Tuesday, October 14, 2008


There Is No Financial Crisis

By Dick McDonald of Rise up America

Weeks ago I said there was no financial crisis. I said the Federal Reserve prints money and they can print as much as it takes to shore up the financial markets. I kept repeating that the taxpayers were never going to pay for this bail out. People don't pay taxes when newly printed money is used by government for commercial purposes - investments or expenses. Now look at what is happening. According to the NYT:
"Two weeks after persuading Congress to let it spend $700 billion to buy distressed securities tied to mortgages, the Bush administration has put that idea aside in favor of a new approach that would have the government inject capital directly into the nation's banks - in effect, partially nationalizing the industry."

Now after stampeding the public into believing that they were going to be taxed for the mortgage bail out, the geniuses that run our country have decided to inject newly printed money into the banks to get them working again. The Fed always had the ability to inject capital - it didn't need to ask for Congressional approval. These political paragons of certainty have confused the folks and put them in full panic mode. Taxing people for the bail out was never in the cards.

Weeks ago the President issued a Presidential Order that any bail out would be done off budget and that any credits issued by the Federal Reserve (printed money) would not be added to the national debt (no taxes necessary). That should have given everyone a clue - but the folks are so desperate to participate in their government they made a run on the banks and 401(k) s and crashed the stock market. Silent George didn't make things very clear.

The economy didn't fail - just a portion of the financial sector. By buying non-voting preferred stock in failing financial institutions the cash injected by the Fed will allow those institutions to firm up their balance sheets and begin loaning money again. As the interest the Fed buys is preferred stock, the investing public can enjoy any improvement in the value of the bank by buying common shares. The Fed will eventually get repaid through bank profits or proceeds from the issuance of new common stock based on the bank's increased earning capability. Banks WILL NOT be NATIONALIZED - no socialism here. Some banks will fail and be "creatively destroyed" - but they will be few.

Now the people who will lose money will be the shareholders of these failing financial institutions - so it should be. Other losers will be those who can't pay their mortgages even after their terms are modified. The winners will be those who have held onto their shares of stock as the market will rebound. Those who buy into solid companies here at the bottom should turn a tidy profit. Those who buy real estate at fire sale prices will do well too. And don't forget banks - some of their common is in the penny range - imagine what it will do with the cash infusion by the FED.

Try to avoid the insanity that always accompanies financial upheavals. Don't blame "hedge funds" they perform the necessary task of ridding old companies of costly entrenched bureaucracies and don't blame "derivatives" they shift risk to those who can afford it. Don't prove your ignorance by blaming the wrong thing or wrong people.

This time around blame the Democrat party and special interest lobbying groups like ACORN (Association of Community Organizers for Reform Now) for their insistence on legislation that forced banks to make NINJA loans (No Income, No Job. No Assets). Legislators like Chris Dodd and Barney Frank should be run out of town on a rail. Think about Maxine Waters and her insistence that lending to those who can't afford it is good public policy. Let's get real - these people are a real danger to running a fiscally sound democratic society. They should all be flushed down the drain in November.

And AIG should disband their 310-man London group that insured many securitized mortgage bundles for surely they were the biggest fools of all. As actuaries and underwriters they get an "F".


The Data Don't Justify Financial-Market Panic

By Robert Higgs, a senior fellow in political economy at the Independent Institute and editor of The Independent Review.

As the hysteria has grown in the discussion of financial markets and related government policies, I have been puzzled by the discrepancy between the best available data and the descriptions quoted in the press - statements by financial gurus, traders, and professors, as well as by government officials. To hear these spokesmen tell the story, you'd think that the world will soon go to hell in a hand basket, if it hasn't gone there already. Yet every time I look for data to check these claims, I find nothing solid to back them up.

The latest case in point concerns the markets for commercial paper. The Fed has just announced that it will launch an unprecedented program to support this credit market. As MarketWatch describes this initiative, the Fed "will buy unsecured commercial paper in an effort to restart a market that's ground to a virtual halt in recent weeks." This report goes on to explain that the Fed's purpose is "to get lending flowing again." It quotes John Ryding of RDQ Economics, who foresees dire consequences "if the Fed doesn't unfreeze the credit markets." Got the picture? Restart a virtually halted market; get lending flowing again; unfreeze credit markets - all of which suggest that at present nobody is borrowing and lending in these markets.

Such comments are extremely common in the press. Bloomberg's Commercial Paper Primer quotes New York University economist Mark Gertler's statement that "large corporations are having difficulty obtaining funds via the commercial paper market." A commentator at "The Bonddad Blog" says: "people are unwilling to buy this paper. . . . [N]o one is buying any commercial paper" (although, inconsistently, this same blogger notes that "lenders . . . are asking for a higher interest rate to pay them for a short-term loan," which implies that someone is lending).

The Federal Reserve System publishes comprehensive data on commercial paper issuance, commercial paper outstanding, and interest rates on commercial paper. I presume that these data give us a clearer picture of what's going on in the markets than a covey of hyperventilating Wall Street commentators.

Consider first the interest rates for commercial paper. For the past several weeks, 30-day nonfinancial paper has been going for about 2 percent; 60-day and 90-day loans in this market have required a slightly greater rate of interest. Financial commercial paper has been going for roughly 3 percent, give or take a few tenths of a point, with little difference among the 30-day, 60-day, and 90-day rates.

Given that the rate of inflation at present is greater than 3 percent, and presumably will remain greater than 3 percent for the next three months, these nominal interest rates on commercial paper imply that lenders are actually giving away money to corporations that sell commercial paper - the nominal rates of interest are less than the expected rate of inflation. Is this situation what one expects to see during a "credit crunch"? Hardly.

Many commentators claim, however, that virtually no transactions are occurring in this market. These claims are completely false. For the week that ended October 1, which is the most recent week currently reported, total commercial paper outstanding amounted to $1,607 billion. Yes, this amount was down from the $1,702 billion reported for the previous week, but is a 5.6 percent drop a good reason to panic? If we go back to March 2008, when nobody was talking excitedly about the commercial market's "freezing up," we find that the total amount outstanding, on average, was $1,822 billion, or only 13 percent more than last week. In March, the market was working fine; now it's "locked up." This sort of hyperbole, with which we are being bombarded hourly around the clock, is totally without a basis in the facts.

For the year 2006, when the financial markets were, for the most part, still ripping along very nicely, the total amount of commercial paper outstanding, on average, was $1,983 billion; for 2007, it was $1,781 billion. For the past seven months, on average of the monthly data, it was $1,743 billion. Does this 2.1 percent decline from last year's average give us a good reason to jump off a tall building?

Either someone is deliberately trying to spook us, or these panic-mongers have simply lost their grip on reality. Officials at the Fed and the U.S. Treasury are running around like chickens with their heads cut off. They are dragging the world's leading central bankers and finance ministers around with them. The news media are raving like lunatics. The big unanswered question is: WHY?




The SEC short-sells us down the river: "The Securities and Exchange Commission took the very drastic step of outlawing the essential financial practice of short selling in an attempt to galvanize financial markets. (The SEC recently extended at least some portions of its initial ban through October 17.) But short selling provides essential information to market participants and helps us update our expectations accordingly. By outlawing short selling, the SEC has eliminated a crucial element of what makes markets work."

A 2006 McCain Letter Demanded Action on Fannie and Freddie: "Sen. John McCain's 2006 demand for regulatory action on Fannie Mae and Freddie Mac could have prevented current financial crisis. McCain's letter -- signed by nineteen other senators -- said that it was "...vitally important that Congress take the necessary steps to ensure that [Fannie Mae and Freddie Mac]...operate in a safe and sound manner.[and]..More importantly, Congress must ensure that the American taxpayer is protected in the event that either...should fail." Sen. Obama did not sign the letter, nor did any other Democrat."

Thousands Of Dead People On Connecticut's Voter Rolls: "An in-depth look at voter rolls across the state by a group of University of Connecticut journalism students earlier this year found that about 8,500 dead people were registered to vote, and that clerical errors made it appear that 300 of them actually had voted. A closer look by state election officials thus far has found no evidence of election fraud, though the review is ongoing. The students' effort focused attention on weaknesses in public record-keeping at the local level that allowed thousands of mistakes to go undetected."

There is a new lot of postings by Chris Brand just up -- on his usual vastly "incorrect" themes of race, genes, IQ etc.


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The Big Lie of the late 20th century was that Nazism was Rightist. It was in fact typical of the Leftism of its day. It was only to the Right of Stalin's Communism. The very word "Nazi" is a German abbreviation for "National Socialist" (Nationalsozialist) and the full name of Hitler's political party (translated) was "The National Socialist German Workers' Party" (In German: Nationalsozialistische Deutsche Arbeiterpartei)


1 comment:

votetheday.com said...

Global crisis is not only about companies of financial services. It is about common people as well. The ones with loans, credits, mortgages. The ones with jobs to preserve, houses to retain, families to maintain, relatives to support, children to send to colleges. The ones with budgets, where every cent has its destination. How many of the people lose jobs, cars, homes? How many have to cut out the spendings, which they considered a normal part of their lives? - http://www.votetheday.com/finance-26/are-you-feeling-the-effects-of-the-financial-crisis-311