May 30, 2008

George Santayana on lessons of history

Those who cannot remember the past are condemned to repeat it.

~ George Santayana, Life of Reason

Moody's Analytics: The market's implied ratings are better than Moody's

[David] Munves [of Moody's Analytics] says that over one year, the [credit default swap market] implied ratings have been a more accurate predictor of defaults than Moody's ratings. The Moody's unit reports that implied ratings for one year have a 91 percent accuracy ratio compared with an 82 percent ratio for Moody's official ratings. "The Moody's accuracy ratio is consistently lower,'' he says.

~ David Munves, managing director for credit strategy research at Moody's Analytics, "Moody's Implied Ratings Lab Reveals Ambac, MBIA Turning to Junk," Bloomberg.com, May 30, 2008

Rating agency ratings of MBIA and Ambac miles apart from ratings implied by credit default swap market

Ambac and MBIA have raised billions of dollars of new capital so that Moody's and Standard & Poor's would keep top ratings for the bond insurers -- and the rating firms have done just that.
Moody's implied-ratings group paints a completely different picture. Using the CDS market, [David] Munves's [Moody's Analytics] unit rates both MBIA and Ambac Caa1. That's seven notches below junk and 15 below the official Moody's rating.

Swap traders see there's a huge risk that Ambac and MBIA will default, hedge fund adviser Tim Backshall says. He says swap traders don't trust S&P's and Moody's investment-grade ratings for the companies.

"The only thing holding them at AAA is simply the model that the rating agencies claim they use to judge that capital and the fact they know that if they downgrade the companies, it'll push them into default,'' says Backshall, of Walnut Creek, California- based Credit Derivatives Research LLC.

The rating companies say their grades are correct.

~ David Munves, managing director for credit strategy research at Moody's Analytics, "Moody's Implied Ratings Lab Reveals Ambac, MBIA Turning to Junk," Bloomberg.com, May 30, 2008

May 29, 2008

Albert Jay Nock on power and politics

Here is the Golden Rule of sound citizenship, the first and greatest lesson in the study of politics: You get the same order of criminality from any State to which you give power to exercise it; and whatever power you give the State to do things FOR you carries with it the equivalent power to do things TO you.

~ Albert Jay Nock, "The Criminality of the State," The American Mercury, March, 1939

Short seller Doug Kass getting long financials

While the negatives of the credit cycle, the dilutive effect of the industry's refinancings and other factors cannot be dismissed, quite frankly, I can make the case that we are now at an unprecedented point of time to get long financials.

I have added Bank of America (BAC) to my banking basket of Citigroup (C) and Wells Fargo (WFC).

~ Doug Kass, "Kass: I'm Putting My Money in the Banks," TheStreet.com, May 29, 2008

David Dreman recommends "gold-standard financials" for 2008

For 2008 I recommend holding on to these three gold-standard financials: Fannie Mae (37, FNM), Wachovia (35, WB ) and Bank of America (39, BAC ), as well as Washington Mutual (14, WM ) and CIT Group (22, CIT ). As the experience of the 1990s shows, they will have substantial upside once the current fright subsides.

I expect the market to likely end the year flat or down somewhat. A real bear market, which we can define as a 20% decline, is quite unlikely from here.

On the positive side: A recession is not likely. The financial panic will gradually ease as we move into 2008. Investors will crawl out of their fallout shelters. Remember that this is an election year, and the incumbent party will do what it takes to prime the pump. Increased federal spending and more Federal Reserve easing are givens. My high-quality financial stocks will soar once that becomes apparent. Just as they did in the early 1990s, banks will maintain fairly good yields on their assets while their funding costs go down. BofA earned $4.70 a share in precrisis 2006. I think it will earn $5.50 or more in postcrisis 2010.

~ David Dreman, "Tug of War," Forbes, February 11, 2008

May 28, 2008

John Kenneth Galbraith on economists

Economists predict not because they know but because they are asked.

~ John Kenneth Galbraith

May 27, 2008

Saudi Prince Alwaleed bin Tal Alsaud on Chuck Prince and Citigroup

Bartiromo: Lets talk about one of your big holdings, Citigroup. Several of the company's largest holders have recently been net sellers. What does [CEO] Chuck Prince need to do?

Prince Alwaleed: I met with Sandy Weill and Chuck Prince a month ago at the George V Hotel in Paris, and we discussed the promise from Chuck that he will deliver good results. If I can quote him, he said: "Prince, we have put the big problems of Citi behind us, and we have to move our shares to above 50."

Bartiromo: So how long a grace period are you giving Chuck Prince?

Prince Alwaleed: The grace period is over. You can quote me on that. Right now we are looking to the results in the next few weeks and....I have full confidence that [Citi] will deliver. This is the No. 1 company in the world. It has equity of $400 billion and assets of $1.4 trillion. So no more excuses.....Excuses are finished. Now we are at war. Citigroup has won the internal war by cleaning up all the Enron residuals, WorldCom, the European scandal. Now we have to win the external war...make good investments...and that should lift the price of the stock. That's it. I told him, as [Citi's] biggest shareholder, we have to win the external war. Thank you, Mr. Chuck Prince. Now, the Prince of Saudi Arabia tells the Prince of New York: Go to war, and I am backing you 100%.

~ "For Citi, 'No More Excuses'," BusinessWeek, April 3, 2006, interview by Maria Bartiromo

Rudy Giuliani on financial regulation

Bartiromo: How should Sarbanes-Oxley be changed?

Giuliani: We have a tendency to underregulate. Then we have scandals, and we swing wildly in the other direction. I think it's time we take a look at some of the requirements of Sarbanes-Oxley. That doesn't mean we get rid of it, but we start to make it more balanced. Most American businesspeople are honest. We have some dishonest ones, but we can't overreact to that.

~ Rudy Giuliani, "Rudy Giuliani On Iraq, Taxes, Mistakes," BusinessWeek, April 30, 2007, interview by Maria Bartiromo

Vince Lombardi on winning

The Green Bay Packers never lost a football game. They just ran out of time.

~ Vince Lombardi, football coach

Yogi Berra on prediction

Prediction is very hard, especially when it is about the future.

~ Yogi Berra

(This quote is also attributed to Neils Bohr, 20th century Danish physicist.)

Lord Kelvin on the impossibility of manned flight (1895)

Heavier-than-air flying machines are impossible.

~ Lord Kelvin, Royal Society, 1895

Frank Knox: "U.S. Navy is not going to be caught napping" (1941)

No matter what happens the U.S. Navy is not going to be caught napping.

~ Frank Knox, Secretary of the Navy, December 4, 1941

Per Jacobsson: "World inflation is over" (1959)

In all likelihood world inflation is over.

~ Per Jacobsson, IMF Managing Director, 1959

Warren Buffett on business forecasting

In the business world, the rearview mirror is always clearer than the windshield.

~ Warren Buffett

Robert L. Bradley, Jr. on the source of natural resources

Economists like Julian Simon argue that as long as people are free to use their minds and act upon their ideas, the world will never run out of energy. Resources spring from knowledge, not from the ground.

~ Robert L. Bradley, Jr., Institute for Energy Research, Energy: The Master Resource

James Schlesinger: "Energy future is bleak" (1979)

The energy future is bleak and is likely to grow bleaker in the decade ahead.

~ James Schlesinger, first Secretary of the U.S. Department of Energy, 1979

U.S. Geological Survey geologist on peak oil (1919)

The peak of [American oil] production will soon be passed – possibly within three years.

~ David White, Chief Geologist for the U.S. Geological Survey, 1919

Jim Grant on market sentiment

The only permanent truth in finance is that people will get bullish at the top and bearish at the bottom.

~ James Grant, Grant’s Interest Rate Observer

Clyde Prestowitz on the Japanese miracle (1988)

The power behind the Japanese juggernaut is much greater than most Americans suspect, and the juggernaut cannot stop of its own volition, for Japan has created a kind of automatic wealth machine, perhaps the first since King Midas.

~ Clyde Prestowitz, Jr., Trading Places (1988)

George Gilder on economic achievement

In explaining economic achievement, academics are inclined to exalt government bodies dominated by intellectuals.

~ George Gilder, Microcosm (1989)

Murray Rothbard on the coming inflationary depression (1982)

We can look forward, therefore, not precisely to a 1929-type depression, but to an inflationary depression of massive proportions.

~ Murray Rothbard, America’s Great Depression (1982)

Time proclaims end of an era of tax cuts and deregulation

Economic eras don't last forever, though, and there are signs that the current slowdown is a harbinger of something bigger: an end to America's 25-year love affair with tax cuts and deregulation.

~ Time (cover), "The New President's Economy Problem," May 26, 2008, by Justin Fox

Todd Salamone on the Time cover "Surviving the Lean Economy"

And while we are on the subject of the economy, there was yet another cover story this week about it weakening. The May 26 issue of Time hit the newsstands last week with a cover titled, "Surviving the Lean Economy." As we've emphasized, low expectations for the economy hold the key to the stock market decoupling from poor economic data, as the market is in a position to rally on poor data that is not as bad as expected.

~ Todd Salamone, "Watching the CBOE Market Volatility Index for a Direction," Schaeffer's Monday Morning Outlook, May 27, 2008

May 26, 2008

Angelo Mozilo on the drive to homeownership and Countrywide's exposure to subprime

Bartiromo: How exposed is Countrywide to the subprime mess?

Mozilo: In 2006 subprime loans were about 9% of our total business, now down to 7%. We're a prime lender...but we also have been on a mission...to try to increase home ownership opportunities for minorities and low-income borrowers. So it's distressful to me personally to see the piling on that's taking place by the media and regulators. This was a system that was working very well, providing an opportunity for people to get over that barrier of entry to owning a home. Now what you've had is panic setting in, and [the subprime story] is leading every newspaper. It's like there's no war going on in Iraq.

Bartiromo: Do you worry that the subprime fallout will bleed into the prime mortgage market?

Mozilo: I don't think it's going to bleed substantially into prime.

~ Angelo Mozilo, interview with Maria Bartiromo, "Inside the Mortgage Crisis," BW, March 26, 2007

Maria Bartiromo on Angelo Mozilo

Angelo Mozilo wants to make one thing perfectly clear: Countrywide Financial, whose stock is down more than 20% for the year, should not be lumped in with the subprime outfits that are getting hammered.

~ Maria Bartiromo, "Inside the Mortgage Crisis," BW, March 26, 2007

Seth Klarman on leverage

We are in an era of leverage.

~ Seth Klarman, speech given at the MIT Sloan Investment Management Conference, October 27, 2007

May 25, 2008

PNC strategist: Cash levels highest since September, 2002

When the correction comes, stocks could get a lift from the stash of uncommitted cash held by investors. Bill Stone, PNC Wealth Management's chief investment strategist, tracks saving deposits and both individual and institutional money-market accounts to gauge the potential fuel for rallies. The level of available cash, he says, recently stood at about 62% of the total market value of the broad S&P 1500 index -- down slightly from 65% in March, but still well above the 47% average over the past decade. In fact, the last time cash hit this level was in September 2002. A year later, the market was up more than 12%.

~ Barron's, "Stocks Fall Hard As Oil Hits New Highs," by Kopin Tan

May 24, 2008

Pat Buchanan on Winston Churchill

Churchill was the indispensable war leader who held on until Hitler committed his fatal blunders, invading Russia and declaring war on America. He was also the man most responsible for Britain's fall from mistress of the greatest empire since Rome to an island dependency of the United States.

About the character of the Bolshevik regime in 1919 and Nazi regime in 1933, Churchill had been right. About British rearmament, he had been right. But Churchill was also often disastrously wrong.

He led the West down a moral incline to its own barbarism by imposing a starvation blockade on Germany in 1914 and launching air terror against open cities in 1940. These policies brought death to hundreds of thousands of women and children.

He was behind the greatest British military blunders in two wars: the Dardanelles disaster of 1915 and the Norwegian fiasco of 1940 that brought down Chamberlain and vaulted Churchill to power.

While excoriating Chamberlain for appeasing Hitler, Churchill's own appeasement of Stalin lasted longer and was even more egregious and costly, ensuring that the causes for which Britain sacrificed the empire – the freedom of Poland and preventing a hostile power from dominating Europe – were lost.

~ Patrick J. Buchanan, "Churchill’s Colossal Blunders," LewRockwell.com, May 24, 2008

May 23, 2008

Ed Easterling on hedge fund regulation

Q: Do you agree when people say hedge funds are lightly regulated?

Easterling: No. It's another myth. Hedge funds are required to comply with every rule, regulation, and law that affects virtually all investors in the financial markets. Then there are a variety of investor-related laws and regulations that impact who can invest with hedge funds. There are state and federal laws that require some managers to register as investment advisers—which adds additional regulations and requirements, including periodic examinations and filings.

~ Ed Easterling, "In Defense Of Hedge Funds," BusinessWeek, July 9 & 16, 2007

David Rubenstein on retirement

Something happens when people retire: They drop dead of heart attacks.

~ David M. Rubenstein, 58, co-founder, The Carlyle Group (one of the world's largest private equity firms)

Robert Reich on capitalism vs. democracy

Q: Aren't companies sometimes better than government at getting things done?

Reich: So harness them with specific laws and rules. Tell the private sector what to do. Corporations are going to play the game as fiercely as they can, and that's not a bad thing as long as the rules of the game reflect public values—preventing global warming, rebuilding New Orleans, etc.

Q: In your view, is "supercapitalism" good or bad?

Reich: Capitalism has proven itself the most successful system ever designed for allocating resources to where they're most needed. Global capitalism over the last 30 years has been extraordinarily successful at providing consumers with a range of choices such as they have never had before and investors with returns unparalleled in history. At the same time, democracy is failing. We used to assume that capitalism and democracy went together, hand in glove. But the intensifying competition in the private sector is sloshing over into our democracy. The money companies are pouring in gets in the way.

~ Robert B. Reich, "It's Not Business' Business," BusinessWeek, September 10, 2007

Bill Nygren still bullish on Washington Mutual

Q: A primary reason the fund is down so much is because Washington Mutual is your largest holding. Why do you still believe in the company?

Nygren: The concern the market has is about its mortgage holdings. But the real attraction of Washington Mutual has very little to do with mortgages. We like its growing strength as a retail bank. When you look at the size of losses it could incur from mortgages, it's not enough to offset all of the value being added on the deposit side of the balance sheet. If you value Washington Mutual with the same kind of premium other banks get for deposits, you get a number that's substantially higher than the current stock price of $37. It's probably worth $50 or $60 per share.

~ Bill Nygren, portfolio manager, $6 billion Oakmark Select Fund, "Straight Talk About Bad Results," BusinessWeek, September 17, 2007

Kevin Duffy on legendary investor John Templeton and the futility of macro forecasting

I encourage everyone to read anything by John Templeton, whose track record spans over half a century. Templeton was the eternal optimist, but also had great contrarian instincts. For example, he pulled the plug on Japan in the late 1980s (early) after being a long-time bull. He bought after the Asian crisis of the late 1990s. He actually shorted tech stocks in 2000. Etc., etc.

As an investor, you have to have multiple arrows in the quiver and know which one(s) to pull out. “The futility of timing,” “the futility of macro forecasting,” and “don’t fight the Fed” are all rationales currently held in wide esteem. And there is still far too much optimism, despite what appears to be the onset of a serious deleveraging. People who dismiss macro forecasting – like Warren Buffett – are currently rock stars… perhaps a sign that we should be using this arrow right now.

~ Kevin Duffy, Bearing Asset Management, May 23, 2008

May 22, 2008

Barack Obama on raising taxes

Bartiromo: Why raise taxes in a slowdown? Isn't that going to put a further strain on people?

Obama: There's no doubt that anything I do is going to be premised on what the economic situation is when I take office next January. The thing you can be assured of is that I'm not going to make these decisions based on ideology. I'm not a dogmatist. My opponents to the right would like to paint me as this wild-eyed liberal, but I believe in the market. I believe in entrepreneurship. I believe in capitalism, and I want to do what works. One of the problems with the Bush Administration has been its rigidness when it comes to economic policy. It doesn't matter what the problem is, they'll say tax cuts. Trade deficit? Tax cuts. Slowdown in manufacturing? Tax cuts. At a certain point, if you've only got one arrow in the quiver, you're going to have problems.

~ Barack Obama, "Barack Obama On Taxes and Why He Is The Best Manager," BusinessWeek, April 14, 2008

Sandy Weill on Jamie Dimon and his rescue of Bear Stearns

I'm very proud of him. What he did was something great for the whole financial industry, preventing God knows what.

~ Sandy Weill, March, 2008 (after the JPMorgan-Bear Stearns deal was announced)

Ben Bernanke: Subprime problems should not spill over (2007)

We do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.

~ Ben Bernanke, Federal Reserve Chairman, May 17, 2007

David Lereah on housing prices (2007)

The steady improvement in [home] sales will support price appreciation... [despite]... all the wild projections by academics, Wall Street analysts, and others in the media.

~ David Lereah, chief economist, National Association of Realtors, BusinessWeek, January 10, 2007

Lord Browne on range-bound oil prices (2006)

But [it] is very likely that oil prices will range in the medium term around an average of $40.... In the long run it could even be $25 to $30.

~ Lord Browne, CEO, BP, June 12, 2006

(Oil prices averaged $70-plus a barrel in 2007.)

Mitchell Caplan on his outlook for the year (2007)

[W]e enter 2007 ideally positioned to capitalize on the secular trends of the industry.

~ Mitchell Caplan, CEO, E*Trade Financial, January 18, 2007

(Bad investments made E*Trade the worst S&P 500 performer in 2007. Caplan resigned on January 29, 2008.)

Tyler Todd pans the Nintendo Wii (2006)

The media's great love affair with the Nintendo Wii is beginning to sour.... There are whispers that the device is tiring and gimmicky.

~ Tyler Todd, video-gaming columnist, The Gazette (Montreal), October 14, 2006

BW: Investment banks off the hook from Enron lawsuit

The U.S. Supreme Court closed out a lingering chapter in the Enron saga on Jan. 22 when it declined to hear an appeal by shareholders seeking billions in damages from investment banks that advised the notorious energy giant. The denial was expected after a decision last week that said aggrieved investors can't sue third parties who abet fraudulent schemes unless they can show they relied on public statements by those parties.

~ BusinessWeek, "Enron Lawsuit: No Go," February 4, 2008, edited by Harry Maurer & Cristina Linblad

May 21, 2008

Robert Olstein: "The bears are in for a good butt kicking"

Don't bet against the Fed. The worst is over, and the market is looking to turn; and when it takes off, the bears are going to be in for a good butt kicking.

~ Robert Olstein, 66, "Tice Proves Every Bear Has Its Day, Invokes `D' Word," Bloomberg.com, May 21, 2008

(Olstein, 66, runs the $1.2 billion Olstein All Cap Value Fund, down 6% year-to-date.)

James Madison on power

All men having power ought to be distrusted to a certain degree.

~ James Madison, Debates in the Federal Convention (July 11, 1787)

Jonah Goldberg on environmentalism

Environmentalism's most renewable resources are fear, guilt and moral bullying.

~ Jonah Goldberg, "The Church of the Green," Townhall.com, May 21, 2008

May 20, 2008

Madeleine Albright on U.S.-led sanctions against Iraq

Lesley Stahl: We have heard that a half million children have died. I mean, that's more children than died in Hiroshima. And, you know, is the price worth it?

Madeleine Albright: I think this is a very hard choice, but the price--we think the price is worth it.

~ Secretary of State Madeleine Albright, 60 Minutes, May 12, 1996

(Albright made no attempt to deny the figure given by Stahl--a rough rendering of the preliminary estimate in a 1995 U.N. Food and Agriculture Organization (FAO) report that 567,000 Iraqi children under the age of five had died as a result of the sanctions.)

Stuart Hoffman: economy not in "death spiral"

I still think we're in a recession, but it's clearly not the economic death spiral that you usually see in the opening months of a recession.

~ Stuart Hoffman, chief economist, PNC Financial, "April U.S. Job Loss Softer Than Feared; Unemployment Falls, Investor's Business Daily, May 5, 2008

(Payrolls shrank by 20,000 in April vs. Wall Street estimates of a drop of 75,000.)

Will Rogers on income taxes

Income Tax has made more Liars out of American people than Golf.

~ Will Rogers, The Illiterate Digest (1924)

May 19, 2008

John Mosby on war

War loses a great deal of its romance after a soldier has seen his first battle.

~ John Mosby

Todd Salamane: "Bad data is priced in and the future couldn't be brighter"

The market's reaction to last week's economic news is a testament to the low-expectation environment we are in. What's more, it's a sign that bad data is priced in and that the future couldn't be brighter.

~ Todd Salamane, "The Disconnect Between the Economy and the Stock Market," Schaeffer's Monday Morning Outlook, May 19, 2008

May 17, 2008

Laurence Vance on taxation

Taxes should be repealed or reduced, not replaced or reformed. Advocates of liberty and less government should focus not on fairness but on lowness.

~ Laurence M. Vance, “There Is Still No Such Thing as a Fair Tax, " Mises.org., May 15, 2008

May 15, 2008

Julian Simon: Are natural resources finite?

Our supplies of natural resources are not finite in any economic sense. Nor does past experience give reason to expect natural resources to become more scarce. Rather, if history is any guide, natural resources will progressively become less costly, hence less scarce, and will constitute a smaller proportion of our expenses in future years.

~ Julian Simon, The Ultimate Resource (1996)

May 13, 2008

The Wall Street Journal: "We're living on planet leverage" (2007)

We're living on planet leverage, and regulators and market gurus are growing nervous.

~ Randall Smith and Susan Pulliam, "As Funds Leverage Up, Fears of Reckoning Rise. Fed and SEC Question Wall Street on Policies;'A Mockery' of Margin," The Wall Street Journal, April 30, 2007

S&P credit analyst: "There's leverage everywhere"

There's leverage everywhere -- whether at corporations or broker dealers or hedge funds or private-equity funds. It sort of feels like something's got to give.

~ Tanya Azarchs, senior credit analyst who follows U.S. banks and brokers at Standard & Poor's Corp., "As Funds Leverage Up, Fears of Reckoning Rise. Fed and SEC Question Wall Street on Policies;'A Mockery' of Margin," The Wall Street Journal, April 30, 2007, by Randall Smith and Susan Pulliam

Humphrey Neill on groupthink

When everybody thinks alike, everyone is likely to be wrong.

Humphrey Neill, pioneer of modern contrarian theory

May 12, 2008

Ron Paul on the housing bust

The situation facing us now in the mortgage industry has its roots in the Federal Reserve's inflationary monetary policy. Without addressing the roots of the current crisis, any measures undertaken to improve the situation will be doomed to fail.

As with asset bubbles and investment manias in past history, the fuel for the current housing bubble had its origins in monetary manipulation. The housing boom was caused by the Federal Reserve's policy resulting in artificially low interest rates.

~ Congressman Ron Paul, Statement before the Financial Services Committee, September 20, 2007

(This quote appeared in "What the Fed Has Done To Us," LewRockwell.com, September 28, 2007.)

Lew Rockwell on the housing bust

The ideological basis of the meltdown began during the New Deal, when the government decided that the American Dream could only be achieved through housing ownership – not renting but owning. As time went on, every conceivable mechanism was pulled into order to realize this dream.

What if borrowing rates are too high for people to afford? We'll beat them down with the sledgehammer of government policy. What if the financial risk is still too high? Who cares, we'll subsidize it. What if there is no credit history or savings on which to justify taking the risk? We'll guarantee it. With what? With newly created money. What if mortgage lenders still aren't convinced that they will get paid? We'll make them lend money no matter what, and even threaten them with lawsuits if they don't.

So on it went for seventy years, until one day the entire hoax was exposed by the ultimate reality test: the market economy. Bad credit risks didn't pan out. Those who lent without regard for underlying fundamentals are suddenly seeing red all over the place. Bankruptcy ensues. Those who purchased repackaged mortgages on the open market find themselves with a hot potato and no one to toss it to.

So what does the government do then? It runs to the basement and turns on the printing presses. It creates $37 billion on the spot and buys up the bad loans and calls them assets. The government says that this is to create confidence. But confidence can't be created by making up reality. That path only leads to more illusion and error.

~ Lew Rockwell, "Reality vs. the State," LewRockwell.com, August 14, 2007

Warren Harding on war

My best judgment of America's needs is to steady down, to get squarely on our feet, to make sure of the right path. Let's get out of the fevered delirium of war, with the hallucination that all the money in the world is to be made in the madness of war and the wildness of its aftermath. Let us stop to consider that tranquility at home is more precious than peace abroad, and that both our good fortune and our eminence are dependent on the normal forward stride of all the American people.

~ President Warren G. Harding

Lew Rockwell on subprime loans

The incredible fact is that these loans are an expected result of 15 years of government propaganda about mortgage loan "discrimination." Some genius noticed that the loan markets tend to favor people with good credit histories and some savings built up over time. And then some other genius noticed the demographic fact that these credit histories, in general, parallel racial demographics. Hot button! And so the pressure was on to lend as if the prospect for repayment didn't matter.

The loans in this category were only viable if we presume that housing equity would rise forever. Then it works like magic. It's like an economic perpetual motion machine. You borrow and borrow and the loan pays itself off. Crazy? Yes, it is, but such is the craziness of any inflationary environment. It leads people who should know better to believe that the impossible is happening.

It was not just the subprime market but the entire housing market that has been wildly distorted through intervention. The money lent has had no economic justification, and the low interest rates are unsustainable.

~ Lew Rockwell, "The Mirage of the Mortgage Fix," LewRockwell.com, December 12, 2007

Lew Rockwell on government delivering the American dream

Since the period after World War II, the American dream has been identified with owning one's own home. And when the government makes a dream come true, it is going to do it good and hard. So there were no limits. The housing market has boomed and ballooned beyond belief.

~ Lew Rockwell, "The Mirage of the Mortgage Fix," LewRockwell.com, December 12, 2007

Lew Rockwell on the limits of credit expansion

Will more monetary injections work to puff up the economy? They might, but only temporarily. There comes a point at which no matter how much the Fed floods the markets with credit, it can still find no takers. It's happened before: in 1930 and following, for example. The Fed tried desperately to inflate but to no avail. It could happen again.

~ Lew Rockwell, "The Fallacy of Money Mania," LewRockwell.com, November 30, 2007

Lew Rockwell on The War on Recession

It's time that we question the very foundations of this war on recession. The recession is a regrettable but inevitable backlash against a boom that was not justified by the fundamentals.

That last phrase is the critical thing. I am not saying that the recession is the price we pay for economic growth. Boom times are fabulous times, provided that they are rooted in sound fundamentals. And what are those? Essentially it is this: the timeframe of investment must match the timeframe of society at large. If people are long-term oriented and saving money, resources become available for investment in the future. When production is completed, there are consumers to buy. But if no one is saving money and there is no sound store of capital, there are no resources to invest – unless, of course, the Fed creates that money. The money the Fed creates is wholly illusory, a fiction of investors' imaginations. It will vanish when the economy wakes up to reality.

This is an example of investment unjustified by fundamentals. What to do in that case? There must be a correction. There is nothing the Fed or the Congress can do about it. It certainly shouldn't attempt to prevent it. To attempt to prevent the correction is like turning away from the skid: it only makes it worse.

~ Lew Rockwell, "The War on Recession," LewRockwell.com, March 20, 2008

Stephen Kinzer on the three stages of American overthrows of foreign governments

The history of American overthrows of foreign governments can be divided into three parts. First came the imperial phase, when Americans deposed regimes more or less openly. None of the men who overthrew the Hawaiian monarchy tried to hide their involvement. The Spanish-American War was fought in full view of the world, and President Taft announced exactly what he was doing when he moved to overthrow the governments of Nicaragua and Honduras. The men who directed these "regime change" operations may not have forthrightly explained why they were acting, but they took responsibility for their acts.

After World War II, with the world political situation infinitely more complex than it had been at the dawn of the century, American presidents found a new way to overthrow foreign governments. They could no longer simply demand that unfriendly foreign leaders accept the reality of American power and step down, nor could they send troops to land on foreign shores without worrying about the consequences. This was because for the first time, there was a force in the world that limited their freedom of action: the Soviet Union. During the Cold War, any direct American intervention risked provoking a reaction from the Soviets, possibly a cataclysmic one. To adjust to this new reality, the United States began using a more subtle technique, the clandestine coup d’état, to depose foreign governments. In Iran, Guatemala, South Vietnam, and Chile, diplomats and intelligence agents replaced generals as the instruments of American intervention.

By the end of the twentieth century, it had become more difficult for Americans to stage coups because foreign leaders had learned how to resist them. Coups had also become unnecessary. The decline and collapse of the Soviet Union and the disappearance of the Red Army meant that there was no longer any military constraint on the United States. That left it free to return to its habit of landing troops on foreign shores.

~ Stephen Kinzer, Introduction to Overthrow: America's Century of Regime Change From Hawaii to Iraq

Bill Fleckenstein: Even the bears aren't very bearish

For what's often thought of as a bear's conference [Grant's semi-annual investment conference], I did not detect much bearishness. Perhaps it's right not to be bearish. But it does strike me that perhaps to be quite bearish about the economy and the stock market might be one of the most contrary thoughts of all.

~ Bill Fleckenstein, Contrarian Chronicles, MSN Money, "Recession isn't an 'if' but a 'when'," October 1, 2007

Bill Fleckenstein on bank SIVs

It just boggles the mind how much leverage is employed by financial institutions and how little knowledge the world has of their workings.

As to why these infinitely leveraged black boxes (with extremely flexible accounting and disclosure rules) exist in the first place, I think we know the pat answer: so that financial institutions can employ them and utilize even more leverage than they are legally allowed to.

Which makes one wonder: Since these entities are designed specifically to circumvent the rules, why have they been countenanced by the rule makers?

~ Bill Fleckenstein, Contrarian Chronicles, MSN.Money, "Banks' dark off-balance-sheet world," September 17, 2007

Bill Fleckenstein on Greenspan's role in fomenting the credit bubble and the coming consumer recession (2007)

Without the Fed's policy -- notably Greenspan's during his entire 18-year tenure -- of repeatedly bailing out reckless speculators, the problems we face would, in all likelihood, never have reached such gargantuan proportions. (This is not to absolve Corporate America, Wall Street or Joe Six Pack of their greed and cutting of corners.) I expect by sometime in the next three or four months, it will be quite clear that the economy is headed for a serious consumer-led recession.

~ Bill Fleckenstein, Contrarian Chronicles, MSN.Money, "Blame Greenspan for this bubble, too," March 26, 2007

May 11, 2008

Robert Rubin on the credit crunch: "I don’t know of anyone who foresaw a perfect storm"

Rubin: People know I was concerned about the markets. Clearly, there were things wrong. But I don’t know of anyone who foresaw a perfect storm, and that’s what we’ve had here.

I don’t feel responsible, in light of the facts as I knew them in my role.

Q: But did he make mistakes?

Rubin: I’ve thought a lot about that. I honestly don’t know. In hindsight, there are a lot of things we’d do differently. But in the context of the facts as I knew them and my role, I’m inclined to think probably not.

There is no way you would know what was going on with a risk book unless you’re directly involved with the trading arena. We had highly experienced, highly qualified people running the operation.

~ Robert Rubin, "Where was the Wise Man," NY Times, April 27, 2008

May 10, 2008

Laurence Vance on Christians for war

It is the power of the state to wage war and engage in an aggressive, imperialistic foreign policy that ought to be eclipsed by Christianity. Instead, Christians have willingly supplied the state with cannon fodder for its wars and military interventions.

~ Laurence Vance, “Christianity in Eclipse," LewRockwell.com, May 6, 2008

Phil Duffy on "The Revolution: A Manifesto"

I have just read Ron Paul’s The Revolution: A Manifesto (just 167 pages). It is to the current revolution what Tom Paine’s Common Sense was to our original revolution. No voter should presume to be adequately informed about the real political issues facing this nation unless the voter has spent the time to read this gem of a book – and pondered its meaning. Even the mystery of the Federal Reserve is stripped away and we see an insidious tool that allows government to spend well beyond its means through the simple mechanism of printing paper money. Now we can understand why energy, food, health and other costs are skyrocketing. Dr. Paul's book is a coherent plan for returning this nation to sanity.

~ Phil Duffy, May 10, 2008

Nouriel Roubini on the $51 billion FHLB lifeline to Countrywide Financial

The widespread use of the FHLB system to provide liquidity — but more clearly bail out insolvent mortgage lenders — has been outright reckless. Countrywide alone — the poster child of the last decade of reckless and predatory lending practices — received a $51 billion loan from this semi-public system; in the absence of this public bailout Countrywide would have ended up where it should, i.e. into outright bankruptcy. And the largesse of the FHLB system does not stop at Countrywide. A system that usually provides a lending stock of about $150 billion has forked out loans amounting to over $750 billion in the last year with very little oversight of such staggering lending. The risk that this stealth bailout of many insolvent mortgage lenders will end up costing massive amounts of public money is now rising.

~ Nouriel Roubini, New York University economist, "Roubini: FHLB Lending ‘Reckless’," WSJ Economics blog, February 27, 2008

Mark Zandi on a proposed housing bailout

The total cost of the plan would ultimately be very modest. At the extreme, the upfront cost would be approximately $250 billion, assuming the federal government purchased all 2 million loans that are expected to end up in foreclosure through the end of the decade at a 30% discount to their original value. According to the FDIC, this is just about the ultimate cost to taxpayers (in today’s dollars) of the early 1990s savings and loan crisis via the Resolution Trust Corporation. Of course, the government would not lose all $250 billion, as many of these homeowners would be able to remain current on their new lower mortgage amount. Even if only half of homeowners were to be good payers, which seems pessimistic, then the ultimate cost to taxpayers will certainly be no more than that of the recently-enacted fiscal stimulus plan.

~ Mark Zandi, chief economist, Moody's Economy.com, "Zandi: A Mortgage Bailout Would Cost up to $250 Billion," WSJ Economics blog, February 27, 2008

Prof. Karl E. Case on the housing slump: "It's bottom-fishing time"

It is really remarkable how much where we are today looks like the bottom we've had in the last three cycles. Every time we've gone below a million starts, the market has cleared at that moment.

It's bottom-fishing time, I think. There's got to be bargains in Florida, Arizona and Nevada.

~ Prof. Karl E. Case, Wellesley College, "Is Housing Slump at a Bottom?," The Wall Street Journal, May 6, 2008, by Brett Arends

May 9, 2008

John Mackey on exploitation, entrepreneurship, and the profit motive

Politically, I drifted to the Left and embraced the ideology that business and corporations were essentially "evil" because they sought profits. I believed that government was "good" (if the "right" people had control of it) because it altruistically worked for the public interest.

[I'd been taught that] business and capitalism were based on exploitation: exploitation of consumers, workers, society and the environment. I believed that "profit" was a necessary evil at best and certainly not a desirable goal for society as a whole. However, becoming an entrepreneur completely changed my life. Everything I believed about business was proven to be wrong.

No one is forced to trade with a business; customers have competitive alternatives in the marketplace; employees have competitive alternatives for their labor; investors have different alternatives and places to invest their capital. Investors, labor, management, suppliers — they all need to cooperate to create value for their customers.

In other words, business is not a zero-sum game with a winner and a loser. It is a win, win, win, win game.

~ John Mackey, founder and CEO, Whole Foods Market, "The Transformation of John Mackey," Mises.org, June 13, 2008, by Ralph R. Reiland

May 8, 2008

Kevin Duffy on banks putting their names on major sports stadiums

Today 24 of 72 major sports stadiums have granted naming rights to financial firms, 14 of them banks. (Recall that 19% of the Stadium Class of 2000 -- including PSINet Stadium and Enron Field -- went bankrupt within five years.)

~ Kevin Duffy, Bearing Asset Management, "For Whom Do the Bells Toll", Barron’s, June 18, 2007

Charles Biderman on market sentiment

There is a still a huge wall of worry for this market to climb.

~ Charles Biderman, founder and CEO of TrimTabs, "Big Money Bearish But Insiders Bullish," Forbes.com, May 7, 2008

Ron Paul on truth

Truth is treason in the empire of lies.

~ Ron Paul in the preface to The Revolution: A Manifesto (2008)

May 7, 2008

Jeff Tucker on the Old Right vs. the military industrial complex

The existence of such an industry scandalized Americans in the interwar period, and there was one treatise that led the way in helping to foment the ourage. In fact, it was a bestseller book in 1934 with the title Merchants of Death. (Here is the PDF and here it is in hard copy.)

We are justified in calling it the first mega-selling conservative book of the 20th century. Why conservative? The lead author was H.C. Engelbrecht, and, most importantly, its co-author was Frank C. Hanighen, who would later become the founder of Human Events, which was the most important weekly publication on the right in the 1940s and 1950s. In other words, the phrase Merchants of Death did not originate on the left but on the right, during the New Deal period when the people later called conservatives became alarmed about the union between big corporations and big government.

This book is not a typical left-wing style attacks on commerce as the essence of war. In fact, it argues the opposite. "The arms industry did not create the war system. On the contrary, the war system created the arms industry."

The blame, then, lies not with the private sector that makes the weapons. "All constitutions in the world vest the war-making power in the government or in the representatives of the people. The root of the trouble, therefore, goes far deeper than the arms industry. It lies in the prevailing temper of peoples toward nationalism, militarism, and war, in the civilization which forms this temper and prevents any drastic and radical change. Only when this underlying basis of the war system is altered, will war and its concomitant, the arms industry, pass out of existence."

The book holds up as a marvelous analysis of how the merchants of death profited from World War I, a fact that the public found riveting and help solidify a strong antiwar temperament in the electorate during those years. This raised consciousness led to a broader insight about the nature of the warfare state: namely, that they only way to restrain it was to keep centralized power of all sorts at bay. The leading spokesmen for the ideal here was later called the Old Right by Murray Rothbard.

How it came to be that the Old Right cause would later be taken up by the New Left, while the New Right came to embrace the warmongering creed of the Old Left – well, let's just say it was a complicated maneuver accomplished in a brief period of time in the late 1950s. Murray Rothbard was there and he chronicled the transition blow by blow. His book is called The Betrayal of the American Right. Sure enough, checking the book, on page 58, we find a nice discussion of Human Events, Frank Hanighen, and the problem of the Merchants of Death.

~ Jeffrey Tucker, "Iron Man and the Merchants of Death," LewRockwell.com, May 7, 2008

Paul Volcker on the demerits of central banks buying mortgage bonds

A direct transfer of mortgage and mortgage-backed securities of questionable pedigree from an investment bank to the Federal Reserve seems to test the time-honored central bank mantra in times of crisis: lend freely at high rates against good collateral. It tests it to the point of no return.

~ Paul Volcker, speech before the Economic Club of New York, April 8, 2008

(Quote cited in "Trust in Central Banks Passes Point of No Return," Bloomberg, April 24, 2008, by Mark Gilbert)

Ludwig von Mises on romanticism

The romantic and the social art of the nineteenth century have prepared the way for socialist destructionism. Without the help it got from this direction Socialism would never have gained its hold on people's minds.

Romanticism is man's revolt against reason, as well as against the condition under which nature has compelled him to live. The romantic is a daydreamer; he easily manages in imagination to disregard the laws of logic and of nature. The thinking and rationally acting man tries to rid himself of the discomfort of unsatisfied wants by economic action and work; he produces in order to improve his position. The romantic is too weak—too neurasthenic—for work; he imagines the pleasures of success but he does nothing to achieve them. He does not remove the obstacles; he merely removes them in imagination. He has a grudge against reality because it is not like the dream world he has created. He hates work, economy, and reason.

~ Ludwig von Mises, Socialism (1922), Chapter 33

Ludwig von Mises on credit expansion and the illusion of prosperity

Expansion of credit does lead to a boom at first, it is true, but sooner or later this boom is bound to crash and bring about a new depression. Only apparent and temporary relief can be won by tricks of banking and currency. In the long run they must land the nation in profounder catastrophe. For the damage such methods inflict on national well-being is all the heavier, the longer people have managed to deceive themselves with the illusion of prosperity which the continuous creation of credit has conjured up.

~ Ludwig von Mises, Socialism (1922), Chapter 34

Murray Rothbard on the drug of credit expansion

Why do booms historically continue for several years? The answer is that as the boom begins to peter out from an injection of credit expansion, the banks inject a further dose. In short, the only way to avert the onset of the depression is to continue inflating money and credit. For only continual doses of new money on the credit market will keep the boom going and the new stages profitable. Furthermore, only ever increasing doses can step up the boom, can lower interest rates further, and expand the production structure, for as the prices rise, more and more money will be needed to perform the same amount of work. Once the credit expansion stops, the market ratios are re-established, and the seemingly glorious new investments turn out to be malinvestments, built on a foundation of sand. It is clear that prolonging the boom by ever larger doses of credit expansion will have only one result: to make the inevitably ensuing depression longer and more grueling.

~ Murray Rothbard

John Stuart Mill on public education, conformity and statism

A general State education is a mere contrivance for moulding people to be exactly like one another: and as the mould in which it casts them is that which pleases the predominant power in the government, whether this be a monarch, a priesthood, an aristocracy, or the majority of the existing generation, in proportion as it is efficient and successful, it establishes a despotism over the mind, leading by natural tendency to one over the body.

~ John Stuart Mill, On Liberty (1859)

Cyril Moulle-Berteaux: "The housing crisis is over"

We are of course experiencing a serious housing bust, with serious economic consequences that are still unfolding. The odds are that the reverberations will lead to subtrend growth for a couple of years. Nonetheless, housing led us into this credit crisis and this recession. It is likely to lead us out. And that process is underway, right now.

~ Cyril Moulle-Berteaux, managing partner of Traxis Partners LP, a hedge fund firm based in New York, "The Housing Crisis Is Over," The Wall Street Journal, May 6, 2008

May 5, 2008

Kevin Duffy on sustainable development

The whole idea of “sustainability” is a bit off kilter. I remember listening to Austrian economist Walter Block talk about the environment. He said he thinks of the earth like a bus, i.e. that it temporarily takes us from point A to point B. At some point, the earth will be sucked into the gravitational pull of the sun and explode (or burn up, or something to that effect). The key is for man to accumulate enough knowledge and build the means to save himself from destruction (admittedly, eons away – enough time for man to self destruct).

The secrets to solving this puzzle are out there in the universe, but require discovery. And what is the most powerful, efficient discovery process known to man? The free market! And of course private property is the cornerstone of that system.

There has been a long running debate amongst economists regarding “natural resources.” Are we in danger of running out? Do we need some kind of government controls to prevent such a catastrophe? This debate is between the resource depletionists (like Thomas Malthus, 1766-1834) and resource cornucopians (led by Julian Simon, 1932-1998). The abundance argument – to which I subscribe – is that resources are simply nature’s materials (virtually unlimited) stamped with man’s ingenuity (which is only restrained by economic ignorance and the resulting state intervention). The Malthusians have been constantly proven wrong in their predictions, e.g. that oil would run out or that the world is overpopulated and incapable of feeding significantly more people. Yet every year the earth yields more food and man discovers more proven (i.e. economic) fossil fuels.

So how should each of us focus our efforts? On conservation or creating greater abundance? Or will that be different for each of us depending on the resources at our disposal – not just our property, but also our drive and creativity? Life is about making tradeoffs in a world of scarcity. The scarcest resource, however, is our time on this planet.

~ Kevin Duffy, May 5, 2008

Dr. Stephen Schneider on advancing the environmentalist movement

To do this, we need to get some broad-based support, to capture the public’s imagination. That, of course, entails getting loads of media coverage. So we have to offer up scary scenarios, make simplified, dramatic statements, and make little mention of any doubts we may have. This "double ethical bind" we frequently find ourselves in cannot be solved by any formula. Each of us has to decide what the right balance is between being effective and being honest.

~ Dr. Stephen Schneider, Stanford University Professor, Discover magazine, October 1989 issue

May 4, 2008

Chinese entrepreneur Zhang Xin on diversification

When it comes to business and relationships, I don't buy this idea of diversification. It neglects comparative advantage. The best way to lower risk is to specialize: Put the things you love into one portfolio.

Zhang Xin, co-founder and CEO, Soho China, "'The Best Advice I Ever Got'," Fortune, May 12, 2008

(Zhang, a woman, is one of Beijing's most successful property developers and a product of Western training - Cambridge, Goldman Sachs. Her husband, Pay Shiyi, focuses on sales while she handles construction.)

Henry Paulson on the dollar

I'm a strong dollar man, we have a strong dollar policy. Our long-term economic fundamentals compare very favorably when I look around the world, and I think they're going to be reflected in the value of our currency.

~ Treasury Secretary Henry Paulson, "Paulson Says U.S. Credit-Market Crisis Is 'Closer to the End'," Bloomberg, May 1, 2008, by Peter Cook and John Brinsley)

May 3, 2008

Michael Rozeff on discrimination

Discrimination is nothing more than making distinctions and being selective. Without discrimination, freedom to choose is an empty exercise. I favor the freedom to choose. Therefore, I favor discrimination.

Not only do I favor discrimination, I discriminate constantly. And so does everyone else.

I am completely certain that your cupboard and your refrigerator contain a different assortment of foods than mine. I am sure that your choice of words differs from mine. Your friends are not mine. Your causes are not mine. Your movie and music favorites are not mine.

~ Michael Rozeff, "I Favor Discrimination," LewRockwell.com, May 3, 2008

May 2, 2008

Franklin D. Raines on expanding homeownership as local and national policy

Homeownership is a local and national policy priority. The U.S. Conference of Mayors has placed expansion of affordable housing at the top of its agenda for 2002. And in his 2002 State of the Union address, President George W. Bush called for "broader homeownership, especially among minorities."

~ Franklin D. Raines, chairman and CEO, Fannie Mae, Fannie Mae 2001 Annual Report

Thomas DiLorenzo on Countrywide Financial's commitment to CRA lending

In his April 26 New York Post article on the CRA entitled "The Real Scandal," Professor Liebowitz explains how the government's Fannie Mae Foundation singled out one bank in particular as the role model for all other banks in America in terms of its commitment to CRA lending: Countrywide, the nation's largest mortgage lender, had committed to $600 billion in low-income or "subprime" loans as of 2003. Today, Countrywide is essentially bankrupted and has been merged with Bank of America.

~ Thomas DiLorenzo, "The CRA Scam and its Defenders," Mises.org, April 30, 2008

Jim Quinn on the decline of great empires

The great empires of Rome and Britain were not defeated militarily, they went broke. We have a choice. Continue on our current unsustainable track or take dramatic action now.

~ Jim Quinn, Senior Director of Strategic Planning, The Wharton School, University of Pennsylvania, "Why We Need Ron Paul," LewRockwell.com, May 2, 2008

Lew Rockwell on the libertarian movement

Anyone involved in the "movement" knows that we have two great problems today as libertarians, one old and one rather new. The first problem is the state, and it dwarfs all others.

The second problem is that the libertarian movement today is dominated by a kind of opinion cartel. If you read the sites and publications from the well-funded outfits, the movement comes across like an echo chamber. The prose is toothless and the analytics very thin. You only need to know this: they have not only failed to support the Ron Paul movement; they organized to smash it using smears and invective. These people decided long ago that if they can't control the movement, they would kill it. Recently they have taken the latter course.

This is the reason that libertarianism can’t really be called a movement, and it's a good thing too. One man tried to buy it, control it, and turn it towards anti-intellectualism for a political purpose. If you think of one thing that libertarians are not, it is subservient. So the ideas march onward, delightfully free of manipulation by elites.

~ Lew Rockwell, "Get 'Liberty'," LewRockwell.com, May 2, 2008

Vincent Reinhart on Fed intervention

If there is a public purpose in lending to investment banks, and taking dodgy mortgage securities as collateral, then it is a question of degree about other potential lending. That's the consequence of crossing a line that had been well established for three-quarters of a century.

~ Vincent Reinhart, former Fed Director of the Division of Monetary Affairs, Bloomberg, May 1, 2008

May 1, 2008

Henry Paulson on the credit crunch

We are closer to the end of this problem than we are to the beginning. [Even with] headwinds and despite some of the things that we're going through, this economy is still growing, albeit modestly.

~ Treasury Secretary Henry Paulson, as appeared on Bloomberg Television, May 1, 2008

(Quote taken from "Paulson Says U.S. Credit-Market Crisis Is 'Closer to the End'," Bloomberg, May 1, 2008, by Peter Cook and John Brinsley)

Al Goldman on commodities

Nothing goes up forever. I think commodities have hit an intermediate top, but they haven't for the long term.

~ Al Goldman, strategist, Wachovia Securities, "Dow Industrials Move Close To Wiping Out Year's Losses," WSJ, May 1, 2008

Sam Zell on commercial real estate

I'm sure there's going to be some casualties, particularly in what I would call ex-urban, the glass-block commodity office building. I don't think there is going to be any casualties in Manhattan, I don't think there's going to be any casualties in any of the first-class office space around the country. The commercial real estate market is going to do terrific no matter what the economy does, short of a depression.

~ Sam Zell, "Zell sees commercial real estate investing surging," Bloomberg, May 1, 2008