If your bank fails, you will wish you had pulled out a decent chunk beforehand so you can wait for things to settle down before trying to get your money.

30 Sep 2008

Two Ladies on the Bailout

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Judy Shelton has a fantastic op ed in today’s WSJ on the need for a gold standard. I kept waiting for “her” to say, “Surprise! It’s really Ron Paul writing! Gotcha!” Here’s my favorite part that you rarely see mentioned in mainstream “free market” outlets:

If capitalism depends on designating a person of godlike abilities to manage demand and supply for all forms of money and credit — currency, demand deposits, money-market funds, repurchase agreements, equities, mortgages, corporate debt — we are as doomed as those wretched citizens who relied on central planning for their economic salvation.

Think of it: Nothing is more vital to capitalism than capital, the financial seed corn dedicated to next year’s crop. Yet we, believers in free markets, allow the price of capital, i.e., the interest rate on loanable funds, to be fixed by a central committee in accordance with government objectives. We might as well resurrect Gosplan, the old Soviet State Planning Committee, and ask them to draw up the next five-year plan.

And then reader Jordan Bullock sent me this Motley Fool piece by Alyce Lomax that is pretty sound. An excerpt:

I can’t help but wonder if the point of the bailout is to take the deflated bubble, which was inflated by easy credit to begin with, blow a little air into it, and apply a patch that just won’t hold. Is the real point that we have to return to loose lending to maintain our economic “growth”?

How much would our economy have grown since 2001 without all the debt-fueled spending? I feel like the real message right now is that the party’s over, but nobody wants it to be. (And it was an acid-trip bender to begin with — nothing that happened was actually real.)

30 Sep 2008

"Why Rescue AIG But Not Lehman?"

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One possible reason: Goldman Sachs would have lost $20 billion if AIG failed, whereas Lehman is a competitor. According to this article:

The seeds of much of the financial chaos engulfing America were sown in London, by a single unit of AIG, the financial services firm recently bailed out by the US Treasury. The New York Times reported yesterday that this 377-person unit “flourished in a climate of opulent pay, lax oversight and blind faith in financial risk models” which resulted in the near-collapse of one of the world’s most important firms.

The newspaper also suggested that the US government’s decision to bail out AIG, within hours of letting Lehman Brothers go bankrupt, owed much to the risk posed to Goldman Sachs – the firm run until two years ago by Hank Paulson, the Treasury Secretary.

Unknown to many, Goldman had become AIG’s largest trading partner according to six people who spoke to the New York Times anonymously. If the insurer collapsed, they told the Times, Goldman stood to lose $20bn.

When federal officials – who let Lehman Bros die – decided to bail-out AIG at a cost of $85bn, Lloyd Blankfein, the CEO of Goldman, was the only Wall Street chief exec present.

30 Sep 2008

Diamond Hill CEO Explains Why He Wanted Off the SEC’s No-Short List

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So far as I know, only Diamond Hill and JMP Investments have asked to be taken off the SEC’s list. I wonder if there is behind-the-scenes pressure for other firms not to follow suit, because it seems like free advertising for firms with relatively clean balance sheets. Either that, or the other 800+ firms on the list really are in trouble.

In any event, here is Diamond Hill’s CEO explaining his decision.

30 Sep 2008

The Great Bank Robbery of 2008

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I give the lowdown here. Incidentally, much of this is repetition for “long time” Free Advice readers, but one novelty is that I discuss the claim that the taxpayers might make money on the deal:

Some analysts think that the price paid for these “toxic” assets is important. No it isn’t. The government officials running this operation will dole out the favors on both ends, when the mortgage-backed securities are coming and when they are going. Neglecting this insight, some people want to say that if the government pays $700 billion for a portfolio of assets that is really only worth $400 billion, then the taxpayers really only lost $300 billion, not the full $700 billion.

Yet this thinking is naïve. The taxpayers are not going to be treated as equivalent to shareholders of a firm that just acquired $400 billion in assets. The taxpayers are not going to get a cut of the monthly mortgage payments (less the servicing costs on the $700 billion in new debt) tied to the government’s massive portfolio. Instead, the government will simply bump up its annual spending by a few billion dollars. Maybe it will have to spend the money on homeownership programs, or homebuilder job retraining, but the net income from those government-owned assets certainly won’t translate into a dollar-for-dollar tax cut.

And then at some point — during a future Republican administration, no doubt — there will be a push to “privatize” the secondary mortgage market, and the government’s portfolio at that time will be auctioned off at very generous prices to politically connected institutions.

29 Sep 2008

The $700 Billion Pelosi Speech

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Here is the “partisan” speech that allegedly so angered the Republicans that they decided to vote against the Paulson bailout after all. I can’t decide which side is less ridiculous on this one. On the one hand, Barney Frank had a good comeback, when he said of the defecting Republicans something like, “So their feelings got hurt, and they took it out on the country?”

On the other hand, I can understand that if you had only very reluctantly signed on to this thing, and your constituents were contacting you against it 20-to-1 (latest numbers I’ve seen), that this speech by Pelosi would push you over the edge. Yes, it’s true that the Republicans should have either voted for or against it based on whether they thought it would help or hurt the country. But if you push that logic all the way, it means Congressional debate doesn’t really matter. I.e. there’s really no sense in discussing whether Pelosi or anyone else is a good leader, if this speech doesn’t prove that Pelosi is a bad leader.

P.S. Pelosi obviously doesn’t know what a free market is, though she can’t be blamed too much since Bush et al. claim they are big proponents of it.

P.P.S. Also note the when she is introduced, Pelosi is granted one minute. It looks like there is inflation on time as well, because she goes way way over.