Nice to see, again, that the system works

Jul 29 2008

Or, to be more correct, at least part of the system. Some of the time.

First, there was the Emperor AG and Premier Governor of New York, Eliot Spitzer, getting his, and a reasonable person could hope he’s got still more coming to him, given the pompous hypocrisy of the crusades on which he embarked before his fall.

Today’s news, however, on Alaska’s Ted Stevens, is equally satisfying to read. Charged with public corruption, and seemingly certain to be found guilty given the brazen and entitled nature with which he sought the spoils of his office, the only shame here might be that, at 86 years old, he’s unlikely to be incarcerated for the term he deserves, if at all. He’s been a national joke, most recently at least, for the Bridge to Nowhere pork fiasco, and his indictment cements his status as an embarrassment to Alaskans, Republicans, the Senate, and Americans.

Most people think that there’s a general presumption of innocence in America, but that’s only true within the court system, and in the issues that surround the court. I’m happy to report that my odds of serving on any jury of Mr. Stevens’ peers are zero, and I’m neither the judge nor the prosecutor in his case, so I owe him no such presumption.

He’s dirty, and the only thing better than having him indicted and removed from office would be to step back forty years, and take he and all other grandees of his sort out of the political process entirely. Glad-handing thieves, selling the citizens’ best interests for their personal aggrandizement, are among the lowest forms of life in America.

That monetary hammer I mentioned?

Jul 19 2008

In a post yesterday, (just below), I mentioned the difficulties in the Pakistani stock market, and the related destruction at the Karachi stock exchange. I contrasted, in a brief and cursory manner, the market there (and the reaction to its fall) to the market here in the US (and the general lack of reaction to its fall).

I also asserted that most of the tools available to the Pakistani government for reacting to the problem are available in other markets, and that they generally don’t work, because they don’t actually address the problems, instead focusing on the symptoms.

Finally, I mentioned in passing that the solution that seems most likely to help resolve matters can be found in monetary policy. It’s the one that everyone has avoided, though they surely have thought of it. Fed chairman Bernanke has begun nibbling around the edges of monetary policy, but may not, based on recent past history, be able to pull the trigger on any actual implementation – huffing and puffing that you really dislike inflation isn’t the same as, say, Paul Volcker (with the full support of Ronald Reagan, and not caring at all what Wall Street wanted) jacking interest rates to the moon and killing inflation dead.

Monetary policy is a complex subject, and one at which I’d hardly claim to be an expert. The meat and potatoes are simple – make money too easy to borrow and people will treat it cheaply, spend it too easily, and invest carelessly (think “drunken sailors”). Result? A debased and devalued currency. Follow that with a commodities supply/demand crunch, and the devaluation of a currency can spiral, as crucial commodities, priced in dollars, increase in price due to the decreases in the real value of the dollar, encouraging (if the Fed is gutless enough) further loosening of credit, further real devaluation of the currency (now itself effectively valued in “barrels of oil”, “tons of iron”, “Euros”, &c).

Silly “stimulus checks”, of the sort pushed by Congress this year and shamefully not vetoed by Mr. Bush, had a one-time effect on spending, which makes sense – they were a one-time return of tax dollars, disproportionate to actual taxes paid, and could reasonably be expected by anyone with a memory extending longer than six months ago to have had precisely the anemic and worthless effect that they did. Undaunted, Speaker Nancy Pelosi thinks (or at least claims to think) that all we need is $50 billion more in such stimulus. Which proves at a minimum only that her memory extends even less into the past that the rest of the nitwits who voted for the somewhat politically astute, but utterly economically absurd notion of the initial stimulus.

Politically astute – why only “somewhat”? Because one-time stimulus is politically astute only if one is trying to impress those who lack mental acuity. On one view of how we might measure such a thing, elementary statistics, something close to 50% of all people have less than average intelligence. Or, as George Carlin put it:

Think of how stupid the average person is, and realize half of them are stupider than that.

Of course that one-time stimulus seems helpful, at the time, and if you don’t think too deeply about it, to have someone handing out money. Better yet if it’s someone else’s money. And if it’s done in a crafty enough way, those same people who don’t think deep thoughts might be gulled into missing the realization that if the money’s better in our hands than the government’s during these current difficulties, why not every year?

But enough of that – I could go on in (small) circles about monetary policy, but have already devolved into fiscal and tax policy, so to keep this from turning into more of a rant than it already is, I’d like to tie this post back to the one from yesterday, and I have found the perfect foil with which to do so.

In an article in the Saturday July 19, 2008 Wall Street Journal, the always-readable James Grant, of Grant’s Interest Rate Observer asks “Why No Outrage?” (subhead: “Through history, outrageous financial behavior has been met with outrage. But today Wall Street’s damaging recklessness has been met with near-silence, from a too-tolerant populace”)

No, he’s not suggesting that we man the barricades, pitchforks in hand, Molotov cocktails at the ready. But he does make the easy case that things haven’t worked out as well as hoped in our current system of carrots, sticks, checks, and balances.

“Raise less corn and more hell,” Mary Elizabeth Lease harangued Kansas farmers during America’s Populist era, but no such voice cries out today. America’s 21st-century financial victims make no protest against the Federal Reserve’s policy of showering dollars on the people who would seem to need them least.

Long ago and far away, a brilliant man of letters floated an idea. To stop a financial panic cold, he proposed, a central bank should lend freely, though at a high rate of interest. Nonsense, countered a certain hard-headed commercial banker. Such a policy would only instigate more crises by egging on lenders and borrowers to take more risks. The commercial banker wrote clumsily, the man of letters fluently. It was no contest.

The doctrine of activist central banking owes much to its progenitor, the Victorian genius Walter Bagehot. But Bagehot might not recognize his own idea in practice today. Late in the spring of 2007, American banks paid an average of 4.35% on three-month certificates of deposit. Then came the mortgage mess, and the Fed’s crash program of interest-rate therapy. Today, a three-month CD yields just 2.65%, or little more than half the measured rate of inflation. It wasn’t the nation’s small savers who brought down Bear Stearns, or tried to fob off subprime mortgages as “triple-A.” Yet it’s the savers who took a pay cut — and the savers who, today, in the heat of a presidential election year, are holding their tongues.

Possibly, there aren’t enough thrifty voters in the 50 states to constitute a respectable quorum. But what about the rest of us, the uncounted improvident? Have we, too, not suffered at the hands of what used to be called The Interests? Have the stewards of other people’s money not made a hash of high finance? Did they not enrich themselves in boom times, only to pass the cup to us, the taxpayers, in the bust? Where is the people’s wrath?


No calls for violence there, no stoning or burning either. But he does wonder why people just accept this asinine state of affairs.

So do I.

Half-baked solutions, designed to appeal only to the stupid, will not solve the problem, and will actively and quickly make it worse. Freely available money, ala Bagehot, but at near-punitively high interest rates, can make it possible for the blockages in our financial system to work themselves out.

The alternative, where the Fed (and the implicit “Bernanke Put“, and let’s not forget the “Greenspan Put“, either) continues to think that Wall Street is more important than Main Street, hasn’t worked and won’t. (Candidate Obama has used that Wall Street/Main Street formulation in his stump speeches; the difference between his use and mine might be that I actually understand what it means, and why it’s a crucial failure in our system).

It’s probably best that I’ve never been a combat medic, because I think that a quick bleed, with full understanding of where the blood is likely to gush, is preferable to a five year drip, or worse, a five year internal bleed of reasonably knowable but still-indeterminate origin.

And if that bleed (the quick gusher) occurs on Wall Street, then so be it. Chasing the dollar down to $250 per barrel of oil/$250 per metric ton of iron ore/$0.25 per Euro seems hardly worth it, when the sole reason for doing so is to continue the pretense that what’s good for Wall Street is good for America.

The rot’s got to stop before the economy can properly heal. Half-measures will continue not to do.

See also:
   WSJ – Stupidity and the State, and Stupidity and the State, Part II
   NYT – Given a Shovel, Americans Dig Deeper Into Debt

So that’s what an unsophisticated investor looks like.

Jul 18 2008

(The excitable investors, that is, not Pakistanis in general)

Clues can be found in a Marketwatch article from yesterday evening:

Investors riot in Pakistan as market tumbles

Benchmark down for 15th straight session; loses 27.5% this year so far
By Polya Lesova, MarketWatch

NEW YORK (MarketWatch) — Popular anger over tumbling equity prices erupted in Pakistan on Thursday, underscoring the difficulties regulators face in attempting to prop up falling markets as turbulence in many of the world’s financial markets continues unabated.

The turmoil in Pakistan comes at a time when several emerging markets are considering market stabilization measures, while regulators in the United States are moving to limit short selling and speculation in the oil market.

Regulators in China have signaled their intention to stabilize the local market, which became the worst performer among global markets this week. India has suspended futures trading in several commodities.
In Pakistan on Thursday, more than 200 protestors attacked the Karachi Stock Exchange, the country’s main equity market, and demanded a temporary closure of the market to curb further drops in share prices, the BBC reported.

Smaller protests took place in Islamabad and Lahore.


For reasons not so easy to articulate, I find it breathtaking that such a reaction makes any sense at all to these aggrieved investors.

Capital markets wizards at work

Capital markets wizards at work

What, I ask myself, is the logical conclusion they’d expect here? To be offered their money back? By whom? With or without smoke-stains and cinders?

Are the investors in emerging Asian markets really so unsophisticated (Albania comes to mind, among others) that they’ll buy anything, at any price? I suppose so – this has happened throughout history, in Asia, the US, and elsewhere. But in the majority of those other cases that come to mind, when it all goes wrong, the populace doesn’t seem to automatically think that all can be made better by burning buildings down, do they?

Not only are such reactions destructive (to property and to society in general), they’re also of no use in resolving the problem.

Some folks, I suppose, should be completely protected from themselves, and prohibited from taking actions they might later regret. Much the same, I further suppose, as special needs kids are sometimes not allowed out of the house without a styrofoam-lined helmet.

Such paternalism would be troubling to those of us who feel able to take responsibility for our own actions, but, by definition, we’re also not the sort of people who’d think burning down the stock exchange (which, really, is just a building, and had no effect on the stupid prices people were willing to stupidly pay for securities, right?) was a great idea. The Pakistani authorities’ “styrofoam helmet” for the markets includes circuit breakers to dampen price volatility, short-selling limitations, and a “market stabilization fund”. Much the same set of tools has been used by other governments over the years, with little beneficial result.

The connection made in the original article to US commodity (primarily oil) markets and allegations of skullduggery in shorting of financial behemoths such as Fannie Mae, Freddie Mac, Lehman, et al is apt, though the differences between the two situations are meaningful. When you add in the other bugbear, the rapidly deflating asset (real estate) bubble, within the US, the focus is on systemic risk (in the financial behemoths) and pure political grandstanding (regarding the oil futures markets and residential real estate), but surely, a minimal number of buildings will be burnt to express disappointment.

The point the two situations have in common is the ultimate futility of efforts to game the market excessively, from either the regulators’ or the speculators’ side of the table. Market stabilization fund? Ask George Soros what he thinks of the efficacy of such devices.

Market volatility curbs? They are a band-aid solution, i.e. no solution at all. If the limits are hit on a given day (particularly down days), the selling frenzy can just as easily be pent-up until the next day. And the day after. In cases where limits on asset price increases would be helpful to halt bubbles of speculative excess (tech stocks in the 1990s, real estate more recently), the proper method isn’t price movement limitations, but instead should be monetary, in the form of interest rates and margin requirements.

Where does it all end? Not in violence, and not in wanton destruction of real property. Too many more gimmicks, such as stimulus checks designed to gull the electorate into thinking all’s well, or handouts to flagrantly uncreditworthy home buyers, and the road to the end of this mess gets steeper and more slippery. Oddly enough, that monetary hammer mentioned above, in the form of interest rates, can play a big part in solving the current woes, though it won’t solve them quickly.

Devaluation of the dollar is the flip side of cheap credit, and while dollar devaluation is a subject for another day, reducing speculative excesses by making money more expensive to deploy in speculation, whether it be in commodities, real estate, or the financial markets seems likely to be the only path out of the current unpleasantness.

If that turns out to be the case, many will feel the pinch. Fortunately, the stoics who make up a lot of the American population, sophisticated or not, seem more likely to suck it up, endure the pinch, and exit the other side better off than they are today. An optimist would further hope that this was all done without the government stupidly taxing the starch out of the economy, but if the government does so, perhaps the government after them will repair the damage, and reap the delayed benefits.

Regardless of government policies, the flame-throwing non-sophisticates of the Pakistani markets may not fare better nearly as soon.