Financial topics

[indyboy]

Your statement of the "Fed is unable to target all aspects of the economy equally" is basically saying that the economy has so many pieces that it is hard for the Fed to control all pieces. That is what I meant by this being a hard "control-system" problem. However, consider a thought experiment. The root of all the current economic mess are all these people who bought assets and now their assets are under water. Doesn't matter if it is a house, or MBS. The person paid one dollar for it, but now it is worth only 30 cents. So the Fed buys it from him from one dollar (so he remains a happy camper). This is not different than forgiving him or paying him for the amount that he is underwater. What if the Fed could do this with all parties in debt ? Again set morality or illegality aside (we all know we are way past that point). Actually, you can include all the people with credit cards. Fed finds a way to forvgive their debt at any instant by giving them as much money as they owe (it would have to do this instantaneously without prior knowledge because the knowledge that the Fed will forgive debt will cause everyone to buy lots of stuff in advance ).

So now we are in a situation where there are no folks sitting on bad debt resulting from their assets being underwater. Is their a problem now ? I dont see it. It seems to me that the only problem is that of morality because the only people who get nothing are those who are in cash whereas all the people who count their net worth to be = cash + assets-that-are-market-valued suddenly become richer because their debt on their assets (such as house being underwater) is being forgiven. The current administration + the Fed is trying to really achieve this hand in hand without raising hue and cry.

Indyboy.

I think I understand the question, but let's be sure first.

"Fed finds a way to forvgive their debt at any instant by giving them as much money as they owe. "

You mean that the Fed will create the money out of thin air that is necessary to pay off all debts. It would be all debts, not just the delinquent or underwater loans. I'm also assuming the money would be paid back to the creditor and the debt extinguished. For example, if a person had a mortgage with ABC Mortgage Company with a balance of $100,000 the Fed would give the $100,000 to ABC Mortgage Company and the person would then own their house free and clear. The same would apply to all auto, student, credit card, business, etc., loans.

Is this correct?

I was playing the game in my head follows. There are two types of debts, those with collateral and those without.
a) For those without collateral (like the $2000 Prada purse the woman bought on her credit card), all the debt is forgiven. She was complaining she couldn't pay this back.
b) For those with collateral such as a house, the Fed pays he house owner the difference between the amount he paid for and the current market value of the house. I mean that the part Mr X, who bought the house for 600K and is now worth only 400K, is groaning about. The fed pays him 200K (which is the same as buying it from him for 600k at the current moment, so that would work too).

Ok, now shoot me now

[Higgenbotham]

I was playing the game in my head follows. There are two types of debts, those with collateral and those without.
a) For those without collateral (like the $2000 Prada purse the woman bought on her credit card), all the debt is forgiven. She was complaining she couldn't pay this back.
b) For those with collateral such as a house, the Fed pays he house owner the difference between the amount he paid for and the current market value of the house. I mean that the part Mr X, who bought the house for 600K and is now worth only 400K, is groaning about. The fed pays him 200K (which is the same as buying it from him for 600k at the current moment, so that would work too).

Ok, now shoot me now

I probably won't get all of this right or prioritized correctly, but will give it a try. There was someone who used to post here who might be able to answer it better. Some who work in the banking industry could almost definitely do better on certain aspects.

Starting with the debt without collateral, some of that is securitized, meaning it has been sold off to money market funds. In that case, then, we would need to assume that the securitized debt is paid off. The money market fund would now have dollars instead of securitized debt. The dollars wouldn't pay any interest. Likewise, if a bank were still holding the credit card, etc., receivables, they would receive dollars for those and would now have cash on their books instead of the receivables, and therefore would not be getting any interest (or income) on those. Any impending delinquencies would be replaced with cash instead of nothing.

All of this would have the immediate effect of improving bank balance sheets while reducing income. This then brings up question of the financial condition of the banks, as a substantial part of their income stream would disappear. If I understand correctly, the collateralized debt would still remain, and the banks would therefore still be receiving some interest payments. Only the uncollateralized income streams would be lost. I don't know enough about bank balance sheets and income statements to know exactly how this would impact bank profits as a percentage. Anecdotally, I understand that the banks derive a substantial portion of their income from credit card interest and, therefore, this plan would cause some reduction in bank profits and might at this point put some bank earnings back into the loss column.

Assuming that the debtors would have no desire to get back into debt at nearly the levels of debt that were discharged, I think the financial industry would shrink and some workers would be laid off. Also, the interest paid on bank deposits would have to be reduced, if that's even possible, and some banks probably would go completely out of business. Banks might use the cash on their balance sheets to try to stay afloat for awhile, but the generational aspects of people becoming more averse to debt won't make it possible for all of these banks to stay in business and this plan would probably hasten their demise.

I don't think this is a horrible idea, but it could do more overall harm than good. There are positive aspects for the debtors that I am not focusing on.

On the other hand, the plan to pay the homeowners the difference between their purchase price and currrent value probably wouldn't work too well, but we'll have to discuss that one later.

[indyboy]

I was playing the game in my head follows. There are two types of debts, those with collateral and those without.
a) For those without collateral (like the $2000 Prada purse the woman bought on her credit card), all the debt is forgiven. She was complaining she couldn't pay this back.
b) For those with collateral such as a house, the Fed pays he house owner the difference between the amount he paid for and the current market value of the house. I mean that the part Mr X, who bought the house for 600K and is now worth only 400K, is groaning about. The fed pays him 200K (which is the same as buying it from him for 600k at the current moment, so that would work too).

Ok, now shoot me now

I probably won't get all of this right or prioritized correctly, but will give it a try. There was someone who used to post here who might be able to answer it better. Some who work in the banking industry could almost definitely do better on certain aspects.

Starting with the debt without collateral, some of that is securitized, meaning it has been sold off to money market funds. In that case, then, we would need to assume that the securitized debt is paid off. The money market fund would now have dollars instead of securitized debt. The dollars wouldn't pay any interest. Likewise, if a bank were still holding the credit card, etc., receivables, they would receive dollars for those and would now have cash on their books instead of the receivables, and therefore would not be getting any interest (or income) on those. Any impending delinquencies would be replaced with cash instead of nothing.

All of this would have the immediate effect of improving bank balance sheets while reducing income. This then brings up question of the financial condition of the banks, as a substantial part of their income stream would disappear. If I understand correctly, the collateralized debt would still remain, and the banks would therefore still be receiving some interest payments. Only the uncollateralized income streams would be lost. I don't know enough about bank balance sheets and income statements to know exactly how this would impact bank profits as a percentage. Anecdotally, I understand that the banks derive a substantial portion of their income from credit card interest and, therefore, this plan would cause some reduction in bank profits and might at this point put some bank earnings back into the loss column.

Assuming that the debtors would have no desire to get back into debt at nearly the levels of debt that were discharged, I think the financial industry would shrink and some workers would be laid off. Also, the interest paid on bank deposits would have to be reduced, if that's even possible, and some banks probably would go completely out of business. Banks might use the cash on their balance sheets to try to stay afloat for awhile, but the generational aspects of people becoming more averse to debt won't make it possible for all of these banks to stay in business and this plan would probably hasten their demise.

I don't think this is a horrible idea, but it could do more overall harm than good. There are positive aspects for the debtors that I am not focusing on.

On the other hand, the plan to pay the homeowners the difference between their purchase price and currrent value probably wouldn't work too well, but we'll have to discuss that one later.

Yes, I did not talk about that. The scenario I mentioned does not prevent the earnings of companies from falling. Like you mention, since people do not want to get into more debt, the earning of the banks would fall since they make money only if people borrow. And that is not just restricted to banks. People would buy fewer iPhones because they do not want to run up their credit card. So the earnings of Apple would fall. By the same token, in the scenario I mention, all corporate earnings would still fall since people are spending less (hopefully, the people learnt some lesson if not as harsh as the 1930's). If the corporate earnings fall (a) more people would be laid off (b) stock prices would have to fall assuming constant P/E. Hence, wages would fall (more people on the labor market). Implies even lower spending. Vicious cycle can continue.

But the cycle would be MUCH less severe and the doomsday scenario may be avoided. Pisses me off like crazy, believe me, but I can see how the administration could get the voter mandate to do it. For example, if all debt acquired before a certain date, say 1/1/2009 is written off by the Fed then at least the problem of people not spending today because they are severely in debt would be solved. Of course, they would be still be spending less because they do not want to get into MORE debt which will have its own repercussions of shrinking the GDP nevertheless.

On another thought, that can also be solved ! Getting the people to spend money they do not have is a game that all administrations are really good at because it means GDP growth (+ more taxes + budget surplus + more Government spending, etc..) the prime indicator of whether the Administration was successful or not. Clinton left a the huge market bubble right before he left and yet every nincompoop I meet will tell me that he was really fixed the economy and balanced the budget. Our current administration would have no qualms about doing it.

So my point is that after having gotten people and institutions to pay off all the debt that the owe, the Government could start the cycle of inducing people to spend all over again with debt. Banks would start mailing those teaser credit cards again. And so on. And things would be just fine. Of course, the Central-Bank/Governement would be saying "I dont plan to bail you out EVER again so DONT DO it" but it would be wink wink. Kind of like legalizing all the illegal immigrants in 1986 and saying "Now we will never do this again, we had to do it this time because there were so many people already inside the borders illegally" and then knowing completely well that it would be done again if needed.

I am quite perplexed at my line of reasoning above, believe me. I have always thought that as a society we ran up debt and spent money we did not have so we must suffer dire consequences. It almost seemed to me like the law of conservation of energy - it cannot be undone. But over the last few months, I am thinking along the above lines. And it seems to me that the printing press can actually solve the problem at the expense of the "moral hazard" of paying one citizen free money over another. That is what is happening all the time anyways as my blood pressure continues to rise. Robbing one Peter to pay three Pauls always works in a democracy because the votes are in your favor. That is the best reasoning I can find for why there is not as much brouhaha about QE. Because more people have to gain from it than lose. It seems to me Bernanke/Obama administration will get their way.

I am hoping someone will explain to me why my understanding of macroeconomics is completely off the mark.

[OLD1953]

Not so much off the mark, as there simply isn't that much money and they can't create that much money without crashing the US bond rating to nil. We're talking about a couple of years worth of GDP in debts. And that's the practical reason why the focus is on bad debts, not my debts, most of which I've paid off.

On the finance and investment front, these gadgets are likely to become common on the other side of this crash, and are worthy of consideration for investment after the bad debts are finally written off, in whatever fashion.

http://mydocs.epri.com/docs/public/0000 ... 008434.pdf

http://apps1.eere.energy.gov/news/news_ ... ws_id=6775

These are needed to smooth out power distribution from wind farms and solar farms, and we'll need quite a few of them as the price of the panels drops, and we see more blue roofs going up. I've actually seen complete working panels selling for less than a dollar a watt (on sale, OFC, by the pallet load) recently. That's a price point where a lot of people are going to see a huge advantage in cutting the electric bill with panels on the roof, and many retirees are fearful of large increases in monthly bills while they are on a fixed income.

And that makes me wonder about long term survival tendencies in a society. As we move towards this generational crisis war, we see more and more people spreading out and doing things that will ensure power and food production even if we see some nuclear strikes on the continental US. The govt has encouraged this, but not very much. Can one theorize about a generational tendency to push survival before a crisis? Was there such a tendency before WWII?

[Higgenbotham]

A headline from yesterday morning (not this morning as I previously indicated) that pertains to our discussion of last night. While the investment community and ratings agencies do not frame the issues in the way we do here, they've begin to sniff out the "disparity" using the same theme of mortgage backed securities and how those values relate to employment and the housing glut. Also, note the use of the word illusion, which indicates that the "disparity" was previously hidden but now has been discovered by the market. Therefore, a panic is probably not too far off in the future.

http://www.housingwatch.com/2010/02/17/ ... webmaildl4

Heartened by the recent rise in home prices? Don't get too comfortable. Standard & Poor's, the credit-rating agency that tells investors what mortgage-backed securities are worth, reports that the increase was just an illusion. It predicts the nation is about to see a deluge of new foreclosures that will drive real estate values back down.

Blame the "shadow inventory" – nearly 1.8 million homes that are on the road to foreclosure but for all kinds of reasons haven't gotten there yet.

Many homeowners have fallen behind on their mortgages or stopped paying, but foreclosure has not yet arrived. Mortgage servicers, the folks who send you the bills and file for foreclosure when you can't pay them, are overwhelmed. Courts, too, are backed up. Mortgage modifications and foreclosure moratoriums have put off the day of reckoning for borrowers, but not forever. And unemployment is sabotaging more homeowners every day.

Out of more than $1.6 trillion in existing mortgages that were packaged into mortgage-backed securities by Wall Street, some $425 billion worth are extremely late on their payments, and therefore likely to go into foreclosure. Only a fraction of borrowers who fall seriously behind are able to catch up, with the help of a loan modification. And even then the majority end up falling behind again. That amount of bad mortgage debt has been spiking up every month, slowing down just a little thanks to the government's Home Affordable Modification Program, but still continuing to rise.

[aedens]

"Your statement of the "Fed is unable to target all aspects of the economy equally" is basically saying that the economy has so many pieces that it is hard for the Fed to control all pieces. That is what I meant by this being a hard "control-system" problem."

[The emergence of an omnipotent managerial class] was, on the contrary, an outgrowth of the interventionist policies consciously aiming at an elimination of the influence of the shareholders and at their virtual expropriation.
Ludwig von Mises 1949

People overall I feel do not get it yet. To be able to delay immediate satisfaction for the sake of future consequences has long been considered an essential achievement of human development.
Contrary to the United States, where regulations were originally developed to protect the shareholders from expropriating managers and induce the latter to best serve shareholders' interests through profit-maximization, in European countries where some kind of "anti-capitalistic mentality" prevails, regulations did not seek to induce managers to promote profit-maximization; rather, they sought to protect workers to maintain social stability.
So how do you maintain Capital when they already spend more than they can be acountable for?
Alternatively, we seek to explain the differences between corporate governance structures by looking at the causal relationships between property rights, incentives, and government regulation, and by redefining the nature of government intervention.
This point is illustrated perfectly by their observation that corporations in civil-law countries are typically controlled by the State (such as in France), while corporations in common-law countries have been under dispersed ownership. Their comment about State-controlled corporations is without appeal; such corporations are “extremely inefficient” and expropriate minority shareholders. Moreover, they show that such countries are also marked by more corruption because of the strong bond with the political sphere (Shleifer and Vishny 1997, pp. 767–69).
Finally, such studies show that in civil-law countries, insider trading scandals usually have a connection to political power. The Triangle Industries scandal is one illustration. The scandal involved insider purchases of Triangle shares shortly before Pechiney bought it in 1989. Among the six French buyers who were indicted for insider trading, one (Roger-Patrice Pelat) was a close, longtime friend of the president of the Republic. Two others (Max Théret and Harris Puisais) were also close to political power. If you follow the individuals back to origen a trend is apparent.
Many argue "Austrians" that managerial omnipotence can be explained as the result of government regulations reducing shareholder-owners' incentives to efficiently manage their property, namely, their stock in the corporation.
Ruthless mindset's can be followed to conclusion as to avert the loss of investment capital and I always convey know it better than your wife since Most older mindset managers convey labor and Capital as a marrage. My preference is based on fact and a line of reason as both party's have only social responsibility's only called contract.

Notes from also: Marks, Stephen G. 1999. "The Separation of Ownership and Control." In Boudewijn Bouckaert and Gerrit De Geest (eds.). Encyclopedia of Law and Economics. Cheltenham: Edward Elgar Publishing. Pp. 692-710

[freddyv]

...
My point is: don't assume that they even care to save the country or the economy. Some speculate that, when the time is right, they may even trigger the collapse. That's when they can really get the wealth -- use all the money they have stolen to buy up all the real assets at bargain prices.

These people are greed plus evil incarnate -- I don't know their plan -- but, I think they have one, and at may well be beyond the ability of reasonable decent people to imagine.
...
Bill

I agree, but there is an answer to that, too and it is called violence. America is a violent nation and anyone who believes they can cow all of the people for very long will likely learn a very nasty lesson.

I believe in Generational Dynamics but I know that there are even larger dynamics at work beyond the 70-80 year patterns. It may well be that the people who really runs things in this country expect to do just as you describe and expect folks to act as they did during the Great Depression, but notice the differences: we didn't start with a crash but seem to be building up to one as the bursting bubbles get bigger and bigger. People are organizing and getting angry as they see what is happening and they see that their 'leaders' do nothing to protect them. And this time there is a clear cascading pattern to it all that suggests it will all end with the complete bankruptcy of America, after many others have fallen and been bailed out by us.

I listen to and watch Glenn Beck with a jaundiced eye but I believe he has the best overall view of what is going on among all the public figures talking about our current situation.

Fred

[wvbill]

...

I agree, but there is an answer to that, too and it is called violence. America is a violent nation and anyone who believes they can cow all of the people for very long will likely learn a very nasty lesson.

..

Fred

Yes, I agree. People will be in the streets... But, at what point... That is the question...

Bill

[aedens]

http://www.minyanville.com/businessmark ... 0/id/26907

http://www.zerohedge.com/article/quants ... alchemists

life or death models. Not opinion to date. When the Consumer decides we will see
but disconnects are reality to models the public will pay for unabated to date.

[wvbill]

From John's log:

German anger grows at Greece and at Goldman Sachs

An excellent article from Rolling Stone on the Goldman scam:

"Wall Street's Bailout Hustle"

http://www.rollingstone.com/politics/st ... out_hustle

It will "make your blood boil" i.e. really piss you off...

Bill