Tuesday, November 17, 2009

Dollar Drops 16% since March

Warren Buffet on Charlie Rose said it clearly: China has sold a lot more in the US than the US has sold there so they have a mountain of dollars that is stuck out of the USA. If they sell it to the French then it is still out of the USA. The only way to get those back in the USA is to buy something with it such as soybeans or gold that they can ship back to China. This is just saying that the capital account plus current account must equal zero. This is similar to Japan in the 1980s and 1990s that exported huge amounts of manufactures to the USA but ignited a bubble that burst and has been mired in recession since then. I was telling Klaus they were just being slaves by working hard to build stuff for the USA and were not going to get much in return.

I think China will want to buy stuff to ship back to China so that some of the poorer inland people can have beef, soybeans, foods and other items to help keep down envy of the rich in the coastal cities. USA is importing less from China and elsewhere. It may take some time to get back to balance. If they let their currency rise in value they could get more goods per yuan.

Most importantly China should start manufacturing more for domestic consumption instead of shipping so much to the USA. Like the Japanese this is unsustainable and does not benefit their own people. China too may be in a boom and get stuck in decades of recession if they continue on an unsustainable amount of exports to the USA.

I see the Fed is worried about the weakening dollar and I hope that Obama gets a dose of reality in China and acts to prevent a dollar collapse.

I would prefer higher interest rates to stop a bubble in asset prices and a big tax cut to stimulate the economy.

Monday, September 28, 2009

Break up if too big to fail

Bankers make the most money in the USA and Britain which is also home to the most bankrupt banks and where the current economic crisis began. It looks like they are getting the blame and the rich will have to pay higher taxes, at least in Britain.

The last 30 years have been a great time to be in finance and to make a lot of money. Looks like the future is not so bright. Rich people and wannabes better curtail the activities of the less scrupulous members of their class or they will lose because of the actions of their fellows.

The system as a whole can be damaged. USA used to be vigorous in busting the trusts and breaking up concentrations of power. This is the idea of a free market, a level playing field, and a chance for talent to rise to the top. If we let hereditary or special interest cliques take over the government, business, universities then the institutions will not work well and will deteriorate or collapse catastrophically.

Sunday, July 26, 2009

Politicians Not Facing Up to the Problems

I talked to a long term faculty lecturer who is getting laid off. The universities have drastic cuts and it looks like no lecturer will get rehired, then they will start firing permanent faculty.

Unfortunately there will be more cuts ahead. Sacramento is still using tricks to avoid the big cuts. As you say there is a disconnect with politicians and reality. The longer it takes them to cut, the bigger the cuts will have to be. Debt is dangerous, interest can eat away the funds needed to run the state.

Washington also is also not facing reality, such as the cost of medical care. They cannot even balance the budget under the current system. California going downhill will only make the Washington problems worse. Less taxes will be paid. Unemployment and welfare will drain the budget. Social Security and Medicare already in trouble, will get worse.

CalPERS STRS and other pensions in trouble. With earnings approaching zero then stock prices will approach zero. They also lost money in real estate, hedge funds, private equity,... All the pension funds are in trouble.

The problem as you point out is that the elites in Sacramento, Washington DC, Wall Street, and Hollywood have not figured out the extent of the problems and are continuing business as usual, hoping that we are just in a blip.

Email:   So far, things have not changed that much here in Sacramento. With the number of cars on the highways and crowded restaurants, it is hard to believe that there is a recession in the Capital. Maybe, that is where legislators are going wrong. They do not percieve a crisis when the downtown restaurants are full.

Saturday, June 27, 2009

Glorious Depression and California Budget Crisis

Politicians may close down the entire C S University or University of California systems in order to preserve welfare for the elderly, disabled, and illegals. The gap is so huge that drastic cuts will be made -- if no money in bank so they cannot write the checks! The LA Times says it will be government by lawsuit as the various interests sue to get money and government grinds to a halt. Next year will be worse.

This is a glorious depression that has already forced people to save more, spend less, get out of debt and quit importing illegals to build houses they have to bulldoze later. Whipping California budget into shape will help unleash this dynamic economy - there has never been a better time for cheap small electronics like macbook, mac mini, ipod, iphone to help people get things done cheaply and efficiently using Oracle DB, Sun servers, Cisco routers, wireless etc. And Hollywood, games, youtube, provides cheap escape without travel, gas wastage, clogged airports and highways and time off work. In the depression of 1975-1982 Microsoft, Apple, Sun, and other high tech companies got started with unemployed talent. Now is the time to think about starting a new high-tech business.

Saturday, June 13, 2009

10 year mortgages

The duration mismatch problem caused by banks borrowing short and lending long should be fixed without using so many risky derivatives. Banks should be stretching deposits to push savers into 5 and 10 year deposits because savers are often saving for retirement so they need a longer term. Also most loans are longer term, such as home mortgages so that savings need to be saved for as long as borrowers need it so that the bank is not vulnerable to "runs" and "panics". Home mortgages should be reduced from 30 years to 10 years to match the deposit maturity.

This problem is caused by home buyers wanting to buy to fancy of a house. For the same monthly payment they could buy a cheaper house and get it paid off faster. Then they could accumulate cash for a down payment on a fancier house. After buying the fancier house and moving into it they could sell the old smaller house and use that cash to more quickly pay off the newer fancier house. At which point they can begin the cycle again and buy an even fancier house...

People would save a lot of money and be exposed to less risk by not getting in over their head and buying a too fancy house at the beginning. This would also help reduce the risks to banking.   Regulators should pressure banks to reduce the duration of their loans and increase the duration of their deposits.  Taxpayer bailouts should not be used to fix the problems of inadequate regulation by government.

Monday, June 8, 2009

Stagflationary Depression

Yes, I think inflation is coming and Obama may be a one term president like Jimmy Carter who also let inflation run out of control. Nobody likes inflation except for debtors who hold on to their jobs and can repay their debts with less valuable dollars than what they borrowed. Everybody else will have to pay more for everything which will be especially painful for those without jobs in bankrupt states such as California which is getting rid of welfare and the safety net. Inflation is also bad for the stock market and bond market and most asset markets. Inflation pushes up the discount rate so this clobbers most asset prices which are inversely related to the discount rate.

I wonder if California cannot get a budget in the next few days and runs out of cash in July then California will have to declare bankruptcy? So then they can throw out CalPERS and other pensions such as what happened at GM, Chrysler and many other bankrupt entitites? They are facing up to some serious cutbacks and I expect to see some quick actions to raise taxes, mass evacuations by the rich and poor, and further drops in real estate prices.

This depression has a ways to go, yet. Stagflationary Depression?

Thursday, May 21, 2009

Beneficial Economic Crisis

I am increasingly optimistic on the economy. It looks like the next 10 years will be miserable, maybe mostly recession and stagflation. But by flooding the system with liquidity it looks like a catastrophic depression is avoided. It is great that USA is saving again and that people are becoming more frugal and less wasteful, and more work and less play.

However there will be much weeping and gnashing of teeth, especially in California. It looks like considerable cuts are in the offing, and most of those will fall on poor people. If they raise taxes they may collect less as the rich leave the state -- Laffer's "J-curve". I think they have reached that point. I think I heard Brisbane now has an 11% sales tax! Paris Hilton and other rich folk can easily leave. Michael Jackson left to bankrupt Dubai some years ago.

The problem is the global reach of the crisis with few places booming except for always wealthy France and a few places like South Dakota with wind power, methanol, banking,... The whole world manufacturing and exporting system must be realigned so everybody is not exporting so much to bankrupt USA which can no longer borrow very much. Too many investors got burned on worthless USA Subprime mortgages.

I am comfortable in this environment because I remember the 1970s which was depressed, but I enjoyed modeling the economy and investments and people would pay a lot of money to help understand the mess and how to profit from it. We are in a similar fix now, even with rising oil prices again.

USA needs to get off drugs and do more work and less play. We succeeded in the past and may be able to do ok in the future as well. The current crisis is a shock back to reality -- just what the doctor ordered.

Thursday, May 7, 2009

Stimulus Leading to Recovery

I got up at 3AM to listen to Geithner interviewed by Charlie Rose for a solid hour. It is clear that Obama will bailout the big banks at taxpayer expense and only make minor cosmetic fixes instead of correcting the underlying problem. Indeed he is encouraging people to take out loans to buy stuff to boost the economy, thus sinking the USA deeper and deeper in debt. This is a victory for the idle rich, incompetent bankers and uneducated cooks in New York and San Francisco and other financial centers.

The fed and treasury has have made trillions of dollars of loans (details of which they refuse to disclose) thus vastly boosting the money supply. In particular house prices that recently tripled in some areas will not fall down to what they are worth. Instead the price level of everything will jump up to match the inflated real estate values. This will happen and become obvious as people sell their overinflated houses, retire, move, etc. Indeed it seems to

This will continue the Ponzi scheme and make people feel richer and spend too much, take out more debt, and refuse to get educated and learn what they need to make our economy competitive.

Millions of Mexicans will return to the USA and build more houses at the current low interest rates.

Overall Obama snatched defeat from the jaws of victory. He should have cut taxes immediately so people could pay back their debts and have money left over to spend to keep the economy going. Some of the current depression could have been avoided -- there were too many layoffs in some areas.

The economy is not out of the woods but will probably recover somewhat on paper. The problem will occur when hyperinflation materializes and people get shocked. This may not happen if the economy cannot recover or recovers too weakly. My best guess without number crunching is that we will see a fairly strong recovery beginning this year due to the massive fiscal and monetary stimulus that is being implemented.

Thursday, April 30, 2009

Decline of American Hegemony

I am afraid this article is correct. USA is declining as a world power. The enemy Taliban is more dangerous than ever threatening to take over nuclear armed Pakistan, even after 8 years of war against them. Communist North Korea now has missiles and nukes. We do not notice because we are in debt, going bankrupt, foreclosed ... states, companies, people in our economic depression.

The main problem is the low quality of our people. USA has become a nation of uneducated bankrupt debtors, ball players, rap artists, taco cooks, porn stars, video game players, gamblers, oral intercourse artists on radio, TV, movies... Nobody knows how to do real work any more.

Hopefully this depression and plague will force some needed changes and slow the decline. But USA enjoyed a boom 1945-2008 because we our competitors killed each other off in WWII. Now we will have to learn to work again to remain economically viable. But USA has many social problems that it will be hard to stay competitive. Particularly the education system is weak.

http://www.spiegel.de/international/world/0,1518,621979-7,00.html

Thursday, April 9, 2009

Conspiracy for Catastrophe

Why does the liberal news media say nobody knew this crisis was coming until Bush comes on TV with Paulson saying taxpayers have to pay a trillion dollars or the economy would crash?

Can our politicians and regulators be so stupid or did they hide the truth? If they were dishonest then, do we have any reason to believe that they are honest now?

I remember taking classes at Berkeley back in the 1970s where they discussed the "optionality" of stocks and banks where managers can take big risks with bank assets in hopes of getting a big bonus then if the scheme flops they could dump the losses onto stock holders and tax payers. A popular required class for phd was Accounting 223C "agency theory" that went into depth on problems of stakeholders hiring agents, or managers who would then try to act in their own best interests instead of being responsible. Lots of words like "asymmetric information" where one party knows much more than another during negotiations.

Seems like this whole crisis was set up and run according to script. It is also a repeat of the S&L Debacle only now much more jazzed up where the conspirators learned from their past mistakes and made it much bigger this time.

Wednesday, April 8, 2009

Bailout Banks, not Autos? Christian teaching

I am worried Geithner, Summers and other Obama hot shots are too much in bed with the bankers and are collecting money from them and are slanting their decisions in favor of the bankers. Why do taxpayers bailout out banks but not autos? The bankers created much of this crisis with their huge unhedged derivatives portfolios that have bankrupted the banks. They collected their bonuses and retired and have left the taxpayer holding the tab. Shouldn't we just let them go bankrupt as normal? FDIC has procedures for keeping checking accounts working as the bank is liquidated and the culprits are fired. That is Schumpeter's idea of creative destruction that leads to stronger, better banks arising from the ashes. Many banks remain in good shape.

Under traditional puritan Christian teaching, debt and spending was sinful -- theft from god. My parent's generation were much more frugal due experiencing the great depression. One benefit of the current depression is that the savings rate has gone up. It is time to change back to a more traditional lifestyle and stop so much waste.

USA spends far too much money on rap music, basket ball shoes, entertainment, TV, Radio, restaurants, toys, travel... And far too little money on education in science, math, engineering and capital stock for the production of steel, vehicles, and houses that will last longer than the mortgage.

Sunday, April 5, 2009

Cult of Equities, Houses

I studied Realtor.com last night and there are hundreds of cheap houses and condos all over California in such places as Marysville, Stockton, Antioch, Los Banos, Riverside, and even good air Santa Maria in Santa Barbara county! Such massive deflation is an indication that we are in a depression, and prices probably have fallen even more than than they fell in the 1930s.

I am really down on stock reinvestment at this time, and yet, it seems that is all I see on the TV. Earnings are "zilch" and the only prospect is capital gain, and that depends on the zero-sum efforts of all investors, which is zero on the total. So, where is the logic to hold stocks?

I fully agree. We are in a sucker's rally. Our auto, newspaper, housing, banking industries are dead and many more walking zombies essentially dead but have not figured it out yet. The only growth areas are drugs, schools, hospitals, and other mostly government entities which do not issue stock. Eventually they "may" come back but don't hold your breath. Chickens are coming home to roost and problems can no longer be swept under the rug as in boom times. USA people, government, companies are all in debt and much income must be for interest, not spending.

I am tired of hearing the argument that Treasuries are losing with little or no interest return. A little is better than nothing.

I have had that feeling for a long time. Stock market just lost half their value. Treasuries earn little but at least they are going up, not down.

For one thing, Treasuries are not less than inflation.
Absolutely as my house price survey indicated. We are in massive deflation. Lots of fancy clothes, boats, cars going for half off. Computers are astonishingly cheap. Dell netbooks for $350! A fully functional computer that would have been very powerful 3 years ago and unavailable 10 years ago. About the only thing going up is college tuition, drugs, crime, guns, doctors, taxes, lobbyists, and earmarks. Even lawyers are getting fired in droves.

Bills are going for .75 percent, and inflation is currently hovering around that or near zero.

I am getting 2% on FDIC insured 7 month CDs. Not much but better than zero and better than inflation in this environment.

Also, you are right about the "cult of equity" thing. If an investment is not bringing in at least 5 percent, as the saying goes, cultitsts say it is "criminal" to let your money get eaten up by inflation. Where do they get that reasoning???

They are just trying to sell stocks. Mosts texts study post world war II boom data and find stocks get around 15% (with inflation at 20% at one point in that history). They will probably continue to quote high returns and omit the inflation problem and the fact that stocks just fell 50%!

I have been skeptical of these studies for a long time and absolutely critical of them since 1998. The theories and data collection methods have defects. That is what I am now going to write up and submit. Before the crash the chances of publication was nil. Now editors might read it.

Saturday, April 4, 2009

Cult of Equity versus Pensions

The problem of CalPERS and many other funds is pie-in-the sky "cult of equity" that think stocks can continue to get 15% year after year while bonds only get 3%. So they buy lots of stocks and then add to that levered hedge funds and risky derivatives in hopes of getting even more. The stock market fell in half so did most of those funds. Many hedge funds did even worse. It is true that stocks did well for a long time because of the post world war II USA bubble. That seems to have halted and our companies have gone bankrupt or are struggling to compete against other countries.

Pension funds would have been better in Treasury bills for the past decade or longer -- Dow is far below the 10,000 that it was trading at 10 years ago. Bills and Bonds may due better over the next 10 years as well due to the lousy company performance. Stocks pay dividends but those are small and cannot grow much due to the poor profit outlook of companies.

The book below details a theory that the huge debt and deficits of the federal government is just a way of making the rich richer and the poor poorer. Middle and lower income people depend on social security that depends on the government running a surplus -- savings -- so that they will be able to write checks in the future. The deficit/debt means that middle and lower income people will not get their checks. Further their company pensions are disappearing. State government pensions are losing money and the states going bankrupt so those pensions will be greatly reduced or disappear.
Pensions must be fully funded and invested in very safe assets such as Treasury Bills and inflation must be kept under control. Gambling on more risky assets such as stocks will probably reduce pension payouts in the future. There is no law of nature that says that stocks must earn more than Treasury Bills. It is just a happenstance of a particular period in USA history.
Joe

http://www.amazon.com/Capitalists-Workers-Fiscal-Policy-Distribution/dp/0674031679/ref=sr_1_1?ie=UTF8&s=books&qid=1238888817&sr=1-1
Capitalists, Workers, and Fiscal Policy: A Classical Model of Growth and Distribution (Hardcover)
by Thomas R. Michl (Author)

Looks like CalPers will continue to stumble with the investment team they have now. Most Retirement Funds are conservative, but not these guys. New York is in bonds, and that is where CalPers should have gone. Now it is too late, and they are trying to do what the loser does at the crap tables, ... to double up and win back what he lost. What a failed stack of cards!!!

Looks like the clowns at CalPERS are still reporting losses on their alternative investments such as Apollo which is down 50%. The Obama Stock Market Rally will not help these alternative investments and seems to be fizzling anyway. The economy is weak but will get a huge boost
from the Obama budget. Bernanke says he will fight inflation but the cow is already leaving the barn and the monetary spigot is turned on and more stimulus is on its way. Foreign investors may panic and start pulling their money out. Currency collapses tend to happen suddenly as everybody heads for the door at the same time so as not to get trapped in a failed currency. A dollar collapse will permanently stigmatize us as a third world banana republic. Obama's photo-op visit will be quickly forgotten in a collapse. He maybe should stay home and put out
fires instead of burning fuel flying around the world.

Republicans should stop criticizing Obamas deficits after running up big deficits on their own. The most recent surplus was under Clinton. Reagan's deficit was so big he had to reverse course and raise taxes early in his administration. Wait until we see the result of this plan. It will probably run up huge debts but that remains to be seen. To get out of the depression we will need deficit spending. Bush should have raised taxes or cut spending during his boom -- then Republicans would be in a stronger position to criticize.

Wednesday, March 18, 2009

hyperinflation, short selling, AIG suicides?

I liked Grassley's (Republican Iowa) suggestion that those who bankrupted AIG should commit suicide.

It looks like the economy is still tanking so Bernanke is going to buy bonds and flood the system with cash. Of course that raises the risk of inflation, but it may stop the downward spiral as people take that extra cash and go waste it on cheap Walmart junk from Asia and gas from enemy Muslims and Latins Hugo Chavez. That is why the stock market jumped, back to normal, SNAFU.

Why do we need short selling at all? If people like a stock they can buy it and if they don't like the stock then they can sell it. If they don't own the, then why should they be allowed to sell it when they may be idiots and the price rise and they get margin call after margin call until they bankrupt and get those who loaned the stock into trouble.

Short selling is a form of debt -- borrowing a security only to sell it. I think we need to get rid of as much debt as possible so that the economy is not made more fragile by people getting in over their heads and not being able to make payments and then getting kicked out of their house, cars repossessed, creditors hounding them, and so forth. Cash is king. If they don't have the cash then they should wait until they have cash before spending. We do not need an unproductive class of people who live off interest and not doing any real work.

Monday, March 16, 2009

bad banks and politics

Good advice. The news media talk about politics but seem not to grasp the fundamental financial problems that have developed over 20 years or more.
Don't get mixed up in the details of political ball throwing. It will only confuse the issue. Concentrate on the indicators, like the financials of banks, the condition of the dollar on the exchange, and the price of gold.
After I get my price series up to date I will look at just what you say, those large financial aggregates. Who has what debt? Then there is to figure out what the Chinese and others have to do with that debt. That is geopolitics that I will not be able to address. But at least I can find and graph the relevant historical numbers. Most of 2008 should be in the databases by now. It takes several months for the Fed and others to figure out what happened and collect the numbers.
I believe that the thing to be looking at now is the Treasury holding of foreign debt and how it changes. I know that it is three months old, as required under the FedRes Report proceedures, but they have not changed the rules, and one can tell if the Chinese are pulling back by looking at the February and March holdings that will be available to us in May and June.
Yes. I have not looked at these numbers in 20 years and no longer get the Federal Reserve Bulleting hard copy. So I will have to learn how to access it online. I will go to the library immediately to see if they have any hard copies of anything.

I watched Bernanke say yesterday they are still working on stress tests for weeks now. This should take only a few seconds on the computer if the banks have been doing their job right. This indicates the poor job on accounting that they have been doing. Why should they get paid?

I saw Rogoff at Harvard, formerly Berkeley who also has a grim assessment that several big banks will go bankrupt eventually and that hyperinflation looks nearly inevitable.

The problem with Ron Paul's bad bank strategy is that the worst banks, the big ones, will get off scot-free. It is probably better to force them into bankruptcy court and make needed changes. AIG should have been bankrupted immediately and those credit default swaps written down to zero, and then bankrupt Merril Lynch and others who bought it. Caveat emptor. They should not be buying paper that is way underpriced. If they cannot assess and manage risk they should get another job, or just focus on what they know.

The bad bank may come about, and it might be ok if they just buy and refinance mortgages to pull those away from FNMA GNMA and other operations that should be scaled back anyway. By putting all the bad apples in one barrel the taxpayer can see where the problems are and who caused them and try to get some of that money bank. So I might support that as long as they do not start dumping credit default swaps and other garbage into it. The total value of the mortgage problem is much less that the total value of the worthless paper in the banks.
One other thing is coming to the surface. Ron Paul was right. I think that AIG will be dealt a death blow by Congress, and the failure to fulfill contracts to banks by AIG will descimate bank assets. This will be shown on having to absorb all of those faulty mortgage packages gone bust. To rectify the problem, I suspect Congress, in its infinite wisdom, will now move to the plan offered by Ron Paul in the first place: i.e. the "Bad Bank to absorb forclosed assets". We'll see.

Sunday, March 8, 2009

hedging

You are correct in the failure of the hedging rationale in the current crisis. I also think a cash economy is a good idea.  People cannot buy any more by using credit. Indeed they will have to buy less because they will lose the money paid as interest. That money cannot be used to buy goods and services. Businesses, Consumers, Governments have been lured into thinking that they must use credit. This depression will teach them a lesson and we will probably see less debt some day in the future.

Hedging makes sense when there are natural shorts and longs that can get together in the market. For example, in farming, the farmer can protect himself from falling wheat prices on his crop by buying a put option. The baker might benefit from those low wheat prices and sell more bread. So the baker can sell the farmer that put and collect the insurance premium in normal times and break even in boom years when there are large harvests that push the price of wheat lower -- The baker will sell enough bread to cover the cost of having to deliver money to the farmer to compensate for the farmer's low wheat sales price.

In the banking crisis there was no way they could cover the insurance (credit default swaps) that they were writing. Anybody buying or selling those instruments was either stupid or just wanting to collect bonuses and quickly retire if the system crashes. Yes, this was a zero sum game with the players collecting the profits and taxpayers paying for the losses. I did not hear Greenspan, Bernanke, Bush or any of their advisors worrying about the impending disaster. They painted a Rosie Scenario to lull the people into getting deeper and deeper into debt.

comments to:

My only problem with the hedging idea is; where do you get the other side of the hedge to assume the risk when there is little to gain? This was the problem with the implementation of the derivative swaps. Both sides were playing against the other failing, with one side not putting up collateral to back its bet. I keep getting back to basics in all of this, and it all centers around a "zero sum game". So who is the loser in all of this. As I see it, it is the taxpayer, who inocently thought that it was a free market and no regulation needed. After the free-fall I predict that we will have to outlaw all hedging and to go back to a cash economy, even dispensing with the idea of such conveniences as credit cards. Until these arguing pondits, still supporting creative financing with manipulations of the futures markets, give up their ways of steering the market, we will be diving even deeper into the collapse. Maybe we should look at a new governing way of life, with a more contollable type society. History has a lot of choices and perhaps we need to get rid of Washington.

I fully agree that we are watching a bunch of comic buffoons managing our financial system in Washington. Sit back and enjoy the show because there is not much we can do about it. Laughter is good medicine.   I guess I should say I am not totally against all hedging.

Ultimately  somebody must bear the risk and reap the rewards or losses. Banks may want to sell the risk to rich, smart people and have to pay to get rid  of that risk.  Banks should not be allowed to trade vast sums between themselves because they are morons and will inevitably lose money and come running to the taxpayer to get bailed out.

Banks should be required to trade over an exchange such as the Chicago  Board of Trade, and make those trades small enough that the average investor can participate in the trading and make some money off the risk that banks are trying to get rid of. Trades must be in the open for prices to reflect all available information. Secret transactions between banks are what got us into this mess. Flush them into the open.

Also Banks should pay a 1% tax on each trade to compensate taxpayers for  past bailouts and as a reserve for future bailouts.

I think a move back toward the regulations we had in place following the  great depression is in order.  While many things are different it  appears that many of the old problems have come back to haunt us.

If this market reaches a drop of 52 percent of its value this year, I will bet that we are on the same track as the year 1931 (taken from the graph you sent me 12/31/2008). We were able to bring about  regulations for the stock market with the SEC Act of 1931, and I will  bet that we can bring about the SEC Act of 2009 and outlaw hedging  altogether. In todays environment, however, nobody has the guts to  step forward to do that, so we are headed for a contiuation of more of  the same. The credit default swaps collapsed the market because there  was no collateral to back up the insurance for default. Had there been  a "reserve requirement" by the issuer, then it would have been so expensive that nobody would have done it. So that is what they need to  do now. Outlaw them unless they are able to back up debt by a reserve  amount of money to pay off. Then they would disappear awfully fast.  The trouble is that nobody will hire people like you and me to help  them do this. Indeed, it is frustrating to watch this circus run by  clowns.

The problem with Obama is that he is not fixing the underlying problem  of derivatives. He can prop up the mortgage market and thus help house  prices and banks that loaned too much to liars, deadbeats, etc. With  the stimulus plan the economy might get enough better that banks can  sweep their problems under the carpet. Yet the derivatives will remain  and new derivatives will get written so that the next down cycle will  kill off more banks and maybe the whole economy.

Particularly credit default swaps are a crazy idea. The banks should  be nationalized or let go bankrupt so that this derivative can be  totally written off and prohibited. Traditionally insurance companies  are regulated so that they have to hold reserves to pay out if the insurance policy terms are met. However, these posted little if any  reserves because a downturn in house prices has not occurred in recent  history. Caveat emptor. Anybody buying these derivatives should know  they should not be able to collect if something bad happened, even if  reserves were posted. The bank issuing these derivatives (AIG) should  not be allowed to do so if the taxpayers might be expected to bail  them out.  The banks should be nationalized, put under control of the military, and  broken up so that the healthy parts can continue operating in separate  markets. The zombie parts killed and divided between those with a  reasonable claim. Credit default swaps should not get a penny, and any  bonuses paid out for them should be seized to repay taxpayers. Big  players should be jailed or banished from the financial industry for  life.  The article excerpted below indicates how derivatives continue to plague  the economy. Note that this is a $47 trillion problem yet to be solved,  dwarfing everything else Obama has been talking about.

Monday, February 23, 2009

Time for a Tobin Tax ?

James Tobin was a Yale economist who won the Nobel prize.
He suggested a small tax on currency trading to reduce speculation.
http://en.wikipedia.org/wiki/James_Tobin

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