Wednesday, November 26, 2008
According to TechCrunch, the SEC outlined its reasons for shutting down Prosper, the peer-to-peer lending network. As Vijay said, at least now we can sleep more easily knowing our financial system is safe. Good thing those guys are on the job since Prosper clearly was a huge contributor to the credit crisis.
Wednesday, November 19, 2008
Tuesday, November 18, 2008
Merrill's David Rosenberg discovers Rothbard (HT Vijay). Maybe one day we will hear the expresson "We're all Rothbardians now."
With this in mind, we were fortunate to have a client mail us a book titled America's Great Depression by Murray N. Rothbard. We think it is an absolute must-read, on the scale of Amity Shlaes' The Forgotten Man. In this book, you will learn that the New Deal machinery was established by Herbert Hoover, not FDR, and that the scale of the government incursion into the economy was so farreaching that the multi-year program actually ended up doing more harm than good. What is amazing is the chapter on the Reconstruction Finance Corporation (RFC), which was like the TARP in its efforts to bolster government equity stakes in banks, and therefore, to perpetuate the excess capacity in the system. The RFC provided money to groups from financials to farmers (cotton loans were big) to railroads ("some $264 million were loaned to railroads during the five months of secrecy") to state governments. Sound familiar?This RFC began with government capital of $500mn in 1932. Eventually, that grew nearly eight-fold, which is why we think the current TARP is really TARP1. You read this book and you get a glimpse of Hoover's "war on the stock market, particularly on short-sellers" and the new Federal bankruptcy law of 1932, which served to "weaken the property rights of creditors ... states also joined in the attack on creditors" ... as in most depressions, the property rights of creditors in debts and claims were subjected to frequent attack, in favor of debtors who wished to refuse payment of their obligations with impunity ... many states adopted compulsory debt moratoria in early 1933.And get this, "the banks also received their share of Hoover's ire for their unwillingness to expand in those troubled times". Hoover actually lodged a complaint in the New York Times that "banks have not passed the benefits of these relief measures on to their customers". So, in the end, Hoover (Roosevelt, remember, inherited and expanded on this infrastructure) "and Congress agreed to transform the RFC from a generally defensive agency aiding banks and railroads in debt, to a bold 'positive' institution, making capital loans for new construction".
Joseph Nacchio was the only CEO of a telecommunications company to demand a warrant for the NSA wiretapping. He was later charged with insider trading. Many people believe he was prosecuted because he did not cooperate with the government.
Mark Cuban is now being charged with insider trading. Naked Capitalism has an article connecting the dots about how this may be retributon for his criticism of the financial industry bailout.
Monday, November 17, 2008
From Bloomberg, the Federal Reserve launched the ABCPMMMFLF. That stands for Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility. It could buy up to $1.8 trillion dollars of short-term debt. This just boggles the mind. As I said in a previous post, the Fed is getting desperate and will do anything to prevent deflation. It looks more and more to me that they will destroy the nation's currency in the process.
Wednesday, November 12, 2008
The Fed tells banks to lend or else. I wonder, "Or else what?"
The agencies expect all banking organizations to fulfill their fundamental role in the economy as intermediaries of credit to businesses, consumers, and other creditworthy borrowers. Moreover, as a result of problems in financial markets, the economy will likely become increasingly reliant on banking organizations to provide credit formerly provided or facilitated by purchasers of securities. Lending to creditworthy borrowers provides sustainable returns for the lending organization and is constructive for the economy as a whole....The agencies will continue to take steps to promote programs that foster financial stability and mitigate procyclical effects of the current market conditions. However, regardless of their participation in particular programs, all banking organizations are expected to adhere to the principles in this statement. We will work with banking organizations to facilitate their active participation in those programs, consistent with safe and sound banking practices, and thus to support their central role in providing credit to support the health of the U.S. economy.
This is so interesting on multiple levels. On one level, the banks got into this mess by making bad loans to people who couldn't afford to pay them back. The Fed never complained while that was happening. In fact, it outright encouraged it. It set interest rates far below market rates and below the rate of inflation which punished savers and subsidized debtors. This resulted in investors taking excessive risks in order to keep up with inflation. Greenspan even encouraged exotic mortgages like pay-option ARMs. So now that the Fed helped create this mess by encouraging the banking system to lend to people who couldn't afford these loans, it now is coming down hard on banks for being conservative and trying to rebuild their reserves.
On another level, it is so clear that the Fed is just terrified -- absolutely terrified -- of deflation. And they can't reinflate the money supply without more lending and borrowing. But the Fed is not able to make that happen because attitudes toward debt are changing. There is a psychological shift going on where people are starting to reject debt. The Fed will do everything in its power to prevent this, but so far, it has been pushing on a string. The more vehicles the Fed creates to lend money to the private sector, the more it makes the private sector dependent on the Fed. Why should a company borrow from a bank at the risk-adjusted interest rate when the Fed will lend it money at below-market rates?
Finally, what we're headed towards is nothing less than full nationalization of the banking system. The banking system and the housing sectors are already the most regulated and manipulated parts of the US economy -- it's no surprise that this is where disaster stuck. Now that the banks have taken money from the Treasury, the next step will just be the Treasury and Fed ordering banks to do exactly what they say. The Fed and the Treasury can ultimately make the banks do what they want, but the results won't be good for the economy. They are trying to fight the market which is begging for liquidation, structural change, and ultimately the shift of capital from malinvestment to where it's actually needed. The more the government tries to prevent this, the more they are going to turn the US into Japan and create the deflation they so want to avoid.
I don't know why anybody at this point would want to own equity in a bank. This letter from the Fed makes it clear that the banks serve the US government, not their shareholders. And if that means destroying their balance sheets even further, that is what the banks must do.
Great article from Lew Rockwell about how conservatives sold out to the Bush administration.
But this reliable support by conservatives for the Republican president confronts what psychologists call “cognitive dissonance,” which is to say that people will not forever live with a massive contradiction between what they do and what they believe. Eventually, the beliefs come around. So it has been for the conservatives who, in the 1990s, blasted Clinton’s big budgets and nation-building and then ended up celebrating far larger budgets and a vaster military empire around the world. The result has been an amazing intellectual bankruptcy on the Right.The culminating event was the financial bailout of the Wall Street plutocrats, which contradicts everything that conservatives allegedly stand for. It was socialistic in every way. It rewarded market failures. It ripped off average families for the sake of billionaires. It was the worst form of Keynesian planning. It was an open conflict of interest, as the ex-CEO of Goldman Sachs funneled vast sums to Goldman Sachs. It had exactly zero chance of helping the economy. In fact, by draining productive private resources necessary for economic recovery, it makes a bad situation worse.And yet, no surprise, conservatives came around. You could check in with the Heritage Foundation or National Review Online and find rousing endorsements of this outrage, complete with pieties: “In normal times, we’ve been against government intervention, but these are not normal times…” And what did they get out of it? Nothing but the satisfaction of knowing that they helped sanitize and baptize what may be the worst piece of legislation in half a century
Wednesday, November 5, 2008
Wise words from Ron Paul.
The Moral Hazard of Regulationby Ron PaulSince the bailout bill passed, I have been frequently disturbed to hear "experts" wrongly blaming the free market for our recent economic problems and calling for more regulation. In fact, further regulation can only make things worse.It is important to understand that regulators are not omniscient. It is not feasible for them to anticipate every possible thing that could go wrong with whatever industry or activity they are regulating. They are making their best guesses when formulating rules. It is often difficult for those being regulated to understand the many complex rules they are expected to follow. Very wealthy corporations hire attorneys who may discover a myriad of loopholes to exploit and render the spirit of the regulations null and void. For this reason, heavy regulation favors big business against those small businesses who cannot afford high-priced attorneys.The other problem is the trust that people blindly put in regulations, and the moral hazard this creates. Too many people trust government regulators so completely that they abdicate their own common sense to these government bureaucrats. They trust that if something violates no law, it must be safe. How many scams have "It's perfectly legal" as a hypnotic selling point, luring in the gullible? Many people did not understand the financial house of cards that are derivatives, but since they were legal and promised a great return, people invested. It is much the same in any area rife with government involvement. Many feel that just because their children are getting good grades at a government school, they are getting a good education. After all, they are passing the government-mandated litmus test. But, this does not guarantee educational excellence. Neither is it always the case that a child who does NOT achieve good marks in school is going to be unsuccessful in life. Is your drinking water safe, just because the government says it is? Is the internet going to magically become safer for your children if the government approves regulations on it? I would caution any parent against believing this would be the case. Nothing should take the place of your own common sense and due diligence.These principles explain why the free market works so much better than a centrally planned economy. With central planning, everything shifts from one's own judgment about safety, wisdom and relative benefits of a behavior, to the discretion of government bureaucrats. The question then becomes "what can I get away with," and there will always be advantages for those who can afford lawyers to find the loopholes. The result then is that bad behavior, that would quickly fail under the free market, is propped up, protected and perpetuated, and sometimes good behavior is actually discouraged.Regulation can actually benefit big business and corporate greed, while simultaneously killing small businesses that are the backbone of our now faltering economy. This is why I get so upset every time someone claims regulation can resolve the crisis that we are in. Rather, it will only exacerbate it.