I’ve just been sent this link to a hilarious face-off between Max Keiser and an Economics Professor. Max calls the Wall Street speculators “financial terrorists”, calls for decapitation as in days of olde…
The most fun I got out of this was watching the Professor’s discomfort, and his attempts to understand the crisis in terms of neoclassical economic theory: markets are rational and merely respond to policy, bonuses are fine, the crisis is all due to bad monetary policy…
April 1st, 2009 at 11:17 am
The talk of decapitation is over the top, of course, and works against any serious point being made.
The recent self-award of bonuses in spectacularly failed (and bailed-out) banks simply illustrates how bogus the bonuses are. It seems to be a case of management awarding themselves whatever they like whenever they like. “Hey, in good times we get bonuses and guess what? In bad times our bonuses are even bigger. Gotta love this system!”
The argument that they were retention bonuses and already locked in actually strenghtens the case that they are bogus. Why write contracts that lock in retentions and bonuses with no clauses to amend or nullify the payments in the case of ordinary failure, let alone catastrophic failure?
The contracts and the bonus system were simply (as an entire set-up) an artifice or device to allow undeserved rewards to keep flowing no matter what.
The USA, far from entering the American century, has entered its century of collapse. The collapse of American morality has been almost complete. The corruption of its militaristic empire system and its domestic business system almost defies belief.
However, we need a reasonably healthy US to counterbalance Russia, China and India in geopolitical and geostrategic terms, so I am certainly not death-riding the US. I have thought very ill of them for some time (Iraq, Gitmo etc.) but this mess exceeded even my worst prognostications.
I hope for all our sakes that something can be salvaged from this implosion. I am not hopeful though. GFC and then resource and climate collapse. Things do not look good.
April 1st, 2009 at 11:35 am
Did anyone see Dr Ric’s (Batellino) spirited defence of the Australian property market in SMH yesterday?
With properties now trading at the historical high of 8-9x earnings, earnings beginning to fall (through both job cuts and wage cuts), the looming spectre of serious unemployment on the rise, and the OECD now estimating a -4% GDP growth, it’s truly comforting to see that Dr Ric can so confidently pronounce that property “appears to have reached a permanently high plateau” (to paraphrase) from the warm and comfy armchair of neo-classical economics. Thanks Ric.
For the rest of us, who know better than Ric, I’ll see you on the other side.
April 1st, 2009 at 12:33 pm
Go Max
Max is brillant.
He does a regular show on the Market Oracle http://www.marketoracle.co.uk/financial_markets_analysis_videos.htm (scroll down a bit)
and I find it very hard to not end up on the floor at work.
PS Although we may have moved on from public lynchings he has a very good point, why aren’t people facing the courts to answer some very tricky questions? Easier to bet up car plant workers than bankers – keep driving that wedge between blue and white colar and things could get messy very quickly.
April 1st, 2009 at 1:12 pm
Moz,
Right on the point. As the US economist Dean Baker said (paraphrasing): “After all, the average autoworker makes $56,650 a year. That’s almost as much as Robert Rubin makes in a day. Who do these autoworkers think they are?”
The guys who are in charge of fixing the mess are the ones who helped to cause it: Rubin, Summers, Geithner, etc.
April 1st, 2009 at 1:18 pm
I agree the call for decapitation is over the top. In all the discussion about the GFC and the fantastic figures quoted as bonus payments there has been very little said about the general levels of income inequality.
Surely a point will be reached when people stop subscribing to the ideals of cooperative society and are encouraged to act increasingly selfishly to the detriment of society and the economy.
We have seen what the results of this are in the corporate world.
April 1st, 2009 at 1:45 pm
DH…Think about it…these blokes are busy trying NOT to prick the Property bubble!! They have to keep it inflating. If property falls…all the banks are bankrupt. Noone else can get money in this country except Real Estate. They are sending mines broke and selling them to China. They are selling our farm land to foreigners. Manufacturing (what we still own of it) is being strangled to death. Small business is being strangled to death…..ALL TO KEEP HOUSING, UNIT BLOCKS, AND SHOPPING CENTRES at high prices! Ask yourself why this is all so? I won’t print my answer because it involves the use of Obscenity.
April 1st, 2009 at 2:05 pm
think its quite apt that max keiser used the word decapitation on a french program.
madam guilotine got quite a work out in that little spat called the french revolution.
political extravagence and corruption, excessive debt, and unjust taxation all led to demise of the french aristocracy.
and to top it all off, a little bloke named napolean came along to tidy up the mess in his own inimitable way.
wonder how many napoleans we are going to have to deal with if dont get a handle on our problems of political extravagence and corruption, excessive debt, and unjust taxation.
April 1st, 2009 at 3:01 pm
@outback .. quite right. Agree 100%.
Maybe it’s time for a few central bankers (both the obvious candidates abroad and a couple of our own ones here) to be shown the way to <> !
April 1st, 2009 at 3:02 pm
That was supposed to be “la guillotine” … that’ll teach me to use french-style quote marks!
April 1st, 2009 at 3:24 pm
The ideology of central bankers is quite brazen and open in respect to inflation. If there is the slightest amount of wage inflation, central bankers will immediately take actions to counter this devil. Strangely enough, if there is asset inflation which is overwhelmingly obvious – they miss it. Take Greenspan and the Federal Reserve: they use a microscope to look for wage inflation, but somehow “missed” a $US10 trillion stock market bubble and a $US8 trillion property bubble.
I don’t think it is too difficult to figure out which classes within the economy are advantaged and disadvantaged by wage inflation and asset inflation.
April 1st, 2009 at 3:32 pm
Philip
I get really upset with all the talk of the US banks being to big to fail and yet a couple of car makers can be wound up in a snap (or so it seems – don’t get me wrong though, the US car makers need a good slap for what they have been doing but who drove them into this present corner?). The amounts required to keep the badley in need of revamping US car makers is tiny in comparison to AIG, Citi or BofA. What seems (to the public – me included) to be a double standard from Obama could back fire badly as to rich to fail, to poor/grubby to save starts to look like abandonment to the average worker (I don’t know but at a guess quiet a few are already there).
It is funny, I remember reading Kurt Vonneguts ‘Player Piano’ 20 years ago http://en.wikipedia.org/wiki/Player_Piano_(novel) and it didn’t really hit me that hard what he was trying to say – I now apprecite it so much more with time and in this current enviroment.
Mahaish,
I agree & really fear for the long term future (5+ years from now) as from previous collapses have risen some very very nasty regimes (Hilter – Stalin spring to mind). What ever vacumm is created down the road will be filled, be it ‘left’ or ‘right’ which could end up being extreme with a bigger human cost than ‘money’ (I hope I am very wrong).
April 1st, 2009 at 4:20 pm
Moz,
Steve has mentioned this point before: the economic devastation could result in political extremists coming into power. Fortunately, in Australia, there are alternative parties to the current duopoly of the Liberal/Nationals & Labor. I would much rather the left-libertarian Green party gaining power than any right-wing (but not conservative) radical statist reactionaries gaining power. In this regard, Pauline Hanson’s One Nation party comes to mind, though while it was right-wing, it certainly didn’t follow the sort of conservative principles one finds a political science 101 textbook.
It really is one-sided deregulation that was implemented over the years and decades. The financial institutions wanted to get rid of those pesky regulations that inhibit their ability to make profit, but kept their “too big to fail” policies intact – so the nanny state could help protect shareholders and corporate managers from the discipline of the market when the economy went south. Free market discipline is something the rich have always feared – the financial and business classes are no exception.
The actions of the auto manufacturers are interesting. If genuine markets had actually prevailed, these firms would’ve listened to consumers (consumer sovereignty), many of whom wanted highly-efficient cars for a long time. As a member of DebtDeflation pointed out a while ago, patents have interfered to some extend in technological innovation, such as making the highly inefficient combustion engine less inefficient. George Monbiot’s article is well worth reading. The average vehicle on US roads are less fuel efficient than Henry Ford’s T-Model, which appeared in 1908! The first electric car was invented in 1832-1839!
http://www.monbiot.com/archives/2008/10/07/the-other-bail-out/
http://www.pbs.org/now/shows/223/electric-car-timeline.html
As a radical reform, I suggest the following: all direct and indirect subsides to the auto manufacturing industry be revoked. In Australia, this amounts to billions of dollars. Now, there is a political problem: auto workers will loose their jobs. There is, in theory, an easy way to solve both problems of lost jobs and getting what consumers want – as the corporate auto manufacturers aren’t doing a proper job. There are, however, entrepreneurs who have done a good job of trying to do what the auto industry has not done, but lack the resources for mass manufacturing.
Use all the corporate subsidies saved to open a government-owned enterprise which designs and manufactures the most sophisticated, sustainable and efficient vehicles known. Given it will be the first mass-manufactured efficient vehicle, there will be considerable demand from inside and outside of Australia for it. It’s quite possible that the enterprise will pay for itself. Auto workers will keep their jobs and consumers will get (mostly) what they want. Also the environment will be better off. One question: does the petroleum industry want more efficient vehicles? As Peter Drucker noted a long time ago, even the auto industry doesn’t want more efficient vehicles.
An interesting proposal, I wonder what others think about it.
April 1st, 2009 at 4:29 pm
As far as our car industry goes, how about we get the Australian dollar down to a level where our expenditures match our income and then reassess what is profiable and what is not in this country.
It’s all too late of course but it would have been an interesting experiment to have conducted over the last 40 odd years.
April 1st, 2009 at 4:35 pm
Hi Phillip, I agree with you too! It would be better for a ‘rational’, progressive party to gain ascendency, But! history again unfortunately shows that it is the opposite! watch carefully the U.S. political situation soon, very soon Phillip, I am expecting some serious attacks on Obama soon, very racially motivated and then a political attack!from where, it is too early to tell, watch carefully the European scenario, there too things could get ugly soon, in France, Italy and Greece! In eastern block well! anything is possible there as they embraced ‘our’ capitalism after they were told it was the successful way to go………to the unemployment scrapheap!
April 1st, 2009 at 4:59 pm
Philip,
You make some very good and important points.
US (and Aust.) car makers took the easy road and built poor quality high fuel consuming vehciles for far too long and are now paying a very heavy price for that lack of vision (GM were so stupid with the EV1 – that had potential). Japan on the other hand took a longer view and paid greater attention to consumer wants (Toyota builds a big variety of vehicles from small to large).
The sad reality is that the US car industry were caught up in the big debt party with everyone else, this is now unwinding – what is frustrating is that the US can and does create great things and if properly directed (legislation/proper ‘demand’ focus etc) can skillfully employ a whole range of people with great varieties of skills to produce items of worth, not sack them because they can’t engineer a MBS or CDO.
What in reality happens is that expectations are so inflated now that if it doesnt set the world on fire and rip a huge profit then it just doesn’t get the go, the idea gets binned and the same old same old keeps getting churned. In the end as my farther has pointed out to me (Industrial Chemist), it is far more important to make items with oil (plastics etc)than burning it to move as it will run out one day but in the end you are correct , there is more money in selling fuel and servicing cars than making them (sorry very off topic).
April 1st, 2009 at 5:53 pm
Brilliant take by Denninger on that nest of vipers at AIG and their pedigree from Drexel and GS ;
http://market-ticker.denninger.net/
The deceit sickens me. To watch as our ,what was once valuable, surplus squandered away on frivolous stimulus.
Global trade has essentially collapsed. Australia is currently living off a pipeline of orders that have not been substantially replenished since late last year.The Govt KNOWS this and yet still urges Australian (particularly FHOG’ ers ) to take on more debt with high levels of unemployment approaching. So while the less experienced in our society walk trustingly into this debt nightmare, the Govt budgets for a serious recession and drop in revenues that can only mean cut’s to benefits and higher taxes;
“Australia Prepares Budget for Economy Shrinking 1%, Review Says
By Jacob Greber
March 30 (Bloomberg) –
March 30 (Bloomberg) — Australian Prime Minister Kevin Rudd’s government is preparing its federal budget on the assumption the economy will contract by at least 1 percent next year, the Australian Financial Review said.
Falling revenue also means the deficit will be larger than the government’s February forecast of A$22.5 billion ($15.5 billion) in fiscal 2009 and A$35.5 billion in the 12 months through June 2010, the newspaper reported, without saying where it got the information.
Figures collected by the Treasury department show business investment is plummeting, the report said, without providing details.”
http://www.bloomberg.com/apps/news?pid=20601081&sid=acfJgiR6JvSA&refer=australia
April 1st, 2009 at 5:54 pm
I found this gem a while back. It’s a report by the tech think tank called the International Center For Technology Assessment. It examines the negative externalities of the consumption of gas in the US (Australia = petrol). Five categories are listed:
1. Tax subsidies
2. Government subsidies
3. Costs of military protection
4. Environmental degradation
5. Miscellaneous
The low estimate for a gallon of gas (petrol) in the US is $US5.60 (1997 dollars) and a high estimate is $US15.14 (1997 dollars). Yet it is selling for approximately $US2/gallon (2009 dollars). This is market mispricing by a colossal factor.
Roughly, a litre of petrol in Australia would cost around $AUD2 – $AUD5 if all its negative externalities were factored into the price – a commonsense market principle. I don’t know for sure as I have never come across a similar report on petrol in Australia.
Ouch.
http://www.icta.org/doc/Real%20Price%20of%20Gasoline.pdf
April 1st, 2009 at 7:22 pm
Seems like the revolution is starting – in France of course:
http://www.smh.com.au/world/bossnappers-strike-again-over-job-threat-20090401-9jjd.html
April 1st, 2009 at 8:30 pm
Hello all
Lindsay Tanner on Lateline with Tony Jones on Tuesday night was saying that Australia is an “exporting nation”, well, we are, but we have been importing a lot more than we export for thirty years. He then went on to rail against “protectionism” and how this could ruin everything.
He said nothing of the Chinese pegging of their exchange rate and the “protection” and offensive advantage this has given to the Chinese manufacturers and technology over the last few decades. What the ??
The west has been happy to take on debt for the last thirty years and now comes the time
to pay the piper. It had to happen but the drovers dog probably saw it first, our heads did not and they knew “no one” who did.
We now have less technological capability, manufacturing capability, and real wealth creating capability than the average third world country. Since when has such a poorly technologically endowed country been entitled to anything but third world status, income and credit rating. The current heads do not have sufficient knowledge to be able to see this deficiency in technological capabilty and its consequences. Technology is more than being able to use Excel to cook books and create fanciful Ponzi schemes, and “derivatives”.
Decapitation in the corporate sense is probably the answer, the heads of the Banks and large Corporations should roll, they failed to see the bleeding obvious. Using the criterion of “performance based” bonuses they should receive nothing and any previously owed (not earned) bonuses should be forfeit because the failure is now obvious. Our heads have ruined our country, they should roll.
Thankfully the head of our previous national government has rolled. If the current head of government does not learn and start real remedial action which should include educating his ministers, he should go toute de suite.
Oui M. Keiser Mm. Guillotine corporate.
April 1st, 2009 at 8:33 pm
BS…50 years. Only surplus in 50 years has been 1971
Elect me dictator!
April 1st, 2009 at 9:06 pm
BrightSpark1,
Good points. Through reading books and journals on intellectual property rights, I’ve realized that Western states (US, UK, Australia, etc) have greatly strengthened IPR partly because the highly distortionary monopoly pricing helps to increase the value of exports of those nations – an attempt to counter-balance the greater value of imports.
What a waste.
April 1st, 2009 at 10:04 pm
I heard Heather Ridout proclaim on The World Today, ABC radio.
“Anyone who thinks they know when this is bottoming out, are just guessing. This is the most unfathomable, unpredictable series of economic events we have seen in my lifetime…”
Am I being nieve to think “they” really don’t know whats happening or are they trying to kept the secret so the mobs don’t lynch ‘em?
I’ll add, from my time with the great unwashed, I noticed they have absolutely know idea how the economy works, couldn’t careless and hold in contempt anyone who tries. A generalisation indeed, but very much in the milieu.
April 1st, 2009 at 10:24 pm
Sometimes I wonder whether the world is being run by smart people who are putting us on or by imbeciles who really mean it…Mark Twain
April 1st, 2009 at 10:29 pm
I’ll have to retract that last statement, forgot that the observation might have been influenced by my own humble self. Maybe they just didn’t care for what i had to say…not what I was saying.
April 1st, 2009 at 11:16 pm
Since we are all off topic, I’ll join in with this extract from the SMH article; RBA says more rate cuts if needed – March 31, 2009
‘China was important to a revival in the global economy and may already have seen the bottom in its own economy, Mr Battellino said.
“While China is not going to return to a 12 per cent growth rate any time soon, it is quite possible that the past six months will turn out to have been the period of maximum weakness in the Chinese economy,” he said.’
From what I understand property prices have dropped by 50% and all new projects have come to a halt. Thousands of factories (recently occupied) are vacant and around 20 million workers are unemployed.
How is it China is still forecasting positive economic growth? Where is this growth? From all accounts their exports are still going to fall even more. It does not look like what I’ll call growth. I think they are overstating their economy to overstate their importance to the world.
And guess who is waiting for the good old days to return? By my reckoning we are in for a long wait.
April 1st, 2009 at 11:40 pm
The US government’s attack on the wages of autoworkers that are on $56,000 per year is another example of who will pay for this GFC.
But here is the problem.
Working class people spend nearly all their income on consumption. On the other hand those who earn large amounts of money spend nearly all their income on investment. So if the US cuts working class wages, they make the crises worse.
If the economy is the real issue of importance then the US will cut the income of the rich and increase the income of the working people. This will stimulate consumption.
But the economy is not the real issue for the US government. The real issue is to protect the wealth and privilege of the capitalist class.
April 2nd, 2009 at 12:00 am
Two great posts discussing the looting of US pension funds (long but worth reading):
http://www.nakedcapitalism.com/2009/03/guest-post-giant-experiment.html
http://www.nakedcapitalism.com/2009/03/black-hole-alert-last-sucker-into-stock.html
I’ve been telling everyone I know in Australia that they are tempting fate if they assume that they can rely on their superannuation schemes (either defined benefit or defined contribution). If they haven’t been intentionally looted by now, they’ll be finished off when the Oz banks and insurance companies:
1. See oz real estate fall off a cliff
2. Manage the fallout from over $12 trillion of derivatives
3. See their overseas wholesale funding dry up (or the source of much of their funding, the US and UK, collapse)
Wasn’t *2008* the year in which the pension funds in western nations tipped over from having a majority of contributors to a majority of claiments (i.e. more members extracting money than depositing money)? Is it a coincidence that *2008* was the year in which it all came crashing down?
Yet another ponzi scheme:
US$ debt markets (turbo charged by derivatives)…
which pumped up global stock markets…
and pumped up global residential and
commerical real estate prices…
which together pumped up paper profits in pension funds…
…after enormous fees had been extracted by the millionaire factories in Australia and elsewhere.
How could anyone in Australia have confidence that they will receive their pension? It now seems reasonable to ask questions about the whole compulsory super scheme. Was it an elaborate method to shift liabilities from governments (who used to invest in stable, low-risk, long-term investments) to financial institutions (who invested your future life savings in CDOs squared, speculative credit default swaps, naked short sales, manipulated commodity markets and criminal syndicates fronted by hedge funds)?
Both the Labour and Liberal parties cheer-led this looting of ma and pa life investors.
If anyone knows of any Australian blogs (other than Steve’s) that attempts to lift the lid on these types of issues, then I’d appreciate if they could provide links to them. The blogging community in the US is doing a brilliant job of exposing the financial crisis. Australia does a good job with respect to the housing bubble (bubblepedia.net.au, homes4aussies, etc.) but seems like a black hole for everything else. It’s disappointing and frustrating to have to rely on captured institutions such as The Australian and Fairfax newspapers to located Australian data. Crikey is worse than a joke when it comes to financial issues.
April 2nd, 2009 at 12:45 am
Absolutely hilarious! Mad Max Keiser meets Professor Clouseau.
The good professor’s defense of bonuses on the basis that they are necessary to attract the best people does expose an absurdly naive faith in markets. Hey, the guys at AIG must be good otherwise they wouldn’t have earned such nice bonuses, would they? Can you imagine how bad this financial crisis would be if we paid such stingy salaries that we attracted second raters?
Nonetheless, I felt somewhat sorry for the good professor on the basis that a truly decent man must always feel some tincture of pity, even for the bishop exposed naked in the whorehouse.
April 2nd, 2009 at 5:09 am
Max Keiser is not againts free markets; he’s instead against the corruption perpeturated by bankers and politicians. It should be noted that many smaller banks did not behave badly or as badly.
April 2nd, 2009 at 5:16 am
On Gold being real money. The world was on the gold standard during the great depression which indicates that nothing is beyond being corruptable.
April 2nd, 2009 at 9:53 am
More looting of superannuation funds…
*Offer came just at the right time for Macquarie*
“The surge across four key Macquarie-linked funds came after a $1.37 billion bid for Macquarie Communications Group (MCG) was launched on Tuesday by the Canadian superannuation giant Canada Pension Plan”
http://business.smh.com.au/business/offer-came-just-at-the-right-time-for-macquarie-20090401-9jqk.html
I wonder how the baby boomers in Canada feel about their life savings being used to bail out a millionaires’ factory. The Australian taxpayer probably doesn’t feel as lonely now.
Was there a quid pro quo? Are Australian funds also bailing out their Porche-driving mates overseas?
April 2nd, 2009 at 12:37 pm
More Max Keiser
April 2nd, 2009 at 12:47 pm
Steve,
Pascal Salin is not a neoclassical economist, but from the Austrian school. There are many
fundamental and deep differences between the two schools (as you are aware). Libertarians (von Mises and Hayek) also hate government interference, but they don’t agree with the simple minded mechanist models of neoclassical economics. To Austrians, human beings are complex and cannot make “rational” decisions because of inherent uncertainty. They make mistakes and malinvestments, particularly during the boom phases of the credit cycle. They have a lot in common with the post-Keynesians such as Minsky in their explanation of the business cycle. Most of the analysts who spotted the global financial crisis early (apart from yourself), such as Peter Schiff, Frank Shostak etc. are Austrians.
The trouble with all economic theories so far is that they are not robust against human moral imperfection. Nowhere do they take into account the possibility of dishonest and unethical behavior in their models. The agency, conflict of interest, problem through excessive financial intermediation has caused many markets to be dysfunctional. Max Keiser was railing against this structural corruption (e.g. between the regulators and the banks) which is often deliberately covered up by the media and governments. The whole financial system needs an anchor to restrain corrupt and unsustainable behavior and they both agree it is the gold standard.
April 2nd, 2009 at 1:52 pm
Downward revisions.
The OECD report of yesterday should focus the minds of us all; http://www.theaustralian.news.com.au/business/story/0,28124,25273610-30538,00.html
“Trade flows are expected to fall by 9 per cent in 2009. Foreign direct investment inflows will further contract, after shrinking by about 20 per cent in 2008.”
“This meltdown is rapidly turning into a jobs and social crisis. Labour market conditions are weakening throughout the world, as companies are cutting production, closing factories and dismissing workers.”
“Our latest projections (to be released officially tomorrow) indicate that the unemployment rate in the OECD area could approach 10 per cent by 2010, compared with 5.6 per cent in 2007. This implies that the crisis could swell the ranks of the unemployed in the OECD by about 25 million people, by far the largest and most rapid increase in OECD unemployment in the post-war period.”
Don’t expect China to save us. They have Big problems as the constant downward revision to China GDP shows. As recently as January, OECD forecasts were for 8% growth in China. Now, OECD drops that to 6.3%;
OECD: China’s growth may slow to 6.3% in 2009.
http://www.chinadaily.com.cn/bizchina/2009-03/31/content_7635497.htm
Fitch is even more pessimistic on China;
“Fitch pessimistic on GDP growth”
“Fitch also revised downward its GDP forecast for China from 7.2 percent to 5.6 percent this year — well below the Chinese government’s goal of 8 percent — and to 8.2 percent next year.”
http://www.taipeitimes.com/News/biz/archives/2009/04/02/2003439990
That amounts to a recession in China and downward revisions have yet to stop.
April 2nd, 2009 at 2:23 pm
“Australia: Still Living in the Dream Time Date 01/04/2009
Member rating 2/5
‘Above all else, we must remember that we are a debtor nation, and that policies which increase that debt, rather than reducing it, must be put aside for future commodity booms. A run on the Australian dollar would be calamitous for us and false steps by governments could easily trigger such a calamity’.”- By Hugh Morgan, AC
http://www.henrythornton.com/article.asp?article_id=5669
April 2nd, 2009 at 4:52 pm
Okay I think I have cracked the code on Giethner’s new/old buy toxic assets plan. You guys may have already got this, but I have only put it together in the last 24 hours.
One part that has troubled me from the start is the private capital component. The speculation is that the private component will be 7%. My understanding of non recourse is that your downside is capped, but your initial capital is at risk. Some commentators have made out that the Giethner plan is a licence to make money for the investors. Not so, they could easily lose their 7%. Unless they buy at rock bottom prices, which can’t happen because it would bankrupt the banks that currently hold the toxic waste. Remember, that capital is always wiped out first. Conclusion, no private money will risk it.
The next part that is strange is the price that investors will pay. Some commentators have speculated that the banks can’t afford to sell the paper for less than 70 cents but it is really worth 30 cents. So to get the banks to sell an investor has to pay well over market. Conclusion, no private money will buy, because the price is too high.
Now the cracking of the code. The banks and funds that already own the toxic assets are the ones that buy them via new vehicles. Eg,
Bank A sells toxic assets for 70 cents to New Entity B (seed capital comers from Bank A or its clone). New entity B knows it will lose 7 cents on the deal, but that’s all. Bank A gets rid of the toxic assets and moves on. Books the loss at 30 cents, of which most is already written off.
What has just happened is that the government has bought the toxic assets and will lock them away for years. The government can keep spinning that they may get a return for years to come. Spin doctors can also keep telling everyone that a market price was reached because of the private component. The private component doesn’t cry foul because they were the original bank trying to get rid of the stuff in the first place. They are over the moon.
The part I struggle with now is that I am not into conspiracies. Some one much smarter than me will work it out and scream from the rooftop. Maybe what’s happened is that I am becoming a conspiracy believer because I have been reading to many blogs. I’ll have to quit and go mainstream again.
April 2nd, 2009 at 5:28 pm
A number of people asked me to put a note here when I (finally) completed an update of my paper on renting versus buying – I have now uploaded the paper onto my website to go with the spreadsheets.
The final impetus to get it finished was the Q&A program asking me to send in a video of the question that I submitted – hopefully it plays (tonight 9.30 on ABC).
April 2nd, 2009 at 5:46 pm
If you believe, as I do, that global economic growth must first recover from within the US to have any menaingful chance of being sustainable, here is a good graphic compilation of 20 vital pieces of US data released in February – from Calculated Risk;
http://www.calculatedriskblog.com/2009/03/march-economic-summary-in-graphs.html
Nasty stuff. Particularly the one on Mortgage equity Wihdrawals for Q4.
April 2nd, 2009 at 6:06 pm
BTB, re: cracking the code.
If fact Bank A can turn a profit from the process. Nothing prevents New Entity B from bidding $120 for the $100 worth of toxic “assets”. Then New Entity B looses the “private” $12 (which were in fact given to Bank A in an earlier bailout) but Bank A walks away with $20 real profit (or even $50 if they have revalued the asset to $70).
As usual the taxpayer foots the bill. Disgusting.
April 2nd, 2009 at 6:52 pm
i’m curious btb
apparently the government is going to provide up to 6 times the capital invested by a private investor with no recourse- just curious as to what rate of interest the government will charge on the loan, or is it interest free.
April 2nd, 2009 at 7:08 pm
good point vk,
actually i think down the line the government might want to, or have to, nationalise all these new entities that will hold all these toxic assetts.
it convoluted, but the politics of the situation, given congressional resistance, and the general resistance towards nationalising anything, might mean this could be the ultimate objective after all.
it will be interesting to see who actually ends up buying these assetts, if any. wonder if any deals have allready been done as to who gets for what.
ultimately i think the governments going to get the bill.
this is all wild speculation mind you.
April 2nd, 2009 at 8:32 pm
very true aac,
the history of the gold standard is a homage on corruptibility.
suffice to say that between 1900 and 1950 it was a pigs breakfast.
the gold standard before ww1 was a different animal to the one in play during the inter war period.
to make things more complicated, different countries all too conveniently took on different interpretations of what the gold standard actually meant to them.
people all too often romantise about the gold standard . but the reality during that period was that there was a considerable lack of co ordination and uninimity .
the strictness to which any particular country stuck to it was considerably dependent on its balance of payments and currency situation, and so , quite often it was unable to stabilise the capital flows between trading nation, and massive imbalances arose.
just like now.
i get a headace just thinking about how complicated things got ,particularly during the inter war period.
April 2nd, 2009 at 8:38 pm
re cracking the code
I can only agree with btb’s conclusion (and possibly vk’s).
I’m not into conspiracy theories either, but the plan looks wilder than the conspiracy theories and the speculation anyway.
Willem Buiter points out that the loans will be provided by the FDIC which doesn’t seem to have the money (http://blogs.ft.com/maverecon/2009/03/more-on-robbing-the-us-tax-payer-and-debauching-the-fdic-and-the-fed/).
Keating tonight on 7.30 report says that the US banks need a bullet (nationalisation) but he isn’t sure the pollies there realise yet or will be capable of taking the decision. [By the way, reading between the comments, he doesn't sound optimistic going forward]
To me the plan attempts two things: protect big creditors and avoid bank nationalisation (which may be about protecting bigger creditors).
I think the US is destructively fooling itself to believe it can do these things. The US hangup with nationalisation seems to tragically blind them to the grossly financially exploitable plan that has been proposed. My gut tells me that the plan will sow seeds of deep distrust in all sorts of institutions – even more than what has come about from the “unexpected” fallout.
Scares the willies out of me, the rest of the world is hoping they get their act together and show a way forward…
April 2nd, 2009 at 11:52 pm
Sadly, the demise of the French aristocracy had no noticeable influence on political extravagance and corruption, excessive debt, and unjust taxation.
After the guillotine bled the upper classes, the Napoleonic wars bled the working classes. I think it is fair to say that France resigned from its previous position of center of the world and is unlikely to ever get back again.
This makes me think about the housing prices in Australia… has anyone considered the possibility of large numbers of economic refugees from USA and UK flooding into this country? I’m expecting people to look for ways to escape from the USA in the near future, and Australia is a likely destination.
April 3rd, 2009 at 12:31 am
The flaws just don’t reside in the banks, its the peoples dependency on them which is really making us suffer.
Huffing and puffing on the minority who run the banks will get us nowhere.
People need broken loose from the control and comfort that they are so used to. Wake up and look at the mind numbing passive environment that you live in.
We love the fact that we live in control of the banks and it gives us an excuse to stay in our cushy office/factory jobs as life flashes by (working 5 days a week!!! Most of us doing something we hate!!).
It’s like possessing has become the key to our existence and we all must have the biggest, best house on the street, or the most substantial rental property portfolio, or super funds that even your kids could retire on!!!
So my good friends pry yourselves from the teat of mother Westpac and start living your lives. These aren’t scary times. These times may breath fresh air into the lungs of everyone.
April 3rd, 2009 at 1:32 am
I’d like to agree with your sentiments horsome, but you said “These aren’t scary times.” and then I wondered about history and I could only think of the image of the “Migrant Mother”.
http://en.wikipedia.org/wiki/Florence_Owens_Thompson
April 3rd, 2009 at 1:59 am
Let me see if I understood the Professor’s position correctly. Bonuses and stock options must be OK, or else business would have eliminated them. This is so, since business doesn’t make mistakes. We know business is perfect, because the Professor told us so.
Making mistakes is the reserved for Government, in particular by interfering with the otherwise perfect private sector.
Also, the crisis can’t be caused by the bankers, since they are perfect and don’t make mistakes (see above). So it must be the fault of Government, by interfering.
The Professor must be irked that it’s the government paying his salary, not private enterprise.
April 3rd, 2009 at 7:23 am
Couldn’t have put it better myself nikdow!
April 3rd, 2009 at 8:16 am
Joshua, were you on Q&A last night? There were 2 very well informed audience participants – on the economy and housing – wondering whether either is active here?
April 3rd, 2009 at 8:24 am
Hey BTB,
Denninger has nailed the code with no conspiracy theory needed, it is the same funneling of gvt money into the banks via a proxy (AIG) to keep the fraud system running. What is happening is illegal in any court of law and they know it, just don’t care. Check out http://market-ticker.org/ . Everything about this stinks. lus I heard today that Kevin’s counterparts are applauding his “stimulus” program, this is all going to end very badly!!