patrick.net

Volcker raised intrest rates in the face of Carter's massive stagnate economy and super high inflation, brougt on by a wage price spiral.
Standard economic theory holds that in a deflationary scenario you lower rates. If that fails you are in a liquidity trap and you may have to resort to other stimulative measures: quantitative easing, direct stimulus, etc.

Of course there is the presumjtion here that we had the correct level of employment prior to now. That the demand gap can be filled as if the previous, pre-gap amount is the correct level of output.

For me, the truth is that we had a bunch of non-viable business models predicated on too low a cost of capital. We need to accept higher unemployment and lower GDP if for no other reason than it was/is impossible to maintain a debt-fueled economy. Real gains come fro putting real savings to work, not just borrowing from the future.

So, read with a jaundiced eye any economist that advises means to return to previous output. We are a $14t economy heading to a $13t and probably lower.

Duke is making good sense here, and Chuck, thanks, I think we are on the same page. I think if people use their heads like Chuck is talking about they stand to do well. Not forcing rates up helps people like Chuck and even me because doing so increases the carrying costs of what in my opinion is a true investment; buying something at a fundamental price and waiting for harvest time.

The approach of high rates then creates an absolute crash that hurts everyone and then does invite more of the dreaded S word. We are not going to get this country back on track with more stimulus checks where people run out and buy Chinese garbage, it is going to take real investment and private people investing in things that make real sense to them is the best way to accomplish this.

# kewp Says:
No defaults allowed, other than death.

The Original Bankster Says:
so what do we do if they default?

If death = default, then default = death. :-)

Didn't someone here already say a few months ago that the reason for the "credit crunch" is that the government is not leaving any room for lenders to actually charge interest that is sufficient to cover the risk?

The problem is that in the short term, letting interest rates go high enough will cause intense pain and disruption (to banks and borrowers). In the long term, it is not clear what the outcome will be, because of side-effects of the short term pain.

Short term pain for long term benefit is hard to sell; short term pain for no clear long term benefit is impossible to sell.

Yeah, what SP said.

I'm not advocating *forcing* interest rates up, just *letting* them rise to the market level that they would be without the Fed ruining the private market for credit.

And what Duke said: "Real gains come from putting real savings to work, not just borrowing from the future." So the example about the boomer not being able to buy a boat at high interest ignores the fact that the boomer can buy TWO boats if he does it with cash and not credit. Borrowing for consumption is always a mistake.

Borrowing for investment in production makes sense, but there is a natural rate that will let profitable ideas be funded without excessive risk of default. That natural rate is being undercut so that the risk of default is now eliminating credit. So we have low rates currently hurting investment in production rather than helping it.

SP,

Maybe someone said that, but I disagree with that person (but not with what you said):

How does the Fed regulate the spread between interest paid and interest charged? I don't think they do. Credit card rates would be a "prime" (pun alert) example.

The Fed setting of interest rates only affects what rate the banks have to pay their customers on deposits. As far as I can tell, the main function of the discount window and rate (in normal times) is that the banks can point to it and say "we can get loans there for X%, why should we pay you any more?". In crisis times, it works the same way, except the banks actually DO borrow money at the discount window (and other "facilities").

Nice for the banks that the Fed Funds rate is so low. That means that they can have a big spread and make up for the losses they created by lending haphazardly in the previous bubble.

I think the real reason for the credit crunch is that banks simply will not loan out money against collateral that is dropping in value unless customers provide a big padding between loan amount and the current value. Most people cannot, hence credit crunch for many (but not all) customers, and a yield squeeze for those who DO have money to deposit.

Bad for everyone except the banks.

And, yes, I am in favor of a considerably higher interest rate.

The spread is market driven and is contained by competition. Yes, it sucks to be a saver and the side effect is that savers do have to move from the purely safe rate to get a better return. That's the downside but then again on a macro level you're promoting further investment.

On the upside, the lower rates lower costs throughout the economy and up the value chain so theoretically you're keeping inflation low which is better for savers than higher inflation.

Now, barring anyone providing evidence to the contrary yes I would agree that Fed intervention does make the rates lower than a purely market driven banking system. The problem, especially now, is that if the free market rates don't stay below a certain point we could have a real collapse as many things won't be feasible from a personal or business standpoint. This would be great for savers but only in the short term because your ability to save depends on your ability to make money so unless you're set up to never have to work again I see more harm than good from a total collapse.

That's how I see the tradeoffs.

Malcolm, right.

In summary, I think the purpose of low interest rates is two-fold:

1. increase the profit margin of banks
2. push/force savers into riskier investments (read: prop up the stock market)

One other way of looking at it: When the stock market is on the rise, banks tempt savers with high deposit interest because they are going to lend the money out to speculators that will more than make up for the interest rate in the stock market gains.

When the stock market drops, the bank (and big stock market players) want the savers to get a low rate so that they are incentiviced to buy overpriced crap in the stock market rather than putting money in the bank.

Big money always tries to buy low and sell high. It did not quite work this time, at least not for all hedge funds, although they had a nice ride.

If death = default, then default = death.

Garnish by gibbet?

As a retired boomer with lots of cash, from my perspective bring on the 10% CD rates.

The real problem(s) with high interest now are:

1. We already have insolvent municipalities. If cities had to compete for people's dollars when higher rates are allowd, we would see cities shed jobs and projects like crazy. Bad time to have the public sector go bad since we are already seeing the private sector shed so many jobs.

2. There are a crazy number of Adjustable mortages out there. These borrows could no sustain the higher payments.

3. There are a great many companies that used debt to expand. If they cannot roll this debt due to price, we again lose jobs.

Look, in princple I comepltely agree. We have had malinvestment for years since people wanted to chase rates but have safety as well. If intrest rates would have been held higher we would have blunted the RE bubble, had people happy to save since the rates were attractive, had companies with viable business models based on realstic costs of capital.

But for now, jobs are the driving force of the Fed. Fix our current problem all at once and we could get 15% unemplyment - or worse. I think we are just going to have to get used to the idea that Uncle Ben is gonna keep rates low, therefor the world will keep rates low and we will ALL have stagnate economies for a very long time.

Yes Justme, that's pretty much how I see it, although I don't think it is as sinister as that. Basically if the bank isn't lending it doesn't want your money as much so it doesn't pay very much. If there is a lot of borrowing going on, the bank wants more money so it can lend more so it pays more.

Now the system is in a bind because banks want to lend but assets are falling and now they are being conservative so they can't lend. In other words banks want cash to stay afloat but don't want to lend it on more bad assets so they can't offer savers very much. That is the reason this bailout was a disaster, it didn't get banks to lend any more than they would have otherwise because there are more lenders competing for the same fewer numbers of safe loans.

More good points Duke, and in principle the original drop to 1% caused the bubble. That's obviously the flip side of forcing rates too low. Now we are in a situation where only us in the absolute top tiers can borrow, everyone else is just out of luck. A pure argument can be made to say that's how it should be, the problem is the country as a whole is overextended and many innocent people will be ruined because of the fallout.

My solution would have involved no bailout, other than making money more freely (lowering the ratest to raise them slowly) to the banks and letting the bad ones fail. Even that has a limit though because all those deposits are guaranteed, so would we rather risk a smaller amount of tax dollars or write off a larger number of tax dollars? Don't get me wrong, a couple of years ago we did some rough math and knew that proposed solutions were a joke since the problem was bigger than the entire budget.

Kewp, it seems like the system can be easily rigged or gamed by loading up the older generation with debt that will be forgiven after they die. I’m not getting it. Or maybe I am.

Again, the idea is that all debt is both capped and secured against income. If you croak with debt the state should seize your assets to pay it off.

Kewp,

What if your income drops, as it often does in retirement? Does the grip reaper show up with a margin call?

(sorry, couldn't resist the sarcastic joke).

Your income drops, your debt ceiling drops right along with it. No new debt until the old is paid off.

I guess my point is that its still too easy for the average Joe to bury himself in debt. I want to make it impossible.

TOB,

You think that job post is just a parody or what? Sometimes it is hard to tell...

I guess my point is that its still too easy for the average Joe to bury himself in debt. I want to make it impossible.

Remember, wealth... flow... weak hands... strong hands...

Fools always part with their money. There is no point protecting people from themselves.

You think that job post is just a parody or what? Sometimes it is hard to tell…

Reminds me of the time I saw job posting looking for someone with five years of experience with Windows 2000 Server. In 2002!

# The Original Bankster Says:
hilarious job posting

Sounds like they get paid in Kool-aid.

There are lots of sweat shops in the BA that offer jobs exactly like the one advertised, but they don't say it out loud :-)

You need to sugar coat it, sugar coat...

Or instead of sugar coating, you only need the following line to get the idea across: Only those who are desperate for a green card need to apply.

Found this on Patrick's front page:
http://www.dailynews.lk/2008/11/15/fea02.asp?ref=patrick.net

"The need of the hour is the injection of demand through direct fiscal action by Governments across the world. For activating Governments for this, two conditions have to be satisfied.

The second is the setting up of an international financial facility, operated on principles different from the Bretton Woods Institutions, which not only makes concessional finance available to developing economies, but also enables them to substitute long-term loans for their current short-term borrowing. "

The above concluding remarks were presented at the UN General Assembly - although it is driven from the viewpoint of developing nations, it gives a clear indication of what governments are thinking. Currency Controls to prevent capital flight, followed by a move away from Bretton Woods.

If the US government follows the same prescription, it would have profound implications for anyone who has USD savings. I have seen a situation when currency controls were imposed literally overnight - it is an indication of huge bad news, which you can't avoid because you cannot convert.

Who cares about development nations?

Don't we want to buy goods from them at ever lower costs?

Anyway, food will be the next big thing.

And, there is such a thing as population bubble in developing countries.

We are living in interesting times.

TOB, I will not say anything about protectionism here. One way or the other, it serves our interests to maintain low trade barriers for us in other countries.

There are usually signs of capital control before it is suddenly imposed.

1) Rapidly deteriorating government finance (check, but not there yet)
2) Rapidly depreciating currency (not checked, right now USD is very strong due to deleveraging, the interesting thing to see is what happens AFTER the deleveraging)
3) Rapidly deteriorating stock market which indicates possible capital flight by foreigners (half check)

It will be of no use if you keep FX in Argentina, Thailand or Indonesia during the financial crisis, because all your currency holding will be FORCED to convert to the local currency at the "official rate".

But, somehow I am more optimistic about the US because after all this is not a developing country, so the reset will be much milder, although I am sure it is not going to be pleasant.

TOB,

people were looking up how much SiPort was paying their employees and it turned out all the green card petitioners are getting paid $60K to $85K despite their years of experience and education background.

Similar jobs would be paying $110-120K for a startup (cos the only attraction of startup is higher pay, since stock option is usually worth crap), and that is how lots of companies keep their cost low in BA.

People shouldn't worry about illegal labor, it is impossible for a Mexican labor migrant hanging outside of HD to steal your job. However, H1B and green card applicants will keep the wage rate compressed for a long time, if you do not have something highly unique and skillful to offer, which is the case for many BA worker bees.

OO,

how did you find out how much SiPort was paying?

I didn't find out, I read about it from some blogs where people dug up SiPort's green card petitions and the salary information is public.

http://www.myvisajobs.com/Green-Card-Sponsor/Siport.htm

OO,

It is heresay at best. I think SiPort management was OK since:

1. They agreed to provide reference for Jing Hua Wu

2. They agreed to meet him after he was fired

I think they also provided him with severance ..... what information you have to show that SiPort management was a shitty bunch ... except that it was a sweat shop...

Lucknow, November 17 Relatives of Siddh Agarwal — the murdered CEO of an US-based semi-conductor company — left for the San Fransisco on Monday to attend his funeral.
Agarwal (58), the CEO of SiPort Inc, was shot dead by a sacked employee in north California two days ago. Two others died in the shooting. The assailant, Jing Hua Wu (47), a lead product test engineer, has been arrested.

Agarwal's younger brother Pawan Agarwal said with the arrest of Wu, the case is almost solved. “There is no question of meeting any officials,” said Pawan, who runs a garment showroom in Sitapur. The body is in the custody of the US police and is likely to be handed over to the family tomorrow evening.

The family received the news from a relative, Ritu Agarwal, who lives near Agarwal's home in San Fransisco.

“I was in my shop. We informed the family of Siddh's wife Asha as well,” said Pawan.

Asha's sister Mangala Das, her husband Hari Mohan and daughter Ragni will be attending the funeral.

Another relative of Agarwal, Ram Avtar said, “Siddh last visited two years ago, on the occasion of my son Rahul's wedding. He came with his family and stayed for three-days.”

Agarwal, who had been abroad for the last 34 years, is survived by his wife and two sons who are medical students. An electrical engineer from IIT-Kanpur, Agarwal had worked with several technology companies.

Peter Schiff Was Right 2006-2007
http://www.youtube.com/watch?v=B8r-nDBx5Jg

Gotta hand it to Peter - in hindsight, he was soooo right and all the others were soooo wrong in all those TV appearances over the last few years.

# OO Says:
Only those who are desperate for a green card need to apply.

OO, get real - that company sounds like it will flame out in a year - nobody is going to get a green card through them. :-)

@permarenter, who here cares which extended relatives are showing up for the Siport funeral? We have better things to worry about...

@peterP - I didn't say we should care about developing nations. But we should care about whether the US will end up with currency controls - it is not about "this can't happen here" - the banksters are looking for "coordinated" action, which might include some of these stunts.

Peter Schiff is the man!

Even though I did not expect the severity he predicted, I did expect trouble and I sold most of my stock during 2007. I am so so very glad that I did. My cash is up 3% since last year.

All we need now to turn this disaster into a full depression is to make it harder for businesses to make money (and employ people). The best way to hurt business is to raise interest rates, raise taxes, and restrict trade.

The 3% is better than holding assets that went down. He sold some assets before they went down in value and I consider that UP. He can now buy those assets he sold in 2007 and have some money left over:)

Realestate is under deflationary forces while many other things are suffering from inflationary forces. It is all about perspective.

Peter Schiff was able to see the crash coming but totally missed the boat with his prediction on inflation.

Monetarily speaking, we are deflating. This will lead to lower prices for most things.

Gotta hand it to Peter - in hindsight, he was soooo right and all the others were soooo wrong in all those TV appearances over the last few years.

Peter Schiff was the worst kind of right; *half* right.

His fund is entirely long gold, oil, foreign equities and short the dollar. He got *hammered* this year. In fact, I've said a few times that the best investment for '08 was shorting the Schiff!

Something you won't see him mention in TV appearances is that many of the foreign exchanges he trades on *banned* short-selling of their securities. We had no such restrictions here and domestic hedge funds basically stripped all the equity out of the foreign markets. The Asians are rubes when it comes to trading and we took them to the cleaners.

More here:

http://globaleconomicanalysis.blogspot.com/2008/11/peter-schiff-hugely-right-enormously.html

I disagree with Mish that decoupling is dead, but I have to admit its looking that way.

For all the talk of a credit/housing/stock bubbles in the U.S. its obvious in hindsight that this was really a global problem.

Peter Schiff has been right in the macro view. You cannot expect one to be right all time. I don't agree with him and Ron Paul all the time. Definitely we need some government action now, while peter claims that let the market work it out.

I don't support the bailout. Look at Paulson's change right now after he bailed out his friends. Even if we need a bailout, we need to invest somewhere else, such as the infrastructure. The will be the real sector boosting up the economy.

OO Wrote:

> People shouldn’t worry about illegal labor, it
> is impossible for a Mexican labor migrant
> hanging outside of HD to steal your job.

That's what this guy thought:

http://www.youtube.com/watch?v=zuDjKGqjC1M