patrick.net

I don't see tremendous bargains in the stores. Real estate is still not worth it. For such a dire financial situation, people are not giving anything away -- there seem to be people being screwed out of things, though.

I don't see how the latest Treasury noises are anything more than bluster. As far as I can tell, there is nobody in particular that will gain by this. They dangle this kind of crumb to help sate some part of the masses, but it usually contains so many restriction that it won't do any good. They will never build a consensus for something like this. The payoff is too nebulous. I have seen how every one of the bailouts have functioned thus far, and I do not see a bagman in this.

TOB,

Jack Welch? Blech, Ech, whatever Bill-the-Cat said.

Speaking over over-rated CEOs:

Isn't it precious how the Ford CEO is now saying that they "probably will not need the money" (interview on PBS today), and pretending that they are taking the loan guarantee mostly as an act of expressing solidarity with GM and Chrysler.

Where did I hear this kind of BS before? Oh, yeah, that's right: 4 and 2 months ago when Citibank and Wells Fargo would (1) take loans from the Fed discount window and (2) sell preferred stock to USG, NOT because they needed the money,
no siree, but to help remove the stigma for their poor cousins that were really desperate for cash.

Mind you, I'm not against the automaker bailout. I'm just against the lies, hypocrisy and posturing.

would sell preferred stock to USG in order to take the2

..Speaking OF over-rated CEOs....

PermaRenter,

I think much of the saber-rattling against deflation is just political theater designed to frighten and soften up the public opinion before USG, UST and FedR start their campaign to inflate us out of dropping housing prices.

Nasty business, it is.

Commercial lending, borrowing and investing enables the movement of financial resources to the most productive ventures. Deflation disrupts this process. It also crushes those enterprises with debt. Employment falls.

Deflation exacerbates the damage of a recession. Inflation exacerbates the damage of a boom/bubble. What the Fed should do is inflate during recessions and tighten during booms. Unfortunately they are slow to move and end up exacerbating the boom by inflating well into the boom. Then they tighten too much and precipitate a more severe decline.

Our current financial crisis would not have occurred if Greenspan had not cranked up the easy credit machine (late 2001 - 2004). Then, by rapidly tightening thereafter the Fed precipitated the credit crunch.

We are suffering from bad Fed policy.

Some deflation is likely as we come down from our credit high.

However, with the wasteful bailout spending, massive stimulus and excessively low Fed funds rate (again) you can be sure that inflation will return with a vengeance.

secretlyironic Says:
> Credit is a tool like any other. Misused it can cause
> great damage. Used properly it can create success.

It is unfortunate that most people misuse the tool we call credit.

> Imagine someone who is 18 and uneducated and has
> no money. Should they skip college until they have the
> full cost of tuition available up front?

If someone makes it to 18 with “no money” and has not thought about he or she is going to pay for college they are not mature enough to go to college and should take a year off and save up to pay for college. I got a great education at a public university and easily paid for my entire education with a part time job.

> Imagine someone who has a steady job, but no way to get to it.
> (And they aren’t in a city with public transit). Should they buy a
> car on credit so they can get to work?

Buying a car (that you are not using in a business to make money) with credit is almost always a bad idea. It is a better idea to move closer to the steady job so you can walk to work while you save for a car.

> How about farmers who need to buy fertilizer before they can
> grow their crops, and need to grow them before they can harvest
> them, and need to pay laborers for the harvest, all before they
> can sell the crops and get money to pay for the labor and fertilizer?

Basically people should use credit only when they think that by borrowing money they will get a bigger return than not borrowing money say buying a home or paying a crop duster to fly over your crops with pesticides to increase your crop yield. Using credit to buy a big screen TV or pay a crop duster to give you a ride in a plane for fun is a bad idea (but the way most people use credit)…

coretexity Says:

> I’ve a question for the board. I got 2 letters in
> the mail - 1 from Wamu and 1 from Chase,
> saying that they’ve closed my credit card accounts
> with them as I had not used their credit cards
> in years. I am worried that this 10-20k hit on
> the open credit is going to put my FICO in the
> subprime range.

I've been over 800 for years and my score actually went up when I had a couple cards closed for non use (a math guy I know who works at Fair Isaac/myfico.com told me that it was because a lot of available credit actually lowers your score). I saw my score drop a little when I increased my limit from $30K to $50K on my most used card (I was buying a lot of stuff for an apartment renovation and actually spent close to $30K in one month)...

Brand says:
Buy now, Bay Area folks, because Uncle Sam might actually have the sheer power to price you out forever!

Uncle Sam is a dirty old perverted pedophile - he finds new ways to fuck the next generation.

I wouldn't panic much about the new treasury plan though. It is not sustainable - it is just a way to make the fire slow down until the current bunch of thieves can exit the building.

Well, there was significant irony intended in my quip. :)

Almost all of this stuff is unsustainable. The primary problem isn't that home prices are falling, it's that a bubble existed to begin with. Congress should be deeply concerned about the fragility of an economy that cannot withstand a contraction. If we keep propping it up with emergency measures, and ignoring the fundamental problems, then our economic backbone will continue to deteriorate.

In other words, we cannot sustain a tulip-based regime by government intervention to prop up tulip prices. At some point ya gotta call a tulip a tulip and get on with the show.

I think government spending in areas that have been deprived like science, infrastructure, and redevelopment will lessen the contraction and add real value.

Apparently the gov wants to drive mortgage rates to 4.5% while eliminating or reducing fees. I wonder if that will include down payment assistance?

What an opportunity! If you are a saver with a paid for house, don't just resent the extract-and-walk folks, get your share! Just get a mortgage now while the house price is temporarily propped up by the 4.5% low fee mortgage. Get max appraisals too, since the gov will buy the debt directly from the bank (no Wall St securitization step). Now move to rental, stop payment on the mortgage, then wait and cash buy a house for much less after the market declines resume.

Contractions need not be severe if the expansion is not artificially enhanced with easy credit or burdened with excessive government spending.

Government policy should be designed to sustain a relatively stable economic environment at a reasonable level. However, the fools in congress are now trying to quickly prop things back up to an unsustainably high level.

The credit-driven spending binge of the last 20 years is not sustainable. But they will try.

Malcolm,

Right, but only if Obama insists on getting value for the taxpayer/public money.

The main problem with Republican "public works" is that they become "corporate works", and there is no oversight ensuring that the taxpayer is getting value for the money. The republicans have had the attitude that the important matter is that the money gets spent, and not what we get for it.

Obama has to change the culture of corporate giveaways in Washington, and I think he will.

You wouldn't happen to be bipolar, would you, Patrick?

While I'm pretty much anti-debt (I would rather rent for the rest of my days than overpay for a house); there are indeed cases where credit is not only a good idea, its cheaper than paying cash!

Here's a personal example; I needed to get my teeth fixed. I couldn't afford to pay cash, so I took out a small personal loan and basically amortized the costs over the duration of my treatment.

If I had waited until I could pay cash my dental health would have deteriorated in the interim and it would have ended up costing me more in the long term.

Regardless, I'm disgusted by people that bankrupt themselves via consumer spending. Or the kid with the sign that says "90k in student loans and no job. Where's my bailout?". Well, you either went to the wrong school, studied the wrong thing or shouldn't have gone to college in the first place.

The sense of entitlement in this country sickens me.

Trying to read the tea leaves with this week's H.4.1 release from the Fed. After two weeks of declines we saw an increase of $20+billion in the Fed balance sheet. Increases of $15billion in the Commercial paper facility and Maiden Lane III LLC (more on that later). Also, "other assets" increased by $20 Billion. There were declines in some other accounts (most notable AIG's credit line). Banks increased deposits at the Fed by $56Billion, which (you'll like this OO), allowed the Treasury supplemental account to actually decrease by almost $40Billion.
As a side note H.3's negative "non-borrowed" reserves improved to only -$32Billion. At this rate we will be positive soon.

Oh, and here's the Fed note on Maiden Lane III LLC in its entirety:
Note: On November 25, 2008, the Federal Reserve Bank of New York (FRBNY) began extending credit to Maiden Lane III LLC under the authority of section 13(3) of the Federal Reserve Act. This limited liability company was formed to purchase multi-sector collateralized debt obligations (CDOs) on which the Financial Products group of the American International Group, Inc. (AIG) has written credit default swap (CDS) contracts. In connection with the purchase of CDOs, the CDS counterparties will concurrently unwind the related CDS transactions.
Payments by Maiden Lane III LLC from the proceeds of the net portfolio holdings will be made in the following order: operating expenses of Maiden Lane III LLC, principal due to the FRBNY, interest due to the FRBNY, principal due to AIG, and interest due to AIG. Any remaining funds will be shared by the FRBNY and AIG.

Is it even possible to have a debt-free society with fiat currency?

Is it even possible to have a debt-free society with fiat currency?

It hasn't worked in the past...

http://en.wikipedia.org/wiki/Continental_dollar

Peter, its not fiat, but fractional reserve banking that demands debt.

TOB :
Interesting video!!
Sometimes , outside people can see forest clearly when people inside can only see trees.
Actually, to my surprise, this Guy has figured out the whole thing pretty clearly.
People around the world are realizing what's going on with dollar.
I think our dollar is like AIG stock. It will retain its value as long as people keep investing blindly in dollars. The demise of dollar will be when everybody in the world realizes its potential and starts getting out of it.
I think US will soon be forced to work its ass off to produce goods and our standard of living will go down the toilet.

Peter, its not fiat, but fractional reserve banking that demands debt.

You are right.

our standard of living will go down the toilet.

Future tense?

snmr says: I think US will soon be forced to work its ass off to produce goods and our standard of living will go down the toilet.

Work?!? Oh noes! :o

Come on, a little honest hard work would do this country a lot of good. Most of the protections by unions and anti-trade lobbies are to preserve laziness. Our standard of living is not going down the toilet, especially not at the present pace of technology. The Americal SoL might decline temporarily as we work off this debt and fall back to our rightful place in the global economy, but then we'll be off to the races again.

Honestly, Americans are so darn concerned about keeping things exactly the way they are, that they have become blind to the fact that we're a culture that rolls up its sleeves and gets on with it. Once circumstances force us to face that fear, I think we'll hit another truly productive era in U.S. history.

It all moves in cycles. After a wave of productivity gains, we get a wave of financial tinkering, followed by financial speculating. Then it all crashes and we have to focus on being productive again.

We have been through this cycle many times.

EBGuy,

I thought Maiden Lane is for Lehman, they have Maiden Lane III now? Are we practicing Islam at the Fed so that it can acquire 72 maidens at the gate of heaven?

It all moves in cycles. After a wave of productivity gains, we get a wave of financial tinkering, followed by financial speculating. Then it all crashes and we have to focus on being productive again.

Eternal wisdom.

RE: 72 maidens

Iron maiden?

Work?!? Oh noes! :o

I thought I could just a get a zero-down, no-doc neg-am mortgage, service it with home equity loans and count on 100% appreciation per year?

Whachoo be talkin' bout, Mr. B?

I was thinking maybe I could just buy a boat, an ATV and a plasma TV by continuously rolling my balance between 0% intro rate credit cards.

"It’s basically all just direct market manipulation to avoid the correct pricing of risk."

Brand,

Japan tried this very thing in the 90s and it had very little effect. Psychology has changed. It will take more than just a lower monthly payment to reignite the housing market. Expectation of appreciation will remain low for decades to come. While demand for purchases might increase slightly (not guaranteed given the worsening economy), decreasing rents will act as a counter force.

"wait till the Fed and Treasury are completely desperate and roll out their weapon of mass destruction - raw print in large scale, and in public."

OO,

You keep waiting. Meanwhile, oil is at $44 (going to $25 before midyear 2009), Gold is down to 750 from a high of over 1000 earlier this year and treasury yields are at historic lows.

AIG has always been a company of smoke and mirrors accounting. For decades AIG has used accounting tricks and off balance sheet companies to hide liabilities.

The collapse of the oil bubble is stunning. Even more stunning than the real estate bubble decline.

I never thought the prices above $60 were sustainable, but I am truly stunned by the speed of the oil price collapse. It usually take many years for the price to fall this far from the peak.

Frank said: "You keep waiting. Meanwhile, oil is at $44 (going to $25 before midyear 2009), Gold is down to 750 from a high of over 1000 earlier this year and treasury yields are at historic lows."

I agree. Short-term Cash continues to be the best investment option.

Frank,

I don't worry, because the Fed is behind me, I don't fight the Fed in a fiat system. They have unlimited power to print, and I endorse that :-)

frank says: ...and treasury yields are at historic lows.

You need to meander on over to Calculated Risk. Remember that bailout cash that the banks are supposed to be lending? They are (apparently) parking it in short-term Treasuries. The Fed pumps cash to the banks, the banks invest in T-bills instead of lending, and then we see yields drive almost to zero.

Liquidity is gridlocked. No matter how much cash the Fed tries to push out at near-ZIRP, they are pushing on a rope. The government is getting its own money loaned back to it, via a circuitous route (Teasury -> Fed -> banks -> T-bills). What a joke. And the banks make interest on their Fed collateral.

The Fed has already put in place the foundation for massive inflation. However, we must get through the deflationary tide before the inflation will be the dominant factor. My guess is about one year before it starts.

You can't push a string. Even with a zero cost of funds nobody wants to borrow to engage in a losing business or loan.

This is the trap of deflation. Interest rates cannot go below zero, but with deflation expected returns can. However, with deflation merely holding cash generates a tax free return equal to the rate of deflation. Why lend or invest?

Cash is King.

For more than a year the dollar has been appreciating in real terms.

Today the dollar buys more than it did a year ago:

It buys more real estate than a year ago.
It buys more stock than a year ago.
It buys more oil than a year ago.
It buys more lumber than a year ago.
It buys more copper than a year ago.
It buys more TVs than a year ago.
It buys more Car than a year ago.
It buys more gas than a year ago.

And now everything is on discount sale at the stores.

It is very easy to break the deflationary trap.

Give everyone $10K, $100K. Luckily that Obama sees the solution and his team is already acting on it. Once everyone of us gets $10K, $100K, it will be hard not to see inflation again.

I have a better solution for them. Instead of giving rebates, give cash coupons that expire in 3 months. It will take them a while, but they will get there.