Phil Anthropy

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    • Mon Oct 13th 00:10 AM
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      Debunking the "Decline of the Middle Class" Myth
      It disappoints, but doesn't surprise, that choosing statistics selectively is still the most popular hobby of economists and analysts. It is absolutely clear that if the super rich become every super richer, everybody's boat rises with the tide (assuming the super rich don't trickle all their money down overseas and make the foreigners rich rathern than their American colleagues). The question is whether the rising tide in the middle class will really float a boat, or is just a wave in a bathtub.

      Regardless if one's income increases by 1% per year in constant dollar terms, it decreases by several percent in terms of purchasing power against various other measures: healthcare, education, food, gasoline, housing (until the last few years), and various foreign currencies. The middle class is much better off each year in terms of dollars earned, and much worse off in terms of purchasing power.

      To those who would tout this as a victory for the capitalist system, I can only say: I don't think so.

      There is nothing wrong with the rich getting richer, and they will always get richer than the middle class or the poor, because that's what the "magic of compounding" does. An oak tree adds more wood each year than a sapling. Nothing can stop it. Whoever got here first-est with the most-est does better than the laggards, for a long time, with few exceptions.

      The problem is that the free market is being distorted. Economies of scale would dictate that as universities grow, the courses should become cheaper in constant dollar terms. That's not happening. As healthcare becomes more automated and efficient, prices should go down, but they don't. In a free market system, estate attorneys should compete, lowering hourly fees. Instead, some states pass "acceptable" fees as part of their laws. What we have in American is a modified guild system, with barriers to entry and high pay for the anointed. This is fine, but those fees are rising much faster than per capita income, in terms of percentage.

      By showing a limited selection of pretty graphs, one can gain applause for the artwork, but a more correct analysis would include a broad range of other measures and statistics, to give a well-rounded picture of economic activity and the implications of the trends.

      When renowned economists can come on CNBC and vigorously disagree, it's clear that the "dismal science" is well named. Economics is a field involving nonlinearities and "butterfly effects," boundary conditions and catastrophic discontinuities, interacting rates in complex differential equation models, human behavior and psychology, and potential manipulations on a scale unparalleled in history.

      However, if data is going to be presented and conclusions drawn, it is better to paint all four walls of the barn and not just the facade, if we're going to have a good picture of what's going on. Please excuse the mixed metaphor. Given our current economic climate I think that barn door was closed after the financial horse was gone.
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    • Fri Oct 10th 20:29 PM
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      Why the Financial Markets Haven't Responded
      Today I talked to the manager of my local bank. I was in the process of moving some money from my usual bank, Bank of America, into a local bank where I have another account, because I figured that BoA might have some MBS/CDO exposure, and yet was spending money buying up other companies, so my comfort level had gone down a bit.

      It didn't help my confidence that several months ago I moved money from the TDAmeritrade Prime Reserve Fund into the bulletproof (I thought) U.S. Treasury Reserve Fund, and a few weeks ago had seen that money frozen indefinitely -- until today, in fact.

      I asked the manager if his bank had exposure to CDOs, and he didn't know. He said he'd check and get back to me. We talked some more. He said the bank was family owned, and didn't leverage their money very much. I am not sure if he's right, but he thinks he's right. He said that the bank had outsourced mortgages and just connected clients with a broker, taking a commission. He said the bank had probably tightened home equity lines of credit, but that for the most part the bank was loaning money as usual for commercial loans secured against assets, and also some regular business loans, which I interpret to mean business lines of credit. He didn't seem to be much focused on a banking crisis, because it appeared to me he didn't have one.

      I tell this story, because perhaps the American public is being snookered to some extent about the crisis. On the other hand, I have a friend who was laid off because his company's bank wouldn't make a business loan without micromanaging the firm's cash flow. It sounds as though there is a crisis, but not everywhere.

      So far, little or nothing has been done with the $700 billion in the bailout with respect to buying distressed assets. Instead, a number of other measures have been taken which appear to be having a positive impact on liquidity, despite de-leveraging, yen carry trade unwinding, and hedge fund redemptions, that have torpedoed the market over the past week.

      So why did we need the $700 billion? I'm a little confused. I though we abso-tively, posolutely needed that money instantaneously, if not sooner, or we'd all be in breadlines by today. Instead, liquidity is being put into the markets in many other ways, and creative solutions are being proposed every day in the financia media.

      Some say liquidity has frozen because the banks don't trust each other. When the CDOs are bought up by Mr. Paulson in unknown quantities, from certain (to be announced) banks,which may or may not then have enough solvency for a "going concern," everybody is supposed to have greater trust. I don't think so.

      If liquidity is a problem, perhaps Treasury can simply set up a newer, better (and this time, really controlled by the government) Fed with another name, let's say "Bank on US," which we can abbreviate as BUS. If you want an easy ride, just take the BUS.

      If any bank wants commercial paper, it just tells the BUS, or the partners of the BUS (see below). The BUS buys the paper and sells it to the bank, keeping a small percentage of the interest payment on the note to underwrite (either self-insuring or through viable firms) "failure to pay" insurance on the borrower. If the BUS doesn't think the paper is sound, it doesn't buy it.

      Since this smacks of socialism on a vast scale (although after all, look at the things the Fed has done), we mitigate this by having the BUS outsource its activities to -- say -- the Federal Reserve Banks. The BUS gives them a small cut of its fees to do the screening for asset quality and to put the deals together. In fact, the BUS lets the Federal Reserve Banks do everything in the whole process, and just takes a cut and provides insurance. Sort of like the "mortgage broker" bank I started this comment with. If the Federal Reserve Banks don't have enough liquidity, the "real" Fed loans them money.

      But wait. How is that different from the way things used to be? Previously, local banks would borrow from each other or the Fed discount window to put together short-term commercial paper deals. For longer term loans, they would use their own cash with fractional reserves. If they wanted to take on some risk, they could use leverage, although many are now finding that the lever pushes back sometimes.

      The new way would put the quality control in the hands of the the entity where the buck stops: the government, or rather its partners, the BUS and the Federal Reserve Banks.

      The BUS needs to delegate, because the government doesn't have the resources screen all the commercial paper in the country. Nor would the Federal Reserve Banks have enough resources. So they would outsource to key regional banks, taking a small cut in the process, of course. As a consequence of all this, banks who purport not to have liquidity would get it, albeit for a fee, but would still make profits.

      If the banks used their own cash, they could avoid the intermediary fees. Therefore, at an appropriate time of their choosing, when market conditions were favorable, they could divest themselves of toxic assets and keep the resulting cash to lend directly, as they did in the "old days." Or if they prefer, they can keep those MBS/CDO assets and let them generate cash monthly cash flow (or default), or sell them at a discount, or use them as collateral for loans from investors (if anyone will accept them), or try to insure them (if anybody credible to the public is willing to do that) to increase their market value.

      How much taxpayer money does the BUS take? None.

      The overnight money to buy the initial commercial paper actually comes from the Fed, loaned to the BUS or its partners. Since the Fed has an unlimited balance sheet and we can always print more money (at the risk of debasement of the dollar), there is no liquidity crisis. The BUS, the Fed and the other partners make loans and write insurance for commercial paper. The stalled economic engine should soon restart. It will cough and sputter due to the default of some toxic mortgages, but the wheels of commerce will turn.

      The businesses can ride the BUS to commercial loans in order to buy inventory. Their suppliers can get loans to buy raw materials. The manufacturers can get loans for equipment to expand their operations to produce more raw materials. And so forth and so on.

      The BUS and its partners can review the loans to ensure that risk is appropriately limited. Although economic growth can be stimulated to over-rev levels through easy credit, with that easy credit comes risk, as we have seen. Far better to limit growth to more moderate levels, so that if credit tightens, businesses have enough liquidity to continue operations without undue distress. This will slow down economic growth, but in the long run, it makes the economy more resilient and mitigates against bubbles, all of which will eventually burst -- it's only a question when and of how far reaching the effects will be. However, it will reduce executive bonuses, so we can't leave the fox watching the hen house. Risk must be reviewed by the lender of last resort.

      Some might say, "But wait, we need countless billions of dollars to handle all the commercial loans in the country." This isn't the case. The first commercial loan, when paid to the supplier, puts money in the supplier's bank in the form of cash. That cash can be loaned out at fractional reserve rates. Some of it then gets paid to the manufacturer's bank, where it can be loaned out by that bank at fractional reserve rates.

      We leverage our injected liquidity through fractional reserves. Once the credit market unfreezes as normal business practices resume, capital will come back into the banks from the "sidelines." Interest rates for our treasuries should rise somewhat as a consequence, slowing inflation and keeping the dollar stable.

      Those latter banks (of the supplier and manufacturer) can use the incoming money (trickling down from the BUS and flowing in from the sidelines) in the same way, buying more commercial paper insured by the BUS for a fee or else loaning money out on their own, without the BUS fee, by making their own judgments about the degree of risk or else buying commercial risk insurance on the loans they make if they can get it at lower rates than the BUS charges.

      This is not an original idea, nor is it framed in the same way, but it is similar to the idea being tossed around that the Treasury should simply insure all commercial loans. I disagree with that concept, because it doesn't punish bad judgment. Banks might make unsound loans, because they have no downside if the loans default. In the concept presented above, the judgments of asset quality come from the very parties who are going to provide the liquidity and insurance in the first place and who have a larger stake in the game.

      Once the financial pump is running smoothly, with increasing numbers of banks choosing to avoid the BUS fees and just make loans on their own the BUS closes down. Or, another option is to close the Fed down and leave the BUS. But that's another story.




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    • Sun Oct 5th 02:42 AM
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      Why the Bailout Cannot Solve a Thing: Nobody Is Blaming the Right Culprit
      Let all the banks fail if they can't compete or made poor decisions. Let the Treasury set up a U.S. National Bank that will make commercial loans and write mortgages to creditworthy people all day long at fair interest rates. Have the FDIC insure the deposits of the failing banks, but if the banks have not maintained adequate reserves to pay the under $100k depositors, put the bank presidents in jail for a decade or two on fraud charges or other criminal charges (they must be guilty of something; if nothing else, we can detain them indefinitely as financial terrorists and send them to Gitmo). I suspect the number of bank failures would magically diminish overnight, with executives taking pay cuts, reducing dividends and taking other measures to ensure financial stability. Meanwhile the U.S. National Bank would be making huge profits to generate a surplus. Foreign investors would swoop in and buy up the failed banks from the FDIC for pennies on the dollar, and we'd be back in business (after a severe recession, I admit). Then we could dismantle the Fed (a private, for-profit bank), since we'd have a national treasury from our surplus. Once the surviving commercial banks got rolling again, we'd liquidate the U.S. National Bank and turn it into a sovereign wealth fund, and have it be a national endowment for America, investing in profitable energy research companies and other real assets. After a few decades, if properly managed, the average American would pay no taxes, because we'd have enough growth in the endowment to start subsidizing our people. The Kuwaitis and Saudis do it. Why not us?
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    • Sun Oct 5th 02:28 AM
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      A $700 Billion Investment - Not Bailout
      Democrats voted for the plan because they expect it to work. Republicans voted against the plan (until their arms were twisted to the point of breaking) because they do not expect it to work. The independent senator from Vermont put it well in his (failed) attempt to amend the bill. Just have everyone making over $500,000 per year pay 10% surtax, and in three years we will collect $300 billion, which is nearly half of the bailout. That went over like a lead balloon. Then the House changed its mind (love them pork projects and political favors). So now we have a plan that nobody really thinks will work, but everybody got some pork, and that's how Washington operates.

      Meanwhile we have spent additional billions to bail out the auto makers, other billions here and there for this and that, and suddenly it's a few trillion that we've spent, and more to come. I hope the Fed has enough printing presses. At least they don't have to worry about overtime costs for their printers. They can just tell the workers to take a few Ben Franklins as they come off the presses.
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    • Sun Oct 5th 02:11 AM
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      Sell Signal of the Day, Greenspan Edition
      First, let's be clear that Fannie and Freddie were never guaranteed by the government. The bailout of these two was completely optional. We were likely blackmailed into it by the Chinese, Saudis, Japanese and British, who hold CDOs issued by those esteemed government sponsored enterprises, which are essentially private companies. If we don't bail our foreign partners out, they don't buy our treasury bills, of which we need to sell a couple of billion dollars daily in order to finance a couple of wars here and there -- and the billion dollars we gave to Georgia for "good will."

      Second, this bailout is a Ponzi scheme, make no mistake. We bail out the banks. This raises bank stock prices. That allows the banks to borrow more money against the higher priced stocks. We also buy up their toxic assets (at above market value, a market value which has been criticized as "fire sale prices," but is actually just the real, fair market value, similar to any other illiquid asset from farmers fields to antiques to collectible coins). They take the cash and (we hope) loan it out. Actually, they take the cash and invest it overseas just as fast as they can, and let the U.S. economy go down the tubes, but who's counting?

      The banks have higher stock prices, so they borrow money from the greater fool (indirectly, the taxpayer) against the higher asset values. Then they loan out money by issuing new credit cards (haven't you received a boatload of offers in the past few months of our "crisis?") They hope the credit card holders will stretch themselves out into 20% interest, which is far more profitable than the few percent they would get on mortgages. So they don't write mortgages or make commercial loans (yet I thought those were the point of the bailout exercise).

      Then the feds will figure this out, after a few months and a few more percent unemployment and mortgage defaults. They will demand that the banks make mortgage loans. The banks will do this, but only if each and every new mortgage under any terms will be bought by Fannie or Freddie (which is to say, by the taxpayers). So now they will make bad loans again, and sell the toxic paper to us while making a profit doing that. For a short time this will stabilize home prices, until the new mortgage holders start to go bankrupt due to the economic recession that is upon us and will get worse. However, the banks are off the hook. They will get rich. Only the taxpayers will suffer.

      Some might say, "but wait, we can get an equity stake in the banks." First of all, that is not required by the law. Do you think Paulson is going to strong-arm his Wall Street colleagues, when chances are good he's going back there in January? Also, some of the banks are on the brink anyway. They'll milk the deal and pay their executives as much as they can. The law, contrary to the "summary" reports by talking heads, does not stop golden parachutes or large bonuses. It only stops their deduction as expenses above $500,000. There is a lot of wiggle room for the banks to pay big money, one way or another, then go under and have their executives walk away rich. But maybe that's why we call it a bailout, rather than an economic recovery package: because we know what it really is.

      I don't think the new law will work. It doesn't provide incentives for loaning money. All it does is recapitalize the banks somewhat at taxpayer expense. It would have been far better, in my view, to just require the Fed to make loans to all banks through the discount window for mortgage refinancing and local commercial loans only and to capitalize the Fed with the $700 billion, except that we loan it to them at interest, not just give it for free. The Fed (a private, for-profit bank) might find that strange, because currently when the government wants to issue money, it borrows it from the Fed at interest. But turnabout is fair play, after all.

      As far as Greenspan is concerned, I have nothing against him. Smart people can be wrong. But I think he should have stuck to music and left economics to those who were better at it.




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    • Sat Sep 27th 20:29 PM
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      Entering the Endgame for Monetary Policy
      The value of something is what people will pay for it. The stock market is like the Antiques Road Show. People buy things in hopes the value will go up, but business success isn't guaranteed. If people suddenly find the Blackberry to be less popular than the latest gizmo from someone else, then RIMM suffers. The wild fluctuations in everything from the bank stocks to the oil funds to the manufacturers to tech implies to me that traders are clueless about whether the Napoleonic breakfront of the day will be more valuable tomorrow or as worthless as yesterday's newspaper. I am oversimplifying, because companies do have a liquidation value, but that is usually far less than the current market price of the stock.

      There is expectation, and then there is reality. If everybody was content to hock themselves to the hilt tomorrow in order to buy a house, because houses would increase in value, then the real estate decline would be over. In one day, everything could turn around. Unfortunately, real estate was a bubble, fueled by a change from banks holding mortgages to banks selling mortgages to Fannie Mae as fast as they could and passing the risk along to the greater fool in a CDO package.

      The total value of derivatives and the leverage used to produce them doesn't matter. All that matters is the pricing, which may have no relation to reality, or may have a relation that can change abruptly. The Napoleonic breakfront suddenly becomes worth twice as much, because the government puts a bounty on breakfronts.

      Let's talk about economic decline. Who would be the real losers in a depression? The Chinese and the Europeans, not us. Yet the Chinese are alleged to have ordered their banks not to make any more loans to U.S. banks. That seems odd. The Chinese have plenty of liquidity. They could bail us out easily if they chose to. They obviously must be continuing to buy our treasuries, because if that didn't happen, interest rates would soar overnight when demand fell. I don't believe the Fed has enough funny money remaining to "monetize the debt" by buying up the treasuries with our own (ink still wet) money without causing immediate inflation.

      So how do we solve the problem? I have some suggestions.

      Put a cap on interest rates for credit cards at some reasonable level, like 10%. Bankruptcy laws have already been changed, so that people can't get out of repaying their debts. The banks don't need 20+% interest to make money, when they are paying 1% at the Fed funds window and can leverage that amount by 12 to 1 on reserves. This will immediately give people in debt some relief.

      For any adjustable mortgage that is resetting, have the lender ask the homeowner if he wants to stay in the house. For houses that are deep "under water," where the current value of the house is far less than the amount owed in the mortgage, foreclosure is inevitable. If the person wants to stay in the house, have the lender refinance to a fixed rate mortgage at prevailing 30 year fixed rates. Have the government then issue 30 year treasury bonds to fund and pay the difference between the current (before reset) amount and the new, fixed rate amount, in return for an equity interest in the house that is senior to all other notes (including the lender's mortgage), and that serves as a senior lien on any sequence of sales. This is not an original idea. It has already been discussed in the media.

      Let me explain a little further. The government becomes a partner of both the homeowner and the lender. The homeowner continues to pay at the previous rate. The government pays the difference, in an "equity sharing" arrangement. If the house is ever sold, the government gets paid first, up to the cumulative amount invested in this equity sharing (plus a nominal interest amount, say 2% APR). The lien goes with the house, so that subsequent sales have the same deal until the government is paid back.

      Meanwhile, the lender can sell the mortgage, which is now a fixed rate mortgage that is probably only a little less creditworthy than prime. Fannie Mae buys it and packages it into CDOs, as before, but this time the rating and insurance agencies are carefully monitored to ensure that they are not overly optimistic about the risk.

      After 30 years the mortgage is paid off. The homeowner then refinances the home (or sells it) to pay back the government's share of the equity.

      Since the funding is done through 30 year treasury bonds, no current money is required from the government, and there should not be an inflationary effect. Banks can use those bonds as assets on balance sheets and "mark to market" at full value the original mortgage, thereby immediately seeing a large increase in the balance sheet total. That has a 12 to 1 multiplier in terms of their ability to loan money, so credit is immediately available.

      It is possible, despite moaning and groaning to the contrary, to bootstrap oneself into prosperity. Indeed, it is easy. If one person makes shovel handles and another person makes shovel blades, and nobody wants either one, the situation can change overnight if the two companies put those products together correctly and suddenly have a shovel that everybody wants and that is useful.

      If toxic CDOs become nontoxic, then suddenly everybody wants them, the prices go up to reasonable levels, credit increases and everybody is happy. The antique dealer's Napoleonic breakfront is in demand again.

      Saying we have to go through a "purging" or "long, deep recession" or other such process is simply untrue. We may end up there, but it is not necessary. We are in our current pickle due to certain excesses. If those excesses are curbed, we can ease our way back to prosperity.

      First, there must be confidence in ratings of debt, based on accurate assessments of the likelihood of default. Second, counter party insurance against default, whether through credit default swaps or straight insurance, must be accurately evaluated for safety in terms of reserves held by the insurer. Third, leverage must be limited to reasonable levels. This will not be enforceable universally, because the markets are too complex and international, but enforcement domestically should be possible. Fourth, banks must not be allowed to conceal debt through alleged creation of Cayman Islands shell companies which buy toxic debt from the banks and shield it from view within the shell, while the risk of default remains the same. Fifth, the government, whether at federal or state levels, should auction off foreclosed and purchased properties at the retail level, property by property, to individual buyers, not just in large packages to the fat cats (as some allege was done during the days of the Resolution Trust Corporation). Sixth, those who have caused this crisis through negligence, fraud or malfeasance should face legal consequences. Seventh, some might advise the American public (I am neutral on this) to vote out of office any elected officials complicit in causing this crisis through their inaction, cronyism, ineptitude, or corruption.

      Our economic markets are sensitive to large perturbations. If we can reduce the size of the perturbations, the markets will be far more resilient. We can absorb dozens of bank failures, as long as they do not happen simultaneously.

      Once values begin to return to sane levels (which may be lower, but will not be zero), the economy can resume its functioning at a reasonable pace. Then we can slowly start cutting our spending (maybe reducing the number of wars we're fighting or moving towards energy independence might help save some money, although I won't second guess our foreign policy).







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    • Wed Sep 24th 17:32 PM
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      Short Selling Ban Welcome
      Further clarification for current full disclosure: Although I am out of AIG stock, I still hold AIG bonds, which I bought early in 2008 for the dividend. They are a long-term holding, not a trade.
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    • Tue Sep 23rd 12:55 PM
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      Short Selling Ban Welcome
      I appreciate the comments, including the condemnatory ones, about this article. To clarify my AIG position for the record, I bought a small position in AIG at around 4.65 as a trade a week prior to September options expiration, because the AIG September 5 covered call that day was 1.35, a huge risk/reward ratio for only a few days holding. I figured that AIG would be similar to Bear Stearns in being "too big to fail," and recalled that Bear stock fell but then recovered. Two days after I bought AIG, the stock price had fallen to under 2 on trading of over a billion shares. I was prepared to lose the entire amount of my trade, since I was aware of that risk when I bought in. When the bailout came, AIG stock recovered. I sold out for a few cents more than my purchase price (the stock has since gone higher) and also kept the premium from the covered call after the option expired worthless for the buyer. It is correct that the short sale rule did help me, and it would have been better if I had written the article after divesting. However, now that I am out of AIG, I still hold the same views. My profits in the AIG trade were small, and I hope readers will believe me when I say that my motivation for the article was a genuine opinion..

      I do not regard covered calls as related to short sales, particularly naked shorts. Covered calls are a bet that stock prices will stay the same or go up a little but not much. Buying a put option is like selling short, but I am not opposed to that, because the bid/ask spread and other factors mentioned in the article mitigate attacks on a stock's price through buying put options.

      If a short seller sells massive amounts of stock into the market, the price will go down quickly. Buyers interested in the stock at the lower price come into the market to acquire the shares. The more stock that is sold or sold short, the lower the price will go. As investors watch the share price plummet, they panic and sell their holdings, adding to the downward cascade. When the price has been driven down far enough, the shorts "cover" their positions by gradually buying stock. The price will indeed rise then as the demand increases, but the shorts are betting that their average purchase price will be less than their average short sale price. At times, other hedge funds that are not short the stock come in at the bottom with massive purchases, driving the price up and forcing "short covering" purchases that accelerate the rise. The long folks then gradually sell out towards the top. The difference is that a long play doesn't destroy the value of the underlying stock by erasing billions of dollars of market cap. Short sales can and do.
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    • Fri Jul 25th 17:28 PM
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      How Can the Dollar Rally As Oil Soars?
      In addition to the dollar nearly holding its own as oil prices increased, it is noteworthy that the dollar has actually strengthened against the yen while weakening against the euro. This would seem to indicate a revival of the yen carry trade, which is somewhat surpising if true, because it would mean that carry traders are betting the dollar will not weaken further.

      In terms of dollar strength (or lack of weakness) against rising oil prices, just consider that it recently took 40% more dollars than before to buy oil. Foreigners had to buy (or spend from reserves) 40% more dollars for all oil purchases for delivery outside the U.S. Therefore, hundreds of billions of additional dollars have been bought on the currency markets in order to make payments for the oil. This increased demand artificially bolstered the dollar, in my view.

      High oil prices also offset the monetary inflation effect of the "economic stimulus" money recently sent out -- most of which was sucked to buy higher priced gasoline (a product of oil, so the money still goes to OPEC). The dollars received by OPEC, China and Japan, among others, must be coming home to roost, recycled into our treasury bonds, because otherwise the world would be awash in dollars and our interest rates would be sky high.

      After observing the unusual fluctuations of oil prices over the past few years -- fluctuations often uncorrelated with expected seasonality or transient demand increases -- it seems difficult to relate them to a single force, whether supply/demand, speculation, or "commoditization&... of the dollar. I think all of these play a part, but perhaps there is more to it.

      One explanation that seems the pass the "Occam's Razor" test as being simple and covering most of the facts is that oil prices are manipulated on a grand scale to further short-term economic goals of the big players. Right now the goal of the U.S. is to keep interest rates down and save the banks. That could not happen if we had dollar monetary inflation. When oil prices are high and resulting demand for dollars is high, interest rates can remain artificially low.

      So, whom shall we blame for high oil prices? Perhaps we should audit our various government and quasi-government entities and see what commodities trades they've been making over the past few months.
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    • Fri Jul 25th 15:31 PM
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      What the SEC Really Accomplished with Its New 'Short-Sell' Rule
      There is nothing wrong with short selling. However, one must begin to ask where short selling stops and market manipulation begins. Orderly short selling is simply a bet against a stock, which is just as legitimate as buying a put option. However, if there is a sudden "run" on short sales which drives the price down, this is as suspicious as a sudden run which drives the price up.

      The difference is that as prices rise, there is resistance, but as they fall, there is often less of a bottom, particularly in a bad economy. Therefore, non-orderly short selling, which destroys market cap (and therefore credit and business opportunity) in a hurry, must be limited by regulations.

      It should come as no surprise to anyone that naked short selling is illegal. The surprise is that there is little or no enforcement, and one must wonder why.

      There is nothing that stops brokers from programming their back office computers to match short sales requests with specific shares of that stock in margin accounts in street name. If this is not being done, and if naked shorts and "failures to deliver" are ordinary business practices, then the culprit is a much the SEC as the violators.

      The limitation of enforcement protection to the Wall Street financial heavies is a travesty -- among other travesties in various markets which would not have come to pass if our regulators were doing their jobs of enforcement.
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    • Fri Jul 18th 17:31 PM
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      Introduction to a Long Lecture on Oil
      This is an excellent article with interesting perspectives. It is clear that oil prices are not determined by supply and demand. The growth curves of demand, showing the gradual reduction of spread between supply and demand, have been available for years, yet futures prices have not soared previously. Unless there is some nonlinearity in the mathematics that has suddenly manifested itself under a variant of chaos theory, prices should increase slowly until the point of actual shortage, at which time they will spike until demand slackens. The recent extreme fluctuations in oil prices do not reflect the reality, which is that there are no actual shortages. Therefore, it is logical that traders (or speculators, if you prefer) are driving prices up and down relentlessly, making money coming and going. The same thing happens, by the way, in the financials, where stocks like Bears Stearns, Citigroup and others can move 10% or more in a single day, which does not correspond to changing valuations. However, a consequence of laissez-faire free market capitalism is the cavalier manipulation of the markets by the capitalists, isn't it? For the Ayn Rand enthusiasts, there should be nothing surprising or malevolent about oil price manipulation. Money is being made, and if the rich are the ones making it, then presumably they will hire more of the poor to work for them. I'm not a fan of that approach to social evolution, but many are.

      One it has been established that supply and demand are factors, but at this point not the major factors, affecting oil prices, the rest follows. We know that it is not OPEC manipulating prices, because if they had wanted to do that, they could have done it long ago by cutting production. There has been so sudden political epiphany by the Arabs that ruthlessly milking the rest of the world for dollars is a good thing. They know that if their customers become disgruntled enough, it could lead to violence.

      The Arabs perforce must be recycling many of their petrodollars into our treasury bonds to help keep our interest rates low and our economy growing despite our massive budget and trade deficits, which flood the world with dollars. This, of course, is the answer to Greenspan's "conundrum" about how our interest rates could be so low; he gave an answered, which translated from Greenspeak, means, "If you think I'm going to tell you the truth about that, you're crazy."

      Therefore, OPEC are actually the "good guys." They (plus China and other exporters) buy our debt and equities, buy our businesses and support our profligate economy. We shouldn't blame them for wanting oil prices that are at least at parity, relative to dollar inflation, with years past. Had they want to exploit us beyond the pale, they could have done it long ago.

      So let's ask ourselves who benefits from higher oil prices. Wait a minute, I think I've got it. The banks benefit. The critical element of our economic future is that interest rates must not be allowed to go up. If they do, mortgages will reset higher, defaults will increase, and the banks will actually lose money for a change, as compared to their huge profits in years past from the immense leverage of their derivatives and CDO holdings.

      So how do we hold interest rates down when we are continuing to inflate the currency with easy credit and budget/trade deficits? We have to take money out of circulation somehow, worldwide. Simple. Raise the price of oil.

      Oil is priced in dollars. The dollars are sucked out of the world economy into the coffers of OPEC (but more important, into the coffers of the intermediaries, whoever they are). As long as OPEC and these intermediaries recycle their enormous oil profits into our treasury bonds, interest rates can stay low. The recent spike up in the price of oil corresponds remarkably to the payment of the "economic stimulus." Somehow, we had to soak up that excess currency before it boosted inflation. High oil prices did the trick.

      We needed to slow the economy slightly, perhaps to a mild recession, which would also impede inflationary trends. There won't be much labor cost inflation if unemployment is increasing. The amount must be moderate, because we need the people who have mortgages to keep paying them, but we don't need inflation. What does it all? Higher oil prices.

      Therefore, in the long run, the people who benefit most from higher oil prices are the American people -- or rather, the American banks, with hopefully a little trickle down for the rest of us. We continue to export our debt and inflate our currency without ill effects, as the dollars get sucked into oil prices. We finally have oil at the level it needs to be to bring us back to the 50 mpg cars of the mid-1970s (yes, nearly 50 mpg in the small Datsuns, using conventional engines, not hybrids). In our hour of desperation, we will develop "alternative energy," which means the nuclear companies will get rich (all part of the plan), since there is no viable alternative to nuclear power to meet our energy needs, barring a breakthrough in physics.

      One actual solution, which is not likely to survive the political process has been suggested for a long time. Simply require all engines to be built to flexfuel standards, using anything from 0% to 100% ethanol. Lift the ban on imports of ethanol from other countries. Let imported and locally produced ethanol from switch grass, sugar cane and other sources compete head to head with gasoline. By dramatically reducing our gasoline requirements, we will reduce our oil requirements as well. I have heard that the engine techonology is already available and proven. If I recall correctly, the estimates for Department of Transportation certification of the modified engines would be several million dollars per engine, which the government could subsidize. We would save that much in oil dollars in a few weeks. However, this would be politically unpalatable to the oil and refining companies, and will therefore probably not happen.

      So, as Pogo once said, "We have met the enemy, and he is us."

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    • Mon Jun 23rd 06:54 AM
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      High Likelihood of a Market Crash
      If we keep our attention on the fundamentals, all will be well. What are the fundamentals? That any policies we formulate will ensure that the super rich become even richer. Therefore, keep an eye on policies regarding the banks and the oil companies. They will get richer in any political climate. I have yet to see a good analysis of past 10 years of leveraged profits by the banks. The current losses do not strike me as being large enough to offset the cumulative profits of the past. I could be wrong on this, and if anyone has the actual facts, please post them.
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    • Mon Jun 23rd 06:42 AM
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      Blame It on Oil Speculators
      Ask yourselves who benefits from running up oil prices. It is the Fed. Why is that? Because otherwise, interest rates would go up, and that would lower profits for the banks. As long as all our excess dollars are being soaked up in oil and recycled back into our treasury bonds, interest rates remain low and the economy doesn't react to the inflated money supply driven by our surging deficit. Note that the Fed has been strangely reticent on oil prices, but doesn't hesitate to bemoan the credit crunch which the Fed itself caused through a decade of easy money policies. If this country wants laissez-faire capitalism with no regulation, our current situation is one of the consequences, so don't complain about $140/bbl oil.
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    • Thu Jun 19th 03:47 AM
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      Inflation Fears Are Inflated
      If we listen to what the prez. of Iran said recently, it's the West keeping oil prices high, for their own purposes. This sounds like a bunch of hooey, particularly since I have heard allegations that the Iranians and Venezuelans were slowing down the tankers to keep prices high, but perhaps those were rumors. Let's take a fresh look.

      Who stands to benefit from high oil prices? If we have a huge negative balance of payments and a huge budget deficit, wouldn't that tend to weaken the dollar? Yet, the dollar is strengthening. As long as oil is pegged to the dollar, rising oil prices increase the demand for dollars to pay for it, shielding our currency from the weakness it actually deserves in terms of inflation of the money supply.

      One might ask what happens to the dollars spent for oil. I conjecture that these are recycled by the oil producing nations, and in particular by Saudi Arabia, back into our treasuries and equities markets. This keeps interest rates low and prevents the stock market from crashing.

      But what about the inflationary effect of our excess dollars, in general? Don't we need to raise interest rates to slow down the economy and prevent inflation? Not if the price of oil absorbs the excess dollars that were printed, keeping the economy moving slowly, which keep interest rates down and allows the financial institutions a chance to recover from the credit crunch.

      Did I mention that higher oil prices, in the midst of these other advantages to our government, lead to higher tax revenues? The oil companies pay tax on their profits from domestically pumped oil, and the more profit, the more income tax.

      So perhaps Iran's radical (but nobody ever said he was dumb) president has a point. It is in the specific interests of the U.S. government to keep oil prices high at this particular time. To let them fall might overheat our economy, leading to higher interest rates, which would tank the banks. Since the banks wouldn't like that, I suspect that measures will be taken so that it doesn't happen. Higher oil prices may be one of those measures, not a "free market" phenomenon.

      Since I have no background in economics and no insider knowledge about my speculations, I thought I'd run this one up the flag pole and see the reaction.

      If the economists in the audience can debunk this theory easily, so much the better, because I would rather it weren't the case. If it is indeed the case, then we have some political issues of much greater concern than high oil prices.
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    • Wed Jun 11th 21:28 PM
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      Deregulate Transportation to Beat 100 MPG
      It is quite clear that there will be no innovation in the United States. ARCO Petroleum bought up solar businesses in the 1970s and touted their research efforts. If there are any ARCO solar panels in use today, it would surprise me. I saw the same turbo car at the 1965 World's Fair in NY. That engine, and many fuel efficient engines, have been kept off the market through regulatory barriers to entry or through simple "burying" of the technology. The British have so much innovation in biodiesel that they have had to pass and enforce laws against using supermarket vegetable oil in cars with modified engines. The Prius is not made by GM or Ford. If there is any innovation, it will be done by the Japanese, not us, since they are more dependent on oil than we are. In the U.S., the oil companies control transportation, and no one in Washington will dare to confront them. It's bad for political careers. Therefore, we should expect to see a severe economic downturn, following which the oil companies, foreign sovereign funds and other holders of large amounts of capital can buy up the country for pennies on the dollar. People who believe in free market capitalism without government "interference&quo... should not complain, because this is how it works.
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