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.