Keyser’s Not Much of a Blogger, Huh?

Blue.Wall

I was surprised to find recently a comment on a post from long-time Lair sufferer Snarkolepsy. She lives in California and is interested in computer robotics (and such things), cialis cars and the economy. Keyser somehow found a post of hers about an apparently dead bird and she noticed a post of his talking about a post of hers, pharmacy and then the common interest in the economic crisis back in 2008 led to a certain bloggy camaraderie.

By 2010, capsule it seemed Benny Bernanke had weathered the storm by making up huge amounts of money out of thin air, and it got tiresome to keep saying, “Oh, my God, just look!” So eventually this site degenerated into some amusing girly pictures. And even that’s lost its novelty. (Must be an age thing. Guess you get jaded about pretty much everything when you pass 50.) The site got “vandalized” several times by cranks, and after putting it back online, it sort of seemed necessary to keep it going just to “show ’em”, but the life isn’t in me much any more, it would seem.

You know, blogging is a wearisome task, what with all the HTML code and looking up URL’s for the old shit. It seems easier just to dump a link on my Facebook page with a snarky comment like, “Gee, wonder why Paula Deen gets crucified for something she said 30 years ago while Alec Baldwin can say whatever he pleases and nobody cares,” and then watch all my leftoid friends come up with clueless “explanations”. Also, I do have various daemonological works to finish up (got a sabbatical for the fall from Satan himself), and there are only so many hours in a day (only Hermione has one of those 27-hour-day widgets).

Yeah, I know, you’re saying to ourselves, “What kind of half-assed excuse is that?” Glad you asked!

It’s not an excuse. Just an explanation for anybody out there who’s been disappointed in the decline of the once mighty Lair. As the great leftist hero and erstwhile Nazi Martin Heidegger once put it, “Shit happens.”

So Where The Fuck Did All Those Bad Mortgages Go?

You may recall that the financial disaster of 2008 was caused by MBO’s, stuff that is, “mortgage backed obligations“. Long story short, the long-term income streams of mortgages were converted into fungible (tradable) financial paper, which meant that those who sold the stuff could make money now on income generated years in the future. Add to this mix the political desire to extend homeownership in the US to people who were traditionally “underserved” (that’s Democrat speak for minorities not being given mortgages because they’re bad risks) and regulators and credit-rating agencies that valued these bits of paper on the false premise that the mortgages would default at the historical rates, and you have a recipe for disaster.

In the fall of 2008, the house of cards collapsed. What was the response in Washington? Well, with a lot of smoke and mirror work to conceal what they were doing, the Federal reserve simply absorbed about $2 trillion worth of the crap, and the Federal government went into deficit-spending overdrive to take up the slack of the economic downturn. What goes on now is that the Federal government sells hundreds of billions of dollars of Treasury bills and bonds and other bits of debt everyone fucking month to Goldman Sachs and the other “primary dealers” of the stuff, and they turn around and sell it for a tidy (and completely unwarranted) profit to Bernie Bernanke over at the Fed. Nice “work” if you can get it from your buddies in the government. You might wonder why Geithner doesn’t just turn the shit over directly to Bernanke. That would be too “obvious”, and in any case, you can’t have Timmy letting his old boss Blankenfein over at GS out of the loop, can you?

The same crap is going on in Europe, where the European Central Bank is propping up the financial craziness in Greece and Ireland (and pretty soon they’ll be doing the same for Portugal, Spain and Italy) by buying up their bonds.

What’s the point of all this? Fundamentally, the sins of the banking sector are being transferred into public debts. That’s what that graph up there shows. You can see the process start in 2008 and take on steam in 2009. So why is this “sovereign debt” supposed to be AAA? Basically, because modern western economies haven’t generally declared bankruptcy with the frequency of the Charles V, who kept borrowing money and defaulting on it every decade or so. But then again, we haven’t lived in a world of basically zero-friction fiat money creation prior to 1971, when Nixon “closed the gold window” (i.e., stop converting US dollars for gold for foreign holders of US dollars, which severed the last restraint on national currency creation). Just because nobody’s defaulted on public debt in the past (and you actually don’t have to poke too far to find expamles of even modern states doing that) doesn’t mean it can’t happen.

The guy who writes the article from which the graph above comes draws the conclusion that the problem is the desire to have AAA ratings on financial instruments. He says that there can’t be so much essentially “risk free” investments, and that this sort of thing leads to complacency. That may well be, but surely the real problem is not that some people want risk-free investments (who wouldn’t?), but that stuff is being rated as risk-free when it isn’t. We all recall (or should) that a big role in the disaster of 2008 was the use of “credit default swaps”, which are insurance guarantees that something can’t lose money because if it does, the insurance will pay you the loss. The swine in Washington took over AIG and paid off these ridiculous guarantees (destroying AIG in the process) because the alternative was that those fuckers at Goldman Sachs would go belly up, and we can’t have that, can we?

And the real “solution” was to transfer the debt to a public account. This has the double advantage of preserving the banking system that the modern welfare state needs to create the money for it to “borrow” in order to provide more “services” than there are available resources to pay for the old-fashioned way (by actually paying for them) and of delaying any reckoning for the losses until the not foreseeable future, when “somebody else” can pay for it.

Some people you can get something for nothing. Sadly, that’s no more true than it ever has been. There will be a come-uppance, and it won’t be pretty. We’ve just hidden the problem in the attic of the Fed’s balance sheet, which is no rational way to solve a problem. Unless, of course, you’re the head of Goldman Sachs and the Washington establishment, for whom that’s probably as good a place as any.

So What’s Up with That Debt Ceiling Bullshit Anyway?

Long time Lair reader Kelly asked your humble correspondent what’s up with this ceiling stuff. You know, hospital I’ve been pondering this (and a bunch of other economic stuff), nurse but somehow it’s just a matter of synthesizing other people’s ideas. Also, hospital you wouldn’t believe the work that goes into producing a text on daemonology. After transcribing the whole thing, I had to review the review and regularize the whole thing, and then review the next text (better than any ever produced since 1535) against the translation I made six years ago from the only printed edition, which was made from an inferior manuscript tradition in 1853. Doing that rather takes up all your mental energy.

So anyway, here, stone from the comments to this post, is a quick run-down of the real meaning of debt ceiling. There may be some infelicities (I ran the thing off quickly this morning after receiving the request for the information), but it’ll do for the time being. Strictly speaking, it should be in indented text as a quotation, but one of the annoying things about this WordPress “theme” is that it puts such text in italics. As they figured out by the end of the sixteenth century, read a lot of italics is a bad idea. So here it is in regular print.

Oh, it’s [the debate about the debt limit ] to some extent a lot of hooey. The problem is that the US Federal government spends a lot more than it takes in, and it can continue to do so only by borrowing more money. There used to be a law setting the maximum amount of increase in the debt, back when the government had some control over its expenditure. Now something like 2/3 of the expenditure takes the form of transfer payments that are made automatically. That is, the government has committed itself to make the expenditure without having to vote for it specifically. Those expenditures now equal all the tax receipts. That is, before a cent is voted to be spent on the parts of the government that they do vote out annual (the defense budget and all the other departments), every tax dollar is already committed. So they borrow the rest.

What happens if they aren’t allowed to borrow more. Well, they can default on interest payments, but they don’t have to. The world won’t come to an end if they don’t have the ability to increase the debt. They’d just have to drastically reconfigure how they spend money, which they don’t want to do. Leftists like scary everybody into increasing taxes by shutting down the “fun” parts of the government to get the public mad. Clinton did that back in 1995. But that’s not obligatory. They’d have to shut something down, but they don’t want to. Everybody just likes spending money. That makes somebody happy. Not spending money generally doesn’t.
Also, I mentioned back when they passed the stimulus bill back in early 2009 that they might get it into their heads that they could spend borrowed money at no “cost.” And such has proven to be the case. The Federal budget is up 30% since its bloated level under Bush in 2008. Was the US a Dickensian nightmare, with would-be bureaucrats dying of hunger in the streets back then? Hardly. Yet, the huge increases made back then were built into the “base budget” of government spending. That is, the heightened levels were made permanent. One of the scams of government spending is that they automatically accept spending of last year and increase it for next year without any consideration of whether it’s actually necessary. So the beast keeps growing without any substantive decision to that effect. Then they foresee ongoing increases, and when they reduce the rate of increase they claim a “decrease.” Even the supposedly draconian Ryan plan will actually increase spending, just at a lower rate. So this talk of “decreasing” is fundamentally bullshit.

Finally, I read the other day than an astonishing 20% of household income in the US takes the form of government transfer payments. The economic measure of GDP is calculated with government spending included, so a reduction in the latter means a reduction of the former. The Federal government is borrowing something like $1.3 trillion per year, which is about 10% of the US economy. Cut out the borrowing, and everybody’s “poorer.” Nobody wants to see that, but at the same time, nobody wants to admit that the whole thing is a Ponzi scheme. Without that borrowing, the US will be a poorer place.
And who’s lending that money? If it’s the Chinese, then what’s going on is that cheap US imports from China are being paid for not by exporting goods to them in return but by selling to them a permanent stake in US income. That is, they sell the US cheap stuff, and since the Chinese run a huge surplus against the US, they park those meaningless dollars in ownership of US assets (claims on income via Treasury debt). In the old days, gold outflows would eventually have become unsustainable and led to high interest rates to bring the gold back. Now that the Fed has control of interest rates and they have their own reasons for keeping them low (it helps out the banks conceal their debts by increasing asset values and they also allow the Treasury to keep its interest costs manageable), there’s no control over the overproduction of dollars. Bernanke has been contributing to this lunacy by buying large amounts of US debt. What does he do that with? Made up money.

So the upshot is that the whole system is basically an unsustainable scam. The debt ceiling is merely a symptom of the problem. The US is living on borrowed money as a country. The Federal government provides 10% of the economy in the form of borrowed money. Doing something about the problem necessarily will take real pain. The Democrats refuse to recognize the problem at all (see Paul Krugman), and represent the recipients of the government largesse (people who get Social Security, Medicare, Medicaid and government employees). The Republicans don’t even really talk a tough game, they just want to push the problem down the road by reducing the rate of progress of the disease.
An increase in the debt in the short term is inevitable. They’re certainly not going to go to zero deficit spending overnight. But in return for increasing it, anybody who actually means business has to come up with a plan for how the government will cease spending more than it takes in. That’s very unpalatable politically speaking. The situation is dire, and it will inevitable blow up. But that may not be for several years, and until it does, no one will really do anything about it. My guess is that at some point, the Fed will be forced to increase interest rates (against its will). When that happens, the Federal government’s interest payments will devour the government and something will have to give. The question is what.

And more importantly, when. God knows. Maybe tomorrow, maybe ten years from now. The latter means “never” in terms of the political process, so I doubt anything will be done until the blow up.

All right, end quote. So maybe I’ll post more about this (no promises). But I will go back to more artsy girly images. Gotta stick to what’s important in life (even for those who turned 49 yesterday!).

Blowing Bubbles: FHA/Trump Edition

It’s not getting too much play, check but since Fannie Mae and Freddie Mac have their hands (but not their pockets!) pretty much full financing 90% of the mortgages in the US these days, cialis the FHA is stepping in to help out. Basically, the Keynesian (read Bernankian/Geithnerian) solution to the bursting in 2007 of the housing bubble that was caused ultimately by lax lending of excess money created by the Fed’s artificially low interest rates is to do whatever they can to reinflate the bubble. The low interest rates that caused the bubble are part of the Keynesian fallacy that interest rates are always too high in the free market, so it’s the government/central bank’s role to push down interest rates. Supposedly, this will end the old boom/bust business cycle by putting the economy on a permanent boom binger. It’s sort of like curing the problem of a hangover by being constantly blitzed.

You’d think that if the government’s avowed policy is to expand home ownership, they’d want low house prices, so more people could afford them on their own, but that runs against the side effects of Keynesian. While the government can create excess credit in the banking system, it can’t control what exactly that lent money is spent on, and lax lending (which is what inevitably happens when there’s too much money sloshing on the books of banks around looking for a home) inevitably fuels a rise in assets valuations through speculation.

Anyway, the US government (including the Fed, which is an unaccountable and irresponsible branch of the government, however it’s position is legally concealed) is trying to cook up ways to restore the previous high levels of house prices, to bail out the banks (whose failure would cost the government money) and to “help out” all those improvident people who took out big mortgages in the gravy pre-2007 days and now have mortgages underwater (that is, the value of the house now less than that of the mortgage).

At first they tried this with the sorts of things the FHA is meant to do, namely assist less wealthy people in getting mortgages (whether this is a good idea is beside the point). But when you think about it, that’s a pretty inefficient way to go about reinflating an assets bubble. Is you want to push up the stock market, do you subsidize penny stocks or the firms on the S&P 500? Likewise, it stands to “reason” that if you want to push up housing prices on average, it’s a lot easier to push up the value of seven digit units on, say, Manhattan than a bunch of broken down trailer homes in Paducah KY, no?

So – presto bailo! – we get this:

The Federal Housing Administration agreed in March to insure mortgages for apartments at the 98-unit Gramercy Park development, known as Tempo. That enables buyers to make a down payment of as little as 3.5 percent in a building where apartments are listed at $820,000 to $3 million.

“It’s a government seal of approval,” said Gollinger, a director at the Developments Group of New York-based brokerage Prudential Douglas Elliman Real Estate. “We need as many sales tools as we can have these days, and it’s one more tool.”

The FHA, created in 1934 to make homeownership attainable for low- to moderate-income Americans, is now providing a lifeline to new Manhattan luxury condominiums after sales stalled. Buildings featuring pet spas, concierges and rooftop lounges are applying for agency backing to unlock bank financing for purchasers. The FHA guarantees that if a homebuyer defaults on his mortgage, the agency will pay it.

At least nine Manhattan condo developments south of 96th Street have sought approval for FHA backing since the agency loosened its financing rules in December, according to a database of applications maintained by the U.S. Department of Housing and Urban Development. The change allows the FHA to insure loans in new projects where only 30 percent of units are in contract, down from at least 50 percent. About 1,900 apartments in New York’s most expensive neighborhoods would be covered by the applications.

The agency also offers insurance to half of all mortgages in a single building after previously setting a limit at 30 percent, according to the new standards, which expire in December. The entire property must be approved for a buyer to get backing. Most of those that applied in Manhattan are buildings converted to condos or built since 2007.

The FHA is filling a void left after mortgage-finance agency Fannie Mae tightened its condo lending standards last year. The Washington-based company won’t back loans made in new buildings where fewer than 51 percent of the units are in contract, sometimes setting a requirement as high as 70 percent.

“It’s not an accident that the FHA is offering this — not private lenders,” said Christopher Mayer, senior vice dean at Columbia Business School’s Paul Milstein Center for Real Estate in New York. “An unfilled condominium complex is not the kind of thing that a bank looking to rebuild its balance sheet on real estate is looking to do.”

In New York City, the priciest urban U.S. housing market, the FHA insures loans of as much as $729,750, and permits buyers to borrow up to 96.5 percent of the price.

Of course, with loans that size, the FHA isn’t going to be directly subsidizing the really expensive stuff (the article says that the average price in Manhattan is $1.4 million), but propping up the low end helps out the high end, and in any case, $730k would probably buy you a lot of homes back in that trailer park in Paducah.

So, they’re giving loans with only 3.5% down instead (instead of the traditional 20%) to people buying really expensive (in absolute terms) condos in Manhattan and Brooklyn and guaranteeing the principal of the loans in case of default, so the lender is at no risk of loss. So, let’s think back to the distant – say less than ten years ago – the had somewhat similar policy. Now what was that called? Hmm. Oh, yes, subprime lending!

And how did that one turn out?

And this time around, instead of the implicit and assumed government guarantee behind Fannie and Freddie, we have the explicit guarantee of an agency of the US Federal government.

What idiot came up with this idea? Oh, yes. That bastard Keynes.

Know Thy Enemy: Federal Reserve Edition

Keyser’s been a bit mum on economic topics recently. It’s not that he hasn’t been paying attention. Far from it. But there isn’t much news in this analysis. Basically, sickness the Fed and the US Treasury have spent trillions of dollars that don’t signify anything real, rx and this “money” has resulted in a lot of institutions that are fundamentally bankrupt from not going out of business. Sounds great, online no? Well, that’s the problem. It sounds good, but it isn’t. And most so-called economists don’t even understand reality.

Here’s an example of people’s non-comprehending frame of mind:

Stocks rose Monday as investors avoided big bets before the Federal Reserve’s meeting this week.

The Dow Jones industrial average gained 42 points in midday trading. Broader indexes had modest gains.

Investors are waiting for the Fed’s latest assessment of the economy that will be issued at the close of the central bank’s meeting on Tuesday. They also want to know if the Fed will restart some of its stimulus programs to help the recovery regain momentum.
The market’s growing concern about the economy has added to the importance of the Fed meeting. Recent economic reports have shown that the recovery is slowing. And Fed Chairman Ben Bernanke just a few weeks ago said the forecast for the recovery remains “unusually uncertain.”

The Fed will likely leave its federal funds rate near zero, but the central bank could signal plans to restart some stimulus programs, such as its purchase of mortgage-backed securities. Those programs ended earlier this year when it appeared the recovery was proceeding well.
“The Fed has a lot of tools in its tool shed,” said Larry Rosenthal, president of Financial Planning Services in Manassas, Va. “They have to bring buyers back into the market; they have to bring consumption back into the market.”

“Have to bring consumption back into the market.” This is like a child imploring Santa to bring nice presents for Christmas. Sounds nice, but that’s not how the real world works. In this instance, the child wants Santa Bernanke to get people to buy stuff they can’t afford with made-up dollars that they borrow, ultimately, from the Fed.

The Federal Reserve is hold-over from the “Progressive Era,” the first decade or so of the last century before the start of the First World War. Basically, a bunch of smart people decided that the laissez-faire economy of the nineteenth-century was anarchic and dysfunctional, and everything would work a whole lot better, if only smart-asses with degrees from Harvard were allowed to “manage” things “rationally.” The consummate example of this line of thinking was the Soviet Union. Turns out that in practice it wasn’t so easy for the geniuses in Moscow to figure out how many, say, paper clips should be made in a given year. And indeed, without the feed back of prices determined freely in an open market, they couldn’t figure out the “right” amount of anything.

But somehow, the notion persists that a pack of idiots like Bernie Bernanke can get together every few months and figure out the value of the single most important commodity in a modern economy: money. To understand the full madness of this, we need a bit of background.

Everybody uses money, but most people don’t really understand what it is. Money is a commodity. That is, it’s something useful, like a bushel of wheat or a barrel of oil. But instead being an actual useful item, it’s seem a unit of account that can be instantly converted into a specific commodity at will. In effect, it’s a claim on a commodity, and it’s reality derives from the fact that it’s not a specific commodity. As the old example goes, if you make a shoe but need a hammer, the shoe doesn’t do you much good unless you can find someone with a hammer on offer who happens to need a shoe. Not too likely, right? But if you can exchange the shoe to someone who needs one and has something valuable like gold to give in return, then you can take the valuable stuff and use it to get the hammer. The step of converting “valuable stuff” to money is when it’s made into a fixed quantity in the form of a coin. This “money” with its fixed units then has a lot of ancillary functions, like allowing you to compare value via prices and to store value over time.

Until the 1930s, the US dollar was a fixed amount of gold. In 1933, Franklin Roosevelt confiscated the freely available monetary gold. The dollars then issued by the Federal Reserve had a theoretical connection to gold, but this was ended in 1971, when the French tried to turn in their dollars for gold, and since there were more dollars than gold, the US government was forced to end the pretense. The dollar is now nothing but a number of “units” that have no external value apart from people’s willingness to accept them in return for stuff like hammers.

Now, here’s where things get a bit complicated. Money is of worth only to the extent that it represents a certain amount of value. That is, a dollar is of value only because it can buy something, and has no inherent worth of its own. Substantive value that has been converted into money for the purpose of investment is called capital.

Money has existed for something like 2500 hundred years, since around 500 BC when the Lydian kings started marking lumps of electrum (a natural alloy of gold and silver) and thereby discovered coinage. But the extensive use of money to invest is not much more than 500 years old. Back in antiquity, if you had money to invest, you had to purchase something with it. If you had a lot, you could buy a business venture, but you had to run it (directly or indirectly). There were no paper investments. That is, you couldn’t buy a piece of paper giving you a fractional share of the profits in some fixed organization in return for giving it the funds to operate with. That’s why today we occasionally find thousands of ancient coins buried in the ground. There was no other way to save value in abstract form.

For some hundreds of years, it’s been possible to invest your money abstractly by providing economic organizations (“companies”) with the “capital” they need. The so-called capitalist system involves the wide-spread practice of using money to invest without having to have any direct role in the investment. While some would equate the capitalist system with a free-market system, the two are actually two distinct notions. One can certainly have capitalism without free markets. That’s true even of most highly-regulated Western economies, and when you get down to it, the so-called communist system is simply capitalism entirely regulated and owned by the state. And the Federal Reserve’s control of the money supply fits in much more easily in a communistic system than a free-market one.

Maybe you don’t want to make a specific investment. Instead, you want to keep your “invested” money in as “liquid” a form as possible. And “liquid” means convertible into cash at will. So instead of buying a share in a company or a bond issued by a company or the government, you choose to lend the money as such. In this sort of transaction, you give someone else money to use for whatever he wants, and the receiver of the money pays you “rent” for the money. But instead of calling it “rent” we call it “interest.” Since money takes the form of monetary denominations, it’s easy to calculate the “rent” as a given percentage of the total loan per period of time.

What then is the interest rate? In a free market, it’s the amount of rent that can be charged for borrowing the available money. And what is money? As indicated before, it’s basically just a claim on value in terms of the prices for goods determined by the free market. In effect, borrowing money is way of acquiring the right to enter into that market with the claim on value you have in the form of money.

Proper interest rates than are simply a pricing mechanism on the worth of liquid capital. And capital becomes available because people forgo either keeping their money in the form of money or using that money themselves to buy stuff (which is known as consumption). Real capital is then made available through two processes: consumption and the desire to lend the money out to someone else in return for interest. If not much capital is available in this way for borrowing, then the rate of interest that the market will bear rises.

High interest rates then have two effects. First, it discourages the borrowing of “expensive” money. Why is this good? Because the refusal of people to save and lend means that the capital available for investment is restricted, and so people shouldn’t be making use of loaned money for the purpose of, say, expanding their business, because there isn’t the excess capital to support such activity. The second result is that because there’s a high rate of return, people will be encouraged to save money and to lend it out for interest, which in turn increases the available capital. Interest rates will then fall as more money (“capital”) is made available, and in turn more people will be encouraged to borrow for investment.

Eventually, the supply of increasingly available capital and increasing borrowing will reach natural equilibrium. Conversely, if interest rates are too low, people will be discouraged from borrowing, and rates will rise, with a corresponding reduction in borrowing. That’s how the system is supposed to work.

But that’s not how people like it to function. Back in the late nineteenth century, bankers used to bitch about the “inelasticity” of the money supply. At harvest time in the fall, farmers would take out a lot of their bank savings in the form of cash to pay their workers and pay for the transport of their crops to market. This would lead rural banks to withdraw balances that they would otherwise keep in larger cities, and this compounding process of withdrawal would have the most magnified effect in the financial capital of the country in New York City, where the big bankers had been lending these deposits out for speculation. Somehow, bankers were too stupid to predict the fall harvest, and they repeatedly had troubles caused by the fall withdrawals, culminating in the crisis of 1907. The upshot was the creation of the Federal Reserve Bank, as a banker’s bank whose supposed purpose was to alleviate these purposed crises caused by seasonal fluctuations in the money supply.

In the first place, the whole purpose of interest rates is to reflect the availability of capital. If Mr. Haney is taking his money back to pay the farm hands, then J. Pierpont Morgan should be subject to higher interest rates. And if some idiots have gotten themselves in trouble by borrowing money to speculate in stock and now can’t pay it back, too fucking bad, dumbass. You shoulda looked at the calendar, moron.

But no. God forbid anything should stand in the way of New York speculators. So let’s cook up the Federal Reserve as a way to provide bucks to our worthy NYC speculators by making up money to pretend that capital is available when it isn’t until real capital reemerges when the farmers start banking their surpluses again. So they created the Fed in 1913.

It took ’em a while to figure out the full potential of their diabolical powers. Somehow or other, the Fed has decide it has the right to buy $1.75 trillion worth of bad debts from banks. Now that one’s an eye opener, but its deleterious effects are basically passive. It means that the big banks like Citigroup and Bank of America can pretend they’re solvent when they aren’t. Now of course there is harm caused by this. In effect, the loser banks can acquire cash more cheaply than they deserve because lenders believe (probably rightly) that the “too big to fail” policy means that even if the big banks do stupid things with that money, the government will bail them out. And the ability to borrow money cheaply gives the big banks an advantage over the smaller banks that a) weren’t so foolhardy in the first place and b) can’t count of a Timmy/Bernie bail out. But that’s small change.

The Fed has the ability to manipulate the interest rate for the whole country (by making up money for banks and putting money in circulation through buying government bonds, among other ploys). Why anyone thinks this is a good idea is a beyond Keyser. The theory is that in times of expansion, the Fed will put the brake on excess by increasing interest rates, and in times of trouble, it will encourage consumption via low rates. So how’s that turned out?

Clearly, the Fed and its low interest rates have led to a massive expansion in prices since the ’50s as a result of a constant expansion of credit. In effect, the Fed is always inclined to have low interest rates, either to keep the good times rolling or to pump them up again in recessions. As we all know, low interest rates in the years following the bursting of the dot com bubble in 2000 resulted in the massive real estate bubble that burst in 2007 and caused the financial meltdown in 2008. And what’s the prescription for this problem? Why, low interest rates of course.

The point being to get people to borrow more money to buy shit they can’t afford, and in the process reinflate the price of housing to bail out the banks stuck with millions of mortgages on houses whose current market value can’t cover the loans taken out to buy them.

But this is insanity. As any dimwit should be able to predict, low interest rates discourage savings, and in the absence of actual capital behind it, lending for its own sake with made-up money is entirely deleterious. In the first place, the Fed has no control of what anyone does with the borrowed money. Since economic prospects aren’t good, many businesses and people aren’t so inclined to borrow and in any case, banks are now being stingy with lending. So that means that the cheap money provided by the Fed is borrowed to speculate (hello, stock market run up since March of last year!). Secondly, and perhaps more importantly, the whole purpose of interest rates is to give people feedback about the availability of capital. That is, low interest rates should tell economic agents that savings is making excess capital available for investment in things like more production. But we’ve already seen that the low rates are having the exact opposite effect on savings, and true economic state is that there’s excess capacity, so investment is counterproductive.

You know, in a show last night, there was talk about who the worst presidents were, and the name Warren G. Harding came up. Now, it may be true that he had some losers in his cabinet. But he was also responsible for the Great Depression of 1920. Oh, wait a minute. No, he wasn’t. Harding was the last president whose attitude was “not my problem.” Prices had become inflated during the big borrowing to pay for the First World War, and there was a major retraction in 1920 as prices began to tumble. Instead of trying to reflate prices, Harding let things go. The imprudent and improvident went bust, there was high unemployment for a year and a half, and then… It was all over, and the boom of the ’20s started. Of course, there was another inflation in the later ’20s, and when that one went bust in 1929, the “modern” period of economic intervention started. With all the deleterious consequences of government intervention, and other Keynesian nonsense.

You’d think by now that the manifest failure of the Fed and the parallel policies in the Federal government should be clear by now. Yet idiots like Bernanke and Geithner are listened to as if they weren’t responsible for the disaster we’re in in the first place. Interest rates are the most basic of signals for a free market, conveying to investors the availability of capital. They shouldn’t be manipulated at will by a pack of pseudo-experts, who have a large number of abstract theories of how the world works and little or no understanding of its fundamental principles. People like this are so deluded by their own misconceptions that they can actually argue that because they have no more ability to lower interest rates since they’re pretty close to zero already, it’s advisable to induce a higher regular inflation rate, so that they’ll have more “wiggle room” to keep lower rates (can’t find the link, but some lunatic proposed this last year). That’s like saying that because the fever-reducing medicine that you’ve prescribed isn’t bringing down the fever much, the patient’s body should be made to have a persistent low-grade fever to improve the effectiveness of the drug. That’s entirely back to front, but fully in keeping with the idea that the Fed should apply its delicate touch to the level of interest rates on the grounds that its board knows best.

Surely, it should be clear enough by now that the Federal Reserve board, and virtually all economists for that matter, have little idea of even what’s gone on and what’s happening now, much less what’s going to happen. And the idea that they can manipulate interest rates in helpful manner is thoroughly laughable.

Emulate Warren G. Harding, the president least known for solving an economic problem, because his lack of action forestalled a far worse downturn than the one that resulted from letting the system work out the problem on its own. A bit less 1900s progressive arrogance and a bit more 19-century laissez faire is what’s called for. No doubt Goldman Sachs and Citigroup and some other “big boys” wouldn’t exist. So what?

But today’s economists and politicians can never leave well enough alone. Because they know better…

Blast from the Past: Lending to Losers Edition

You know, viagra Keyser has a strong sense of when the impending financial debacle in the US that was caused (in part at any rate) by giving away mind-boggling sums of money in mortgages to people without sufficient means to repay the money. Keyser and Mrs. S. were going for a walk along a street here in Iglooland, ed and there was a sign painted on the back of a bench at a bus stop. The sign said something to the effect of “Bad credit? No one else will give you a car loan? Then call us! [phone number]” Keyser turned to Mrs. S. and said, thumb “Apparently, that’s what they’re doing all over the place in the US. Seems to Keyser that it’s a self-evidently bad idea to give loans to people with bad credit. There must be a reason why they can’t money from anyone else.” That would have been the summer of 2007. That December, Keyser was in Chicago to get an award (for his magnum opus in daemonology, and he and Mrs. S. dropped in on the guys who were (mis)managing Keyser’s little sum of money that he got from Keyser Sr.’s life insurance after Satan finally claimed his due. Well. There were already deep rumblings, and Keyser actually alluded to this advertisement that he saw. Keyser said, “Okay, guys. Keyser’s in this for the long haul. If you think these problems are transient, he’s willing to ride things out.” We all know how that one turned out. If those idiots had dumped Fannie Mae, AIG, Citigroup, Bank of America, and Wells Fargo back then, Keyser would be in much better shape (instead of being a poster child for the “thanks for the money, sucka!” PR campaign that Wall Street has put out.

Anyhoo, this just a bit of background for a little piece of humor that tickled Keyser’s sardonia bone courtesy of that subsidiary of the US Treasury, General Motors:

General Motors said on Thursday that it had agreed to buy a financing company, AmeriCredit, for $3.5 billion so it can lease more vehicles and increase sales to consumers with lower credit ratings [note that the term “subprime lender” is used in the title to the story].

The transaction, expected to close in the fourth quarter, gives G.M. a captive financing arm for the first time since 2007, when it sold control of GMAC Financial Services. G.M. recently considered starting a new financing arm or reacquiring GMAC, now known as Ally Financial, to strengthen its lending capabilities and to raise the carmaker’s value ahead of a public stock offering.

“Our dealers have been telling us that not having an in-house finance arm hurt our ability to finance certain loans and leases,” Edward E. Whitacre Jr., G.M.’s chief executive, said in a conference call. “It hurt our ability to meet rising customer demand for G.M. cars and trucks. Now we’re going to fix that.”

Well, there you go. What better “fix” to the problem of not being able to sell enough product than lending money to people who can’t afford your product and will eventually default on your loans? As a wise man once said, “it’s a self-evidently bad idea to give loans to people with bad credit.” Then again, if you get big bonuses from selling product and the risk of default is picked up by someone else (like the US Treasury and its friends in the PRC), then it probably sounds like a nice gig.

What could go wrong?

So, here’s a bit of investment advice. Rule Number One: Don’t let idiots handle your money. Rule Number Two: Don’t let idiots handle your money. Rule Number Three: Don’t let idiots handle your money. If you follow these three simple rules, you can never go wrong!

Think Bernanke’s Got This Seared in His Keynesian Brain?

Who knows? The world seems to be full of what they take to be the wisdom of good ole Maynard Keynes, look whose shtick was that the government’s supposed to save money in good times and then binge in times of economic recession to prime the pump (which has always struck Keyser as an image from masturbation, buy but maybe that’s just Keyser). The only thing that the Neo-Mayntards remember is the spend part, pharmacy but they all seem to forget about the savings bit. That is, even in good times they use monetary policy to crank up production (and produce assets bubbles), and then when the resultant malinvestment results in excess capacity and bad debts, which in turn necessarily leads to contraction, they use monetary policy to crank up production (and produce assets bubbles), and then when the resultant malinvestment results in excess capacity and bad debts, they use monetary policy to crank up production (and produce assets bubbles). Rinse and repeat.

Seemingly, this cycle can go on ad Keynsian infinitum. Or ad libitum. Or maybe that’s ad nauseam. Anyhoo, check out this following graph.

Supposedly, Sir Mayntard said that there would be problems in the long term, but in the long term we’re all dead. It would appear that we may have the pleasure of seeing the long term while still alive. Buckle up. This may be a bumpy ride.

Economic Insanity: Counter Flooding Edition

Back in the day, ambulance Keyser used to write a lot about the economy. That was when the sky was falling, shop back in late 2008 and early 2009. Since March of last year, sovaldi the stock market has regained about 50% of its losses, and seemingly the situation has been stabilized.

Seemingly.

But it’s all madness. Bernie Bernanke has “saved” the leeches at Goldman Sachs and the rest of their ilk by “buying” $1.4 trillion of their bad debts (in the form of shitty mortgages given out recklessly with fake money concocted by the Fed in the preceding half decade or so and of shitty “securities” made up out of such mortgages as a way for GS and the other scum to make more money for themselves knowingly selling this shit, a lot of which the banks wound up with). And of course, when Keyser says “buy,” that’s rather misleading. Normally, when one person buys something, that involves a transfer of funds. But the Fed has absolutely no actually wealth. It just has the ability to add a bunch of zeroes to the end of the account balances of member banks. That is, the debts haven’t been “bought” in any substantive sense of the word. Rather, they’ve been concealed with concocted money.

Oh, here’s another one. The whole purpose back in 2008 for bailing out the banks was that then they’d be able to lend. But of course they’ve done nothing of the kind. Lending is declining, along with many prices (that’s called deflation). Instead, what the banks have been doing is borrowing money from the Fed at fundamentally 0% interest (the ridiculously named ZIRP, or “zero interest rate policy”) and using that money to buy US bonds paying 3% or so. And what does the US government do with the vast amount of money it borrows in that way? Well, one thing is to prop up unsustainable levels of state and Federal government employment. And another is to stick vast sums in the Fed, which, of course, has been lending vast sums to the banks to lend to the Federal government. This must be great work if you can get it, but sooner or later, all this charade of passing non-existent wealth (that is, fiat money that represents no actual value) back and forth has got to hit a wall.

But Keyser speculated a long time ago that perhaps the worst effect of all the deficit spending might get the nitwits in Washington accustomed to the idea of spending vast amounts more than they have. That is, the US government has run deficits for years (with a minor stop in the late ’90s), but it was mainly nickels and dimes comparatively speaking. The debt would inch up all the time, but only incrementally. Now, it turns out that the Federal government can spend more than $1 trillion more than it takes in every fucking year. For a while at any rate. With China and Europe in economic chaos, the US$ seems “safe,” so that helps too. But get this. Back in Ronald Reagan’s day, the entire national debt was $1 trillion. Now they add that much to the total each year. And the other day, the total surpassed the $13 trillion mark (and no one seemed even to notice). How long can that go on? Well, we’ll see, since there seems not to be the least sign that anyone in Washington is willing to do the least bit to reduce that extravagance.

Speaking of which, the housing market is continuing to decline despite the best efforts of the Federal government to prop up the bubble. Used to be that most mortgages in the US were actually put together by that institutionalized source of fraud, Fannie Mae and Freddie Mac. But it turns out that these days the single largest creator of mortgages is the fucking FHA. The what? Why, the Federal Housing Authority. And why’s that, you might ask? Because their standards are even lower than those of the Fannie and Freddie. That is, in order to prop up the market, the Federal government itself is active attempting to give mortgages to people who can’t afford them.

How fucking insane is that?

Oh, well, the “paper of record” (the Nude York Times) had a story the other day about how people who took out loans they shouldn’t have are now practicing “strategic defaulting.” What this means is that they’ve figured out that the banks aren’t too eager to foreclose because doing so means that the loss on the mortgage loan is realized, whereas up until that point, the banks can pretend that the loan is worth more than it is. That is, an unserviced loan looks better on the books, so the banks are dilatory about foreclosing. So the fuckers who bought some home they could never have afforded now figure that it’s okay to stick it “to the man,” so they simply don’t pay anything towards the mortgage, stay in the house, and squander the “saved” payments on vacations, and televisions and other shit! Well, it’s even better than using your house equity as an ATM. This is just flat-out theft.

And how’s all that vast amount the Federal government borrows for “stimulus” doing, anyway? Well, last month, there were 431,000 new jobs supposedly created. But the statistics are simply made up by the BEA on the basis of some sort of formula of theirs and not on actual employment facts, so it’s bullshit to begin with. But even by their reckoning, 411,000 of those were temporary census workers. So absolutely fuck-all is going on the “real” world, where people actually create wealth rather than helping find out how many illegal aliens need to be represented in Congress.

Meanwhile, Europe is totally falling apart. The European Central Bank has “bailed out” the completely irresponsible national spending in Greece with money they don’t have, and are now on the hook for Portugal, Ireland, Spain and Italy. The euro continues to drop, going from $1.31 to $1.20 since the great bailout. And it seems Hungary is now teetering on the brink. And the reason the ECB had to bail out Greece is not because anyone really cares about the Greeks but because all that debt the Greeks took out irresponsibly is actually held by European banks, which are really in terrible shape, but their lack of transparency makes the US situation look clear as day by comparison. This clip is humorous but sadly true:

Fundamentally, what’s going on is that in 1933 Franklin Roosevelt confiscated privately held monetary gold as part of a hare-brained scheme to end the deflation that had been going on since 1929 by devaluing the US$. Under the gold standard an ounce of gold had been worth $20.67, but after a year of playing games with the value, he settled on the tidy sum of $35, a devaluation of something like 40%. On this basis was set up the Bretton Woods system at the end of the Second World War, with the US$ serving as the world reserve currency and being itself backed by the US gold reserves. No private individual had access to this gold, but supposedly foreign central banks did. The US abused this system in the ’60s to issue more dollars than the gold could support in order to fund the Great Society and the Vietnam War on the cheap. Eventually, the French called the US bluff and asked for gold for their dollars. The US didn’t actually have that much gold, and so ended any pretense of convertibility in 1971. Richard Nixon called the French assholes for causing this. But in this instance, if anyone was acting like an asshole, it wasn’t the French.

In any event, since 1971, there has no actual value whatsoever behind any currency. It’s all paper and zeroes made up by central banks across the globe. You know, everyone takes the institution known as the “central bank” for granted, but if any group on earth should be discredited after a record of unmitigated disaster, it should be central banks. Just since 1960, you’d need three times as many dollars to have exactly the same purchasing power. That is, two thirds of the value of the currency has been inflated away in the space of 50 years. That in effect forces everyone to “invest” their money rather than keep it, which of course helps out the boys on The Street, who make money off all these transactions (apart from their ability to make more money through their insider advantage and other manipulations).

So what is the dollar based on? Well, nothing. It’s legal tender, and people have no alternative. But the currency is fundamentally based on an ongoing increase in debt. But debt has to be paid off eventually, or it’s unsustainable. You can’t just go adding on to it in the futile effort to “create” more money to service the debt. This is the basic error of confusing money and wealth. Money is merely a claim to wealth, and money created in excess of the available wealth is in the final analysis worthless.

Do you know what happens when a warship is breached on one side and begins to list? The let in water on the other side as a counterbalance. This is known as counter flooding. Now, if you didn’t do this, the ship would just keep on listing until it capsized. But counter flooding does nothing to solve the underlying problem. It simply gives you time to plug the hole and pump out the water. And if you can’t do that, then the counter flood actually makes things worse, since you’ve now got more water in the ship. It just settles more slowly on an even keel. In the meanwhile, things might seem better to someone who’s merely judging the list and not paying attention tot the freeboard (how far the deck is above water level).

Think of the stock market as being the inclinometer that registers the degree of list. Since spring of last year, they’ve open the sea cocks on the other side of the ship, so the list has decreased.

But how much lower in the water is the ship? And more importantly, will she make it back to port before foundering? There is no way to know, but the situation looks bad. And the bulkheads seem to be giving way.

God help us if they give way.

Jumping out a Window: The First 15 Stories Are Fun Edition

Just as the Federal government has assumed a huge new liability by regulating and subsidizing the entire medical sector, viagra here’s how the next decade is set to play out:

President Obama’s fiscal 2011 budget will generate nearly $10 trillion in cumulative budget deficits over the next 10 years, medical $1.2 trillion more than the administration projected, and raise the federal debt to 90 percent of the nation’s economic output by 2020, the Congressional Budget Office reported Thursday.

In its 2011 budget, which the White House Office of Management and Budget (OMB) released Feb. 1, the administration projected a 10-year deficit total of $8.53 trillion. After looking it over, CBO said in its final analysis, released Thursday, that the president’s budget would generate a combined $9.75 trillion in deficits over the next decade.

The federal public debt, which was $6.3 trillion ($56,000 per household) when Mr. Obama entered office amid an economic crisis, totals $8.2 trillion ($72,000 per household) today, and it’s headed toward $20.3 trillion (more than $170,000 per household) in 2020, according to CBO’s deficit estimates.

That figure would equal 90 percent of the estimated gross domestic product in 2020, up from 40 percent at the end of fiscal 2008. By comparison, America’s debt-to-GDP ratio peaked at 109 percent at the end of World War II, while the ratio for economically troubled Greece hit 115 percent last year.

And this is by the retarded CBO rules, by which they simply assume that present behavior continues unchanged, and they just price the supposed new system according to the costs of the proposed legislation. Apparently, it never occurred to anyone in Washington that if you increase the cost of something (say, through taxes), there’ll be less of it to tax, or that people adjust their behavior to conform with the incentives of the new system (for instance, individuals and companies changing their medical coverage in the way that costs them least, and the government most). That is, this new medical system is inevitably going to cost more than they expect. That’s a complete given.

So, they expect the total debt to increase by 125% in the space of merely twelve years, and this will be sustainable? Apart from anything else, what happens if the Fed can’t keep interest rates down to basically zero? And anyone who thinks that the system can function with interest rates like that is crazier than a Democrat.

Fundamentally, politicians are like horny teenagers. They have one thing on their mind, and they’ll do whatever it takes to satisfy that urge. For the teenager it’s the emission of seminal fluids. For the politicians, it’s the emission of money. Keyser has mentioned in the past that one of the biggest dangers of the present economic straits would be that it will dupe the parasites politicians in DC into imagining that since they can borrow huge sums in the short term, they can buy whatever shit they want. That was fundamentally the collective problem on the private/personal level in the US: excess consumption through debt. This situation popped with the financial debacle in the fall of 2008. It seems that the upshot is that the debts, rather than being dealt with honestly through bankruptcies, have been concealed through shoving the banks problems onto the “balance sheet” of the Federal Reserve and the pumping out of debt-based spending by the Federal government.

How bad is this spending? Well, here’s a graphic illustration (click as often for a bigger version):

Keyser’s somewhat dubious about it (though seemingly it does come from the FRB of St. Louis). Seemingly, the First and Second World Wars didn’t cost much. But whatever the case with the early years in the graph, the trend towards the end is not good, and to judge by the CBO report, things aren’t going to improve any time soon. Or ever.

Then again, the “intellectual” frontmen for the leftards are telling us that you can borrow as much as you want without consequences. If the Democrats actually believe this, it’s going to be a bumpy ride…

Kind of reminds Keyser of the old joke about the people who saw a man that had jumped from the top of a building go hurtling past their window on the way to the ground. “How’s it going?” they ask him.

“So far, so good!”