Jan 31, 2008

Horace how those in honor fall

Many shall be restored that now are fallen and many shall fall that now are in honor.

~ Horace, Ars Poetica

Frank Shostak on Fed balance sheet expansion from 1931-1932

[T]he pace of the Fed's pumping in terms of the yearly rate of growth of its balance sheet (Fed Credit) jumped from 10.9% in August 1931 to 154% in July 1932. Yet bank lending had continued to decline — falling on average during this period by 22% (we suggest that this occurred on account of declining pool of real funding). As a result, the monetary measure AMS fell during this period on average by 11.3%.

~ Frank Shostak, "Why Is Bernanke Trying to Fight the Bear?," Mises.org, January 30, 2008

Ben Bernanke on protecting the economy from a stock market collapse

History proves, however, that a smart central bank can protect the economy and the financial sector from the nastier side effects of a stock market collapse.

~ Ben S. Bernanke, "A Crash Course for Central Bankers," Foreign Policy magazine, September/October 2000

Jacob G. Hornberger on the financial iceberg dead ahead

My advice? Given that the American people and their federal officials are not yet ready to give up on either their welfare state or the warfare state – and the massive expenditures that are needed to fund them, my advice would be the same I’d give to people on a ship heading directly toward an iceberg: Brace yourselves.

~ Jacob G. Hornberger, "Brace Yourselves," LewRockwell.com, January 30, 2008

Jan 30, 2008

Hitler on ignorance

What luck for rulers that men do not think.

~ Adolph Hitler

Frederic Bastiat on the proper functions of government

A science of economics must be developed before a science of politics can be logically formulated. Essentially, economics is the science of determining whether the interests of human beings are harmonious or antagonistic. This must be known before a science of politics can be formulated to determine the proper functions of government. Immediately following the development of a science of economics, and at the very beginning of the formulation of a science of politics, this all-important question must be answered: What is law? What ought it to be? What is its scope; its limits? Logically, at what point do the just powers of the legislator stop? I do not hesitate to answer: Law is the common force organized to act as an obstacle to injustice. In short, law is justice."

~ Frédéric Bastiat

Paul McCulley on Fed rate cuts

The Fed needs to get the overnight lending rate close to zero. It's the right medicine since debt deflation in housing is upon us. The notion that the Fed should be tightening is preposterous.

~ Paul McCulley, Bond Fund Manager, PIMCO, Bloomberg TV, January 30, 2008

NAR: "Homeownership is a safe, secure way to build long-term wealth" (2006)

It's a great time to buy or sell a home.

Contracts for home sales in August are up 4.3% and the outlook is for home prices to increase next year.

Former Federal Reserve Chair Alan Greenspan recently said the housing prospects are looking up...

Homeownership is a safe, secure way to build long-term wealth.

~ National Association of Realtors, full-page advertisement placed in WSJ, USA Today, and The New York Times, November 3, 2006

Alan Greenspan: "Most of the negatives in housing are probably behind us" (2006)

Most of the negatives in housing are probably behind us. The fourth quarter should be reasonably good, certainly better than the third quarter.

There are early signs of stabilization... It's not over.

The evidence is that we're beginning to see a flattening in statistics for sales of new homes. The rate of construction is well below the rate of purchases. [The U.S. is] beginning to dig into the inventories of unsold new homes.

~ Alan Greenspan, former Federal Reserve Chairman, speaking at a conference sponsored by the Commercial Finance Association, October 26, 2006

Jim Cramer forgives the Fed

The Fed is forgiven... I am bullish.

~ Jim Cramer, CNBC, January 30, 2008

Paul Samuelson on the shortcomings of fiscal policy

In the early stages of the Keynesian revolution, macroeconomists emphasized fiscal policy as the most powerful and balanced remedy for demand management. Gradually, shortcomings of fiscal policy became apparent. The shortcomings stem from timing, macroeconomic theory, and the deficit itself.

— Paul Samuelson, Economics, 15th edition (1995)

Chris Whalen on derivatives market

One operations officer tells The IRA that his biggest headache is policing the tendency of equity traders, for example, to take punts in commodities or other asset classes, often using the same type of cash settlement index instruments employed with horrible effect by Mr. Kerviel. Such shenanigans are made possible due to the wonders of cash settlement derivative contracts. Financial contracts which settle in cash and do not require the seller to deliver some tangible asset upon maturity are gaming instruments, not investment vehicles. Such contracts actually enable young masters of the universe like Mr. Kerviel to multiply risks exponentially. The settlement procedures for derivatives also provide ample opportunities for a smart trader to game the system, thus the possible permutations of op-risk events are open-ended. The same phenomenon, incidentally, is visible in the way that third-party mortgage originators so handily gamed bank loan approval systems in creating the $1 trillion subprime structured asset debacle. Whether you speak of losses due to unauthorized trading in index contracts or write-downs of Collateralized Debt Obligations, the common cause in both cases is the unregulated and unrestrained use of derivatives to create instruments and risk exposures which are not transparent and which lend themselves to at least the appearance of intentional deception if not fraud.

~ "Rogue Traders and Economic Capital", IRI, January 28, 2008

Lew Rockwell on Arthur Burns' political gaffe

[Arthur] Burns--whom Murray [Rothbard] described as sounding like W.C. Fields without the humor--answered, the Fed chairman has to do what the president wants, or "the central bank would lose its independence." He meant, of course, its ability to live high on the hog, and reward its constituents in banking and Wall Street.

A retired Fed official once told me that was "the most damaging statement" ever made by anyone associated with the central bank. It certainly meets Michael Kinsley's definition of a political gaffe: inadvertently telling the truth.

~ Lew Rockwell, "Great Moments in Central Banking," LewRockwell.com blog, January 21, 2008

Banker Rudolph Peterson on perpetual prosperity (1966)

Businessmen are concerned about the future, but they are also remarkably confident. Among the most confident is Banker Peterson, who believes that with intelligent and courageous policy actions, men can make prosperity perpetual, create great societies at home and grand designs abroad. In the next five years, he observes, the number of U.S. families will grow by 5,000,000, or 10%, providing a tremendous expansive force and placing many new demands upon the nation's banks and businesses. "The next big thrust in the economy," he says, "will come from urban development — new concepts of housing, transportation, pollution control. All these things are sitting on the shelf, ready to go, and when the war in Viet Nam ends, domestic development will move fast." America's economy need never run down, because, says Rudy Peterson, "there are so many things that need to be done."

~ Time, "The Year of Tight Money and Where It Will Lead," December 30, 1966

(Rudolph Peterson is president of California's Bank of America.)

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Ben Eldred on Japanese inflation

After waiting so long, the Bank of Japan may well end up with the wrong sort of inflation. Rising energy and food prices are bad news for firms and consumers and will provide a further headwind at a time when Japan already has to contend with a sharp slowdown in the U.S.

~ Ben Eldred, Senior economist, Daiwa Securities, "Japans Long Awaited Inflations Saps Spending, Growth," Bloomberg, January 29, 2008

Jan 29, 2008

Bill Bonner on what does and does not create wealth

A word to the wise: you can’t really make people wealthy by resorting to "Zimbabwe economics." A society grows rich by producing things...and saving money. There is no other way. Cheaper credit won’t do it. More consumption won’t help. Printing money – and dumping it from helicopters – is a losing proposition.

~ Bill Bonner, "Zimbabwe Economics," LewRockwell.com, January 29, 2008

Robert Higgs on economic stimulus

Economic stimulus is like draining the deep end of the pool, pouring it back into the shallow end, and expecting the water level to rise.

~ Robert Higgs, historian and author of Crisis and Leviathan, from a speech given to the Mises Circle in Houston, Texas, January 26, 2008

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Jan 28, 2008

Joseph Mason on derivatives

The contingent liability of banks to support off-balance sheet assets is a huge source of volatility in the financial markets and that a system which supports over $9 trillion worth of GSE and private label securitizations atop $6.7 trillion worth of US bank deposits is inherently unstable.

~ Joseph Mason, Drexel University Professor, "Rogue Traders and Economic Capital," IRI, January 28, 2008

Thomas Russo on intervention

Absent government intervention, the economic picture is very grey but with government intervention you have a decent chance of stabilising the picture.

~ Thomas Russo, Vice President Lehman Brothers, "IMF Head in Shock Fiscal Warning", Financial Times, January 27, 2008

Dominique Strauss-Kahn on credit crunch

The intensifying credit crunch is so severe that lower interest rates alone will not be enough to get out of the turmoil we are in. I don’t think we would get rid of the crisis with just monetary tools, a new fiscal policy is probably today an accurate way to answer the crisis.

~ Dominique Strauss-Kahn, IMF Managing Director, "IMF Head in Shock Fiscal Warning", January 27, 2008

Jan 27, 2008

Alan Greenspan on recognizing asset bubbles

We at the Federal Reserve considered a number of issues related to asset bubbles--that is, surges in prices of assets to unsustainable levels. As events evolved, we recognized that, despite our suspicions, it was very difficult to definitively identify a bubble until after the fact--that is, when its bursting confirmed its existence.

~ Alan Greenspan, Federal Reserve Chairman, remarks at a symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming, August 30, 2002

Moody's CEO: In hindsight, our models didn't work

Are there things we need to change? Yes. It would be completely disingenuous of me to sit here and try to tell everyone that everything worked perfectly. We and others have to retool our processes. In hindsight, it's clear to us that there were fundamental failures in key assumptions supporting our analytical models.

~ Raymond McDaniel Jr., chairman and chief executive of Moody's Corp., speaking from the World Economic Forum in Davos, January 18, 2008, as reported in Fortune, "Financiers never say 'sorry'," January 25, 2008, by Peter Gumbel

Sean Corrigan: Dot-com speculators should look in the mirror

What never ceases to amaze, is people’s prodigious ability to indulge in a little cognitive dissonance when they think it will make them rich.

For several years past a coterie of solid, sceptical writers and contrarian investors have been cogently pulling apart matters like GM’s wild pension fund assumptions, GE’s earnings smoothing from its unregulated, quasi-banking arm at GE Capital, Cisco’s aggressive use of pooling, Intel’s Dot.Com ‘investment’ gains, Microsoft’s stock options scheme, Dell’s aggressive use of put options to pad the income statement, a host of senior Execs’ avoidance of full regulatory filing by the use of total return swaps and non-recourse loans to cash in their options grants, IBM’s ability to achieve double digit earnings growth with barely changed revenues – and more besides.

But ain’t it funny how nobody listened to any of this when stocks were going up 5% a day just 'cos Battapaglia & Blodgett, Abbey & Acampora, and Glassman & Greenspan were egging the mug punters on to believe in the New Paradigm?

Oh, those bandits in the boardrooms, those shyster lawyers, those crooked accountants and devious wildcat bankers, that energy regulation-killing Rubin, that options-expense scotching Liebermann, that money-pumping, cheerleading Fed Chairman – why could they not just continue with the game just a little longer so I could have got mine out before the House of Cards came tumbling down!

I’m sorry, people! Most of you were warned, you just chose not to heed it, so, when you start moralizing about ‘Infectious Greed’, just remember to look in the mirror when you mouth the words.

~ Sean Corrigan, "Take It Like a Man," LewRockwell.com, July 24, 2002

Winston Churchill on Mussolini (1938)

It would be a dangerous folly for the British people to underrate the enduring position in world history which Mussolini will hold; or the amazing qualities of courage, comprehension, self-control and perseverance which he exemplifies.

~ Winston Churchill, 1938

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Edward Ketz on proposed bills to prevent subprime foreclosures

It punishes those who have acted prudently and rewards bad decisions by homeowners who bought what they could not afford. It gives incentives for future homebuyers to act rashly, because they may believe Washington will rescue them from error and greed.

~ Edward Ketz, accounting professor, Penn State University, "Freezing Teasers," Mortgage Meltdown blog, December 17, 2007

ERISA puts pensioners at the front of the line of corporate liabilities

As of Labor Day 1974, the capital structure of every firm with an unfunded vested pension liability was altered. The Employment Retirement Income Security Act (ERISA) gave these liabilities a claim equal to a federal tax lien; that is, senior to debentures, bank loans, and the claims of other corporate creditors. Prior to ERISA, the legal claims of beneficiaries were limited to the assets of the pension fund.

~ Linda J. Martin and Glenn V. Henderson, Jr., "On Bond Ratings and Pension Obligations: A Note," Journal of Financial and Quantitative Analysis, December 1983

Peter Schiff on the coming decline of Wall Street

Most importantly, Wall Street's reputation, once its greatest asset, is also in jeopardy. Just as Detroit lost its reputation for high quality cars, bankrupted dotcoms and worthless subprime debt are creating similar problems for Wall Street. You can't expect to keep your customers if you continually sell them shoddy merchandise. Wall Street has spread hundreds of billions of dollars in losses around the world and in so doing shattered its reputation with some of its best customers.

However, in the last few years Wall Street has not only screwed customers but their own shareholders as well. At one time all of our major investment banks, such as Goldman Sachs, Lehman Brothers, Morgan Stanley, Bear Stearns, Smith Barney, Shearson, E.F. Hutton, Kidder Peabody and Solomon Brothers, were private partnerships. However, during the 1990's they all went public (of course many merged first so they no longer exist as independent firms). Goldman Sachs was the last to go public in 1999. The transition allowed Wall Street partners to cash out, transferring future risks to new shareholders. In so doing they were able to capitalize on bubble valuations, yet through lavish bonus compensation packages, still keep the lion's share of the profits for themselves. In other words they got to have their cake and eat it too.

As a result of this transfer of risks, the business models of America's leading financial institutions shifted, with profits coming from riskier sources such as proprietary trading and structured finance. To line their own pockets, Wall Street willingly exposed its shareholders to risks that it would never have assumed with its own capital. This moral hazard set the stage for the enormous losses shareholders are now suffering, and are a direct consequence of the phony profits booked in prior years. However, while shareholders are left holding the bag, Wall Street's former partners, now turned employees, have already walked away with huge IPO and stock option windfalls, as well as lavish bonuses paid on phantom profits.

~ Peter Schiff, "Another One Bites the Dust," Gold321 Ltd, January 25, 2008

Jan 26, 2008

Jeremy Siegel on the Enron verdict

Conviction on all 49 counts makes this unlikely in the future. This is good: it restores confidence.

We were in the biggest bubble in history... I don't think that's going to happen for a long time... There were lessons I think that were learned.

~ Jeremy Siegel, as appeared on CNBC, May 26, 2006

Jan 25, 2008

Albert Einstein on stubbornness

Insanity: doing the same thing over and over again and expecting different results.

~ Albert Einstein

Robert Heller on Fed intervention

The stock market is certainly not too big for the Fed to handle.

~ Robert Heller, Former Federal Reserve Governor, The Wall Street Journal, October 27, 1989

Jan 24, 2008

James Lockhart, OFHEO, respond to increased loan limit

We are very disappointed in the proposal to increase the conforming loan limit as we believe it is a mistake to do so in the absence of comprehensive GSE regulatory reform. To restore confidence in the markets we must ensure that the GSEs’ regulator has all the necessary safety and soundness tools.

Yesterday Chairman Dodd talked about moving a GSE reform bill early this year. We are ready to work with him and the Senate Banking Committee. We will also be working with Fannie Mae and Freddie Mac to ensure that any increase in the conforming loan limit moves through their rigorous new product approval process quickly and has appropriate risk management policies and capital in place.

~ James Lockhart, OFHEO Director, January 24, 2008

William L. Anderson: Paul Krugman blames the late '90s tech bubble on "animal spirits"

Even when [Paul] Krugman "gets it right," he actually is wrong. In recent columns, he has admitted that there were speculative excesses in the stock market and elsewhere. However, in Krugman's world, that just happens because such unwise speculation, in his opinion, is simply nothing more than a trait of capitalism. Like most noneconomists posing as economists, Krugman does not acknowledge what Carl Menger wrote in the first lines of the first chapter of his path-breaking Principles of Economics: "All things are subject to the law of cause and effect."

Yes, Krugman admits there was unwise mass speculation during the latter years of the "fiscally responsible" Clinton Administration, yet he has no idea from whence it came, other than to place his faith in Keynes' dictum that these things were the results of the "animal spirits" that are released by capitalism. While Austrians can clearly point to the reckless credit expansion by the Federal Reserve during the late 1990s as the cause of the speculative bubbles, Krugman has nowhere to turn other than to say that capitalists are stupid people who need the guidance of the state.

~ William L. Anderson, "Krugman the Keynesian," Mises.org, September 11, 2003

William L. Anderson: "Paul Krugman is not an economist"

It does not bother me to read [Paul] Krugman's anti-Republican rants. What does bother me is that the man pretends to be something he clearly is not: an economist.

That is correct. Let me say it again. Paul Krugman is not an economist. His colleagues in the economics profession and the editorial board of the Times may call him an economist, but that does not make him one.

This is harsh criticism, I realize, so I must explain my views in full. Yes, Krugman has a Ph.D. from MIT in economics, but his writings, both popular and academic, demonstrate that he does not believe in laws of economics. Instead, like most folks with socialist leanings, he believes that the state is both omniscient and omnipotent and simply by fiat can eliminate those pesky little problems caused by scarcity.

~ William L. Anderson, "Krugman the Keynesian," Mises.org, September 11, 2003

William L. Anderson on Paul Krugman's love affair with the Clinton administration

If all we read on economics were [Paul] Krugman's columns, we would learn that Bill Clinton gave us prosperity because his administration pushed a tax increase through Congress in 1993. That tax increase, says Krugman, enabled us to "balance" the federal budget, which magically created a good economy. (That the federal budget actually was never "balanced" in conventional accounting terms, and that the alleged balanced budgets occurred late in Clinton's term during the Fed-created unsustainable boom, and not when taxes were increased seems to be off Krugman's radar screen.)

Furthermore, his columns claim that Clinton's government was the model of "fiscal responsibility," and is always full of praise for the former president's policies. My guess is that if the Clinton Administration were in power now and following basically the same budgetary and legal priorities as the Bush Administration is currently doing, he would be writing excuses for Clinton.

~ William L. Anderson, "Krugman the Keynesian," Mises.org, September 11, 2003

Jeremy Grantham on the credit crunch

Markets are well into a massive repricing of both risk and asset prices but it has far to go outside the original subprime area, where repricing may have already run its course.... This of course will be a painful process and will be a considerable drag on economic activity. Unfortunately, it is likely to take several years. To house clean completely by the end of 2010 would be a reasonable target... By the end of this credit crisis, perhaps better defined as a sloppy-debt-issuing crisis, we will be lucky if the amount of write-downs does not start with a “T.”

~ Jeremy Grantham, Managing Director, Grantham, Mayo Van Otterloo, "The Minsky meltdown and the problem with quantery," Seeking Alpha, January 24, 2008

(Quote came from Grantham's quarterly letter to shareholders, January 12, 2008.)

Jan 22, 2008

Jim Cramer on the Fed's 3/4% rate cut

Today was the day the Federal Reserve finally blinked and woke up from its reckless stupor... Today may be the beginning of the end of this nightmarish market.

~ Jim Cramer, CNBC's Mad Money, January 22, 2008

(Without Tuesday's emergency move, Cramer said the market could have dropped 1,000 points or even 1,500 points. He said more cuts are needed to turn around the markets.)

Jan 21, 2008

Credit contraction's impact on economy, Davos 2008

The big question is how deep the losses in the banking sector will be. They will be at least $300 billion to $400 billion, which would be a moderate crisis. But if house prices continue to drop, we could see two or three times those losses, and it will one of the bigger financial crises.

~ Kenneth Rogoff, Former IMF chief economist, "Trichet, Summers See Less Optimism After Complacency", Bloomberg, January 21, 2008

Kevin Duffy on the credit bubble changing its spots

This credit bubble has morphed over the last several years. It was focused initially on residential real estate – amateur hour. The housing bubble obviously hit the wall in July, 2005 yet the stock market is up over 20%. What’s going on? It’s a credit bubble, not a housing bubble, and as the air has gone out of that balloon the torch has been passed to the professional speculator who shows up in commercial real estate, hedge funds, and private equity. It’s amazing how this bubble has changed its spots over the past few years. It also makes it more dangerous, because we have a new bubble on top of the older bubble. The new bubble has masked the damage of the older bubble, so we’ll end up with both deflating at the same time, which could be quite spectacular.

~ Kevin Duffy, "This Time It's Value Traps," Dollar Collapse.com, June 13, 2007, by John Rubino

William Penn on government

Government, like clocks, go from the motion men give them; and as governments are made and moved by men, so by them they are ruined too. Wherefore governments rather depend upon men, than men upon governments. Let men be good, and the government cannot be bad. . .But if men be bad, the government (will) never (be) good.

John Adams on civic responsibility

We electors have an important constitutional power placed in our hands; we have a check upon two branches of the legislature...  It becomes necessary to every [citizen] then, to be in some degree a statesman: and to examine and judge for himself... the... political principles and measures.  Let us examine them with a sober... Christian spirit.

~ John Adams

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John Adams & His House

Davos meeting 2008

Davos was marked last year by an irrational exuberance. I hope that we don't swing to the opposite this year and give in to an irrational depression.

~ Josef Ackermann, Deutsche Bank CEO, "Trichet, Summers See Less Optimism After Complacency", January 21, 2008

Jan 19, 2008

George Stephanopolous on the Ron Paul revolution

He’s tapped into something. I don’t know exactly what it is. All I know is whenever I go to a college campus, I see a lot of Ron Paul supporters.

~ George Stephanopolous, former adviser to President Bill Clinton and now host of “This Week,” ABC’s Sunday news program, "Movement Bigger Than Paul," The Facts, January 18, 2007

Murray Rothbard on the Progressive Era

Thus the foundations of today's massive state intervention in the internal life of the American family were laid in the so-called "progressive era" from the 1870s to the 1920s. Pietists and "progressives" united to control the material and sexual choices of the rest of the American people, their drinking habits, and their recreational preferences. Their values, the very nurture and education of their children, were to be determined by their betters. The spiritual, biological, political, intellectual, and moral elite would govern, through state power, the character and quality of American family life.

~ Murray Rothbard, Austrian economist

Jan 18, 2008

Alain Belda on naming Stanley O'Neal to Alcoa Board

Stan is a straightforward leader who focused on improving the operations of the business during his tenure at Merrill as part of his broader strategic vision for the firm.

-Alain Belda, CEO Alcoa, "Alcoa Names Former Merrill Chief Stan O'Neal to Board ", Bloomberg, January 18, 2008

Bill Laggner on credit default insurance

Complacency is near an all-time high and mutual fund cash positions are near an all-time low. Bank loan loss reserves are falling due to the illusion of credit default swaps. Everyone is writing default insurance.

~Bill Laggner, Bearing Asset Management, "Everyone is writing default insurance", Dollarcollapse.com, November 29, 2006

Bill Laggner on investment banks

Bearing is shorting the underwriter. We are short Bear Stearns, Merrill Lynch, Lehman. Anyone involved in structured finance.

Bear, Merrill and Lehman is who has let this structured finance get carried to a whole new level. It’s like each has a role in a play, you had an originator, you had a borrower, and you have Wall Street, buying and securitizing all that paper. This is who sold it to a group of people reaching for that yield.

~Bill Laggner, Bearing Asset Management, "Respect is Due", Hedgefund.net, March 23, 2007

Bill Laggner on housing/credit bubble bursting

We knocked the ball out of the park! When we shorted New Century, the stock was $50 or $40. Now, it’s nothing.

Have we learned something from that last bubble? Holding Global Crossing and WorldCom debt? Obviously not. This bubble is much more damaging to the economic landscape than the last.

There is a lot of debate, and we would argue we are in a recession. Is it a housing-led recession? We think so.

~ Bill Laggner, Bearing Asset Management, "Respect is Due", Hedgefund.net ,March 23, 2007

Bill Laggner on credit bubble

A lot of faith has been placed in central banking in general, too much faith. I Blame the Fed, Bank of Japan and central banking in general for a credit creation and increased monetary base, which has hurt consumers. 70% of the economy is consumer-based.

In the last bubble, the consumer got burned with telecom and technology now, the consumer is getting burned in the housing bubble. Burned on equities following the bust of the dot-com and telecom bubble, consumers put easy surplus credit toward real estate when the interest rate was low. The rising rate has been a feared trigger for default-fueled recession. I would say the recession is in the here and now. The Fed has baked a cake, and a lot of people came to the party via mortgage.

It is not going to be a soft landing.

~ Bill Laggner, Bearing Asset Management, "A Rough Summer", Hedgefund.net, August 28, 2006

Jim Cramer on financials

Jamie Dimon's books are a thing of nonfiction. Thank heavens Jamie Dimon seems like a pretty realistic guy.

With Wells Fargo you're dealing with fact, not fiction. Goldman Sachs is deeply rooted in fact.

~ Jim Cramer, Mad Money Host, CNBC, January 17, 2008

Bill Laggner on structured finance

I think you're going to get this constant flow of hits going forward, spread out over multiple quarters. A lot of people think that it doesn't matter what happens, that the Fed will rush in and find some way to save some of these larger institutions and the various assets that they own but I don't see how there's going to be a market for a lot of this paper for a long, long time.

~ Bill Laggner, Bearing Asset Management, "Dow Hits Record Despite Losses At Big Banks", Wall Street Journal, October 2, 2007

Kevin Duffy on the creators and destroyers of wealth

The interplay of wealth creation (entrepreneurship) and destruction (government intervention) is constantly at work; it is the focus and mood swings of investors that change. During the late 1920s investors turned their attention to the positive – the wonders of new technology such as autos, electrification, radio, and the telephone. Meanwhile, the negative – government goosing of the money supply in the name of maintaining a stable price level – went either largely unnoticed or celebrated by mainstream economists as a powerful force to prevent any serious downturn, both for the economy and the growing crowd of stock investors. The "New Economics" of 1929 was followed over time by similar flights of fancy regarding government’s ability to manage an economy: the U.S. "New Era" (late 1960s), "Japan Inc." (1989), and a global "New Economy" (2000).

In contrast, major stock market lows are often set when the failures of the state are exposed and become engrained in the public psyche. Depression (1932), world war (1941), expected return to depression (1949), inflation (late 1970s), and deficits (late 1980s) created the best buying opportunities for investors of the past 75 years.

~ Kevin Duffy, Bearing Asset Management, "Investing as an Entrepreneurial Endeavor," July 13, 2004

Jan 17, 2008

Jim Grant on commercial real estate

Rarely has commercial real estate yielded so little or appealed to so many as it does today. For that matter, rarely has it been priced so as to yield less than the cost of financing it.

~ Jim Grant, Grant’s Interest Rate Observer, February 9, 2007

C.A. Philips, T.F. McManus, and R.W. Nelson on the seeds of World War I inflation

Had it not been for the creation of the Federal Reserve System, there would have been a [lower] limit to the expansion of bank credit during the War. . . . The establishment of the Federal Reserve System, with its pooling and economizing of reserves, thus permitt[ed] a greater credit expansion on a given reserve base. . . . It is in the operations of the Federal Reserve System, then, that the major explanation of the War-time rise in prices lies.

~ C.A. Philips, T.F. McManus, and R.W. Nelson, Banking and the Business Cycle: A Study of the Great Depression in the United States (1937):

Bill Laggner on CDO implosion

We had what is now getting called the 20/90 Model. It had been priced at $0.90 on the dollar when in fact it is worth $0.20 on the dollar.

The real question for [financial service] is, do we get together and write this stuff down at once—collective solidarity? Or does it happen piecemeal, with the hope the Fed will cooperate?

It does not matter what The Fed does. It is not a liquidity problem, it is a solvency problem.

First it was the homebuilder and lender. The next to leave the denial stage and go into panic mode was the mortgage insurer. But who is the owner of the paper? Where does it reside? Well, with hedge funds and on the balance sheet of the finance sector.

~ Bill Laggner, Bearing Asset Management, "Armageddon Time For The Finance Sector?", Hedgefund.net, October 29, 2007

Ben Bernanke on inflation

Inflation, both including and excluding food and energy costs, should moderate this year and next, so long as the public's confidence in the Federal Reserve's commitment to price stability is unshaken. Inflation expectations appear well anchored and futures suggesting food and energy price increases will slow.

~ Ben Bernanke, Fed Chairman, "Bernanke Says Fiscal Stimulus Could Be Helpful", Bloomberg, January 17, 2008

Jan 16, 2008

Bill Laggner on credit contagion

Is it worth par? No. Is it worth 50 cents on the dollar? I do not know.

Any rating agency is under a lot of pressure to downgrade all of that paper. I am betting that they will be proactive and downgrading will be significant. They have to preserve their brand. They cannot be sitting back watching everything go delinquent.

There is a question of a contagion. I do not think it is a question. I think the only question is how significant will the re-pricing be? Could it reach $100 billion? It could reach more.

Right now, we are in an unwinding process, it is still early in the game.

~ Bill Laggner, Bearing Asset Management, "Subprime Summer", Hedgefund.net, July 16, 2007

Ben Bernanke on credit markets

It’s been a challenging economic situation and also a difficult, rather tenacious set of problems in credit markets. However, I have the advantage of having a terrific committee — the Federal Open Market Committee — and strong staff support, and I think we have a good hold and understanding of the situation.

~ Ben Bernanke, Fed Chairman, "The Education of Ben Bernanke", NY Times, January 20, 2008

Paul Volcker on Ben Bernanke's bind

I think Bernanke is in a very difficult situation. Too many bubbles have been going on for too long. The Fed is not really in control of the situation.

~ Paul Volcker, former Fed Chairman, "The Education of Ben Bernanke," The New York Times, January 20, 2008

Thomas Carlyle on war

War is a quarrel between two thieves too cowardly to fight their own battle; therefore they take boys from one village and another village, stick them into uniforms, equip them with guns, and let them loose like wild beasts against each other.

~ Thomas Carlyle

Jan 15, 2008

Kevin Duffy: "Get long bodybags" (2008)

The credit canary is stone cold dead, yet the Bubblevision faithful continue to pour down the speculative mine shaft. Our advice for 2008: Get long bodybags.

~ Kevin Duffy, Bearing Asset Management, January 2, 2008

Christopher Mayer: All the ingredients of a bubble exist (2000)

Looking back, future financial historians will likely relate the Glassman-Hassett thesis to Irving Fisher's famous proclamation in 1929 that "stock prices have reached a permanent and high plateau." James Grant likes to say that there are three common features of a bubble: one part fundamental (i.e., a technological revolution), one part financial (i.e., a surge in money and credit), and one part psychological (i.e., a suspension of belief in traditional value measures.) All the ingredients would appear to exist in the current bull market.

As is often said, only time will tell. Unfortunately, no theory of cycles or bubbles can tell us precisely when it will end. Maybe twenty years from now, we will be able to definitively state whether these prices were reasonable or whether the boom time of the 1990s ended in a bust. From where I sit, heeding the teachings of the Austrians, I'll place my bet on the latter.

~ Christopher Mayer, 2000

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James Glassman and Kevin Hassett: Stocks are cheap (1999)

This book will give you a completely different perspective on stocks. It will tell you what they are really worth - and give you the confidence to buy, hold, and profit from your investments. It will convince you of the single most important fact about stocks at the dawn of the twenty-first century: They are cheap.

~ James K. Glassman and Kevin A. Hassett, Dow 36,000: The New Strategy For Profiting From the Coming Rise in the Stock Market (1999)

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Jan 14, 2008

Sean Berkowitz on the Enron fraud

These men did not try to put the company into bankruptcy. They felt if they could just hold on, if they could just lie a little bit longer and get to the next quarter and the next quarter and the next year, everything would be fine.... They figured the market wouldn't understand. They were arrogant, and they decided what the market heard and what the market didn't hear.

~ Sean Berkowitz, lead prosecutor in the Enron trial, "The Guiltiest Guys in the Room," Fortune, July 5, 2006

(These comments were made to the jury in his closing argument.)

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Jan 13, 2008

Jim Paulsen on endless liquidity (2007)

This could be a prolonged cycle where the cost of capital is low [for] 10 or 20 years.

~ James W. Paulsen, chief investment strategist at Wells Capital Management, "It’s a Low, Low, Low, Low-Rate World," BusinessWeek, February 19, 2007 cover story

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Lao Tzu on humility

He who knows, does not speak. He who speaks, does not know.

~ Lao Tzu

Lao Tzu on kindness

Kindness in words creates confidence. Kindness in thinking creates profoundness. Kindness in giving creates love.

~ Lao Tzu

Lao Tzu on leadership

A leader is best when people barely know he exists, when his work is done, his aim fulfilled, they will say: we did it ourselves.

~ Lao Tzu

Lao Tzu on knowledge

To realize that you do not understand is a virtue; Not to realize that you do not understand is a defect.

~ Lao Tzu

Søren Kierkegaard on risk taking

To dare is to lose one's footing momentarily. To not dare is to lose oneself.

~ Søren Kierkegaard, Danish philosopher

Lao Tzu on courage

A man with outward courage dares to die. A man with inward courage dares to live.

~ Lao Tzu

Lao Tzu on world improvers

Do you want to improve the world? I don't think it can be done. The world is sacred. It can't be improved.

~ Lao Tzu

Jan 12, 2008

Gary North on the influence of CFR on presidential elections

Except for Barry Goldwater and Ronald Reagan, no one since the formation of the Council on Foreign Relations in 1921 has gotten the nomination for President by the two major parties who was not screened first by the CFR. Goldwater came out of nowhere. Goldwater's mailing list became the basis of Richard Viguerie's creation on the New Right after 1965. Nobody else wanted the list in 1965. Nobody else saw what it could mean. That data base led to Reagan's nomination, which could not be stopped by the Establishment. He took George H. W. Bush as his running mate, contrary to what he had promised his supporters publicly, and the media stayed neutral in 1980.

The media would not stay neutral with respect to Ron Paul if he gets the nomination.

~ Gary North, Gary North's Specific Answers, "Ron Paul Is Dropped Down the Memory Hole by the Media -- Too Late," January 11, 2008

Lao Tzu on virtue and expediency

When virtue is lost, benevolence appears. When benevolence is lost, right conduct appears. When right conduct is lost, expedience appears. Expediency is the mere shadow of right and truth; it is the beginning of disorder.

~ Lao Tzu, 6th century BC poet and father of Taoism

Lao Tzu on being yourself

When you are content to be simply yourself and don't compare or compete, everybody will respect you.

~ Lao Tzu, 6th century BC poet and father of Taoism

Marc Faber on government lies and the credit crunch

The government is lying, and they will continue to lie because they don't want to admit that they created an unbelievable economic mess. Nor will the Fed admit that their ill-conceived monetary policies led to the crisis we have today in the financial markets.

~ Marc Faber, Financial Sense Newshour interview with Jim Puplava, January 12, 2008

Lao Tzu and laws and security

The more laws and order are made prominent, the more thieves and robbers there will be.

~ Lao Tzu, 6th century BC poet and father of Taoism

Lao Tzu on love

To love someone deeply gives you strength.

~ Lao Tzu, 6th century BC poet and father of Taoism

Lao Tzu on leadership

To lead the people, walk behind them.

~ Lao Tzu, 6th century BC poet and father of Taoism

Lao Tzu on prediction

Those who have knowledge don't predict. Those who predict don't have knowledge.

~ Lao Tzu, 6th century BC poet and father of Taoism

Marc Faber on monetary liars and crooks

Why did the dollar collapse against the price of gold? You call up Mr. Greenspan and Mr. Bernanke and you ask them about it. Of course they will never give an answer. Each time Ron Paul asks them a sensible question, they just evade the question and they move on to something else. Because, as I explained, they're a bunch of liars. And actually, if there was a court for honest money, both Mr. Greenspan and Mr. Bernanke should be hanged.

~ Marc Faber, Financial Sense Newshour interview with Jim Puplava, January 12, 2008

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Jan 11, 2008

Henry Paulson on the latest stimulus package

There are signs the economy is slowing down fairly rapidly. If something were to be done here, I think the focus would be on something that's temporary and that could get done and make a difference soon. We are looking at things that could be done quickly. Time is of the essence.

~ Henry Paulson, Treasury Secretary, "Paulson Says Time 'of the Essence' in Any Stimulus", Bloomberg, January 11, 2008

Clarence B. Carson on regulation

Government regulation restricts, confines, diverts, focuses, makes inflexible, and alters the course of men's actions in hundreds of ways.

~ Clarence B. Carson

Friedrich Hayek on international planning

Planning on an international scale, even more than is true on a national scale, cannot be anything but a naked rule of force, an imposition by a small group on all the rest of that sort of standard and employment which the planners think suitable for the rest.

~ Friedrich A. Hayek, The Road to Serfdom, page 223

Lew Rockwell on government's role in dealing with busts

The rap on the Austrian School of the 1930s is that they counseled a do-nothing policy on the depression. That is not true. There are many things that government can do but they all amount to doing less, which is a positive action of sorts. It must not attempt to prop up and raise wages. It must stop taxing business so heavily and raising the costs of investment. It must cut regulations that are hampering recovery. It can cut spending dramatically as a way of returning resources to the private sector where they can do some good.

What government cannot do without causing even more problems is take positive action against symptoms, such as falling stocks or housing prices, rising unemployment, business failures, and falling incomes. This is precisely what caused the Great Depression to get its name instead of being called what it might have been called: the recession of 1929–1931.

~ Lew Rockwell, "Recession or Depression?," LewRockwell.com, January 10, 2008

Lew Rockwell on the purpose of recessions

Writing all throughout the 1930s, both Mises and F.A. Hayek tried to explain that the recession itself served a market purpose, in the same way a correction to an inflated stock market serves a purpose. It re-coordinates economic structures that have grown seriously out of balance.

In other words, they urged that we look back before the recession, to the good old days of economic boom, and realize the prosperity of the past was a partial illusion. The recession is the way that the economy tells the truth about the fundamentals. The illusion itself is caused by errors in monetary policy. Interest rates are driven down by the Fed, and this causes widespread errors in the investment sector. These investments are unsustainable over the long term. The recession is the time of cleansing out errors and reestablishing economic soundness.

The housing boom and bust is only a symptom of a wider problem. If the economy has indeed fallen into recession, we can know with certainty that recession is precisely what the economy needs the most. It is the equivalent of the drunk who needs time on the wagon.

~ Lew Rockwell, "Recession or Depression?," LewRockwell.com, January 10, 2008

Jan 10, 2008

Ludwig von Mises on anti-trust laws

Those politicians, professors and union bosses who curse big business are fighting for a lower standard of living.

~ Ludwig von Mises, Theory and History, p. 147

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Lionel Robbins on how inflexible wage rates created unemployment during the Great Depression

If it had not been for the prevalence of the view that wage rates must at all costs be maintained in order to maintain the purchasing power of the consumer, the violence of the present depression and the magnitude of the unemployment which has accompanied it would have been considerably less…. A policy which holds wage rates rigid when the equilibrium rate has altered, is a policy which creates unemployment.

~ Lionel Robbins, The Great Depression (1934)

Phil Duffy on filtering information

Man synthesizes information through the filters of reason, emotion and faith.

~ Phil Duffy

Jan 9, 2008

WSJ on another mortgage bailout plan

Among the bailout ideas is a plan that would ask lenders to take a small, 10%-15%, haircut on these subprime loans but then bring in the Federal Housing Administration to insure the rest. This idea has backers on Capitol Hill, and we're told it even has takers at Hank Paulson's Treasury.

But if Mr. Paulson embraces it, he'll be putting taxpayers at risk if housing values decline further. He'll also be sending a terrible signal to lenders, borrowers and investors -- to wit, that Congress will save them from bad decisions. Treasury has spent years warning about the risk to taxpayers from expanding Freddie Mac and Fannie Mae. If it now embraces a larger role for their federal housing cousin, the FHA, Treasury's credibility on Fan and Fred will be zero.

All of these plans reflect the political imperative, or should we say panic, to rescue individuals from bad mortgage decisions. But you can't bail out borrowers without also bailing out lenders and investors -- and down that route lies endless taxpayer liability. Before embracing a radical restructuring of the relationships between American homeowners and mortgage companies, it's worth reviewing the facts: Roughly 35% of homeowners have no mortgage debt remaining on their homes. Of those homeowners still paying a mortgage, 95% are paying on time. And even in the risky category of subprime adjustable-rate loans, more than 83% are still paying on time.

~ The Wall Street Journal, "Review & Outlook: Mortgage Meltdown," October 24, 2007

Credit Suisse sees Countrywide Financial earning $2.00 in 2008

Moshe Orenbuch, an analyst at Credit Suisse, raised his estimate for Countrywide earnings in 2008 to $2 a share from $1.60, compared with a projected loss of 28 cents a share for all of 2007.

He expects Countrywide to have solid profits from loan servicing, which includes collecting payments and handling other administrative tasks, such as foreclosures. Credit Suisse has done investment-banking work for Countrywide in the past year. Mr. Orenbuch has an "outperform" rating on the stock with a target price of $28. He says he doesn't own any Countrywide shares.

~ The Wall Street Journal, "Countrywide's Profit VowMay Call for Closer Look," October 30, 2007, by James R. Hagerty

Henry Paulson on expanding the role of Fannie Mae and Freddie Mac to deal with the mortgage mess

If we ever need them it's during times like today, and they're most valuable when there is distress in the mortgage market. I'd like to see them playing an even bigger role.

~ Henry Paulson, Treasury Secretary, "Paulson Shifts on Mortgages; Treasury Secretary SeeksBroad Moves by Lenders;'Not Business as Usual'," The Wall Street Journal, November 21, 2007

(Mr. Paulson faulted Congress for failing to pass several bills that could potentially provide relief for borrowers, and took aim at a Republican senator who is holding up a piece of legislation that would allow the Federal Housing Administration to play a greater role in the cleanup. While the Bush administration and Democrats in Congress backed the bill, Oklahoma Republican Sen. Tom Coburn objected, saying it will result in additional risky loans for which taxpayers will be liable.

Mr. Paulson said he understands Mr. Coburn's concerns, but notes: "This is not business as usual. This is an extraordinary situation.")

Charles Schumer on Countrywide's borrowing from the Atlanta FHLB

Countrywide is treating the Federal Home Loan Bank system like its personal ATM.

~ Senator Charles Schumer, as written in a press release, "Countrywide BorrowingTriggers Call for Review," The Wall Street Journal, November 27, 2007, by James R. Hagerty

(As of Sept. 30, Countrywide Financial owed the Atlanta bank $51.1 billion, 77% more than the $28.8 billion it owed three months earlier. Although it is based in Calabasas, Calif., Countrywide deals with the Atlanta home-loan bank because Countrywide owns a savings bank based in Alexandria, Va., part of the Atlanta bank's territory.)

WSJ letter-to-the-editor on Angelo Mozilo rationalizing government intervention in the mortgage mess

I found it humorous that Countrywide Financial Corp.'s CEO Angelo Mozilo was quoted in "Mortgage Crisis Extends Its Reach" (Page One, Nov. 13) as justifying government intervention by stating, "Capitalism isn't perfect." I think that capitalism is working just fine without government intervention, handing Countrywide and others billions of dollars in losses for acting so irresponsibly. What's unfortunate is legislators' eagerness to intervene, guaranteeing even more ill-advised loans, which amounts to a forced transfer of wealth from solvent middle-class taxpayers (and their descendents) to those responsible for the mess.

Capitalism only works when those who make bad decisions are allowed to fail or to get out of trouble on their own. Socialism doesn't work because it tries to save people from themselves, thus prolonging the effects of bad decisions and encouraging more bad decisions. Milton Friedman, in his book "Free to Choose," pointed out the difference: When companies fail, they go out of business, provided they're left on their own. When a government project fails, it gets bigger. It appears we're about to see that in action with Fannie Mae and Freddie Mac and the guaranteeing of jumbo loans at a time when housing prices finally are starting to revert to the mean on their own.

~ Brendan Conner, La Grange Park, Ill., "Capitalism Pays the Piper," The Wall Street Journal, letters-to-the-editor, November 28, 2007

Countrywide Financial on loan forebearance

During the first 11 months of 2007, Countrywide helped more than 69,000 customers retain their homes through solutions such as loan modifications, long-term repayment plans, special forbearance and other options. We want to emphasize strongly that customers experiencing difficulty making their loan payments should contact us as soon as possible, even if they do not have a mortgage with a rate reset. Regardless of the reason for the payment difficulties, Countrywide wants to try to find reasonable solutions for our borrowers.

~ Steve Bailey, Countrywide Financial Senior Managing Director Loan Administration, "Countrywide and ACORN Work on Blueprint for Home Retention and Foreclosure Prevention," MarketWatch, December 21, 2007

Jan 8, 2008

Sam Stovall on the outlook for 2008

We're a little more optimistic, I would say, than most people on the Street. S&P's equity analysts - we've got 65 of those who do cover about 1,500 stocks of the S&P 500. Using their target prices for the full year, we think we could see about a 14% price appreciation in the 12 months ahead. So we've got the target price of 1685 for the S&P 500 from an analytical standpoint. And our investment policy committee is not too far behind. We have a target of 1650. So both targets show a small double-digit advance for '08.

~ Sam Stovall, chief investment strategist, Standand & Poor's Equity Research, MarketWatch video, January 8, 2008

Jan 6, 2008

Stephen Roach on US monetary policy

The only lesson the U.S. has learned from Japan is how to clean up the post-bubble mess. America has failed to learn the much more important lesson -- how to avoid dangerously destabilizing bubbles in the first place. The Greenspan/Bernanke ideology still places disproportionate emphasis on the former while ignoring the latter at great peril.

~ Stephen Roach, Chairman, Morgan Stanley Asia, "Japan Ghosts of Bubbles Past Haunt U.S. in 2008", Bloomberg, January 6, 2008