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


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.