Third world america

Third World America
http://krugman.blogs.nytimes.com/2008/10/07/third-world-america-2/

Paul Krugman's latest article touches on a subject of mine 6 months ago.

Subprime Nation
http://economicrantsoflunatic.blogspot.com/2008/05/subprime-nation.html

Mark to market witch hunt

If mark to market is to blame for banks woes as many of the shills have said, then answer me this. If these assets are really worth more than what the market is bearing, then why isn't the market (which has plenty of capital...Buffet, PIMCO) buying these assets left and right. If something that should be worth 80 is being marked to 40 and you know it is worth 80, then there would be a rush to buy these assets at a discount. The reality is, the smart people (market forces) know the value of this garbage. Price discovery will not happen until the government clearly removes itself from the game. Otherwise, there is no incentive for private equity to step in and no incentive for banks to sell at the low (true) value. Don't fall for the bullshit being spewed by banks, investors and the government. They want the tax payers to prop these assets up for all the wrong reasons.

China and Economic Warfare

The evidence is mounting that China has pointed the economic equivalent of a nuclear weapon at the US. China (and possibly some other countries) are in a position to cut-off the flow of money into treasuries that the US NEEDS to pay federal expenses month to month. We are a debtor society. We require foreign funding to sustain our current spending. Without it, the government would be forced to print worthless dollars. Checkmate (hyperinflation). China swallowed a shitload of toxic MBS and agency debt. They are pissed. It's becoming pretty clear that they have backchannelled a demand to our leaders that funding will be cut-off if the toxic debt is not purged from their markets. That is what this bill is really about when it comes down to it. It does nothing to recapitalize banks, but it does restore the foreign money pump required for us to fund our economy. We are no longer controlling our destiny or government. It's a sad predicament.

Not unlike a gambler begging the loan shark for an extra week to try and kite the debt.

State and local finances crumbling

As predicted, states and local governments are starting to feel the pinch of decreased revenues. As I've said before, they are completely underestimating the severity of these shortages and they will get massacred over the next few years. The news is starting to pick-up on this oncoming tsunami. It's getting overshadowed, however, by the larger financial crisis in the credit markets. This will only exacerbate the problem at local levels, as spineless politicians will refuse to cut costs far enough and will refuse to raise taxes high enough. This will leave borrowing as the only remedy for shortfalls and borrowing won't be cheap. All of this was predictable, yet the weak remain in power and the weak will continue to destroy the foundations of this country.


Alabama County Misses Bond Payment- Bloomberg
State, Local Tax Revenue Stagnates- Wall Street Journal
Under Strain, Cities Are Cutting Back Projects - New York Times

So much news and so little time

So much is going on right now and I have so little time. I hope to get back into the swing of things shortly. Underneath the surface crisis, there are a number of ominous signs of depressionary times ahead.

False hopes

I hope none of the readers of this blog (if there are still any), have any false hopes that the proposed bailout will help the economic disaster we are facing. It is far from a coherent solution to the fiasco. In fact, this bailout more closely resembles the Japanese version of zombifying banks by maintaining artificially inflated asset prices. It failed miserably in Japan and will fail here as well. You must address the underlying fundamentals. There are 3 clear things that must happen to do that.

1) Balance Sheet Transparency - institutions must be forced to disclose all of the assets that they have clearly. No offsheet assets, level 3 assets, etc... Until everyone knows what's on the balance sheet, there will be no confidence in the system. Yes, I know this will collapse some companies, but those companies for all intents and purposes are dead anyways. This bailout will only help keep the weak alive maybe only temporarily, but it is a misallocation of funds.

2) All over the counter derivatives must be placed on an exchange and the counter parties must verify that they are adequately capitalized. These derivatives will still be ticking time bombs regardless of this bailout. You have to have a transparent market to manage this.

3) All institutions must be limited to 12 to 1 leverage at most. There could be a time frame provided for the deleveraging to occur, but it must occur. Leverage ratios above that are unnecessary and completely at odds with any sensible risk strategy.

This is the only way to provide confidence back into the marketplace. The assets underlying these debt products will continue to deflate. They have to. We were at the peak of the greatest asset bubble in history. There is no possible way that current incomes can support the payment streams of these inflated assets. Trying to artificially support that is a joke at best and the joke will be on taxpayers. People may want their houses to stay at the current price, but like it or not, 9 times out of 10 that is just unrealistic. It sucks, but that is the price we pay for artificially low interest rates, loose loan standards and a stagnant income base. The bubble has to burst.

Forcing tax payers to absorb all the risk of a bailout aimed directly at propping up more than likely insolvent companies is criminal. Especially when there are plenty of coherent and sensible solutions to addressing this nightmare.

This bailout achieves only this:

1) Burdening taxpayers with 100% of the risk
2) Maintaining artificially inflated asset prices
3) Maintaining non-transparency at the corporate level
4) Further eroding confidence in the market (delayed reaction)
5) Continued obfuscation of the price discovery process of the free market
6) Weakening the dollar
7) Spurring commodity inflation

Please don't be fooled by any version of this plan. Because of what this plan doesn't address, you can expect trillions more in pain down the road. Only now there may be a few more companies on Wall Street and a few more hedge funds that will survive to bleed this country of more misallocated funds.

Colbert Report Funny

Last night in the Colbert Report, they made a funny. In discussing the bailout, they flashed up this title...

Hindsight is $2020 billion