This provides us a very powerful analogy to the fatal damage inflicted on our financial system by an apparently "glancing blow" with risky subprime mortgages and high-flying derivatives. Just as the Titanic was mortally wounded not by great tears in its hull but by the buckling of steel hull plates, so the U.S. (and thus global) financial system is sinking from similarly "glancing" blows.
The actual damage could have been contained--do you sense another analogy about to surface?-- had the fifth watertight bulwark--shall we call it "the bulwark against systemic failure"?-- extended a few decks higher. But inexplicably, this watertight barrier did not extend as high as the other watertight bulkheads.
Thus even though the water gushing through a fat three foot gash in the forward engine room was held back by the ship's great pumps, as the bow sank lower then water seeped over the fifth watertight bulkhead and gushed into the boiler room.
And so against all "rational odds," the ship's apparently minor structural design flaw led to its inevitable loss as the mighty pumps lost their battle against the rising water.
To all the "experts," the risk of collision with an iceberg were considered low, while the risk of catastrophic damage were considered essentially zero. Hmm, does that remind you of our financial system circa April 2008, just as the great U.S. economy's hull was buckling?
Charles Hugh Smith
Showing posts with label folly. Show all posts
Showing posts with label folly. Show all posts
12 March 2009
Gambling, economic growth and imagination
By Spengler
America's homeowners feel like busted gamblers after a bender in Vegas. They wagered not only the nest egg, but the nest, with the abandon of tulip-bulb traders in 17th century Holland. Americans are hard put to explain how the American dream turned into a chip on the craps table. The focal point of speculation was the asset one usually associates with secure domesticity. What happened to the risk-averse Economic Man of textbooks?
The textbook was misleading to begin with: we are all gamblers and always have been, argues Reuven Brenner, the Repap Professor of Business at McGill University. In a series of books beginning in 1983 with History: The Human Gamble and culminating with his latest volume, A World of Chance: Betting on Religion, Games, Wall Street [1], Brenner yanks economics
inside-out by placing risky behavior at the center of the economic model.
Conventional economics describes an artificial world of slight deviations from equilibrium; Brenner presents the real world, in all its danger and uncertainty. Man lives not only by the sweat of his brow, but by the fortitude of his intestines, for survival demands that we take mortal leaps of a kind that are unknown to the conventional model. Men who would prefer to be timid risk everything to leapfrog their peers before they themselves are left behind.
Rather than award yet another Nobel Prize to an economist who put bells and whistles on the conventional model (Princeton University Professor Paul Krugman was honored this past weekend ''for his analysis of trade patterns and location of economic activity",) the Swedish Academy should have honored Brenner, who gives us a model that makes sense in the real world of tumult and uncertainty - 2008 should have been Brenner's year, given the cataclysmic breakdown of the conventional model. Only a few months ago, the governments of the world went about their business as if nothing unusual was at work; now they are lurching from one emergency plan to another and warning of a new Great Depression.
This sort of thing isn't supposed to happen in the imaginary world of the consensus economic model. Radical changes, though, are the underlying premises of Brenner's approach, which "deals with jumps - relatively large changes. The traditional economic models can deal with small changes, where people adapt passively but do not bet on any new idea," he writes. People take risks because they know that gambling may be the only survival strategy under given circumstances.
Why, for example, would Americans bet their homes? Within Brenner's framework, we need to look to the circumstances that prompt apparent risk-friendliness, rather than click our tongues over an outbreak of collective madness. As Brenner and his wife, economist Gabrielle Brenner, explain:
If people reach the age of fifty or fifty-five and have not "made it", what are their financial options to still live the good life? Except for allocating a few bucks to buy lottery tickets, it is hard to think of any other option. If people find themselves down on their luck and see no immediate opportunities to get rich, what can they do to sustain their hopes and dreams? Allocating a fraction of their portfolios on games with a chance to win a large prize is among the options. And when people are leapfrogged - that is, when some "Joneses" who were "below" them jump ahead - how can they catch up? They will tend to challenge their luck too for a while, taking risks that they might have contemplated before in business, financial markets, and other areas but did not follow up with action.
As it happens, a huge number of Americans began to turn 50 or 55 during the past 10 years, as the baby boomers approached retirement. Between 2005 and 2025, the number of Americans aged 60 or over will jump from around 15% of the population to 25%.
Between 1990 and 2000, that is, the baby boomers reached the age at which workers are supposed to earn their highest lifetime compensation and salt away most of their retirement savings. Americans who saved money during the 1990s put a great deal of it into the stock market and were bitterly disappointed. An American saver who invested in 1996, just as the boom was getting underway, would have given up all his gains by October 2002, at the stock market's following the technology stock collapse. If the same investor held on to a broad market portfolio all the way to the present, he would only break even after inflation.
American asset markets did not offer returns high enough for the baby boomers to earn enough to retire. There are a number of reasons for this. One is that not only Americans, but Europeans, Japanese, and above all Middle Easterners are aging rapidly and seeking retirement assets, such that the price of all capital assets rose and their prospective rate of return fell. Capital markets, as I have argued in the past, come down to old people lending money to young people, and the declining numbers of young people in the industrial world during the past generation are reflected in shrinking investment opportunities.
The prospective retirees of the world had no choice but to take more risk in order to earn the returns they required. Riskier assets were brought to the marketplace, such as subprime mortgages and high-yield loans. Professional gamblers - the hedge funds - raised US$4 trillion to bet on the riskiest portion of pools of mortgages and corporate credit. Americans found that the global demand for mortgage bonds created an inexhaustible supply of cheap credit even for the riskiest borrowers.
With home prices rising 10% a year between 1998 and 2006, Americans found that they could use leverage to achieve triple-digit returns on their equity (if you buy a $200,000 house with $10,000 down and its price rises by 10%, or $20,000, your return on equity is 200%).
In retrospect, it may seem silly for the baby boomers to have assumed that they could double the price of their homes and then all sell their homes to each other and retire on the proceeds. Demographics ultimately destroyed the home price bubble.
As a group, the baby boomers did not have sufficient funds on which to retire, and, given the condition of American asset markets, could not earn sufficient returns on conventional assets. Instead, they chose to "leap into uncertainty", in Brenner's phrase. This sounds fairly general, but Brenner has elaborated his view in a number of startling ways. How, for example, do entrepreneurs set prices for new products, where demand is unknown? Brenner demonstrates (in "Rivalry") that the mechanism by which they do so depends on the creation of new markets. In effect, Brenner has replaced the view of human behavior at the center of economics, and from this elaborated a set of theories, each of which has enormous analytic power.
In Brenner's model, survival means maintaining one's social status, one's place in the pecking order or the corporate food chain, because falling behind decreases the likelihood of survival. Rivalry is the driving force, not an abstract measure of utility. There is something profoundly Biblical in this view: "I considered all labor and all excelling in work, that it is a man's rivalry with his neighbor. This also is vanity and a striving after wind." - Ecclesiastes 4:4.
The Jewish sages of late antiquity spoke of an "evil impulse", variously identified with competitive or sexual drives, without which no one would build a house, start a family or open a business. The entrepreneur, in Brenner's view, resembles Goethe's Mephistopheles, who introduces himself as "the spirit that always wishes evil, but always does good".
Brenner strongly believes that the greatest contribution to welfare comes from letting individuals bet on ideas, pursue innovations, and overturn the existing order of things. A profound faith in a beneficent providence is required to draw this conclusion, for it is easy to argue that betting on ideas may produce apocalyptically harmful outcomes.
Rivalry between nations never was so clear cut as in the preparations for World War l. Each European nation feared being leapfrogged by the others. France feared Germany's high population growth rate, Russia feared Germany's intrusion into the restive western wing of its empire, Germany feared Russian industrialization, England feared the losses of its ability to control the continental balance of power, Italy felt left out, and so forth. All had excellent reasons to fight rather than be left behind, but the result was the collective ruin of all the European nations.
At the outbreak of the war in 1914, some of Europe's best minds exulted in the "leap into uncertainty". Thomas Mann, arguably the greatest writer of the past century, wrote a famous essay entitled "Thoughts in War" comparing the risk-taking attitude of the artist and that of the soldier. A great sense of liberation from the ordinary swept over Europe as its nations prepared to risk everything for their place at the head of the queue. The trouble is that they risked everything, and they all lost everything.
The stench of brimstone precedes the entrepreneur. As God told Mephistopheles in the Prologue in Heaven of Goethe's Faust, human beings tend toward unconditional rest, and to keep them on their toes God assigns them a companion who must act as and be perceived as a devil. The great theorist of entrepreneurship, Frank Knight, of the University of Chicago, is one of Reuven Brenner's spiritual ancestors. His 1921 book Risk, Uncertainty and Profit showed that entrepreneurs' compensation derives from the leap into uncertainty, that is, the assumption of unhedgable risk.
Knight, unlike Brenner, thought that entrepreneurship did not add enough wealth to justify the disruption that it occasioned. Joseph Schumpeter, who took from Mephisto the notion of creative destruction and applied it to economics, was pessimistic about the future of capitalism. He thought communism would triumph.
The apogee of gambling on ideas well might have been the Internet stock bubble of the late 1990s, when any undergraduate with a few computer science credits could launch a company on the equity market. It is hard to find the fault in the system from a pure economic standpoint, for America's markets were the world's most efficient. The trouble is that when we speak of a leap into uncertainty, we leave the realm of probability distributions and enter the realm of the imagination. The entrepreneur's vision of society five or 10 or 20 years ahead is what counts - how lives, mores and tastes will change.
Thomas Alva Edison had one sort of vision of the future when he invented the electric light bulb and the phonograph. The Internet entrepreneurs of 1999 had quite a different one, in which the delights of youth culture would somehow substitute for cash flow. Once investors concluded that music downloads, multi-player games, chat rooms and pornography did not justify a market capitalization larger than America's manufacturing plant, the illusion was gone and so were the valuations.
For that matter, the ill-fated markets for structured credit and mortgages of the past 10 years had the undivided attention of some of the world's best applied mathematicians. Never before were risks so parsed, measured, cut, dried and marketed to different investor groups with different risk preferences. Professional gamblers, or "hedge funds", were enlisted to manage the riskiest part of the capital structure, while legions of mathematicians arranged other securities to be as safe as possible - for example, AAA-rated securities backed by subprime mortgages that are now trading at 50 cents on the dollar.
We have no choice but to leap into uncertainty, where imagination takes the place of probability distributions. Standing still and doing nothing is the most dangerous strategy of all. The one thing we know about all places and all times is that if you stay in the same place doing the same thing long enough, someone is going to come along and rape the crops, burn the women and take you out of the picture.
But what if our imagination goes wrong? If Ecclesiastes (4:4) recognized that business stems from rivalry, as Reuven Brenner maintains, this must be balanced against Jeremiah (7:24), which warns that the people "walked in the counsels and in the imagination of their evil heart, and went backward, and not forward". Brenner has given us as much as economics possibly can: he walks us to the moment of the mortal leap, describes the conditions that motivate it, and reminds us that we have no choice.
But it is important to keep in mind that economics does not explain everything. If we decline to raise a next generation, and abandon ourselves to so-called youth culture, ultimately we will encounter imbalances that economic policy cannot cure. Our imagination is the basis on which we make leaps into uncertainty, and how we cultivate this imagination ultimately may be of greater import than economics as such.
Note: 1. A World of Chance: Betting on Religion, Games, Wall Street, by Reuven and Gabrielle A Brenner with Aaron Brown. Cambridge University Press (August, 2008). ISBN-10: 0521711576. Price US$29.99, 352 pages.
link
America's homeowners feel like busted gamblers after a bender in Vegas. They wagered not only the nest egg, but the nest, with the abandon of tulip-bulb traders in 17th century Holland. Americans are hard put to explain how the American dream turned into a chip on the craps table. The focal point of speculation was the asset one usually associates with secure domesticity. What happened to the risk-averse Economic Man of textbooks?
The textbook was misleading to begin with: we are all gamblers and always have been, argues Reuven Brenner, the Repap Professor of Business at McGill University. In a series of books beginning in 1983 with History: The Human Gamble and culminating with his latest volume, A World of Chance: Betting on Religion, Games, Wall Street [1], Brenner yanks economics
inside-out by placing risky behavior at the center of the economic model.
Conventional economics describes an artificial world of slight deviations from equilibrium; Brenner presents the real world, in all its danger and uncertainty. Man lives not only by the sweat of his brow, but by the fortitude of his intestines, for survival demands that we take mortal leaps of a kind that are unknown to the conventional model. Men who would prefer to be timid risk everything to leapfrog their peers before they themselves are left behind.
Rather than award yet another Nobel Prize to an economist who put bells and whistles on the conventional model (Princeton University Professor Paul Krugman was honored this past weekend ''for his analysis of trade patterns and location of economic activity",) the Swedish Academy should have honored Brenner, who gives us a model that makes sense in the real world of tumult and uncertainty - 2008 should have been Brenner's year, given the cataclysmic breakdown of the conventional model. Only a few months ago, the governments of the world went about their business as if nothing unusual was at work; now they are lurching from one emergency plan to another and warning of a new Great Depression.
This sort of thing isn't supposed to happen in the imaginary world of the consensus economic model. Radical changes, though, are the underlying premises of Brenner's approach, which "deals with jumps - relatively large changes. The traditional economic models can deal with small changes, where people adapt passively but do not bet on any new idea," he writes. People take risks because they know that gambling may be the only survival strategy under given circumstances.
Why, for example, would Americans bet their homes? Within Brenner's framework, we need to look to the circumstances that prompt apparent risk-friendliness, rather than click our tongues over an outbreak of collective madness. As Brenner and his wife, economist Gabrielle Brenner, explain:
If people reach the age of fifty or fifty-five and have not "made it", what are their financial options to still live the good life? Except for allocating a few bucks to buy lottery tickets, it is hard to think of any other option. If people find themselves down on their luck and see no immediate opportunities to get rich, what can they do to sustain their hopes and dreams? Allocating a fraction of their portfolios on games with a chance to win a large prize is among the options. And when people are leapfrogged - that is, when some "Joneses" who were "below" them jump ahead - how can they catch up? They will tend to challenge their luck too for a while, taking risks that they might have contemplated before in business, financial markets, and other areas but did not follow up with action.
As it happens, a huge number of Americans began to turn 50 or 55 during the past 10 years, as the baby boomers approached retirement. Between 2005 and 2025, the number of Americans aged 60 or over will jump from around 15% of the population to 25%.
Between 1990 and 2000, that is, the baby boomers reached the age at which workers are supposed to earn their highest lifetime compensation and salt away most of their retirement savings. Americans who saved money during the 1990s put a great deal of it into the stock market and were bitterly disappointed. An American saver who invested in 1996, just as the boom was getting underway, would have given up all his gains by October 2002, at the stock market's following the technology stock collapse. If the same investor held on to a broad market portfolio all the way to the present, he would only break even after inflation.
American asset markets did not offer returns high enough for the baby boomers to earn enough to retire. There are a number of reasons for this. One is that not only Americans, but Europeans, Japanese, and above all Middle Easterners are aging rapidly and seeking retirement assets, such that the price of all capital assets rose and their prospective rate of return fell. Capital markets, as I have argued in the past, come down to old people lending money to young people, and the declining numbers of young people in the industrial world during the past generation are reflected in shrinking investment opportunities.
The prospective retirees of the world had no choice but to take more risk in order to earn the returns they required. Riskier assets were brought to the marketplace, such as subprime mortgages and high-yield loans. Professional gamblers - the hedge funds - raised US$4 trillion to bet on the riskiest portion of pools of mortgages and corporate credit. Americans found that the global demand for mortgage bonds created an inexhaustible supply of cheap credit even for the riskiest borrowers.
With home prices rising 10% a year between 1998 and 2006, Americans found that they could use leverage to achieve triple-digit returns on their equity (if you buy a $200,000 house with $10,000 down and its price rises by 10%, or $20,000, your return on equity is 200%).
In retrospect, it may seem silly for the baby boomers to have assumed that they could double the price of their homes and then all sell their homes to each other and retire on the proceeds. Demographics ultimately destroyed the home price bubble.
As a group, the baby boomers did not have sufficient funds on which to retire, and, given the condition of American asset markets, could not earn sufficient returns on conventional assets. Instead, they chose to "leap into uncertainty", in Brenner's phrase. This sounds fairly general, but Brenner has elaborated his view in a number of startling ways. How, for example, do entrepreneurs set prices for new products, where demand is unknown? Brenner demonstrates (in "Rivalry") that the mechanism by which they do so depends on the creation of new markets. In effect, Brenner has replaced the view of human behavior at the center of economics, and from this elaborated a set of theories, each of which has enormous analytic power.
In Brenner's model, survival means maintaining one's social status, one's place in the pecking order or the corporate food chain, because falling behind decreases the likelihood of survival. Rivalry is the driving force, not an abstract measure of utility. There is something profoundly Biblical in this view: "I considered all labor and all excelling in work, that it is a man's rivalry with his neighbor. This also is vanity and a striving after wind." - Ecclesiastes 4:4.
The Jewish sages of late antiquity spoke of an "evil impulse", variously identified with competitive or sexual drives, without which no one would build a house, start a family or open a business. The entrepreneur, in Brenner's view, resembles Goethe's Mephistopheles, who introduces himself as "the spirit that always wishes evil, but always does good".
Brenner strongly believes that the greatest contribution to welfare comes from letting individuals bet on ideas, pursue innovations, and overturn the existing order of things. A profound faith in a beneficent providence is required to draw this conclusion, for it is easy to argue that betting on ideas may produce apocalyptically harmful outcomes.
Rivalry between nations never was so clear cut as in the preparations for World War l. Each European nation feared being leapfrogged by the others. France feared Germany's high population growth rate, Russia feared Germany's intrusion into the restive western wing of its empire, Germany feared Russian industrialization, England feared the losses of its ability to control the continental balance of power, Italy felt left out, and so forth. All had excellent reasons to fight rather than be left behind, but the result was the collective ruin of all the European nations.
At the outbreak of the war in 1914, some of Europe's best minds exulted in the "leap into uncertainty". Thomas Mann, arguably the greatest writer of the past century, wrote a famous essay entitled "Thoughts in War" comparing the risk-taking attitude of the artist and that of the soldier. A great sense of liberation from the ordinary swept over Europe as its nations prepared to risk everything for their place at the head of the queue. The trouble is that they risked everything, and they all lost everything.
The stench of brimstone precedes the entrepreneur. As God told Mephistopheles in the Prologue in Heaven of Goethe's Faust, human beings tend toward unconditional rest, and to keep them on their toes God assigns them a companion who must act as and be perceived as a devil. The great theorist of entrepreneurship, Frank Knight, of the University of Chicago, is one of Reuven Brenner's spiritual ancestors. His 1921 book Risk, Uncertainty and Profit showed that entrepreneurs' compensation derives from the leap into uncertainty, that is, the assumption of unhedgable risk.
Knight, unlike Brenner, thought that entrepreneurship did not add enough wealth to justify the disruption that it occasioned. Joseph Schumpeter, who took from Mephisto the notion of creative destruction and applied it to economics, was pessimistic about the future of capitalism. He thought communism would triumph.
The apogee of gambling on ideas well might have been the Internet stock bubble of the late 1990s, when any undergraduate with a few computer science credits could launch a company on the equity market. It is hard to find the fault in the system from a pure economic standpoint, for America's markets were the world's most efficient. The trouble is that when we speak of a leap into uncertainty, we leave the realm of probability distributions and enter the realm of the imagination. The entrepreneur's vision of society five or 10 or 20 years ahead is what counts - how lives, mores and tastes will change.
Thomas Alva Edison had one sort of vision of the future when he invented the electric light bulb and the phonograph. The Internet entrepreneurs of 1999 had quite a different one, in which the delights of youth culture would somehow substitute for cash flow. Once investors concluded that music downloads, multi-player games, chat rooms and pornography did not justify a market capitalization larger than America's manufacturing plant, the illusion was gone and so were the valuations.
For that matter, the ill-fated markets for structured credit and mortgages of the past 10 years had the undivided attention of some of the world's best applied mathematicians. Never before were risks so parsed, measured, cut, dried and marketed to different investor groups with different risk preferences. Professional gamblers, or "hedge funds", were enlisted to manage the riskiest part of the capital structure, while legions of mathematicians arranged other securities to be as safe as possible - for example, AAA-rated securities backed by subprime mortgages that are now trading at 50 cents on the dollar.
We have no choice but to leap into uncertainty, where imagination takes the place of probability distributions. Standing still and doing nothing is the most dangerous strategy of all. The one thing we know about all places and all times is that if you stay in the same place doing the same thing long enough, someone is going to come along and rape the crops, burn the women and take you out of the picture.
But what if our imagination goes wrong? If Ecclesiastes (4:4) recognized that business stems from rivalry, as Reuven Brenner maintains, this must be balanced against Jeremiah (7:24), which warns that the people "walked in the counsels and in the imagination of their evil heart, and went backward, and not forward". Brenner has given us as much as economics possibly can: he walks us to the moment of the mortal leap, describes the conditions that motivate it, and reminds us that we have no choice.
But it is important to keep in mind that economics does not explain everything. If we decline to raise a next generation, and abandon ourselves to so-called youth culture, ultimately we will encounter imbalances that economic policy cannot cure. Our imagination is the basis on which we make leaps into uncertainty, and how we cultivate this imagination ultimately may be of greater import than economics as such.
Note: 1. A World of Chance: Betting on Religion, Games, Wall Street, by Reuven and Gabrielle A Brenner with Aaron Brown. Cambridge University Press (August, 2008). ISBN-10: 0521711576. Price US$29.99, 352 pages.
link
23 January 2009
Redecorating the Titanic, post impact ~ Thain and exec bullshit
Thank you John Thain! We needed a poster boy for Wall Street excess and the bank bailout, and you're it! Congratulations......
"In early 2008, just as Merrill Lynch CEO John Thain was preparing to slash expenses, cut thousands of jobs and exit businesses to fix the ailing securities firm, he was also spending company money on himself, senior people at the firm say.
According to documents reviewed by The Daily Beast, Thain spent $1.22 million of company money to refurbish his office at Merrill Lynch headquarters in lower Manhattan. The biggest piece of the spending spree: $800,000 to hire famed celebrity designer Michael Smith, who is currently redesigning the White House for the Obama family for just $100,000.
Big ticket items included $87,000 for an area rug, four pairs of curtains for $28,000, a pair of guest chairs for $87,000 and fabric for a "Roman Shade" for $11,000.
The other big ticket items Thain purchased include: $87,000 for an area rug in Thain's conference room and another area rug for $44,000; a "mahogany pedestal table" for $25,000; a "19th Century Credenza" in Thain's office for $68,000; a sofa for $15,000; four pairs of curtains for $28,000; a pair of guest chairs for $87,000; a "George IV Desk" for $18,000; six wall sconces for $2,700; six chairs in his private dining room for $37,000; a mirror in his private dining room for $5,000; a chandelier in the private dining room for $13,000; fabric for a "Roman Shade" for $11,000; a "custom coffee table" for $16,000; something called a "commode on legs" for $35,000; a "Regency Chairs" for $24,000; "40 yards of fabric for wall panels," for $5,000 and a "parchment waste can" for $1,400.
The documents also show that Thain signed off on the purchases personally. "Labor to relamp the six wall sconces" cost $3,000, and Thain authorized the payment of another $30,000 to pay the expenses Smith incurred in doing the work. Thain has hired Smith—whose celebrity client list includes Steven Spielberg, Michelle Pfeiffer, Cindy Crawford and Sir Evelyn de Rothschild—to design and decorate his private residences. They include a Manhattan apartment at 740 Park Avenue, and his 10-acre mansion in Rye, NY.
See Thain’s Top 16 Outrages
Thain was tapped to run Merrill Lynch as the firm suffered massive losses from investments tied to the depressed real estate market under his predecessor Stan O'Neal, who was ousted in late 2007. Those losses continued through 2008, forcing Thain and his management team to sell the brokerage firm to Bank of America in mid-September or face near certain liquidation as investors fearing further losses began pulling lines of credit and other financing.
Just last week, Bank of America announced that Merrill has suffered an unexpected loss of $1.79 billion for the fourth quarter of 2008, nearly collapsing BofA's purchase. Bank of America CEO Ken Lewis said that without $138 billion in government assistance, including the infusion of $20 billion from the federal government he would have pulled out of the Merrill deal, which was approved by BofA shareholders in early December.
Thain has come under pressure in recent weeks after several top executives at Merrill, including brokerage chief Bob McCann and investment banking head Greg Fleming, abruptly resigned from the firm citing differences with Thain. People close to Lewis say his relationship with Thain was further strained by the recent massive loss. Lewis himself has faced withering criticism for rushing the buy Merrill for $28 billion after less than two days of due diligence.
"I don't want to convey to you that Ken was delighted in mid-December when he found out about the losses, in fact he was pissed at Thain," one person at BofA who is close to Lewis told The Daily Beast earlier in the week. "He's not doing anything about Thain now because it isn't clear whether Thain should have told him sooner. So at least for now, Ken is sticking with Thain." (A spokeswoman for Thain denied a rumor inside Merrill that Thain is poised to step down from the firm.)
It's unclear how the disclosure of the personal expenses will effect now Thain's position. Thain signed off on the purchases in January, people close to Merrill say, when Merrill was still an independent firm and when some analysts believed the company was poised for a rebound with Thain as the new CEO. Thain came to Merrill after a largely successful stint as CEO of the New York Stock Exchange, where he converted the not-profit entity to a public company. Before that, he was a long-time executive at Goldman Sachs, where he served as former CEO Hank Paulson's No. 2.
Still others say spending so much company money on personal items shows incredibly bad judgment on the part of Thain since Merrill was in the middle of a financial crisis that ultimately led to its demise as an independent company. At the time, Thain was preaching the virtues of cost control, telling employees to reduce expenses including car services, entertainment and travel. In addition to the personal expenses on his office, documents show Thain paid his driver $230,000 for one year’s work, which included the driver's $85,000 salary and bonus of $18,000, and another $128,000 in over-time pay. Drivers of top executives are often paid about half that amount.
"If this is accurate it has shades of Dennis Kozlowski's $6,000 shower curtain," said investor Doug Kass of Seabreeze Capital Management, in a reference to former Tyco CEO Dennis Kozlowski who was convicted of fraud and is serving prison time for improperly spending millions of dollars on personal items. While there is no evidence that what Thain did is either illegal or of the magnitude of the spending by Kozlowski, Kass said "Merrill was on the fence and Thain came into save the company. It's still a lot of money and there is no rationalization for something like this."
"In early 2008, just as Merrill Lynch CEO John Thain was preparing to slash expenses, cut thousands of jobs and exit businesses to fix the ailing securities firm, he was also spending company money on himself, senior people at the firm say.
According to documents reviewed by The Daily Beast, Thain spent $1.22 million of company money to refurbish his office at Merrill Lynch headquarters in lower Manhattan. The biggest piece of the spending spree: $800,000 to hire famed celebrity designer Michael Smith, who is currently redesigning the White House for the Obama family for just $100,000.
Big ticket items included $87,000 for an area rug, four pairs of curtains for $28,000, a pair of guest chairs for $87,000 and fabric for a "Roman Shade" for $11,000.
The other big ticket items Thain purchased include: $87,000 for an area rug in Thain's conference room and another area rug for $44,000; a "mahogany pedestal table" for $25,000; a "19th Century Credenza" in Thain's office for $68,000; a sofa for $15,000; four pairs of curtains for $28,000; a pair of guest chairs for $87,000; a "George IV Desk" for $18,000; six wall sconces for $2,700; six chairs in his private dining room for $37,000; a mirror in his private dining room for $5,000; a chandelier in the private dining room for $13,000; fabric for a "Roman Shade" for $11,000; a "custom coffee table" for $16,000; something called a "commode on legs" for $35,000; a "Regency Chairs" for $24,000; "40 yards of fabric for wall panels," for $5,000 and a "parchment waste can" for $1,400.
The documents also show that Thain signed off on the purchases personally. "Labor to relamp the six wall sconces" cost $3,000, and Thain authorized the payment of another $30,000 to pay the expenses Smith incurred in doing the work. Thain has hired Smith—whose celebrity client list includes Steven Spielberg, Michelle Pfeiffer, Cindy Crawford and Sir Evelyn de Rothschild—to design and decorate his private residences. They include a Manhattan apartment at 740 Park Avenue, and his 10-acre mansion in Rye, NY.
See Thain’s Top 16 Outrages
Thain was tapped to run Merrill Lynch as the firm suffered massive losses from investments tied to the depressed real estate market under his predecessor Stan O'Neal, who was ousted in late 2007. Those losses continued through 2008, forcing Thain and his management team to sell the brokerage firm to Bank of America in mid-September or face near certain liquidation as investors fearing further losses began pulling lines of credit and other financing.
Just last week, Bank of America announced that Merrill has suffered an unexpected loss of $1.79 billion for the fourth quarter of 2008, nearly collapsing BofA's purchase. Bank of America CEO Ken Lewis said that without $138 billion in government assistance, including the infusion of $20 billion from the federal government he would have pulled out of the Merrill deal, which was approved by BofA shareholders in early December.
Thain has come under pressure in recent weeks after several top executives at Merrill, including brokerage chief Bob McCann and investment banking head Greg Fleming, abruptly resigned from the firm citing differences with Thain. People close to Lewis say his relationship with Thain was further strained by the recent massive loss. Lewis himself has faced withering criticism for rushing the buy Merrill for $28 billion after less than two days of due diligence.
"I don't want to convey to you that Ken was delighted in mid-December when he found out about the losses, in fact he was pissed at Thain," one person at BofA who is close to Lewis told The Daily Beast earlier in the week. "He's not doing anything about Thain now because it isn't clear whether Thain should have told him sooner. So at least for now, Ken is sticking with Thain." (A spokeswoman for Thain denied a rumor inside Merrill that Thain is poised to step down from the firm.)
It's unclear how the disclosure of the personal expenses will effect now Thain's position. Thain signed off on the purchases in January, people close to Merrill say, when Merrill was still an independent firm and when some analysts believed the company was poised for a rebound with Thain as the new CEO. Thain came to Merrill after a largely successful stint as CEO of the New York Stock Exchange, where he converted the not-profit entity to a public company. Before that, he was a long-time executive at Goldman Sachs, where he served as former CEO Hank Paulson's No. 2.
Still others say spending so much company money on personal items shows incredibly bad judgment on the part of Thain since Merrill was in the middle of a financial crisis that ultimately led to its demise as an independent company. At the time, Thain was preaching the virtues of cost control, telling employees to reduce expenses including car services, entertainment and travel. In addition to the personal expenses on his office, documents show Thain paid his driver $230,000 for one year’s work, which included the driver's $85,000 salary and bonus of $18,000, and another $128,000 in over-time pay. Drivers of top executives are often paid about half that amount.
"If this is accurate it has shades of Dennis Kozlowski's $6,000 shower curtain," said investor Doug Kass of Seabreeze Capital Management, in a reference to former Tyco CEO Dennis Kozlowski who was convicted of fraud and is serving prison time for improperly spending millions of dollars on personal items. While there is no evidence that what Thain did is either illegal or of the magnitude of the spending by Kozlowski, Kass said "Merrill was on the fence and Thain came into save the company. It's still a lot of money and there is no rationalization for something like this."
15 January 2009
"A surge of inflation is sure to follow". Fed fault line grows.
WASHINGTON (MarketWatch) - Key fault lines are emerging at the Federal Reserve over the central bank's journey into uncharted monetary policy.
In a speech on Tuesday, Philadelphia Fed Bank president Charles Plosser publicly took issue with positions advocated by Fed chief Ben Bernanke.
In a breathtaking innovation in monetary policy, the Bernanke Fed since the fall has not only expanded its balance sheet from $900 billion to well over $2 trillion in its efforts to restore the credit markets to health but has stopped offsetting the expanding bank reserves.
The Fed has begun purchasing commercial paper, mortgage-backed securities, and other assets to keep the markets from collapsing.
Bernanke signaled on Monday that it was full speed ahead with these new purchases. See full story.
He even talked about an expansion of the plan - saying the Fed's plan to purchase consumer and small business loans with the help of the Treasury was a model "that can be expanded to accommodate higher volumes or additional classes of securities as circumstances warrant.
He said he sees no near-term problem with inflation.
On the other hand, Plosser urged the Fed to "proceed with caution" with the new policy. Others outside the Fed are much more strident and want plans in place immediately to reverse it. They believe an inflation storm is already in train.
"It is a huge disagreement," said Robert Brusca, chief economist at FAO Economics.
While the Fed chairman has made it a practice to run a more democratic central bank, the disagreements come at a crucial time when the Fed is striving to appear on top of the current financial market crisis and steep recession.
Bernanke argued that focusing on the size of the balance sheet misses the point, arguing the Fed's various asset purchase programs are not easily summarized in a single number.
But Plosser said that the growth of the Fed's balance sheet was a key metric.
"It is not appropriate to ignore quantitative metrics in this new policy environment," Plosser said.
On the surface, the debate is about how the describe the programs.
Bernanke and Fed officials have gone to great lengths to say that the new policy is not "quantitative easing" similar to the Bank of Japan's actions in the 1990s.
Instead, Bernanke called the new program "credit easing" and tried to put the focus on "the mix of loans and securities that it holds and on how this composition of assets affects credit conditions for households and businesses."
But Plosser is bringing the spotlight right back to the Fed's balance sheet.
"The size of the balance sheet does offer a possible nominal anchor for monitoring the volume of our liquidity provisions," Plosser said.
Underneath the surface is a real concern about how and when the Fed tries to exit from its new monetary policy.
Fed officials who pay attention to the money supply believe that the Fed's current policy of printing money never ends well and the danger of inflation is very high. They believe the Fed must withdraw the stimulus before there is any sign of inflation or it is too late.
Bernanke's remarks indicate he wants the flexibility and doesn't want to tie his hands.
William Poole, who recently left his post as president of the St. Louis Fed, says it is crucial that the Fed set a target for cutting its balance sheet.
Poole said the expansion of the Fed's balance sheet is unprecedented and research suggests that a surge of inflation is sure to follow.
"I would say if the policy is not reversed, there is a high probability that the unpleasant risk (of inflation) materializes," Poole said in an interview.
"I believe that the Fed should set a hard number - a target that they take seriously for the overall size of the balance sheet," he said.
Plosser also argued that the Fed has put its independence at risk by buying long-term assets. He worried that some "interest groups" will try to use political persuasion to stop the Fed from selling these longer-term assets even if the central bank has decided it makes sense.
"We will need to have the political fortitude to make some difficult decisions about when our policies must be reversed or unwound," Plosser said.
Bernanke said that he would watch this situation closely but didn't expect it to be a "significant problem."
Poole said he was very concerned that the Fed could simply lend money to anyone, without constraint.
In the Soviet Union and Eastern Europe during the Cold War era, economies were inefficient because they had a soft-budget constraint. If a firm got into trouble, the banking system would give them more money, Poole said.
The current situation at the Fed seems eerily similar, he said.
"What is discipline - where are the hard choices - when does Fed say our resources are exhausted?" Poole asked.
Greg Robb is a senior reporter for MarketWatch in Washington.
In a speech on Tuesday, Philadelphia Fed Bank president Charles Plosser publicly took issue with positions advocated by Fed chief Ben Bernanke.
In a breathtaking innovation in monetary policy, the Bernanke Fed since the fall has not only expanded its balance sheet from $900 billion to well over $2 trillion in its efforts to restore the credit markets to health but has stopped offsetting the expanding bank reserves.
The Fed has begun purchasing commercial paper, mortgage-backed securities, and other assets to keep the markets from collapsing.
Bernanke signaled on Monday that it was full speed ahead with these new purchases. See full story.
He even talked about an expansion of the plan - saying the Fed's plan to purchase consumer and small business loans with the help of the Treasury was a model "that can be expanded to accommodate higher volumes or additional classes of securities as circumstances warrant.
He said he sees no near-term problem with inflation.
On the other hand, Plosser urged the Fed to "proceed with caution" with the new policy. Others outside the Fed are much more strident and want plans in place immediately to reverse it. They believe an inflation storm is already in train.
"It is a huge disagreement," said Robert Brusca, chief economist at FAO Economics.
While the Fed chairman has made it a practice to run a more democratic central bank, the disagreements come at a crucial time when the Fed is striving to appear on top of the current financial market crisis and steep recession.
Bernanke argued that focusing on the size of the balance sheet misses the point, arguing the Fed's various asset purchase programs are not easily summarized in a single number.
But Plosser said that the growth of the Fed's balance sheet was a key metric.
"It is not appropriate to ignore quantitative metrics in this new policy environment," Plosser said.
On the surface, the debate is about how the describe the programs.
Bernanke and Fed officials have gone to great lengths to say that the new policy is not "quantitative easing" similar to the Bank of Japan's actions in the 1990s.
Instead, Bernanke called the new program "credit easing" and tried to put the focus on "the mix of loans and securities that it holds and on how this composition of assets affects credit conditions for households and businesses."
But Plosser is bringing the spotlight right back to the Fed's balance sheet.
"The size of the balance sheet does offer a possible nominal anchor for monitoring the volume of our liquidity provisions," Plosser said.
Underneath the surface is a real concern about how and when the Fed tries to exit from its new monetary policy.
Fed officials who pay attention to the money supply believe that the Fed's current policy of printing money never ends well and the danger of inflation is very high. They believe the Fed must withdraw the stimulus before there is any sign of inflation or it is too late.
Bernanke's remarks indicate he wants the flexibility and doesn't want to tie his hands.
William Poole, who recently left his post as president of the St. Louis Fed, says it is crucial that the Fed set a target for cutting its balance sheet.
Poole said the expansion of the Fed's balance sheet is unprecedented and research suggests that a surge of inflation is sure to follow.
"I would say if the policy is not reversed, there is a high probability that the unpleasant risk (of inflation) materializes," Poole said in an interview.
"I believe that the Fed should set a hard number - a target that they take seriously for the overall size of the balance sheet," he said.
Plosser also argued that the Fed has put its independence at risk by buying long-term assets. He worried that some "interest groups" will try to use political persuasion to stop the Fed from selling these longer-term assets even if the central bank has decided it makes sense.
"We will need to have the political fortitude to make some difficult decisions about when our policies must be reversed or unwound," Plosser said.
Bernanke said that he would watch this situation closely but didn't expect it to be a "significant problem."
Poole said he was very concerned that the Fed could simply lend money to anyone, without constraint.
In the Soviet Union and Eastern Europe during the Cold War era, economies were inefficient because they had a soft-budget constraint. If a firm got into trouble, the banking system would give them more money, Poole said.
The current situation at the Fed seems eerily similar, he said.
"What is discipline - where are the hard choices - when does Fed say our resources are exhausted?" Poole asked.
Greg Robb is a senior reporter for MarketWatch in Washington.
19 December 2008
Beware - "Quantitative Easing" is Hallucinogenic
The Bernanke Fed can’t wait to experiment with QE, by printing unlimited amounts of US-dollars out of thin air, and monetizing the US Treasury’s debt. On Dec 16th, the Fed shocked the market by adopting a target for the fed funds rate, within a range of zero to 0.25%, an all-time low, and said it would employ “all available tools” to dispel a year-long recession. “The Fed is sending a message that it will print money to an unlimited extent until it starts to see the economy expanding,” remarked William Poole, former president of the St. Louis Fed.
However, “Quantitative Easing” is a very dangerous hallucinogenic drug, and quoting Santayana again, “Those who do not learn from history are doomed to repeat it.” Fed chief Ben “Bubbles” Bernanke, who strongly endorsed “Easy” Al Greenspan’s ultra-low interest rate policy earlier this decade, which was designed to inflate the commodity, housing, and sub-prime debt bubbles, is now fueling a massive Treasury market bubble, and legions of speculators are taking collective leave of their senses and succumbing to delusions of zero-percent 10-year yields.
If left unchecked, “Bubble-mania” engenders a massive, largely uncorrected rise in valuations that discounts not just the present and near-future, but also a distorted view of the far-horizon. The Fed’s bold shift to QE seems designed to head-off the possibility of a deflationary depression. However, “if inflation targeting creates the presumption that the central bank can look at consumer price inflation alone, then it might have the unintended effect of creating a bubble,” warned BoJ chief Shirakawa.
Japanese bond traders still carry the scars from the bursting of the JGB bubble in 2003, and so, far haven’t gotten caught-up in “irrational exuberance” of the US Treasury bond market. “Wisdom comes by disillusionment,” said Santayana. JGB traders are anxiously waiting to see how the BoJ’s reacts to the Fed’s dangerous experiment with QE, and whether it will boost its purchases of long-term JGB’s from the current 1.2-trillion yen ($13.2-billion) per month.
The BoJ has put a floor under the 10-year JGB yield at 1.25% for the past five-years, but BoJ chief Shirakawa is under heavy pressure from Tokyo warlords, to resume full-scale QE.“We acknowledge the Bank of Japan’s independence. But as stipulated under law, the BoJ and the government keep in close contact with each other in guiding economic policy,” said Finance chief Shoichi Nakagawa on Dec 16th. “I hope the BoJ reaches an appropriate conclusion, bearing in mind Japan’s economic and liquidity conditions,” he warned.
The yield on the US Treasury’s 2-year note has collapsed to 20-basis points above Japanese yields, the smallest gap since 1992, which in turn, has crushed the US$ versus the Japanese yen, to a 13-year low of 88-yen. Japan is heavily dependent on exports, particularly to the US and Europe, and a major factor sinking Japan’s Nikkei-225 index is the strength of the yen against all major currencies including the Euro and US-dollar. Falling exports have already led to a contraction in the Japanese economy in the second a third quarter, and the worst is yet to come.
On Dec 16th, BoJ chief Shirakawa said he is “examining quantitative easing,” and is increasingly concerned about a deepening recession. “In addition to falling exports due to a slowdown in overseas economies, corporate profits, household finances and job conditions are worsening, and it is taking a toll on domestic private demand. Output, employment and consumption data were all severe,” Shirakawa told parliament, sending JGB futures higher.
As the Fed floods the global money markets with another big tidal wave of US-dollars in the months ahead, the BoJ might return to QE, to cushion the slide of the dollar. The BoJ might buy commercial paper, increase its monthly purchases of Japanese government bonds, or expand the types of collateral it accepts when making loans, the Nikkei business newspaper reported on Dec 15th.
However, “Quantitative Easing” is a very dangerous hallucinogenic drug, and quoting Santayana again, “Those who do not learn from history are doomed to repeat it.” Fed chief Ben “Bubbles” Bernanke, who strongly endorsed “Easy” Al Greenspan’s ultra-low interest rate policy earlier this decade, which was designed to inflate the commodity, housing, and sub-prime debt bubbles, is now fueling a massive Treasury market bubble, and legions of speculators are taking collective leave of their senses and succumbing to delusions of zero-percent 10-year yields.
If left unchecked, “Bubble-mania” engenders a massive, largely uncorrected rise in valuations that discounts not just the present and near-future, but also a distorted view of the far-horizon. The Fed’s bold shift to QE seems designed to head-off the possibility of a deflationary depression. However, “if inflation targeting creates the presumption that the central bank can look at consumer price inflation alone, then it might have the unintended effect of creating a bubble,” warned BoJ chief Shirakawa.
Japanese bond traders still carry the scars from the bursting of the JGB bubble in 2003, and so, far haven’t gotten caught-up in “irrational exuberance” of the US Treasury bond market. “Wisdom comes by disillusionment,” said Santayana. JGB traders are anxiously waiting to see how the BoJ’s reacts to the Fed’s dangerous experiment with QE, and whether it will boost its purchases of long-term JGB’s from the current 1.2-trillion yen ($13.2-billion) per month.
The BoJ has put a floor under the 10-year JGB yield at 1.25% for the past five-years, but BoJ chief Shirakawa is under heavy pressure from Tokyo warlords, to resume full-scale QE.“We acknowledge the Bank of Japan’s independence. But as stipulated under law, the BoJ and the government keep in close contact with each other in guiding economic policy,” said Finance chief Shoichi Nakagawa on Dec 16th. “I hope the BoJ reaches an appropriate conclusion, bearing in mind Japan’s economic and liquidity conditions,” he warned.
The yield on the US Treasury’s 2-year note has collapsed to 20-basis points above Japanese yields, the smallest gap since 1992, which in turn, has crushed the US$ versus the Japanese yen, to a 13-year low of 88-yen. Japan is heavily dependent on exports, particularly to the US and Europe, and a major factor sinking Japan’s Nikkei-225 index is the strength of the yen against all major currencies including the Euro and US-dollar. Falling exports have already led to a contraction in the Japanese economy in the second a third quarter, and the worst is yet to come.
On Dec 16th, BoJ chief Shirakawa said he is “examining quantitative easing,” and is increasingly concerned about a deepening recession. “In addition to falling exports due to a slowdown in overseas economies, corporate profits, household finances and job conditions are worsening, and it is taking a toll on domestic private demand. Output, employment and consumption data were all severe,” Shirakawa told parliament, sending JGB futures higher.
As the Fed floods the global money markets with another big tidal wave of US-dollars in the months ahead, the BoJ might return to QE, to cushion the slide of the dollar. The BoJ might buy commercial paper, increase its monthly purchases of Japanese government bonds, or expand the types of collateral it accepts when making loans, the Nikkei business newspaper reported on Dec 15th.
11 December 2008
Can't fix what you don't understand, can you
"They have been raised solely within the neoclassical approach to economics, which has dominated the academic discipline of economics since the mid-1970s. They have been trained to uncritically believe in models of the economy based on the fantasies of hyper-rational individuals (who can predict the future), that markets that are always in equilibrium where money is simply a veil over barter.
One excellent question put to James by Henry Blodget is worth quoting in its entirety. Blodget quite justifiably expressed the belief that in their training economists look at history–a statement that shows he didn’t himself do an economics degree, because one of the first subjects that neoclassical economists eliminated to make way for their obsessions with “microeconomics” and “econometrics” was economic history:
Blodget: But obviously in training economists, especially academics who go through an incredible period where they’re learning and studying history, and you look back over history where you’ve had many of these complete crashes that were unforeseen at the time. How does academia deal with that? Is the story always told that “Oh yes, but we were stupid and unsophisticated then, and now we’re smart and therefore we’ll see it”? How do people explain that?
James’s reply was:
Galbraith: That’s an excellent question, but the reality is that training in economics does not involve coming to grips with history. Economic history is barely taught in graduate economics departments, and the history of economic thought isn’t taught at all. So figures that have been fundamental to understanding phenomena like the Great Depression–or for that matter the Great Crash–are simply not in the curriculum.
Keynes, who taught my father John Kenneth Galbraith–who understood the Great Depression as well as any figure in the 20th century–… you won’t find them on the reading lists. That is in some sense the shocking commentary on the intellectual direction that the profession has taken.
There’s much more worth listening to in this interview. There is, also, hope. The fact that serious intellectuals who are critical of neoclassical economics are now being listened to by the media and the markets–though not yet governments–is a sign that, possibly, the days of the delusional neoclassical approach to economics are coming to a close.
Unfortunately, it has taken a serious economic crisis–possibly the most serious in history–to bring that delusion to its knees. But in the meantime, people trained in that delusion are still in control of economic policy, and are charged with helping overcome a problem they did not foresee, and still do not understand."
One excellent question put to James by Henry Blodget is worth quoting in its entirety. Blodget quite justifiably expressed the belief that in their training economists look at history–a statement that shows he didn’t himself do an economics degree, because one of the first subjects that neoclassical economists eliminated to make way for their obsessions with “microeconomics” and “econometrics” was economic history:
Blodget: But obviously in training economists, especially academics who go through an incredible period where they’re learning and studying history, and you look back over history where you’ve had many of these complete crashes that were unforeseen at the time. How does academia deal with that? Is the story always told that “Oh yes, but we were stupid and unsophisticated then, and now we’re smart and therefore we’ll see it”? How do people explain that?
James’s reply was:
Galbraith: That’s an excellent question, but the reality is that training in economics does not involve coming to grips with history. Economic history is barely taught in graduate economics departments, and the history of economic thought isn’t taught at all. So figures that have been fundamental to understanding phenomena like the Great Depression–or for that matter the Great Crash–are simply not in the curriculum.
Keynes, who taught my father John Kenneth Galbraith–who understood the Great Depression as well as any figure in the 20th century–… you won’t find them on the reading lists. That is in some sense the shocking commentary on the intellectual direction that the profession has taken.
There’s much more worth listening to in this interview. There is, also, hope. The fact that serious intellectuals who are critical of neoclassical economics are now being listened to by the media and the markets–though not yet governments–is a sign that, possibly, the days of the delusional neoclassical approach to economics are coming to a close.
Unfortunately, it has taken a serious economic crisis–possibly the most serious in history–to bring that delusion to its knees. But in the meantime, people trained in that delusion are still in control of economic policy, and are charged with helping overcome a problem they did not foresee, and still do not understand."
5 September 2008
The Death of Capitalism. Not Yet but Close. Financial Tsunami Incoming
"At what point shall we expect the approach of danger? By what means shall we fortify against it? Shall we expect some transatlantic military giant to step the Ocean, and crush us at a blow?
Never! All the armies of Europe, Asia and Africa combined, with all the treasure of the earth in their military chest; with a Bonaparte for a commander, could not by force, take a drink from the Ohio, or make a track on the Blue Ridge, in a trial of a thousand years.
At what point, then, is the approach of danger to be expected? I answer, if it ever reach us it must spring up amongst us. It cannot come from abroad. If destruction be our lot, we must ourselves be its author and finisher. As a nation of freemen, we will live through all time, or die by suicide."
Abraham Lincoln January 27, 1838
Bill Gross seems to be a smart and decent man. He is a savvy bond trader but like most traders he often 'talks his book' when speaking publicly.
And he is afraid. He is afraid of what he sees behind the scenes in the markets, as one of the largest holders of US debt, public and private. His words are a reflection of how bad it must be behind the facade of calm appearance. Bill Gross is a sincere voice of a probable victim coming out of a business sector most recently devoted to manipulation and deception.
Capitalism is sick, perhaps on its death bed. It has not been conquered from abroad by a competing ideology, jealous of its great success. It is slowly being strangled by the crony capitalists and a rogue financial sector out of control.
Crony capitalists do not want any part of free markets. They loathe them, run from them, seek to undermine them at every turn. Their intent is always and everywhere to create monopolies, sinecures for themselves, to wield inordinate power to keep what they win and give the public what they lose. They manipulate through words, and bribery, and deception.
Yes, Fannie and Freddie debt must be supported, with a haircut perhaps, because of the 'implicit guarantee' which was extended for years by the Congress. We cannot afford to default on anything that so closely resembles sovereign debt.
But 'buying assets' with public monies without reforming the system feeds the problem and makes the eventual solution more severe.
The Resolution Trust is a fee and commission generating machine for the same group that caused the problems. Receivership, investigation, orderly liquidation, position limits and transparency in commodity markets, a restoration of the laws created after the Crash and Great Depression to restrain reckless and fraudulent banking are essential to a genuine solution to these serial bubbles and financial Ponzi schemes.
It is what we do when no one is looking, or when you are under duress, or frightened, that takes the measure of our character.
We will stand free or we will fall. But if we fall it will be by our own hand and a lack of resolve, a reluctance to put aside our fears and prejudices and greed that are used to play us for fools and face the facts, and listen to the truth. When the banks make us an offer they think that we cannot refuse, we will be at the crossroads and will decide what we wish to be: slaves or free men. Yes, it really is that simple.
"And I sincerely believe, with you, that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale."
Thomas Jefferson
U.S. Must Buy Assets to Prevent `Financial Tsunami,' Gross Says
By Jody Shenn
September 4, 2008 08:43 EDT
Sept. 4 (Bloomberg) -- The U.S. government needs to start buying assets to stem a bourgeoning ``financial tsunami,'' according to Bill Gross, manager of the world's biggest bond fund.
A process of ``delevering,'' where banks are shrinking and cutting off lending, is sapping demand for loans, bonds, stocks and commodities, driving down prices of assets of even ``impeccable quality,'' Gross said. The decline may continue until the government steps in as a buyer, he said.
``Unchecked, it can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami,'' Gross of Newport Beach, California-based Pacific Investment Management Co. said in commentary posted on the firm's Web site today. ``If we are to prevent a continuing asset and debt liquidation of near historic proportions, we will require policies that open up the balance sheet of the U.S. Treasury.''
The government should be used to support not only mortgage finance providers Fannie Mae and Freddie Mac, but also ``Mom and Pop on Main Street U.S.A.,'' through subsidized home loans issued by the Federal Housing Administration and other government institutions, Gross said. A new version of the Resolution Trust Corp., which bought assets from failing institutions during the savings-and-loan crisis of the 1980s, may also work, he said.
Pimco, sovereign wealth funds and central banks are reluctant to participate in new capital raising by financial companies after losing money on more than $400 billion of investments, Gross said. (and that's the money quote - Jesse)
Never! All the armies of Europe, Asia and Africa combined, with all the treasure of the earth in their military chest; with a Bonaparte for a commander, could not by force, take a drink from the Ohio, or make a track on the Blue Ridge, in a trial of a thousand years.
At what point, then, is the approach of danger to be expected? I answer, if it ever reach us it must spring up amongst us. It cannot come from abroad. If destruction be our lot, we must ourselves be its author and finisher. As a nation of freemen, we will live through all time, or die by suicide."
Abraham Lincoln January 27, 1838
Bill Gross seems to be a smart and decent man. He is a savvy bond trader but like most traders he often 'talks his book' when speaking publicly.
And he is afraid. He is afraid of what he sees behind the scenes in the markets, as one of the largest holders of US debt, public and private. His words are a reflection of how bad it must be behind the facade of calm appearance. Bill Gross is a sincere voice of a probable victim coming out of a business sector most recently devoted to manipulation and deception.
Capitalism is sick, perhaps on its death bed. It has not been conquered from abroad by a competing ideology, jealous of its great success. It is slowly being strangled by the crony capitalists and a rogue financial sector out of control.
Crony capitalists do not want any part of free markets. They loathe them, run from them, seek to undermine them at every turn. Their intent is always and everywhere to create monopolies, sinecures for themselves, to wield inordinate power to keep what they win and give the public what they lose. They manipulate through words, and bribery, and deception.
Yes, Fannie and Freddie debt must be supported, with a haircut perhaps, because of the 'implicit guarantee' which was extended for years by the Congress. We cannot afford to default on anything that so closely resembles sovereign debt.
But 'buying assets' with public monies without reforming the system feeds the problem and makes the eventual solution more severe.
The Resolution Trust is a fee and commission generating machine for the same group that caused the problems. Receivership, investigation, orderly liquidation, position limits and transparency in commodity markets, a restoration of the laws created after the Crash and Great Depression to restrain reckless and fraudulent banking are essential to a genuine solution to these serial bubbles and financial Ponzi schemes.
It is what we do when no one is looking, or when you are under duress, or frightened, that takes the measure of our character.
We will stand free or we will fall. But if we fall it will be by our own hand and a lack of resolve, a reluctance to put aside our fears and prejudices and greed that are used to play us for fools and face the facts, and listen to the truth. When the banks make us an offer they think that we cannot refuse, we will be at the crossroads and will decide what we wish to be: slaves or free men. Yes, it really is that simple.
"And I sincerely believe, with you, that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale."
Thomas Jefferson
U.S. Must Buy Assets to Prevent `Financial Tsunami,' Gross Says
By Jody Shenn
September 4, 2008 08:43 EDT
Sept. 4 (Bloomberg) -- The U.S. government needs to start buying assets to stem a bourgeoning ``financial tsunami,'' according to Bill Gross, manager of the world's biggest bond fund.
A process of ``delevering,'' where banks are shrinking and cutting off lending, is sapping demand for loans, bonds, stocks and commodities, driving down prices of assets of even ``impeccable quality,'' Gross said. The decline may continue until the government steps in as a buyer, he said.
``Unchecked, it can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami,'' Gross of Newport Beach, California-based Pacific Investment Management Co. said in commentary posted on the firm's Web site today. ``If we are to prevent a continuing asset and debt liquidation of near historic proportions, we will require policies that open up the balance sheet of the U.S. Treasury.''
The government should be used to support not only mortgage finance providers Fannie Mae and Freddie Mac, but also ``Mom and Pop on Main Street U.S.A.,'' through subsidized home loans issued by the Federal Housing Administration and other government institutions, Gross said. A new version of the Resolution Trust Corp., which bought assets from failing institutions during the savings-and-loan crisis of the 1980s, may also work, he said.
Pimco, sovereign wealth funds and central banks are reluctant to participate in new capital raising by financial companies after losing money on more than $400 billion of investments, Gross said. (and that's the money quote - Jesse)
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