Stimulating the Stimulus

Here is a crazy idea: devalue the dollar which will lead to immediate demand abroad for us goods and services creating exports and an influx of cash to exporters and the overall economy. The free market at work works well! Cons: consequences of a falling dollar?

I see the Wapo leads with an article on the economy today, as Speaker Nancy Pelosi reviews the options for rapidly lifting lagging employment indicators.

The Big Bankers and the Bigger Fools Who let them Bank Your Money

Once again, after a few weeks of noting nothing newsworthy, in itself newsworthy an occasion, (besides the bankruptcies of our largest automakers of course, but who didn't see that coming?) I see the New Yorker is on the ball again with a review of a promising new look at the CREDIT DEFAULT SWAP, called FOOL'S GOLD (link here). The "new" financial product is taking much of the blame for the recent implosion of the banking industry, deservedly so, except that the blame should be placed on the person and persons who made them happen without adequate regulation to. The so called "off sight" meetings of the big bankers during this period also looks to be VERY interesting reading.

A morsel of this review:

In June, 1994, when a team from J. P. Morgan went on an off-site weekend to Boca Raton, they conformed to normative behavior in certain respects. Binge drinking occurred; a senior colleague’s nose was broken; somebody charged a trashed Jet Ski and many cheeseburgers to somebody else’s account. Where the J. P. Morgan team broke with tradition was in coming up with a real idea—an idea that changed the entire nature of modern banking, with consequences that are currently rocking the planet.

Just One More, Reduce Rates to 4% and Let's Everybody Do The Refi!

I forgot to mention this solution, as I see more talk about nationalizing big banks that are set to lose more money this year and become insolvent. The good news is, they are already insolvent, and always insolvent, according to their debt to equity ratios. The bad news is they still don't know how insolvent because they haven't yet resolved their "computations" respecting those "bad mortgages" no doubt hoping they could unload all the worst "investments" on the feds, or get more money because of them.

Instead, write these down immediately to zero (creating certainty over the amount of the loss), suspend the capital requirements (to ensure lending without running afoul of federal rules) and federally insure all deposits under 250 thousand (in case there is a run for cash). That should cover most of us working stiffs.

Am I a genius? Or what?

A Fourth Crazy Bad Mortgage Scenario

Moratorium on Foreclosures for one year, to be extended if necessary based on events on the ground.

Wash, Rinse, Repeat..., Rinse, Repeat ...., .....

More dots on the emerging financial meltdown from NYT.

Now, with the Madof debacle, I'm tempted to ask, "Where were the regulators" -- Oversight is so passe?

Soros on the Crisis

At this link to the NYRB, read George Soros's take on what went wrong in the financial system.

A Workout Plan

Just for the record, here is one plan put forward by a couple of lawyerly individuals in the New York Times.

I like the community based aspect of this one. My thoughts on this are for agencies at Hud or Treasury to work with existing local-community based non-profits, such as Habitat and others, to provide funding and/or guarantees for private buyouts and lease-backs for those still able to make a reasonable, market-adjusted, mortgage or rent payment. Lease-back might not be the technically correct term; just so I'm clear, private investors, local non-profits, and not the federal government would be the purchasers; the original homeowner could stay on the mortgage, and in the home, under the new terms, or be provided a rent-to-own provision if they want.

Investing in Future: More Stimulus

What to make of the idea of more economic stimulus, now that we seem to be determined to shore up failed banks, and the bankers that failed them? The first rule: avoid a massive asset bubble. We've seen at least two recently; real estate and before that, high tech stock. The second rule: all public spending is political, whether we recognize it or not. If I'm not mistaken, that's why we've seen declining funding for R&D and basic research. Leaving this to the private sector results in capital flight to areas that yield quick returns on Wall Street and speculation. The untempered "Free Market" philosophy of the last thirty years has proven itself to be, as in the previous century, not good for the people. Similarly, leaving philanthropy and charity to the private sector is tending sheep with wolves.

The best investments we could make would seem to be R & D in new science and technology applications, manufacturing enterprises we cannot do without such as autos and planes, the obvious -- energy, medical/health just to name a few. Of course injecting more $$$ into these areas is not as rapid an economic stimulus as cash in the pocket, but it may be almost as fast as the infrastructure projects Washington is talking about.

Careful screening may yield investment in businesses that are in a position to put many people into decent jobs quickly, such as construction projects. What else?

Here is another unique idea: provide a "co-op" fund for government and community organizations to invest in and rehabilitate houses. That would immediately begin to adjust the failing housing market. It might even put some people to work right away.

Global Finance in Crisis

We're off on a tangent, political economy, aka the credit crisis, global recession, market meltdown. M y previous post focused on this and questioned specifically what caused the market to tank, banks to stop lending if that is indeed the situation, and well, putting us all through another Black October.

Fareed called it "hiding mountains of debt in complex instruments." As is often the case the Economist has attempted to provide an answer including info on the financial instruments and policy to blame, perhaps, such as credit default swaps, interest rate swaps, derivatives, options, futures. In a word however, the slant is not surprisingly a policy question concerning regulation. In A Short History of Modern Finance, the closing question is whether the future of the increased regulation that seems inevitable will be as benign as the past "liberalized" capital regime has been for growth.

To my mind, tactically, questions should be couched in terms of transparency and disclosure. For instance, at some point during the previous 18 months, when oil and gasoline prices started to ratchet upward for reasons which must remain unspoken, when mortage defaults first started to become noticeable, coupled with and perhaps caused by job losses, slowing growth, and slowing demand for, and then plummeting home prices, all related to core inflation and stagnant wages, who could have failed to see the risks increasing with respect to the securities tied to home mortgages. By then, of course, it was too late to do anything except sell. Hedging seemed like a good idea, but this only increased exposure if you guessed wrong about the direction of the market, and ratcheted up volatility.

And how do you sell something that is an "off balance sheet" instrument, by definition something you don't want the investing public knowing about. And there is another problem, there is no market or clearinghouse for these things, not surprisingly. So my question from the previous post still remains, how could reasonably smart people have been enticed to continue to sell these things knowing that the rapid rise in home prices could only mean one thing, an asset bubble. Bubbles are a recurring phenom, so...? Greed is the word. As AIG executives have recently shown, taking junkets with taxpayer dollars, stupidity is also rampant.

Finally, after Enron, how could regulators have failed to outlaw similar "off balance sheet" transactions? Or, was the investing public hoodwinked into believing the practice was obsolete?

My question is this. In times of good growth anything goes and nobody notices a few bad decisions, even sleazy ripoffs. When things get tough, when prices are falling, and when people are losing jobs, it is not regulation or the lack thereof that is the problem. It is just that times are tough. Free trade might take it's share of the blame. Let's not forget the corporate execs who forgot to pass along the cost savings and other goodies realized from free trade and robust growth to consumers and workers while socking away golden parachutes, bigger boats and mansions to pass the time. This seems less of a crisis in global finance than a crisis in global productivity and the division of labor, aka the global distribution of wealth. This is a failure of the notion of the Economy and the discipline of Economics itself, as we know it. This is called politics and it is criminal, paying lip service to the theme of this blog. Heads must roll.

The rich have been allowed to get away with far too much. The blame rests squarely with the failed execution and incoherent policy of the current, soon to be ex, President and the cronies who ran his administration. I predict that we will not see another such disasterous presidency, not at least until my grandchildren are grown.

Just one more thing. When banks fail you know we are in for a rough ride. So just on more question to think about. How could we have allowed matters to come to this?

Hiding Mountains of Debt in Wall Street?

Here's what I want to know more about. What about this "hiding mountains of debt in complex instruments?"

It brought down Enron and others. Is that what the "mortgage backed securities" were all about? This is Fareed, in Newsweek:

If there is a lesson to be taken from this crisis, it's a simple and old rule of economics: there is no free lunch. If you want something, you have to pay for it. Debt is not a bad thing. Used responsibly, it is at the heart of modern capitalism. But hiding mountains of debt in complex instruments is a way to disguise costs, an invitation to irresponsible behavior.

And, excuse me, but could someone please explain to me how a "derivative" in the sense used here and on Wall Street, differs from a worthless piece of paper sold to an unwitting investor with knowledge it had no intrinsic value or economic basis in equity, meaning something of tangible value such as an asset. Is a derivative something derived from a mortgage, but not a piece of the pie?

Am I right on this, or what? These were never worth more than precisely zero? How could they have been purchased? Zachary Karabell in Newsweek:

... Absurd though these all were, they paled in comparison to the financial innovations that grew out of the mortgages—derivatives built on other derivatives, packaged and repackaged until no one could identify what they contained and how much they were, in fact, worth.