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Direct Lending

By someone else following x   2008 Nov 21, 1:36am 29,293 views   286 comments   watch   sfw   quote     share    


house I'd live in

With CD's paying 4%, and Wells Fargo charging 8.8% for a jumbo 30-year fixed, maybe I should finance someone's jumbo mortgage -- but only for a house that I'd actually want to live in. Either I get direct interest payments up around 8%, or, if the user defaults, I get the house. The trick would be to lend only the amount that I'd be willing to pay for the house in the first place.

Is it evil? Is it risky?

#housing

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207   frank649   ignore (0)   2008 Nov 30, 12:16am   ↑ like (0)   ↓ dislike (0)   quote   flag        

Here's one interesting alternative...

"A Free-Market Monetary System" by Hayek

http://mises.org/story/3204

208   Duke   ignore (0)   2008 Nov 30, 12:18am   ↑ like (0)   ↓ dislike (0)   quote   flag        

By the way, why do we ever have the gold as money debate? Gold was absolutely and effectively put to rest in the 1970s. In fact, any hard currency suffers from the same problem s gold: to increase the monetary base you have to go dig up more stuff, some areas have more stuff than others, blah blah blah.
There are certainly things we can do to make fiat currency more accurate, and I suspect we will be doing them in the near future.

209   HeadSet   ignore (1)   2008 Nov 30, 12:26am   ↑ like (0)   ↓ dislike (0)   quote   flag        

Randy and I have had long and heated debates on this very blog for several months back in 2005 when he said that the then current economic conditions would not result in a deflationary outcome

Then I stand corrected. Apparently I have only read RandyH's posts since his change of view, possibly a change infuenced by you.

210   HeadSet   ignore (1)   2008 Nov 30, 12:45am   ↑ like (0)   ↓ dislike (0)   quote   flag        

frank says
Inflation is a net expansion of money supply and credit and deflation is the opposite, a net contraction.

Sounds like MISH:

http://globaleconomicanalysis.blogspot.com/2008/06/is-inflation-scare-over-yet.html

Of course, this all starts with a proper definition of inflation. In Austrian economic terms, inflation is an expansion of money and credit.

This isn't new here. Haven't RandyH, Brand, Zepher, Duke, and others made reference to the Austrian school?

211   Zephyr   ignore (0)   2008 Nov 30, 1:20am   ↑ like (0)   ↓ dislike (0)   quote   flag        

Keynesian, Monetarist, Austrian – all these views have worthy and useful points. And they each have their own bias and imperfections.

It is like the three blind men describing the elephant by each holding one part – one the trunk, one the leg, and one the tail. Each is certain of his description (a snake, a tree, a rope), but none is very accurate of the entire animal. Understanding the entire picture takes more than any single bias can tell us.

212   Zephyr   ignore (0)   2008 Nov 30, 1:33am   ↑ like (0)   ↓ dislike (0)   quote   flag        

My own bias is a blend of the schools. However, the blend varies. On fiscal issues my bias is mostly Keynesian, on monetary issues my bias is very Monetarist, and on cycles my bias is the Austrian view.

http://mises.org/story/3226

213   Zephyr   ignore (0)   2008 Nov 30, 1:54am   ↑ like (0)   ↓ dislike (0)   quote   flag        

As for defining inflation I prefer the more traditional view that inflation is a rise in the general price level.

Of course, it is usually caused by expansion of money (&credit). But expansion of money will not cause inflation if the supply of goods and services expands at the same or faster rate.

One could also cause inflation by reducing the supply of goods and services without changing the supply of money and credit.

Inflation and deflation are all about the relationship between the effective supply of money vs. the effective supply of what can be purchased with it.

214   Duke   ignore (0)   2008 Nov 30, 3:59am   ↑ like (0)   ↓ dislike (0)   quote   flag        

Hey Patrick.

How about a thread on the possible future bankruptcies of municipalities?

215   frank649   ignore (0)   2008 Nov 30, 4:51am   ↑ like (0)   ↓ dislike (0)   quote   flag        

"...to increase the monetary base you have to go dig up more stuff"

Well, your Keynesian bias is certainly evident.

The whole idea behind a gold standard is such that the monetary base cannot be easily increased. Indeed, there is rarely a case to do so given that innovation and efficient production naturally lowers prices.

216   frank649   ignore (0)   2008 Nov 30, 5:22am   ↑ like (0)   ↓ dislike (0)   quote   flag        

Lietaer and "script currencies", oh yes. I believe, Wörgl, Austria in the early 1930s experimented with such an idea. Unsound money by any other name, is just another Keynesian scam, imo.

217   frank649   ignore (0)   2008 Nov 30, 5:52am   ↑ like (0)   ↓ dislike (0)   quote   flag        

The idea behind Lietaer's local currency is that there's a hoarding fee (in Worgl, Austria it was 1%/month) which in effective is like negative interest that in effective guarantees inflation. It destroys savings by transferring wealth from savers to the town's treasury so they can run soup kitchens.

Our system already has a much better investment motivation, it's called interest. It's better because it's rate is determined by the market (that is ignoring the Fed) and the rates adjust to ensure that investment meets demand.

218   kewp   ignore (0)   2008 Nov 30, 6:21am   ↑ like (0)   ↓ dislike (0)   quote   flag        

As for defining inflation I prefer the more traditional view that inflation is a rise in the general price level.

That is a somewhat ironic as that is the contemporary definition. Historically inflation simply referred to and expansion of the money supply.

219   Zephyr   ignore (0)   2008 Nov 30, 6:46am   ↑ like (0)   ↓ dislike (0)   quote   flag        

Then I guess what was once old is now new. It was the textbook definition several decades ago.

220   frank649   ignore (0)   2008 Nov 30, 7:02am   ↑ like (0)   ↓ dislike (0)   quote   flag        

I am not sure the Euro will fare too well given the disparate interests of its member nations, but that's a different discussion.

Can't find much on the web regarding Lietaer's ideas. What makes his ideas different than other local currency schemes and more importantly how does it solve the problems inherent in fiat currencies?

221   frank649   ignore (0)   2008 Nov 30, 7:38am   ↑ like (0)   ↓ dislike (0)   quote   flag        

I believe the nonsensical definition of inflation that you refer to was introduced has part of a political campaign intended to mislead the public into thinking that rising prices resulted in an increase in money supply rather than the other way around. Many people now realize the fallacy, but nevertheless they still refer to inflation as an increase in prices.

222   frank649   ignore (0)   2008 Nov 30, 7:51am   ↑ like (0)   ↓ dislike (0)   quote   flag        

Can't imagine how that might work, if they are referring to Ithaca Hours on that link then I don't think his idea holds too much promise. From the Ithaca Hours home page:

"It’s also fun to get and use something other than dollars (remember how much you enjoyed or still enjoy using monopoly money)..."

I think that says it all.

223   Zephyr   ignore (0)   2008 Nov 30, 8:11am   ↑ like (0)   ↓ dislike (0)   quote   flag        

Excessive expansion of the money supply is the most typical cause of inflation. Many confuse the most common cause of inflation as being inflation itself. Easy to understand making that mistake given the very high correlation of the two.

The classic economics textbook definition of inflation is a rise in the general level of prices. Has been such for many decades.

224   kewp   ignore (0)   2008 Nov 30, 8:29am   ↑ like (0)   ↓ dislike (0)   quote   flag        

Well, things get dicey when your monetary system is based on debt.

Short term credit/debit inflation (and associated price inflation) will ultimately lead to monetary and price deflation. Debt can only be defaulted on paid back; both of which reduce and individuals purchasing power.

In reality, the interest on debt amounts to a tax on consumption. This can only cause deflation in the long-term.

225   frank649   ignore (0)   2008 Nov 30, 9:21am   ↑ like (0)   ↓ dislike (0)   quote   flag        

Ultimately the problem does not lie with the currency but with the issuer of the currency, whether the currency is backed by gold or fiat, local or global. Can we trust the issuer to give us a money that preserves our savings and at the same time provides for productive and meaningful investment?

I like Hayek's idea of a free market issuer. That the free market should provide its own currency by methods subject to the same laws that govern it seems like a promising alternative.

If the government is to remain the issuer, then the gold standard is the only method we known to force discipline.

226   frank649   ignore (0)   2008 Nov 30, 9:53am   ↑ like (0)   ↓ dislike (0)   quote   flag        

On monopolies, seems to me that the government interference in the form of favoritism (i.e. anti-free market) is what creates unwanted monopolies. As for monopolies in general, I don't view them as necessarily evil for several reasons:

1) if there is one company that provides the best product at the best price bar none, well then all the more power to them.

2) the existence of such a company does not bar any others from nibbling away at it's profits if there is a profit to be made by providing a better and/or less expensive product.

3) while such a company can conceivably use its market dominance to crush competition in ways not complementary with its service to the public (e.g. not improving the product and/or cost of manufacture), it can only do this at a cost and therefore cannot do this forever. And indeed it would need to be able to do this forever for as long as there is a profit to be made, the barrage of new competitors would never cease.

4) It's only via government favoritism or other non-free market mechanisms that unfavorable monopolies can maintain their dominance in a cost effective manner.

227   frank649   ignore (0)   2008 Nov 30, 9:59am   ↑ like (0)   ↓ dislike (0)   quote   flag        

"While Im not an expert in Hayek’s views on ‘free market currencies’, its seems as though he is in accord with Lietaer."

If Lietaer is proposing competing currencies that do not implicitly or explicitly have the backing of any body of governance, then I believe the proposals are very much the same.

228   Brand165   ignore (0)   2008 Nov 30, 11:33am   ↑ like (0)   ↓ dislike (0)   quote   flag        

TOB says: One weakness I find with the libertarian cosmology is that they refuse to admit the problem of monopolization. As if the ‘market’ will correct it.

I arrive at the same headache reading mises.org. Most of the libertarian economists also ignore that we do not have a clean initial state. Without strict laws, the existing "haves" in the system can easily collude to remove competition in the new system. Their present resources are a huge sledgehammer with which they could create artificial barriers to entry. Any truly "free" market must also be accompanied by massive political reform, particularly on campaign donations and corruption. And lastly, it seems that many Austrian theorists restrict their analysis to simplistic models involving carpenters, glassmakers and cobblers. As we have just seen in the present financial crisis, the goals of the CEO are not necessarily aligned with those of the shareholders, which means that there is no reason to believe capital would truly be allocated efficiently. It seems naive to assume that corporations would behave in society's best interests without meaningful oversight.

frank says: 3) while such a company can conceivably use its market dominance to crush competition in ways not complementary with its service to the public (e.g. not improving the product and/or cost of manufacture), it can only do this at a cost and therefore cannot do this forever.

frank, a fundamental problem here is that:

0

229   Brand165   ignore (0)   2008 Nov 30, 11:54am   ↑ like (0)   ↓ dislike (0)   quote   flag        

Grh. Open/close braces.

0 is less than my lifetime, is less than forever. Summary: it might take 100 years for a monopoly to correct itself naturally, and the societal damage it causes might far outweigh the eventual benefit of its demise. Most of these theories appear to idealize the relationship between industry and society... in reality, industry must always be subordinate to society, so that the general good can be served by the efficient allocation of labor and capital. Man cannot serve his own machine.

230   frank649   ignore (0)   2008 Nov 30, 12:24pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

"It seems naive to assume that corporations would behave in society’s best interests without meaningful oversight."

According to Austrian economics, corporations do NOT behave in society's best interests per se, but in the interests of making a profit. Only as far as those interests are aligned with those of society does society benefit.

You totally miss the boat when it comes to understanding this very basic premise.

I suggest you read mises.org before presuming anything else, like that they only deal with carpenters, glassmakers and cobblers.

You're also wrong to assume the theory places any reliance on what the CEO's true goals are. It's naive to believe that any oversight could possibly be a substitute for a free market, especially in light of the recent failures in oversight by the SEC, the FED, the sanctioned rating agencies, the FDIC and the GSEs (just to name a few) in our current crisis. Sheesh, what more could it possibly take to convince anyone of this fallacy?

Austrian economics does not preclude strict laws, this should be obvious if you read anything about it, and certainly does not condone corruption through campaign donations. They are against government intervention in the free market, which would make this all the more difficult.

I agree that there must be reform. We should start by eliminating the Fed, fractional reserve lending. the SEC, the FDIC and the GSEs.

231   frank649   ignore (0)   2008 Nov 30, 12:30pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

"it might take 100 years for a monopoly to correct itself naturally,"

Based on what? That's ridiculous. Name a monopoly that existed any time in history that operated in a free market manner and didn't provide the best product or at the best price that existed for any appreciable length of time as such.

232   frank649   ignore (0)   2008 Nov 30, 12:36pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

"in reality, industry must always be subordinate to society, so that the general good can be served by the efficient allocation of labor and capital."

If you mean that society, through free market actions, is efficient at allocation of labor and capital, then you'll have no argument from me or any libertarian.

I would go further and say the the free market is by definition the only truly efficient such allocator of capital and that a governing body can only guess and often guesses incorrectly.

233   SP   ignore (0)   2008 Dec 1, 12:01am   ↑ like (0)   ↓ dislike (0)   quote   flag        

For those who did not know yet, Tanta from Calculated Risk passed away yesterday. Here is the link:
http://calculatedrisk.blogspot.com/2008/11/sad-news-tanta-passes-away.html

234   DennisN   ignore (1)   2008 Dec 1, 1:06am   ↑ like (0)   ↓ dislike (0)   quote   flag        

What is it about Texas Congressmen and "original" ideas about economics? First it was Ru Paul. Now get a load of this guy....

www.tylerpaper.com/apps/pbcs.dll/article?AID=/20081130/NEWS08/811300328

U.S. Rep. Louie Gohmert, R-Tyler, proposed that the U.S. government stimulate the country's economy by collecting no federal income tax this year....
Gohmert said, as the current administration continues obligating trillions of taxpayer dollars to bail out failing businesses, a better, cheaper solution to revive the economy would be to suspend collection of the estimated $1.2 trillion the U.S. Treasury will receive in 2008.

235   Zephyr   ignore (0)   2008 Dec 1, 1:40am   ↑ like (0)   ↓ dislike (0)   quote   flag        

Suspending the income tax sounds like a bad idea to me (although I would be happy to keep the money). I do think that suspending the tax would be less damaging and cheaper than what is currently being done. But that is not a good reason to do it.

236   justme   ignore (0)   2008 Dec 1, 4:18am   ↑ like (0)   ↓ dislike (0)   quote   flag        

Kewp,

What is the material (or "working surface") of the Save-A-Blade gizmo? I can't help but think that there must be a more low-tech solution to the whole thing. Something similar to the "strop" that they use in an old-fashioned barber-shop. Or at least in old movies :-).

How does the gizmo function, especially on modern triple and quadruple blades?

237   EBGuy   ignore (0)   2008 Dec 1, 6:28am   ↑ like (0)   ↓ dislike (0)   quote   flag        

This has got to affect market psychology in the Bay Area:
Today, more than 600 properties currently on the market here are listed below $100,000.

238   justme   ignore (0)   2008 Dec 1, 6:37am   ↑ like (0)   ↓ dislike (0)   quote   flag        

This whole business about the protest and civil disobedience in Thailand is really bugging me.

The main-stream media are completely asleep and the reporting os atroucious, focusing on lame stories about airport closures rather than trying to explain what is really going on.

The only place I heard something remotely sounding like an analytic approach to the news was on Deutsche Welle TV (PBS). The reporter stated something to the effect that the PAD protesters wanted to take away the voting tights of the workers and peasants, and that the protest was bankrolled and organized by the upper middle class and the wealthy . Imagine that.

Even Wikipedia was no good. The only useful tidbit I found was

The PAD also demanded "New Politics," the amendment of the constitution in ways that would make Parliament a largely royally-appointed body.

In short, the protest in Thailand is by a bunch of anti-democratic pseudo-fascist royalists. Did anyone read that in the mainstream press?

239   OO   ignore (0)   2008 Dec 1, 6:48am   ↑ like (0)   ↓ dislike (0)   quote   flag        

Read BB's speech today, he is going to raw print to buy T
http://www.federalreserve.gov/newsevents/speech/bernanke20081201a.htm

The great reflation begins.

240   OO   ignore (0)   2008 Dec 1, 6:49am   ↑ like (0)   ↓ dislike (0)   quote   flag        

OK I stand corrected, I believe he has already started, but it is a good thing that he is making it public.

241   kewp   ignore (0)   2008 Dec 1, 6:52am   ↑ like (0)   ↓ dislike (0)   quote   flag        

Justme,

It looks like a strip of ultra-fine sandpaper. I think they claim it is silicon carbide.

The thing is pretty low-tech and is pretty similar to the 'stropping' you refer to.

It works fine on my Mach3 turbo. The 4/5 blade razors are like cheese graters IMHO. The blades are more like like wires (and about as useful).

242   justme   ignore (0)   2008 Dec 1, 7:45am   ↑ like (0)   ↓ dislike (0)   quote   flag        

Kewp,

Thanks. That confirmed the impression I got from the pictures.

243   OO   ignore (0)   2008 Dec 1, 7:49am   ↑ like (0)   ↓ dislike (0)   quote   flag        

Tanta was cute and intelligent, she had it all.

It makes you wonder that people like Paulson, Bush and even Cheney are still healthy and kicking around.

244   justme   ignore (0)   2008 Dec 1, 7:55am   ↑ like (0)   ↓ dislike (0)   quote   flag        

While I am on a geopolitical tear, here is another bothersome development:

Scores of dimwitted Bombay yuppies are on TV news and talk shows, whining about how the government did not protect them enough, babbling on about bipartisanship (god, not again) and demanding the heads of politicians.

Look, you have seen that "populist" approach to terror response once before, after 2001/09/11, Be VERY careful what you ask for. Your anger and distress will be exploited by those who want to channel your anger for their own benefit.

I have great sympathy for the people who lost their lives in yet another senseless terror attack, But please, do not make the situation worse by demanding immediate "action" before all the facts are clear and there has been time to cool off and consider the consequences. The terrorists would like nothing better than have India and Pakistan at each others throat. In fact, it is very likely to be their main motivation.

245   justme   ignore (0)   2008 Dec 1, 11:00am   ↑ like (0)   ↓ dislike (0)   quote   flag        

OO,

Which sentence of Bernanke's speech indicates raw printing to buy Treasury paper? Not a rhetorical question, I just could not spot it off-hand.

**

On another note, Bernanke apparently is saying that the Banks are NOT getting face value for the bad paper that they pledge as collateral at the various FedR funding facilities:

It should be emphasized that the loans that we make to banks and primary dealers through our standing facilities are both over-collateralized and made with recourse to the borrowing firm, which serves to minimize the Federal Reserve's exposure to credit risk.

246   OO   ignore (0)   2008 Dec 1, 2:07pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

"Although conventional interest rate policy is constrained by the fact that nominal interest rates cannot fall below zero, the second arrow in the Federal Reserve's quiver--the provision of liquidity--remains effective. Indeed, there are several means by which the Fed could influence financial conditions through the use of its balance sheet, beyond expanding our lending to financial institutions. First, the Fed could purchase longer-term Treasury or agency securities on the open market in substantial quantities. This approach might influence the yields on these securities, thus helping to spur aggregate demand. Indeed, last week the Fed announced plans to purchase up to $100 billion in GSE debt and up to $500 billion in GSE mortgage-backed securities over the next few quarters. It is encouraging that the announcement of that action was met by a fall in mortgage interest rates.

Second, the Federal Reserve can provide backstop liquidity not only to financial institutions but also directly to certain financial markets, as we have recently done for the commercial paper market. Such programs are promising because they sidestep banks and primary dealers to provide liquidity directly to borrowers or investors in key credit markets. In this spirit, the Federal Reserve and the Treasury jointly announced last week a facility that will lend against asset-backed securities collateralized by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration. The Federal Reserve's credit risk exposure in this facility will be minimized because the collateral will be subject to a "haircut" and because the Treasury is providing $20 billion of EESA capital as supplementary loss protection. Each of these approaches has the potential to improve the functioning of financial markets and to stimulate the economy."

247   OO   ignore (0)   2008 Dec 1, 2:10pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

Compare his speech to this part of his Helicopter speech in 2002
http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htm

There are at least two ways of bringing down longer-term rates, which are complementary and could be employed separately or in combination. One approach, similar to an action taken in the past couple of years by the Bank of Japan, would be for the Fed to commit to holding the overnight rate at zero for some specified period. Because long-term interest rates represent averages of current and expected future short-term rates, plus a term premium, a commitment to keep short-term rates at zero for some time--if it were credible--would induce a decline in longer-term rates.

A more direct method, which I personally prefer, would be for the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt (say, bonds maturing within the next two years). The Fed could enforce these interest-rate ceilings by committing to make unlimited purchases of securities up to two years from maturity at prices consistent with the targeted yields. If this program were successful, not only would yields on medium-term Treasury securities fall, but (because of links operating through expectations of future interest rates) yields on longer-term public and private debt (such as mortgages) would likely fall as well.

248   OO   ignore (0)   2008 Dec 1, 2:12pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

He is going from NOT talking about the Fed's purchase of the T, to substantial purchase of the T (where did the money come from), and he will go to unlimited purchase of T which is the final step of raw printing.

We are still in the middle, if deflation doesn't go away, we will go to unlimited purchase of T.

249   Zephyr   ignore (0)   2008 Dec 1, 4:03pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

"The terrorists would like nothing better than have India and Pakistan at each others throat. In fact, it is very likely to be their main motivation."

I think you are right. If India can be provoked into attacking Pakistan, then the Pakistani military will be diverted away from their anti-terrorist efforts (such as they are), and both governments will be under stress. This could create an opportunity for a takeover by the religious radicals in Pakistan.

250   SP   ignore (0)   2008 Dec 2, 12:03am   ↑ like (0)   ↓ dislike (0)   quote   flag        

Zephyr Says:
the Pakistani military will be diverted away from their anti-terrorist efforts

The Pakis have used this bluff all the time. As it stands, they are doing the bare minimum required to prevent the US army from taking over the operation in their Northwest province.

I think we should call their bluff - if they are going to be diverted, then sure, go ahead. Get out of the way - we will take over the NW province and finish the job ourselves.

251   SP   ignore (0)   2008 Dec 2, 1:53am   ↑ like (0)   ↓ dislike (0)   quote   flag        

I agree with OO - it is pretty much a signal that Bernanke is itching to bring his monetary doomsday machine out of the closet. This is his "yeee-haa!" moment from Dr. Strangelove.

Not that it will solve the crisis, but I don't think he cares. This is his last shot at trying to defend his Ph.D. thesis - most of which has turned out to be full of crap so far.

252   Zephyr   ignore (0)   2008 Dec 2, 2:26am   ↑ like (0)   ↓ dislike (0)   quote   flag        

Bernanke probably is very interested in a real world test of his ideas. And I expect that Bernanke very much does care whether it works. His credibility and legacy will be hugely affected by his success or failure with this crisis.

Which specific elements of his thesis do you consider to be full of crap?

253   EBGuy   ignore (0)   2008 Dec 2, 2:42am   ↑ like (0)   ↓ dislike (0)   quote   flag        

On another note, Bernanke apparently is saying that the Banks are NOT getting face value for the bad paper that they pledge as collateral at the various FedR funding facilities:
I've posted the Fed "haircut" worksheet (PDF) several times. Definitely worth a look to see how comfortable you are with the Fed margins.

Anybody want to hazard a guess if Black Friday came a week early for the stock market (was that the low or will we retest)? The banks I picked up were at a 30+% discount (certainly better than GoLDs performance over that last week).

254   justme   ignore (0)   2008 Dec 2, 6:47am   ↑ like (0)   ↓ dislike (0)   quote   flag        

EbGuy, thanks for the worksheet. I missed that earlier.

255   Paul189   ignore (0)   2008 Dec 2, 8:04am   ↑ like (0)   ↓ dislike (0)   quote   flag        

The gubment does not want the direct lending you talk of comrade.

http://tinyurl.com/6b3gmd

They are crushing prosperDOTcom

256   OO   ignore (0)   2008 Dec 2, 9:51am   ↑ like (0)   ↓ dislike (0)   quote   flag        

Zephyr,

while I am pro bailout in general because I am comfortable with where I am, and do not want anything to topple the current matrix order, I am very much against the BB bailout so far, not because of moral reasons, but because it just won't damn work.

The whole issue of the housing bubble is because there are fewer and fewer people in the US with enough $$$. So when everyone falls below the least eligibility line to buy a house (which is a symptom of something much larger), you just need to find ways to scrape the bottom of the barrel, that's why we have rampant fraud in mortgage business, because we need marginal breathing bodies to keep the game going.

Now we have hit the wall. The game stops. Don't get me wrong, I like the game, because I have been beneficiary of the game, but their way of playing it is NOT sustainable, and that's why I think they are so full of crap. If they are smart, they may want to share a bit more with rest of the income and wealth pyramid, but not to grab more when the bottom levels are already at a destitute situation and the middle level are falling off the cliff! Who is going to support the top level if your bottom levels hollowed out?? What they are doing is inviting REVOLUTION, violent revolution, and I don't like revolution one single bit.

So the quantitative easing has to start from the bottom. Give everyone a rebate check of $1K, 10K, whatever. Build roads and bridges to keep the poor employed so that they don't go loot the stores. I am even fine with loan modification with under-water properties so as to keep them in their homes forever.

The game plan is not to recapitalize the banks, it should be recapitalizing the American people, if you recapitalize the American people, the banks will be recapitalized automatically. If you throw $30K at every single American (that's how much these bailouts have cost so far!!!), we have long reflated. We probably are already running at 20% inflation by now.

257   frank649   ignore (0)   2008 Dec 2, 10:22am   ↑ like (0)   ↓ dislike (0)   quote   flag        

"We probably are already running at 20% inflation by now"

Lol. Gold isn't going anywhere for a long long time. Deal with it.

258   B.A.C.A.H.   ignore (0)   2008 Dec 2, 11:33am   ↑ like (0)   ↓ dislike (0)   quote   flag        

I think gold fell from around $200 to around $100 before it went up again. That was in 1974.

In present times gold isn't down by that ratio in USD. Not yet.

259   PermaRenter   ignore (20)   2008 Dec 2, 11:35am   ↑ like (0)   ↓ dislike (0)   quote   flag        

How does the Fed get its money? It doesn't need to borrow it; it merely creates an entry into its balance sheet. All the Fed requires to "print" money is a keyboard connected to a computer. The difference between the Fed and the Treasury issuing money is that the Treasury needs to get permission from Congress before selling bonds. In this context, it shall be mentioned that physical cash (coins, bank notes) are entered as liabilities on the Fed's balance sheets; they are rather unique liabilities, however, as you can never redeem your cash: if you went to a bank, the best you can hope for in return for your dollar bill is a piece of paper that states that the bank owes you one dollar. While it is possible for central banks to remove cash in circulation, they are not obliged to do so.

Until recently, the Fed would only temporarily park non-government securities on its balance sheet: a bank would typically receive a temporary, often overnight, loan for depositing top rated securities with the Fed; these "swap agreements" were traditionally intended for very short-term loans, but the crisis has led the Fed and other central banks around the world to engage in 60, 90 day or even longer agreements. Since late September, the idea of swap agreements has been supplemented by outright purchases.

When the Fed issues cash for debt securities it acquires, we talk about "monetizing the debt".

260   OO   ignore (0)   2008 Dec 2, 11:59am   ↑ like (0)   ↓ dislike (0)   quote   flag        

frank,

I am not concerned about gold. If we do not resolve deflation within 12 months, gold is going through the sky, because USD will collapse, simple as that. US government has to default. Those who have gold will be the only wealth holders, and if they hold guns to defend their gold, even better.

But this is not the scenario that I would like to see, because that means system reset. I would rather run an inflation, gold wins a little, the system can go on, so that we can still live happily ever after in our American dream.

261   OO   ignore (0)   2008 Dec 2, 12:01pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

Sybrib,

you forgot the event that triggered the gold to go down that much - because US government allowed citizens to own gold again. There was so much pent-up supply to sell gold to American citizens from all over the world because everybody was anticipating that moment.

262   B.A.C.A.H.   ignore (0)   2008 Dec 2, 12:15pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

I didn't forget.

But I thought it was the other way around. A small surge in demand for a short while in the US. Whatever. More volatile in USD price than we've seen in the present.

263   frank649   ignore (0)   2008 Dec 2, 12:26pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

"because USD will collapse, simple as that."

Just be thankful that you won't lose your shirt with gold, because given your lack of knowledge in economics, you could do a lot worse.

Just look at poor Peter Schiff. 50% down and counting.

264   frank649   ignore (0)   2008 Dec 2, 12:29pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

I'm not trying to insult. You're in good company like Warren Buffett who has been betting against the USD for the past 3 years (at least).

265   frank649   ignore (0)   2008 Dec 2, 12:30pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

You are just using the wrong economic theory. Suggest you take a look at mises.org.

266   frank649   ignore (0)   2008 Dec 2, 12:35pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

Though I gotta say, at times you must be making up stuff because it doesn't make sense in any model of economics.

267   B.A.C.A.H.   ignore (0)   2008 Dec 2, 12:41pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

There is a book called the Power of Gold by economist Peter Bernstein. He sorta makes the reader feel like gold is coveted by a hoarding mentality, a greedy hoarding instinct that'll always getcha in the end.

But I heard Bernstein interviewed on Money Talk last year, he actually recommended having a position in gold.

268   frank649   ignore (0)   2008 Dec 2, 12:41pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

Headset, thanks for that MISH link.

Some good stuff there, though I'm not convinced when it comes to trend analysis or Elliot wave theory.

269   Paul189   ignore (0)   2008 Dec 2, 2:52pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

"I think gold fell from around $200 to around $100 before it went up again. That was in 1974."

I think that was '75 / '76 but no matter. I was always perplexed by that part of the chart from the 70's gold bull. What I think was related to that move back then was when they introduced futures contracts on gold in the USA on the COMEX. At best it was the wild west (as it is now again).

Probably nobody will care, but the reason I became interested in markets (any and all) goes back to this time frame (around 1980). My father said "take this $200 USD and get Canadian as we are about to go north on vacation". I as a youngster, went to multiple banks for quotes and found huge discrepancies in bid/ask. Even to the point that I was able to arbitrage between banks (walking between them buying from one selling to another) as a preteen, for a quick profit.

270   Zephyr   ignore (0)   2008 Dec 2, 2:58pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

Almost everyone recognizes that the US dollar (like all fiat currencies) will lose purchasing power over time. Because of this, many people wrongly assume that the US dollar must decline relative to other currencies. But the exchange rate with other currencies can move in either direction depending on what is going on in those currencies/markets.

In 2007 I thought the bottom would come in 2008 for the USD, and so this summer I bet long the dollar against the Euro, Canadian, Pound, and Swissy. So far so good.

I think the dollar will continue to gain against other currencies in the next two years.

In fact, for more than a year I have felt that cash was the best investment. I think it is still a little early to bet on anything else. And the best cash is the US dollar. Most of the world agrees with this view, which is why we have seen a flight to the safety of US treasury bonds.

271   Paul189   ignore (0)   2008 Dec 2, 3:02pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

This type of currency volatility as witnessed now and described above can not be a good thing for international commerce. I have only heard it mentioned as a problem once or twice in the mainstream media in all of this chaos.

272   Paul189   ignore (0)   2008 Dec 2, 3:05pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

@ Zephry,

2 more years a dollar bull - WOW? How high you think?

273   Paul189   ignore (0)   2008 Dec 2, 3:07pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

Any chance someone (like China) blinks?

274   Paul189   ignore (0)   2008 Dec 2, 3:08pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

or Japan

275   Paul189   ignore (0)   2008 Dec 2, 3:09pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

or the British?

276   Paul189   ignore (0)   2008 Dec 2, 3:09pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

or Brazil?

277   Paul189   ignore (0)   2008 Dec 2, 3:10pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

etc...

278   Zephyr   ignore (0)   2008 Dec 2, 3:13pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

I think the current bailout is mostly a terrible waste of money. It is far too expensive for the benefit we will get. And much of it will be counterproductive.

I do think that the Fed needed to take action to stabilize the financial system and the counterparty credit risk for normal commerce. But, that could have been accomplished by guaranteeing deposits, without guaranteeing the survival of the banks (and other entities). Let them fail, but cover the depositors and counterparties for normal commercial balances. As for credit default swaps let them sink – they were mostly speculator positions anyway.

Unfortunately, the fools in congress want this path, so we will have these expensive bailouts. And the spending on weak banks and other weak entities will divert resources away from the healthier parts of the economy. These programs will waste resources and stifle the normal recovery of the economy. We are starting down the policy path that Japan followed in the 1990s, and that the US followed in the 1930s. It failed both times.

The Fed caused the great depression by bad policy. And they have caused this crisis in the same manner. In both cases the policy was far too loose leading into the bubble, and then they tightened quickly precipitating a credit crunch and a financial panic.

Once the panic starts you cannot cure it with low interest rates. You have to let the speculators lose money.

279   Zephyr   ignore (0)   2008 Dec 2, 3:16pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

I do not expect the dollar to have a dramatic rise. But the rest of the world is going into the toilet much worse than we will. And they are on a lag behind us. By 2010 we will be rising while they are still falling.

280   Zephyr   ignore (0)   2008 Dec 2, 3:24pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

China cannot afford to blink. As I have posted for years, China is addicted to our trade. They need us - but we don't really need them. They sell stuff to us for dirt cheap prices and they even lend us the money to buy it with. So they give us real stuff now, and in exchange we give them a promise to pay them later with our paper that is declining in value.

But they are desperate and must sell their goods at any price (even at a loss) to maintain employment. Otherwise they will have civil unrest, rebellion. The economic tide is going out now and they are headed for severe trouble. Watch for increased turmoil and serious rioting in China soon.

281   justme   ignore (0)   2008 Dec 3, 12:13am   ↑ like (0)   ↓ dislike (0)   quote   flag        

Zephyr,

"China addicted to our trade":

In one sense, because the trade is the primary mechanism for creating the hierarchical capitalist social structure that the leadership appears to be so very much yearning for. ("I need oh-so-badly someone to be on top of").

In a practical sense, they could just as well sell their consumables domestically.
And the US consumer is quite addicted to the cheap stuff, if you ask me. They are the ones that really need to go to the dollar store and buy a tool for $1 that used to cost $10.I do think that WE are addicted.

So there is your contrarian view. Tell me where I'm wrong.

282   Zephyr   ignore (0)   2008 Dec 3, 4:47am   ↑ like (0)   ↓ dislike (0)   quote   flag        

Justme, The communist structure gives them more dominance over the people. The leaders of China have been supremely on top of the people. That dominance is eroding.

Economic reforms give power to more people - diluting the concentrated power of the party elite. It is also creating a small but growing middle class.

Clearly China could consume more of their own output, but not enough to keep their factories running at their current rate. If the export market declines for them their unemployment will skyrocket. The lack of freedom in China has unrest already boiling under the surface. A rise in unemployment would be a disaster for the rulers.

283   Zephyr   ignore (0)   2008 Dec 3, 4:55am   ↑ like (0)   ↓ dislike (0)   quote   flag        

We have become accustomed to cheap goods from China. But removal of that source would mean we pay more to buy those goods elsewhere. Our quantity of unnecessary stuff would decline somewhat. Americans would be annoyed by the reduced purchasing power.

However, the impact on China would be soaring unemployment, rising poverty, civil unrest and violence in the streets in protest against the government. There are already thousands of such protests each year. The Chinese rulers cannot afford to inspire greater dissatisfaction. They are sitting on a powder keg.

284   Zephyr   ignore (0)   2008 Dec 3, 5:07am   ↑ like (0)   ↓ dislike (0)   quote   flag        

Paul,

My two year currency forecasts:
Euro $1.00 (if the Euro survives at all)
Pound $1.30
Canadian $0.70

285   kewp   ignore (0)   2008 Dec 5, 8:19am   ↑ like (0)   ↓ dislike (0)   quote   flag        

Clearly China could consume more of their own output...

I think they know better than to eat their own dog food...

286   RecentCost   ignore (0)   2018 Jul 9, 10:57am   ↑ like (0)   ↓ dislike (0)   quote   flag        

Malcolm says
Patrick, that kind of loan actually pays 12% or more. There are hard money brokers I have told you about who do these loans. Yes, it is risky, you have to be very careful about the appraisal and working with a broker you trust. That is not meant to be a joke, you have to find someone reputable to work with. Also, realize that someone's residence is different than say a commercial project. I have seen people get very protective of their home and threatened to sue for such things as usury. Even if the claim is bogus it still scares people. If you have money burning a hole in your pocket and want to lend or invest in real estate get in touch with me and I'll show you how. I am working on some things on foreclosures back east that you will find interesting. You could get in with less than $15,000.


The vast majority of hard money lenders/brokers will not lend on owner-occupied property because a home owner may threaten a lawsuit. The laws are always in favor of the consumer.

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