A fuss about banks

British banks are being criticised for not passing the 1.5% rate cut on to their customers, but retaining some or all of the difference. Presumably they are trying to rebuild their reserves, for running down which they have been much more justifiably criticised. Or do we wish them to remain insolvent, which, as Rick Santelli has admitted, they are?

As my wife said, what do we expect the banks to do: take in washing? Look after your pets in holiday time? Run daycare for the elderly in their conveniently-located, brightly-lit premises?

Inflation-adjusted Dow

( htp: The Mogambo Guru)

As I said in my recent letter to the Spectator, "a return to 6,000 points should be unsurprising, and a low of 4,000 not impossible."

Just asking

A propos the (I would say) criminal systematic financial looting of past years:

1. Is there any limit in scope or number to the pardon/s of a retiring US President?

2. Can an incoming President challenge or reverse any such pardon?

P.S. If Thomas J. DiLorenzo is right, perhaps the pardons should be made retrospective right back to 1781, just to be on the safe side.

Pro-am economics

But there are at least 15,000 professional economists in this country, and you’re saying only two or three of them foresaw the mortgage crisis?

Ten or 12 would be closer than two or three.

What does that say about the field of economics, which claims to be a science?

It’s an enormous blot on the reputation of the profession. There are thousands of economists. Most of them teach. And most of them teach a theoretical framework that has been shown to be fundamentally useless.

James K. Galbraith, 31 October 2008 (htp: Jesse)

And I thought I ought to start reading academic textbooks on economics. It seems that the difference between an amateur and a professional is that the latter gets paid.

Dow 4,900 - sometime?

I'm still working on looking at the Dow in real (CPI-adjusted) terms. Meanwhile, note that in two previous cycles, the Dow dropped to a third of its former peak: from 15 to 5, from 30 to 10 (see red dots).

If history repeats itself, then in real terms the Dow would again lose two-thirds of its value, from 66 to 22, which considering last autumn's peak would imply an ultimate low (if it happened all at once, tomorrow) of about 4,900 points.

But in the previous cases, the process took years to complete, and I would expect it to be a long affair this time, too. The Dow may not hit this 4,900 low in nominal terms.

Continuing this theme, may I draw your attention to the letter I emailed to The Spectator today?

Public service, public broadcasting, public nuisance

12 months' earnings in pounds sterling (official for the PM, reported for the others):

Yet another letter to the Spectator

Sir:

Your leader (“Riders On The Storm”, 1 November) suggests that current investor sentiment is “excessively negative”. That depends upon one’s historical perspective, in both directions.

A reversion to the mean (over the last generation) for UK house prices would be some 3.5 times household income, which on 2007 figures would imply average valuations around £120,000. Turning to shares, the progress of the Dow over the past 80 years (adjusted for consumer prices) indicates that a return to 6,000 points should be unsurprising, and a low of 4,000 not impossible.

But in addition to the business cycle and recurrent bubbles, there are deep linear changes at work. While maintaining the Western consumer in his fantasy of idle wealth, the East has been building up its human and physical industrial resources. We are focussing on the present recession, but not what the world will look like afterwards. When Asia has sufficiently developed its domestic demand, it will lose its enthusiasm for US Treasury debt, and the credit markets will tear at our economies with higher interest rates. Already, the search is well under way for an alternative to the US dollar as a world trading currency; and foreign investors, sovereign wealth funds and oil-rich governments are building up holdings in our bellwether businesses (e.g. Barclays Bank), thus converting imbalance into equity and exporting our future dividends.

Besides, the Dow and FTSE companies derive an increasing proportion of their income from abroad, so stock indices no longer reflect national prosperity. Real wages have stalled, and seem set to decline against a background of rising inflation and global competition; this, plus an interest rate correction, might strengthen the downward trend for house prices.

In short, successive governments have failed to repair our economic structure, and bear market rallies notwithstanding, I think we must eventually recalibrate our measures of normality.

Interlude

On holiday for a week. Best wishes to you all.

Aussie humour

At first I was prepared to believe that an Australian politican could be this aggressive, but despite Web-spread assurances that it's genuine, it come from this series.

Doing the rounds: explaining the world with cows

I think the main thing learned here is that, as Oscar Wilde said, when good Americans die they go to Paris.

The World Explained with Cows

DEMOCRAT You have two cows.Your neighbor has none.You feel guilty for being successful. Barbara Streisand sings for you.

REPUBLICAN You have two cows.Your neighbor has none.So?

SOCIALIST You have two cows.The government takes one and gives it to your neighbor.You form a cooperative to tell him how to manage his cow.

COMMUNIST You have two cows.The government seizes both and provides you with milk.You wait in line for hours to get it.It is expensive and sour.

CAPITALISM, AMERICAN STYLE You have two cows.You sell one, buy a bull, and build a herd of cows.

DEMOCRACY, AMERICAN STYLE You have two cows.The government taxes you to the point you have to sell both to support a man in a foreign country who has only one cow, which was a gift from your government.

BUREAUCRACY, AMERICAN STYLE You have two cows.The government takes them both, shoots one, milks the other, pays you for the milk, and then pours the milk down the drain.

AMERICAN CORPORATION You have two cows.You sell one, lease it back to yourself and do an IPO on the 2nd one.You force the two cows to produce the milk of four cows.You are surprised when one cow drops dead. You spin an announcement to the analysts stating you have down sized and are reducing expenses.Your stock's price goes up.

FRENCH CORPORATION You have two cows.You go on strike because you want three cows.You go to lunch and drink wine.Life is good.

JAPANESE CORPORATION You have two cows.You redesign them so they are one tenth the size of an ordinary cow and produce twenty times the milk. They learn to travel on unbelievably crowded trains. Most are at the top of their class at cow school.

GERMAN CORPORATION You have two cows.You engineer them so they are all blond, give excellent quality milk, and run a hundred miles an hour. Unfortunately they also demand 13 weeks of vacation per year.

ITALIAN CORPORATION You have two cows but you don't know where they are. While ambling around, you see a beautiful woman.You break for lunch.Life is good.

RUSSIAN CORPORATION You have two cows.You have some vodka.You count them and learn you have five cows.You have some more vodka.You count them again and learn you have 42 cows. The Mafia shows up and takes over however many cows you really have.

TALIBAN CORPORATION You have all the cows in Afghanistan, which are two.You don't milk them because you cannot touch any creature's private parts.Then you kill them and claim a U.S. bomb blew them up while they were in the hospital.

IRAQI CORPORATION You have two cows.They go into hiding.They send radio tapes of their mooing.

POLISH CORPORATION You have two bulls.Employees are regularly maimed and killed attempting to milk them.

FLORIDA CORPORATION You have a black cow and a brown cow.Everyone votes for the best looking one.Some of the people who like the brown one best, vote for the black one.Some people vote for both. Some people vote for neither.Some people can't figure out how to vote at all.Finally, a bunch of guys from out-of-state tell you which is the best looking cow.

CALIFORNIAN You have a cow and a bull.The bull is depressed.It has spent its life living a lie.It goes away for two weeks and comes back after a taxpayer-paid sex-change operation. You now have two cows.One makes milk; the other doesn't.You try to sell the transgender cow, but its lawyer sues you for discrimination.You lose in court.You sell the milk-generating cow to pay the damages. You now have one rich, transgender, non-milk-producing cow.You change your business to beef. PETA pickets your farm.Jesse Jackson makes a speech in your driveway.Cruz Bustamante calls for higher farm taxes to help "working cows". Hillary Clinton calls for the nationalization of 1/7 of your farm "for the children."The legislature passes a law giving your farm to Mexico.The L.A. Times quotes five anonymous cows claiming you groped their teats. You declare bankruptcy and shut down all operations and the cow starves to death.The L.A. Times' analysis shows your business failure is Bush's fault.

htp: my wife's American cousin. GOK where it started, though.

A credible, horrible warning

In a fearsome, plain-speaking guide to the long-standing debt problem, Karl Denninger explains why he believes we are now in dire crisis. If the insolvent continue to be bailed out with money that the government itself must borrow from elsewhere, the American government's own credit will be destroyed. And non-Americans are in an even worse plight, in fact may trigger the explosion:

We may be days away from an international credit incident originating outside of the United States. Foreign nations, banks, and businesses have "levered up", or taken more risk, than we have. They too have chosen to lie.

This will hammer the stockmarket:

You have already seen nearly half of your money disappear.
You could see another half disappear - within days.

This is an implication of the graph I did on Sunday (see below), looking at the Dow adjusted for CPI inflation since 1928. A return to 4,500 points would seem to be reversion to the long-term norm - but to have it happen all at once, from its peak last October, is a scary prospect.


UPDATE

Tyler concurs, with respect to the UK economy, because of our dependence on income from financial services and associated services:

"Brown's boom was built on a group of industries that are now facing an Almighty bust..."

Throw the grenade, or put it in your pocket?

I was educated in the wrong things. Karl Denninger explains - in a way I struggle to understand fully - how the US government's schemes to support the banks must ultimately be financed by Treasury bonds on such a scale as to seriously damage their credit rating and pump up interest rates to a ruinous level.

This is a consequence of avoiding taking the right action, i.e. finding out who's insolvent and letting them go bust. I still remember Henry Paulson's panicky look when Congress threw out the bailout bill the first time.

Once you've pulled the pin out of a grenade, you can throw it, or you can hang on to it. Madly, it looks as though the government is following the latter course, and hopes to be able to handle the consequences.

UPDATE

Relevant to the above is Wat's resume of public debt history in the UK since World War II, showing how important it is NOT to get into debt, to fight inflation and control the finances.

A reason not to invest in pensions?

Argentina appears to be planning to seize private pension funds. Who is to say that, in extremis, it couldn't happen here? They're already taking tax on the dividends that were tax-free until 1997.

The Great Theft begins

I comment on The Great Depression of 2006:

Once inflation gets going it'll be Alice in Wonderland, I think. Real wages have to come down in relation to earnings in competitor countries, and house prices have to come down with respect to wages.

So whatever the nominal value, I think we in the West shall see a real depreciation in both houses and the stockmarket, plus a real decline in earnings relative to both consumer prices and foreign labour.

Am I wrong?

Do-it-yourself Dow prediction

I've battled Windows Vista to produce the above graph, which takes the Dow at the beginning of October each year from 1928 on and adjusts it for CPI.

The red dot is where we were on Friday; some are saying it could hit 6,000 or 4,000, also indicated (adjusted for CPI as at the end of September 2008).

The question is, how much of the fantastic gain of the past 20 years or so will be undone, and over what period? Where would you say we "ought" to be? (Not that Mr Market cares, obviously.)


Connect up the lows of the early 30s and the 70s and extend the line, and you get what? An implied 2,500 or so. Connect up the highs of 1929 and the 50s and extend the line, and you end up about where we were at the start of this month, nudging 11,000.

"Faites vos jeux, Mesdames et Messieurs." Too rich for me, I think.

UPDATE

Karl Denninger is now talking about the S&P 500 falling to 500 points, a level it first broke above in March 1995; this would mean a further c. 50% drop from its close on Friday.

And he gives his reasons (plausible to me) why the American economy is in worse shape to overcome the setback, than it was in the 1930s.

A note on abortion

We tried to watch a bit of "Sex and the City" last night, just to see why it's talked about. This episode was "Coulda, Woulda, Shoulda". The friends were, by turns, lying and boasting about their abortions. Apparently a baby wasn't in someone's "plan"; it's not as though these nitwits had any plans worth considering - for example, evidently they didn't plan to have a condom in their handbag. I've never seen a programme so louche and vapid. What can its makers think of us all?

I pass over the religious objections to abortion, and the arguments (to my mind, wholly specious and self-serving) about the humanity of the unborn. Do please spare me the hate mail.

But why is the political class so keen on it? And on the experimentation that continually encroaches on the right of human beings to live? (Don't tell me it will cure cancer and all the other things that make us mortal.)

Is it a financially-motivated plan to murder the poor, the deformed and the sick in their mother's wombs, so that they will not live to become benefit dependant and/or petty criminals? Is it about money? Has money become more real, more valid, than the people who earn and spend it?

Don't think it'll work anyway. A while back, I saw an interview with some serial shagger who didn't give a fig for any of his girlfriends, but there's one instinct he still retained. Remarking on his last, he said, "At least I got a kid out of her."

Abortion is a bloody and chaotic approach to sexuality and relationships. This study aims to correct some of the misunderstandings on the subject by both "conservative" and "liberals", and tends to support the greater use of contraception.

Will that work?

Are we headed for the Red Pond?

Recycled from my post of April 1st, 2008.

How do we get out of this?

I'm trying to understand the situation, and it's worrying that many experts freely admit they don't understand, either. Here is the simplified picture I'm building up:

Democratically-elected governments wanted their voters to get back the feelgood factor after the tech bubble burst and the stockmarket pretty much halved. So they undid the belts round the banks' waists and said, go eat.

The banks went at it like labradors at a full plate of Gravy Train, and got very fat on lending far too much money, with very few questions asked. Houses doubled in value and became the new stockmarket.

Then the bust, because whatever you treat like an investment will behave like one. Except houses are unlike shares: if you lose all your money on them you have nowhere to live, and this will make the losers very angry and vengeful. Also, housing is illiquid, which is bad news for banks, who can't put bricks and fridges in their vaults. And if the banks go bust their richer depositors (some of them Party contributors?) will get very upset, also the businesses that hold their balances in cash. This last is very important: a small fraction of bank accounts holds the majority of uninsured cash.

So now the "rescue". Billions - hundreds of billions - poured into the system. Who will pay the bill?

• Not the shareholders, since (in most cases) we didn't let the banks collapse.


• Not the majority of retail depositors - they have votes, and enough education to make trouble.


• Not the poor - they have nothing, and are more likely to vote for whoever keeps paying their benefits. That's if they vote at all, but non-voters will become very interested in democracy if their money runs out.


• Not the seriously rich - they have most of their personal wealth safely outside this thieving country and if annoyed, will not only move out but close businesses that employ many voters, which will dump smelly stuff on the heads of the Government and leave a big tax hole to boot.

I can see only two classes of juicy victims: taxpayers, and people who have saved up money.

Very few people understand that the combination of income tax plus National Insurance and employer's NI, is effectively a marginal tax rate on income of over 40% on all but the worst-paid. Raising direct taxation much more will only increase the incentive to give up work altogether, or to lay off employees. And there's only so much benefit to be gained by shipping-in zillions of low-paid foreign immigrants to replace them - that dodge is getting to be a public embarrassment, politically as well as economically.

Indirect taxation tends to be regressive, hitting the poorer worse (as a proportion of their income) - which implies a need to increase their benefits. Not impossible - there's a plan afoot for an extra levy on power bills, to finance heating costs for the poor. Doing it in this roundabout way preserves the illusion that we are a lower-tax economy, and appeals to the sneaky, surreptitious personality of the man currently running the country. There will be other subtle and economically suspect ways to raise tax, and Gordon Brown thought up many during his incumbency as Chancellor of the Exchequer - which, I think, has not yet ended.

And then there's the attack on savers. Means-testing is a good one, yielding a very high effective tax rate. Last time I looked, the combination of minimum income guarantee and savings credit for pensioners worked out to a 40% tax on poor pensioners who'd increased their pension income by voluntary savings.

Inflation is a fruity possibility. The government is going to have to borrow staggering amounts in coming years, to pay for the current bailout and future mass unemployment, so if the returns on its bonds can be lower than inflation it'll help the public finances a bit.

But who's got the money to sub our kleptomaniac Government? Maybe they won't bother to ask the people to trust them any more; maybe they'll just ask the Developing World to buy-in with their sovereign wealth funds. In other words, sell the country, piecemeal.

Isn't that what's happening? The younger generation will be taxed and worked half to death, the older ones will find they're not as wealthy as the illusory boom led them to believe, and meanwhile the New Pan-European Bureau-Aristocracy is selling us all to foreign powers and foreign businessmen, who do not have to answer to the electorate?

I must study the Highland Clearances, and the Flight of the Earls.

Stating the obvious

Recession is here, warns Item Club

UPDATE: Britain surrounded by water. More on the main news bulletin, next.

Goldman Suchs

Read, and hang your head.