Prague Twin

Friday, August 10, 2007

Friday Economic Report

It has been many months since I did one of these, so the name hardly holds meaning. However, it is Friday, and a report is certainly overdue.

I'm sure the markets are all over the news. More important than the huge losses we saw yesterday is the extreme volatility we are seeing. After all, the major indices are up for the week, and well up for the year. But there is a lot of fear going around. Is it warranted? Probably not.

It was just a few days ago that the Fed decided to leave the target rate at 5.25%. If there really was a huge problem with liquidity, we would have expected to see a rate cut. Having said that, they did inject $38 billion in three separate moves today. Central banks around the world injected over $300 billion in similar moves. This was done to prevent a crisis in short term liquidity. If these moves are not enough, the Fed may consider cutting rates in September, but I still doubt they will.

Instead, the Fed is saying that they will support the banks, that there is no reason to panic, but also that liquidity is a bit short. The overriding issue in all of this, of course, is the failing sub-prime mortgage sector in the United States. I have been tracking this problem since last summer when I realized that over the next couple of years, defaults would be commonplace, and the American consumer would be affected.

I still believe that in this interconnected world the sub-prime mortgage situation (I'll call it a crisis in about 6 months) will bleed into the larger economy and create a feedback effect that will affect everything. Am I saying the sky is falling? No. But this is not going to go away anytime soon. I suspect that we will continue to see this issue evolve over the next 12 to 18 months, and the full extent of the fallout won't be seen for a couple of years.

For the next six months, I expect the stock market to be unpredictable. The Dow will probably stay between 12 and 14,000, but will it be 12, 13, or 14? I have no idea. 12,200 looks to be very strong support, and with all the money people have made over the last several years, the bargain hunters should keep things afloat.

But the easy times are over. I feel sorry for the poor suckers who bought those high-yielding instruments thinking they were buying something safe. Well, maybe "feeling sorry" isn't really the word for it. But I pity them nonetheless.

"Forgive them Father, for they know not what they do."

And no one is going to inject liquidity into these peoples' bank accounts, unlike like the treatment that the financial institutions are getting.

And the financial institutions should have known better. Of course, they knew all the while that they would get bailed out, should thing go a bit sour.

Today's events prove they were right.


  • In the second half of 2007, $170 billion in ARM's readjust to market rates. $400 billion readjust in 2008. You're right that this has a while to go, pt.

    Import prices for July came in much higher than expected today, mostly due to higher prices on Chinese products. The WSJ started their article this way: "Today may have signaled the end of the Era of Imported Disinflation..."

    If the higher import prices have seeped into the PPI and the CPI next week, an emergency rate cut will really look like a desperate act, since all Bernanke and Company have talked about for a while is how inflation still hasn't moderated.

    As for whether the sky is falling, all it will take is a few big subprime stories to really get the panic in the markets going. Remember, we don't know who has exposure to this problem. W/ the SEC looking to see whether the big banks are hiding subprime losses and with it anybody's guess which funds fail next, I'd say that the stage is set for serious panic, even if the Fed cuts rates a quarter to a half point. When the Fed raised rates, it took a while before that filtered into the mortgage market. I'm not so sure a sudden rate cut will filter through any faster and help many of the defaulting homeowners.

    By Blogger reality-based educator, at 2:05 AM  

  • Good points all around. The rate cuts are not going to solve the problem, and meanwhile inflation pressures will not subside (oil, food, CYN appreciation). The Fed is in a big pinch, and we are just seeing the first drops.

    But there is so much money out there. In the end, I think the whole thing will just be another major transfer of money from new money to old money. Just the opposite as what happened after the dot-com boom. Remember then when all the young kids made huge cash on the old-timers who got in late? Yeah, well, now they are having their revenge on the middle class.

    By Blogger Praguetwin, at 2:09 AM  

  • Hard times PT, but the warning has been there for a while now. I understand how some have been trapped into super funds and the rest. But our governments have failed to regulate the basics, refused to regulate the basics!
    I wish I had your grasp on the market, but equally our governments have handed over responsibility for economics. Not bloody good enough!

    By Blogger Cartledge, at 5:16 AM  

  • cartledge writes:

    "But our governments have failed to regulate the basics, refused to regulate the basics!"

    Those are the most frightening words in a free-market capitalist's vocabulary.

    By Anonymous no_slappz, at 5:56 AM  

  • no_slappz
    I would have though hard, unthinking ideology was the most frightening aspect of any "vocabulary".
    Neither Keynes or Galbraith could be considered left wing (outside the US) and both show major economic success through market regulation.
    I'm afraid I'm more inclined to finding solutions, the approaches which really work for all. Ideology leaves me cold.

    By Blogger Cartledge, at 6:16 AM  

  • Cartledge,

    I agree. The regulatory bodies have abdicated their responsibility. The free-market purists tend to overlook the efficacy, no necessity of regulatory bodies.

    Remember the deregulation of the 80s and the S&L scandal that ensued? Just one example.

    Free-markets are not unregulated. I suppose is NS had his way, the SEC would be dissolved. A lot of good that would do.

    By Blogger Praguetwin, at 11:09 AM  

  • I blogged about the problems with subprime lending last December and provided a link to a report that said there were going to be 2.2 million US foreclosures in the near term.

    I also happened to eat lunch at the Chicago Fed's lunchroom yesterday, and everyone seemed quite calm. Then again, hardly anyone was in the lunchroom. Their daily inhouse paper was full of articles on the meltdown.

    By Anonymous Publia, at 5:31 PM  

  • cartledge, you wrote:

    "Neither Keynes or Galbraith could be considered left wing (outside the US)..."

    Both Keynes and Galbraith are left wing.


    "...and both show major economic success through market regulation."

    This claim is debated every day. Since it is not possible to conduct a meaningful test of alternatives to the plans implemented according to their theories, we can never conclude these arguments. But there is no doubt that letting free markets work has proven itself many times over.

    You wrote:

    "I'm afraid I'm more inclined to finding solutions, the approaches which really work for all."

    That's the first problem. YOu believe that a handful of humans can "solve" an economic issue that has as many variables as there are people in the system.

    In economic issues, the Government should aim to ensure a level playing field for all competitors. But you obviously believe the government should skew an entire economy to suit a handful of people who believe they can manage a system as complex as global weather.

    You wrote:

    "Ideology leaves me cold."

    Your dream of regulation would leave you physically cold. The global-warming nuts won't rest until we're all living like muslims before the discovery of oil under their feet.

    Thus, if they achieve political power, they will regulate heating and cooling out of existence -- at least that's what they promise to do.

    By Anonymous no_slappz, at 6:53 PM  

  • praguetwin, you wrote:

    "The regulatory bodies have abdicated their responsibility."

    Nonsense. Banks must adhere to certain regulatory constraints that enable them to maintain their operations. Notice that you have heard nothing about bank failures in the sub-prime brouhaha.

    Mortgage companies have taken a beating. But they are not banks and they are not regulated like banks because they are not affiliated with the federal or state governments. Investment funds have taken hits. But they are not banks. Nor are they affiliated with government entities.

    Regulation is generally aimed at creating fairness in markets or maintaining safety.

    I've said this before. Look into the meaning of "rent-seeking". This is the perversion of government and its "regulation" of economic matters.

    You wrote:

    "The free-market purists tend to overlook the efficacy, no necessity of regulatory bodies."

    As I said, the best regulation is aimed at keeping markets fair and open. Instead, we have a Department of Justice that believes Microsoft is a monopoly because it sells a great product at a low price; a DOJ that once believed IBM was a monopoly; a DOJ that allowed ATT to operate as a monopoly for about 75 years before prying its death-grip from the national phone market.

    You wrote:

    "Remember the deregulation of the 80s and the S&L scandal that ensued? Just one example."

    Yes. I know it well. But it's clear you don't. The S&L Crisis occurred mainly because the government attempted to PROTECT the Savings & Loan industry by allowing S&Ls to compete with BANKS. Instead, the well intentioned rules backfired and led to disaster.

    If the government had simply backed away and permitted banks to acquire S&Ls, we would have had no problems.

    Instead, the government attempted to keep the S&L industry alive even though it served no useful purpose. The evolution of the mortgage industry and the appearance of secondary markets for mortgages drove the S&L industry into obsolescence. But that didn't stop the federal government from attempting to keep the S&L industry alive.

    You wrote:

    "Free-markets are not unregulated."

    Once again, the best regulation is aimed a keeping things fair. For the auto industry, it's obvious that fairness to consumers means that having a small number of large manufactureres is best.

    There were 30,000 banks in the US before the Great Depression. Today there are about 9,000 banks and 2,000 S&Ls. That's still too many. Canada has SIX banks. That's it. SIX. Japan has less than 200.

    You wrote:

    "I suppose is NS had his way, the SEC would be dissolved. A lot of good that would do."

    Unfortunately, the SEC is a relatively toothless regulatory body. You can be sure that people on Wall Street do not quiver in their boots when they hear the SEC is snooping around.

    Wall Streeters committing criminal acts are prosecuted in the federal court system. The SEC is mainly focused on civil law.

    I got a good laugh the other day when I discovered a former employer of mine is now in court with the SEC. I was the first person hired by my former boss when he founded a company focused on financing small -- microcap -- companies. To make a long story short, he violated a lot of SEC rules after I left and now he is in big trouble.

    By Anonymous no_slappz, at 7:26 PM  

  • Slappz
    I expect your “You wrote” approach could do with some regulating, to make it mildly readable. Apart from your empty and subjective rhetoric, I note you suffer a rather blinkered view of the world.
    “…a meaningful test of alternatives” It is called history, littered now with salutary tales and clear examples.
    I’m not sure how you managed to bring Muslims and global warming into the discussion; so long as you are happy.

    By Blogger Cartledge, at 10:23 PM  

  • cartledge, you wrote:

    "“…a meaningful test of alternatives” It is called history, littered now with salutary tales and clear examples."

    At least one of your fellow countrymen promotes his own revisionist view of history. He claims that Nazi Germany did not kill six million Jews during those troubled years. Mr. Gibson claims only a relative handful were murdered, that most of the six million slipped out of the the nazi grasp and departed for safety elsewhere on the globe. Based on your view that history is a collection facts, I don't know how you can disagree with him.

    Meanwhile, back to economic matters. The Great Depression in the US was made significantly worse by the government's demand that US employers keep wages steady. Employers were faced with a dilemma: watch revenues shrink while paying fixed wages to employees until bankruptcy struck OR fire employees to hold off the forces of bankruptcy that approached as revenues fell.

    Had Franklin Roosevelt supported wage cuts for employees, the unemployment rate in the US during the Great Depression would have never reached 25%.

    Due to the deflation that afflicted the US during those years, anyone who kept his job actually saw a huge increase in his purchasing power. Thus, without receiving higher pay, those who held their jobs were better off as prices dropped and others suffered.

    With 75% of the US work force able to hold its jobs, the terrors of the Great Depression were more limited than populist literature would have you believe.

    Is that a brilliant government policy? Millions of Americans still think so.

    Cutting wages would have led to a far different -- and better -- experience for the country.

    Economic history is littered with similar governmental mis-steps.

    World War II saved the US economy.

    By Anonymous no_slappz, at 10:57 PM  

  • Slappz
    I take it a slide into irrelevance – “At least one of your fellow countrymen” – signals a problem arguing the point.
    You are all over the shop here, and Australia has its own share of whackos who interpret history to suit their own purpose.
    I am more concerned with demonstrable evidence of history. You said earlier “Both Keynes and Galbraith are left wing.” That is a subjective judgement of course, one that suits your purpose, somehow.
    The Nazi’s, regardless of any other activities, were acknowledged socialists, as is your current administration (and mine). The difference being they are in favour of corporate welfare as opposed to wider community welfare.
    If; “Economic history is littered with similar governmental mis-steps.” It is not the fault of economics, but of the political practitioners.
    If the current Australian government had, for example, invested more in skills training and infrastructure this country would be realizing the full benefit of our current resources boom, rather than being held back by structural bottle necks.
    If our governments had regulated against sub-prime lending, rather than follow the ideological line of an open market superannuation and pension funds might have been protected from outright greed.
    I am horrified to find funds which manage these essential savings mechanisms can be geared six or seven times; and all beyond the control of those whose money is being played with.
    The story is similar with insurance. Governments require that we enter into these future savings plans and insurance at many levels. They should, must, also require those playing with that money operate in a responsible manner. It is called ‘duty of care’.
    This is not ideology, but rather responsibility to the wider community.

    “World War II saved the US economy.” That canard is still alive? The US didn’t want to get into world war fucking two. To be sure, there was an economic boost supplying weapons: To both sides. Something the US has historically found economically, if not politically efficacious.
    I would not be proud to claim that creating a military industrial complex selling to the highest bidder was a salvation. As for saved; I’d hardly be proud that my country had a homeless population as large as 1/3 of the population of Australia. I’m hardly proud of our own dispossessed population.
    What the US should be proud of, and celebrating in its own economy, is the Marshall Plan! Engineered by Galbraith (so he was a Canadian, big deal!) and based on Keynes, this was the real basis of post war economic reconstruction – internationally.

    PT, sorry for crowding your space here...

    By Blogger Cartledge, at 12:30 AM  

  • C,

    You can take as much space as you like. Anytime.

    By Blogger Praguetwin, at 12:57 AM  

  • Cartledge, good points all around.

    By Blogger Kathy, at 8:29 PM  

  • Cartledge,

    What do you thionk about Denis McCormack?

    By Anonymous Baron Samedi, at 5:23 PM  

  • Baron Samedi
    What do you think about Denis McCormack?
    I assume you are referring to he of Australians Against Further Immigration. I really have no brief for any of those who would limit the rich diversity of this country, or consign blame in such a mindless manner.
    Australia is an immigrant country and finger pointing goes way beyond the latest wave of bodies. It is an empty argument.

    By Blogger Cartledge, at 9:58 PM  

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