Posts Tagged ‘collapse’

Where the money went

Monday, February 15th, 2010

The government has been shuffling the money around to obfuscate who stole it.  It lends money, and then announces that there is no problem, the money has been paid back.

But after much fiddling, the money has mostly come to rest, in that the government is now the proud owner of about one trillion dollars of mortgage backed securities guaranteed by Fannie, Freddie, and the FHA, plus some Fannie, Freddy, and FHA debt.

The first graph in the above link is the money wizzing around in complicated circles to obfuscate who is at fault, the second graph is the bailout of private entities, other than General Motors, and the third graph is primarily the bailout of Fannie, Freddy, and the FHA.

That these Mortgage Backed Securities are “Fully guaranteed by Federal Agencies” implies that the vast majority of the crisis, the vast majority of the bailout, was dud mortgages rubber stamped Fanny, Freddie, and the FHA, that privately issued mortgage backed securities have been liquidated – that the dud mortgages underlying privately issued mortgage backed securities have been settled by foreclosure and bancruptcy, but the dud mortgages underlying Fannie, Freddy, and FHA issued mortgage backed securities are on the tax payers tab to the tune of about a trillion dollars.

Overtime, as the mortgages are resolved, the trillion dollars of mortgage backed securities will diminish with time.  In proportion as they were worthless, the agency debt will correspondingly increase.

American debt

Sunday, September 6th, 2009

Total federal debt twelve trillion

That is not too alarming in itself. It is a bit less than GDP, and for most countries, trouble ensue when debt is around twice GDP. The liberty papers are not too worried.

Total American indebtedness (public and “private”) is sixty trillion, which is much larger than federal debt, and has been rising very rapidly. The primary cause of this rise has been implicit and explicit governmental and quasi governmental guarantees – FHA guarantees, debt of too-big-to-fail corporations, guarantees by too-big-to-fail corporations, state debt, for example California, and so on and so forth.

Some substantial part of this sixty trillion is secured by real assets such as houses and the income stream of hard working people, and some substantial part is not.

Thus the excess “private” debt is not private.  The normal level of public and “private” debt is about twice GDP, say twenty six trillion, so we are about thirty trillion or so in the hole and getting deeper fast – well past the danger level of twice GDP.

Prospects of hyperinflation

Monday, August 24th, 2009

Arnold Kling thinks that “hyperinflation would be political suicide” and that therefore that the US government will sooner or later do the extraordinary and drastic things necessary to avoid it.

Even if it was political suicide, this is like arguing that someone will lose weight because his morbid obesity is about to kill him – but it is not political suicide.  Incumbents that engage in hyperinflation usually gain political benefit in the short run, and the short run is all they care about.  The Weimar government was not punished at the polls. (more…)

Inflation looms

Friday, June 19th, 2009

Bryan Caplan, favorably citing Sumner, tells us “stop worrying about inflation

Supposedly we should stop worrying about inflation, because the bond markets predict only moderate levels of inflation. Supposedly we can determine future inflation by looking at the difference between Treasury Securities, and Treasury Inflation Protected Securities. Supposedly, this tells us what the people investing in securities think that inflation will be, and they are pretty good at predicting inflation.

However, this tells us only what people who are confident that inflation will be moderate think inflation will be, because if you are worried about immoderate levels of inflation, you do not diversify into long term Treasury Inflation Protected Securities, you diversify into gold, silver, guns, ammunition, rice and beans, which is roughly what the Chinese are doing, except that they are also diversifying into copper and iron, and private Chinese are not allowed to diversify into guns and ammo.

The bond market does not tell us what the smart money people think inflation will be. It tells us what those among the smart money people who do not expect very high levels of inflation think inflation will be.

What are the Chinese worried about?

They are not worried about the possibility four percent inflation in 2011. They are worried about the possibility of four hundred percent inflation in 2020. And so they are not buying Treasury Inflation Protected Securities. And so the difference between Treasury Securities and Treasury Inflation Protected Securities fails to reflect their concerns. And so, if we look at the bond market, what it tells us is that the Chinese think inflation may well hit four percent in 2011, but does not tell us what they think inflation will be in 2020. But if you listen to what they are saying, what they are saying is that they think there is a substantial risk of very high levels of inflation in eight years or so.

Governments tend to go down the tubes when total public debt is around two hundred percent of GDP or so. Thus a deficit of ten percent of GDP or so is sustainable for ten or twenty years or so. Trouble is that in addition to an on budget deficit of ten percent or so, there is also a much larger off budget deficit, in the form of an ever growing pile of government guarantees, which there is no will to restrain. Put the two deficits together, crisis looms.

Trees do not grow to the sky. That which cannot continue, must stop.

Securitization

Wednesday, May 6th, 2009

From the point of view of oligarchs and crony capitalists, the crisis is not that a lot loans were made to no hablo English wetbacks. The crisis is that people are rejecting securitization of debt.

The Obama regime’s capitalism smashing measures are intended not to destroy capitalism, nor to install socialism, but to restore securitization of debt. This is socialism for the financiers, not for the proles:  Crony socialism, crony capitalism, a fascist economic order.

Regular old fashioned loans are going through just fine. There is no credit crisis, the financial system is not freezing up. Securitization is freezing up, and it @#$% well should freeze up.

When debts are securitized, many different debts of many different borrowers are piled together into a great big pool of debt, and then shares in the pool are sold to lots of creditors – which means that there is no one person responsible for verifying that any one particular loan is sound, that the assets securing the loan are worth what they are supposed to be worth, that the person responsible for making payments on the loan can read and write, that he speaks the language that the papers that he signed were written in, that he was sufficiently sober when he signed them to remember signing them, or even that the paperwork exists and is in good order.

For securitization to work, the particular organization that arranged the loan, and the particular people in the particular organization, would have to remain responsible for that loan.  The debtor would have to be making payments through the people that arranged the loan for the life of the loan.

Securitization leads carelessness with large sums of other people’s money. Such carelessness leads to crime. Crime destroys the trust that is necessary for the economic system to work. Securitization must stop. If securitization continues, capitalism will end. By and large, those who favor continued securitization are wealthy criminals, who personally benefited from stolen money, as over the years carelessness slowly became indistinguishable from deliberate fraud.   The problem before Obama was not lack of regulation, but that the foxes were regulating the chickens, and now under Obama the foxes are still regulating the chickens.  Each Obama intervention has the effect of keeping the criminals in power over other people’s money, resisting the natural propensity of capitalism to purify itself through creative destruction.

Securitization was born in fraud:  The original motivation for securitization was the 1995 Community Reinvestment Act. If the government is pressuring you to make loans on the basis of race, rather than willingness and ability to pay one’s just debts, you want to get rid of the politically correct mortgages to some other sucker as fast as possible.

Securitization of debt is only legitimate when the people that arranged the loan remain linked to the loan.  Otherwise, securitization is a scam, as the origins of mortgage securitization demonstrate.

Iran tells it like it is:

Sunday, April 19th, 2009

In his April 15, 2009 speech, Iranian President Mahmoud Ahmadinejad told America:

We say to you that you yourselves know that you are today in a position of weakness. Your hands are empty, and you can no longer promote your affairs from a position of strength.

… with the grace of God, and thanks to Iran’s national unity, the recommendations of Supreme Leader, and the following of his [path], nearly 7,000 centrifuges are spinning today

The crisis explained

Saturday, March 28th, 2009

I have been seeing a lot of references to “a speculative bubble”

Nope. They were not speculating.

The crisis consisted of people, mostly members of protected minorities with nothing to lose, buying houses they could not afford with borrowed money in the expectation that they would go up, and if they went down, it was the bank’s problem.

So the people who bought houses were taking no risk, since mostly they bought them with 100% loans, had no credit rating and no assets to lose.

So were the banks making the loans taking a risk?

No, because it was not the bank’s problem, because the loans were for the most part guaranteed by Freddy, or Fannie, or AIG – all of which had implicit government guarantees, and all of which had an AAA rating.

So why did AIG and the rest have an AAA rating?

AIG and the rest were issuing naked puts greatly exceeding their total capitalization, which pretty much guaranteed that sooner or later they would go broke in a big way. So why AAA?

Moody’s, who issued the ratings, was tweaked on this, and replied that it was unthinkable that the government would allow these institutions to fail. So it was not true that nobody knew what was happening. All the insiders knew what was happening, the regulators knew what was happening: they knew that businesses were taking big risks for big money in the expectation that if they won, they won, and if they lost, the government would take care of them. It was government policy. People have been complaining about this for years.

The fundamental cause of this crisis is government regulation: Governments cannot be trusted with money. They think only of short term political gain, so dispense money to the loudest pressure group, in this case those represented by ACORN, rather than to people who are likely to repay it with interest. In this case, the regulators decided that “traditional” standards of credit worthiness were racist and discriminatory, because too many Jews, and not enough Blacks, met “traditional” standards.

The crisis has barely begun

Sunday, March 8th, 2009

“Naked capitalism” explains what has happened, and observes that the Bush-Obama policies caused it, are causing it, and are likely to cause a lot more of it.

Government guarantees will be abused – and the broader the guarantees, and more chaotic the situation the more they will be abused.  The solution is that existing guarantees must be reduced, and existing government initiatives curtailed or at least allowed to expire.   Extensive state intervention is extremely difficult to do right, easy to do badly, and the arrogant interventionists lack the necessary humility to do it right.

The lesson of Japan’s failure

Thursday, February 12th, 2009

Ten years ago, Japan had a banking crisis very like the one we just had.  It was discovered that financiers and big businessmen had blown staggering sums of money, whereupon the government massively intervened to keep those that had screwed up from losing their jobs.

The Japanese economy has been stagnant ever since, even though, or perhaps because, the government has poured huge amounts of “stimulus” over the economy, so much “stimulus” that the Japanese government is now approaching bankruptcy.

President Barack Obama correctly observed:

There are two countries who have gone through some big financial crises over the last decade or two. One was Japan, which never really acknowledged the scale and magnitude of the problems in their banking system and that resulted in what’s called “The Lost Decade”. They kept on trying to paper over the problems. The markets sort of stayed up because the Japanese government kept on pumping money in. But, eventually, nothing happened and they didn’t see any growth whatsoever.

Obama then proceeds to explain why we are going to do what failed for Japan:

we want to retain a strong sense of that private capital fulfilling the core — core investment needs of this country.

No we don’t. We want to retain a strong sense that businessmen who succeed, win, and businessmen that foul up, lose their shirts. It is not capitalism when the capitalists are kept in power by the state.

To work, capitalism has to be run by people who are smart.  The entrepreneur unites other people’s money and other people’s labor, to create value.  The Wall Streeters revealed themselves to be idiots who massively subtracted value.

Similarly General motors, who managed to destroy the amazing sum of about four hundred billion dollars of value over the last decade.

The big factor in downturns is that people attempt to continue saving, while holding back from investing, whereupon the economy bogs down, thus the big factor is distrust of financial intermediaries.  In this sense, recessions are largely supply side problems rather than demand side problems. In the last three years, vast numbers of financial intermediaries have been revealed as untrustworthy and incompetent.

In Japan, in a similar crisis thirteen years ago the insiders were revealed to be incompetent and corrupt. In a similar response, the Japanese government intervened to protect insiders from the consequences of exposure, keeping them in charge of other people’s wealth.

This in Japan as here led to massive decline in investment and demand, to which the Japanese government responded with “stimulus” – building bridges to nowhere, paving rivers, and so on and so forth.

This led to a massive increase in Japanese government debt, now the highest in the world, but failed to cure the recession.  The government could manufacture demand, but not supply.

Japanese government debt is the highest in the world not because no other government was prepared to borrow so much, but because all other governments that attempted to borrow as much, have gone bust.

Bridges to nowhere will not fix the supply side problem, and tax cuts can have only limited effectiveness. Rather, a new crop of productive entrepreneurs must arise, the creation side of capitalism’s creative destruction.  But in a world of bailouts, the way to success is connections, political correctness, and getting on with the rest of the elite, which gives us the sort of capitalist establishment that got us into this mess.

The banks that were run by bankers of the Ebenezer Scrooge type, who accepted CRA with the same enthusiasm as they turned up at their dentist for a root canal, tended to be taken over by banks of the Washington Mutual type, who were rewarded for their political correctness in embracing CRA with genuine enthusiasm, by regulatory favor in their takeovers.  And that crowd, the Washington Mutual sort, is the crowd that is still in charge, government guaranteed to be in charge.  We need a finance sector run by the likes of Ebenezer Scrooge, and an automobile industry run by the likes of Hank Rearden.  To get that, badly run businesses have to go bankrupt, and their assets need to be auctioned off at the block.

Explanations of the oil price rise

Thursday, August 7th, 2008

My explanation for high oil prices is the collapse of oil states. Arnold Kling argues that instead the problem is that investors fear the collapse of advanced states, so are reluctant to take their money.

My explanation is that oil states are increasingly short of the competence to pump oil, the ability to provide security to people pumping oil, and the credibility to make deals with people who are competent to pump oil — for example it is difficult for foreign companies to pump oil in Nigeria, because there are too many different bandits and terrorists to pay them all off, and difficult for foreigners to pump oil in Venezuela or Mexico, because the government cannot credibly promise not steal everything, and difficult for the Venezuelan government to pump oil, since it could not run a pie stand, plus the security situation in Mexico, though better than Nigeria, is deteriorating.

Arnold Kling, however, argues that the problem is the increasingly scary on book and off book debt levels of the advanced nations, in particular the US. Investors fear hyperinflation. Where to put their money? Answer: Buy commodities that are underground, and leave them underground.