$700 billion: cui bono?

Hunter in the Daily Kos (HTP: my brother) says that the $700 billion rescue plan has no relation to the (much smaller) likely amount of mortgage defaults; instead, it's designed to prop up the derivatives scam that banks have been running for years.

I've thought recently that the bankers and traders are, in effect, being offered absolution without confession (1), restitution (2), doing penance (3) or a "firm purpose of amendment" (4).

1. Full disclosure of all liabilities and "assets"; admission of each person's part in the debacle. This should be Watergate Plus: there's a lot more than four burglars and the damage to third parties is incalculable.
2. Preferably, repayment of past bonuses awarded at a time when the recipient knew, or ought to have known, that the game was destabilising his own firm and the national economy.
3. Ideally, jail time, for some; at least, loss of office for those responsible.
4. Adoption of regulations designed to maintain the value of the currency and prevent future speculative bubbles.

From time to time we hear the defence that the consumer was at fault, too. Perhaps, if you're thinking about home equity withdrawals; but even the boll weevil is "just looking for a home" as Leadbelly sang, and when banks opened the money sluices house prices doubled. The buyer had no option to purchase a home at 2002 prices in 2007 (and I'm not sure what happened to the cost of rent in that time). The lenders should have known what they were doing; the poorest borrowers were not their equals in expertise. There was a duty of care.

What would houses cost, if it had always been illegal to use them as collateral for debt? What would the US and UK economies look like, if the vast sums sunk into housing had gone into small business enterprises? How much wealthier would we be?

Have Britons become slaves?

Lilith's daughter has been charged for demonstrating back in June. I was disturbed about it then, and am again now.

As in the early nineteenth century, the people are effectively disenfranchised and have little other way to express their dissatisfaction than by demonstrations - in this case, holding up a placard. Do American police arrest placard-holders outside the White House, or is America still a democracy?

It's not as though we're putting the windows through in Whitehall, as in 1831 (Reform Bill), 1855 (against closing pubs on Sundays) and on other occasions.

When did the police turn from being a people's Watch to fight crime as normally understood, to a standing army whose purpose is to suppress the people?

Spectator letter is published

The Spectator magazine has published my recent letter; heavily edited, but at least it was the first in the list, so that's some sort of recognition:

"Storing up more trouble

Sir:

Your leading article (20 September) calls for a ‘kick up the backside’ to the banking industry. That kick should be aimed elsewhere. The British and American governments have not merely permitted this crisis to happen, but positively created it by a deliberate relaxation of monetary controls. Worse still, they have now decided that instead of destroying excess credit by asset deflation, bankruptcies and share collapses, the monetary inflation is to be consolidated by absorption of bad debt into the public finances.

I don’t see how this can end well. Some commentators are already saying that, if passed unaltered, the proposed American financial legislation could, once properly understood, trigger a major crash in US financial shares, possibly before this letter is published.

I think The Spectator and its economically savvy readers should put on fresh pairs of winkle-pickers, and gather in Whitehall and Washington for some kicking practice."

A crisis of democracy, not of capitalism

One of the features of the present crisis is that it is not so much financial as political. Vast bailouts of greedy and destructive banks lead Americans to ask, who is running the country, and for whose benefit? Mish and others are turning from financial commentators to pro-democracy activists.

Shall "Government of the people, by the people and for the people" perish from the earth? The lazy, defeatist cynics of the UK fail to understand how Lincoln's words still burn brightly in many Americans' hearts. It's why they are so quick to attack their politicians as liars and shysters, wheras we merely expect them to be that anyway. Their idealism shames us.

A Marmite Backwater

Dark Matter, Dark Energy, now Dark Flow... my brother directs me to a new discovery/theory.

It seems that a great cluster of galaxies that is halfway towards the edge of the observable universe, is moving in a different direction from the general stretching of space-time. It's like a little boat caught in an eddy.

Cosmologists theorise that there may be massive, unobservable structures hundreds of billions of light years away, pulling these galaxies in their direction. They imagine that the universe beyond what we can see (c. 17 billion light-years) may be very different from ours.

And some of us laugh at mediaeval theological speculation. How foolish those people were, building elaborate worlds of internally-consistent ideas, applying nothing but logic to extend their understanding beyond the few things they were certain that they did know, attempting to move from the seen to the unseen.

And now we lift our gaze from the CERN to the unCERN.

I wonder what Ben Jonson would have made of it all?

May I prevail on you all for charitable contributions to fund a new chair of Marmite Studies?

Sell your house now?

If Karl Denninger is right and the long-term trend for house prices is 3 times income, instead of 5 or 6 as it seems to be now, then houses remain overpriced in real terms.

So even though house sales are seizing up and prices dropping, shouldn't we go ahead and sell anyway?

Diary of a mayfly day trader

Wait! I was wrong! The Dow is up 32 points (09:42 EST)! Buy, buy! We've turned the corner! I am renaming this blog Bullwatch!

Oh no, only 14 points now (09:44 EST). Hold. Or maybe sell - over 50% of gains lost in only TWO MINUTES, goodness knows what could happen in a whole hour. Yes, sell! Sell!

Gosh, this is hard. Think I'll watch the TV news, they know what's going on.

UPDATE

OMG, down 32.42 (10:13 EST)!! In only 43 minutes! Over a 7-hour day that means 633.32 off the Dow!!

No, make that "!!!"

And there's another two days to go!!! !!! !!!

However could Mouton de Rothschild stand the tension?!!??

A note to newsreaders from the Pronunciation Unit

Say "new". Say "clear". Now, say "nuclear".

Just wondering

Why does having a ladder on your roof make you drive badly?

Paulson gets super-rich on short-selling

It's an ill wind... No relation to Hank, I suppose.

Komedy Korner

Harry Hutton points us to a sarcastic site that invites you to add your own bad assets to the proposed $700 billion bankers' buyout. Currently they're up to $415 billion. It's amazing what you've got in your attic and garage.

Bear market rally blues

Dow 18 Sept: 11,019.69
Dow 19 Sept: 11,388.44
Dow 22 Sept: 11,015.69
Dow 23 Sept: 10,854.17

Inspired by Nick Drew's bardic effusions, I offer a pastiche of Lonnie Donegan:

Does your equity lose its value
On the market overnight?
If your broker says don’t do it
Do you buy loads more in spite?
Can you hedge it with short selling?
Can you get the timing right?
Does your equity lose its value
On the market overnight?

Wall Street is waking up

The Dow has just dropped to 4 points below where it closed last Thursday; the 368-point sigh of relief it gave on Friday has been replaced by slightly sharper take of breath. It seems the equity traders are beginning to understand the details of the toxic buyout "solution". The rest of this week should be interesting.

Derivatives: the "pub with no beer"

You could be forgiven for thinking that financial bloggers are hysterical and fantasy-ridden, far more so than the middlebrow newspapers that have only just caught on to the crisis.

Until you learn the facts.

The money system is so enormous and complex that nobody knows all the details, but it is estimated that in 2007, the entire world's GDP was equivalent to $54.35 trillion.

Derivatives - mutual insurance without the requirement on anybody to hold any assets - have recently been estimated by the Bank for International Settlements at over $1,000 trillion.

To put it visually (figures are in trillions of dollars):

And now a quotation on default rates - the percentage of bonds (promises to repay) that fail:

NEW YORK, Aug 1 (Reuters) - The U.S. junk bond default rate rose to 2.25 percent in July from 1.92 percent in June, as a credit crisis and sluggish economy pushed more companies into bankruptcy protection, according to data from Standard & Poor's released on Friday.

The default rate is likely to rise to 4.9 percent over the next year and could reach 8.5 percent if economic conditions are worse than expected, S&P said in its report.

Note that in the case of derivatives contracts, a default rate of less than 5.5% would equate to a wipeout of a whole year of the entire world's earnings.

No wonder that governments are absolutely determined that confidence in the system must be maintained, at whatever cost. It may take a long time to blow up a balloon, but it doesn't burst slowly.

And how do we get out of this threatening situation? How on earth, to use a different analogy, will the cat ever climb back down from so high a tree?

Lehman and that $8 billion

Lehman administrators have filed a court order for the return of $8bn that was transferred from the UK to the US just before the firm's failure. The radio news this weekend said (my phrasing) that it was Lehman's practice to park the money in the US overnight to earn interest.

Reuters says "Administrators for Lehman's European operations have questioned why $8 billion was transferred to New York from London just before the bank collapsed."

Was this really standard practice? Couldn't the money have been earning (possibly higher) interest overnight here? Do other firms do the same?

Or was it part of a Lehman plan to draw assets back onto US soil in preparation for its bankruptcy, in order to favour American creditors over foreign ones, as London Banker mooted on 12 September?

Another prophet foresees market panic

Thus Jim in San Marcos:

This week, look for a serious drop in the DJIA of 4,000 to 6,000 points and the close of the stock market for a week or two. [...] Most people have sensed something is seriously wrong with the markets and are heading for the exits (even the President said so). With the automated computer trading system in place, this could be very fast and furious,--sleep late and wake up broke.

Monday morning at the brokerage houses you’ll hear; “Sell everything; I didn’t sleep a wink the whole weekend.” It will be a group effort.

Carte Blanche; take cover!

We're back in the days of Dumas' Cardinal Richelieu (*), as London Banker points out. He quotes Section 8 of the proposed new US financial legislation:

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

How is this to be subjected to democratic accountability?

I essayed a paranoid spoof on Friday, only to find it exceeded by reality. See Karl Denninger for more details of the amazing, autocratic powers proposed in the new US financial legislation.

This is not a sweary blog, but if that becomes law, head for the bl**dy hills.

Denninger also explains how the $700 billion limit can be manipulated to absorb infinite amounts of bad debt, by discounting on resale and then taking on more fresh garbage. He says:

I predict that if this passes it will precipitate the mother and father of all financial panics, although exactly when the "short bus" riders who inhabit the equity market will figure it out remains to be seen.

_____________________________

(*) see Wikipedia:

"Dec. 3, 1627

It is by my order and for the good of the state that the bearer of this has done what he has done.

Richelieu"

Another letter to the Spectator

Let's see if they bin this one: (n.b. I've made a few alterations in the hour since posting)

Sir;

Your leader (“Long live capitalism”, 20 September) calls for a “kick up the backside” to the banking industry. That kick should be aimed elsewhere.

Light regulation and free markets, which the Spectator advocates, depend on the self-regulating properties of a sound money system. But like many others, the British government has long used the fiat nature of its currency-cum-credit to solve temporary problems and create permanent ones. The long-term real growth of GDP is said to average 2.5% annually, yet since 1963 the Bank of England’s own statistics show that the M4 money supply has grown by about 13.5% p.a. Over the same period, RPI has averaged about 6.5% p.a. At this rate, the banks will ultimately own everything.

For the first 5 years of the New Labour administration, M4 growth was, not exactly prudently, but less recklessly, restricted to around 8.25% p.a. However, by 2003 the FTSE had halved from its 2000 peak, and there was gloomy talk of recession; and over the next five years M4 suddenly averaged nearly 14%. Then house prices doubled; hinc illae lachrymae.

How did this happen? The system of fractional reserve lending means that banks can loan out a multiple of what they retain in their vaults. State regulators set the rules for the required marginal reserves, and when reserve requirements are halved, lending can double, and usually will; like Labradors, bankers will have whatever is put on their plate.

Knowing this tendency, the British and American governments have not merely permitted this crisis to happen, but positively created it by a deliberate relaxation of monetary controls. Worse still, they have now decided that instead of destroying excess credit by asset deflation, bankruptcies and share collapses, the monetary inflation is to be consolidated by absorption of bad debt into the public finances.

I don’t see how this can end well. Some commentators are already saying that, if passed unaltered, the proposed American financial legislation could, once properly understood, trigger a major crash in US financial shares, possibly before this letter is published.

I think the Spectator and its economically savvy readers should put on fresh pairs of winkle-pickers, and gather in Whitehall and Washington for some kicking practice.

Yours faithfully

I'll stay on the outside, thanks

Actually, I hope all the top bankers and star traders keep their huge bonuses (one year's worth of which would keep people like us for life), and I hope none of them gets jailed for their corruption/criminal incompetence.

Because otherwise, I might have to believe in Big Brother, and love Him.

I don't BELIEVE it

So I asked for a strong tea. And when I lifted the lid to stir it, I saw they'd put in a single bag, but only half-filled the pot with hot water.

Suddenly, I'm less deterred by fuel surcharges on foreign holidays.