OT: another long off-topic economics thread

Since you're in a mood to be depressed, I just sent you another depressing article from this month's Harper's. This one says we're now addicted to bubbles and that the economy is mostly fluff or "fictitious value," and the author is no lightweight -- Eric Janszen, president of iTulip, former CEO of several companies, and former managing director of the venture capital firm Osborn Capital.

(Is it meringue, or is it just another soufflé?)

-- Ed Huntress

>

================== More of a "belly bomb" I think.

Thanks for the article. Much good insight, and food for thought.

Being of Scots descent, I think that the Darien bubble should have been included. When this grift blew c. 1699, it not only took down the Scots' economy, it took down Scotland as an independent nation. The Act of Union of 1707 included Article 14 (the Equivalent) granted £398,085 10s sterling [a huge sum of money in those days] to Scotland to offset future liability towards the English national debt. In essence, it was also used as a means of compensation for investors in the Darien Scheme. See

This article reinforces the old adage "power corrupts, and absolute power corrupts absolutely," although the term the author uses is "exorbitant privilege."

A critical phrase that should be noted is "For those investing in that sector [the new bubble], legislation guaranteeing favorable tax treatment, along with other protections and advantages for investors, should already be in place or under review." So much for the free market economy and "invisible hand."

The conclusion of this report should be a klaxon horn of warning. As the old (but gold) adage states "If something can't continue

-- it won't." ============= The next bubble must be large enough to recover the losses from the housing bubble collapse.

Thus, we can expect to see the creation of another $8 trillion in fictitious value, which gives us an estimate of $20 trillion in speculative wealth, money that inevitably will be employed to increase share prices rather than to deliver "energy security." ============ I like the author's use of FIRE for "finance, insurance and real estate" as this segues neatly into the observation that "FIRE is a dangerous servant and a fearful master."

(Why do I keep hearing the song "She got the gold mine and I got the shaft" playing in the background?)

Unka' George [George McDuffee]

------------------------------------------- He that will not apply new remedies, must expect new evils: for Time is the greatest innovator: and if Time, of course, alter things to the worse, and wisdom and counsel shall not alter them to the better, what shall be the end?

Francis Bacon (1561-1626), English philosopher, essayist, statesman. Essays, "Of Innovations" (1597-1625).

In response to several emails I just received, the web sites for your congresscritters email addresses and/or web feedback pages are (I suggest you bookmark thes specific pages on your browser)

FWIW -- I just posted the following message to my senators and representative on this, although I don't know how much if any effect it will have. Feel free to use any or all of it for your email.

============ It is clear that much of the current economic and fiscal malaise has been caused by speculation and gambling on an unprecedented scale.

As increasing numbers of bonds near default, a new risk, called CDS or "credit default swap" is looming. As the below referenced article indicates, CDS was intended and originally sold as a type of "credit insurance" for "high yield" (i.e. junk) bonds, but has now become a super bingo or punchboard game, concealing the unstable nature of our major financial institutions which now resemble the proverbial "house of cards."

The problem is that the CDS contracts outstanding far exceed the amount of debt for which the contract written. For example, when Delphi defaulted, the KNOWN volume of CDS outstanding was $28bn against $5.2bn of bonds and loans.

Rather than "stabilizing" the markets through "risk management," this proliferation of "naked" CDSs appear to have greatly exacerbated and amplified market instability because of the ephemeral nature of the pseudo "assets," which in too many cases are used to back or generate additional, highly leveraged "securities," or "derivatives."

I am therefore requesting urgent action to require that an actual "insurable interest" as in the ownership of a bond must exist before any valid CDS contract may be entered into, and that the CDS so created either transfers with the bond when sold, or lapses. This is no different than requiring the effective ownership of a stock before a "short sale" is allowed in order to prevent market instability/manipulation.

For more complete information on CDSs, and the danger they present to orderly markets please see the Financial Times article at

I hope this is helpful.

Unka' George [George McDuffee]

------------------------------------------- He that will not apply new remedies, must expect new evils: for Time is the greatest innovator: and if Time, of course, alter things to the worse, and wisdom and counsel shall not alter them to the better, what shall be the end?

Francis Bacon (1561-1626), English philosopher, essayist, statesman. Essays, "Of Innovations" (1597-1625).

OOPS try

for the senate.

Unka' George [George McDuffee]

------------------------------------------- He that will not apply new remedies, must expect new evils: for Time is the greatest innovator: and if Time, of course, alter things to the worse, and wisdom and counsel shall not alter them to the better, what shall be the end?

Francis Bacon (1561-1626), English philosopher, essayist, statesman. Essays, "Of Innovations" (1597-1625).

Damn, I didn't realize it's available for free. I'm a subscriber so I downloaded it after I'd logged in.

Here's the free link (I think):

-- Ed Huntress

LINK, Ed?

oh - this one?

quote: anyone who went through the crash of 1987 will remember the role played by "portfolio insurance." institutional investors believed they could mitigate risk with dynamic hedging, selling stock index futures as necessary when/if the market turned down. feeling bullet proof because of the predicted effectiveness of such a strategy, they piled on risk. of course, when the market started going down, all the portfolio insurers simultaneously started selling index futures. this drove the price of the futures down, so every step of the way down arbitrageurs bought the futures and simultaneously sold the stocks. the portfolio insurers saw their equity values dropping further, and so sold more futures to hedge. repeat sufficiently to create a 25% drop in one day. get the picture?

noland's piece teases out a similar mechanism, option- instead of futures-based, underlying the tech sell-off after the peak in 2000. and he discerns the same kind of feedback loop in-the-making in the credit markets, based in credit default swaps along with similar derivatives.

i must say that, having read through this, i actually feel afraid of what's in store. thinking about the economic future, i haven't felt really afraid before.

========== The problem is that this is only the *KNOWN* "stuff" that has floated to the top belly up like a dead fish.

It now appears that the financial markets are so intertwined and convoluted that *NO ONE* has any real idea or even an accurate estimate of what remains to be discovered -- how much double counting has occurred -- how many circular references there are in the spread sheets -- etc.

And we were supposed to entrust our Social Security/retirement funds to this bunch of f**k wits, dick weeds, no-loads, and con men? Just look what they did with the GM and Ford pension funds.

Unka' George [George McDuffee]

------------------------------------------- He that will not apply new remedies, must expect new evils: for Time is the greatest innovator: and if Time, of course, alter things to the worse, and wisdom and counsel shall not alter them to the better, what shall be the end?

Francis Bacon (1561-1626), English philosopher, essayist, statesman. Essays, "Of Innovations" (1597-1625).

Nowadays we barely pause between such bouts of insanity. The dot-com crash of the early 2000s should have been followed by decades of soul-searching; instead, even before the old bubble had fully deflated, a new mania began to take hold on the foundation of our long-standing American faith that the wide expansion of home ownership can produce social harmony and national economic well-being.

Two books I read illustrate what is going on quite nicely. One was called When Corporations Rule the World and the other was by Kevin Phillips, I forget the title but it was about wealth and finances. In Phillips book he warns of the danger of "finance" taking over from business as the driver of wealth creation. He cited several cases where most of the money in some countries was being made from finance and not from making things. All of the countries where finance took over came to ruin. That's what is happening to the U.S. If you look at GM you have a good example of how it works. GM makes cars and you think this is how they make their money. They don't. Their auto operations make little or nothing but the finance wing of the corporation is where they really make their money. It's like the movie theatre business where they make nothing from showing the movie but all their profit comes from the concession stand.

In the book about corporations ruling the world the author explains how when corporations rule and their mentality of putting profits about all else takes over a nation, like ours, it changes the whole idea of what the government is for. Instead of providing services and a safe environment for human beings profit is all that matters. If more profit can be made from outsourcing and from finance that is what the corporation does. What else matters? What is supposed to matter is for a country to put it's people and its environment first. This is not done through finance but by the old ways of creating wealth from agriculture, mining, and manufacturing, where real products are made and sold, producing real wealth. When the wealth is all made on paper like with the real estate run up in value or in the stock market trillions are made and lost but it's nothing but ink on paper. When you build a solid infrastructure for the benefit of the people, and you focus on making ways for the people to improve their lives and not simply on profits then human lives are improved. Corporations do not care about human lives; only about profits.

In this country we've been on the course of finance and corporations ruling for a couple of decades now and if the trend isn't reversed my guess is that we will wind up like the Dutch did when the tulip bubble burst. You can only go so far without a solid foundation and ours is crumbling. Wanna buy some gold? It's only $900.00 an ounce and it's sure to go up, right?

Hawke

OK, I think the author's analysis is good food for thought, but I didn't intend to sow panic.

Keep in mind that Janszen bills himself as a contrarian. That has a certain implication in the financial world: contrarians often make money when others don't, but they don't make money when others do. Also, Janszen seems like a well-balanced guy who recognizes that the role of a contrarian is to smoke out things that other people miss, and to consider the consequences that other people would deny. I don't think that he would claim to have a unique hold on truth.

His prediction of a third bubble is predicated on several things. First, that another opportunity for a bubble exists. As he says himself, alternative energy just looks like a good candidate, not that it will necessarily become the next bubble. Second, he's projecting from one event -- the follow-up of the housing bubble to the dot-com bubble -- and concludes that this is now a pattern, and that the financial markets will provoke another bubble to recover their losses from the last one.

That's speculative as hell. It is something to think about and to watch for. But assuming it will happen assumes the predicate that nobody in a position to do anything about it will *not* recognize it, or won't care, or that there will again be complicity in covering it up when it does happen.

If it happens again, I doubt if other people won't notice it. And we have the tools to stop it, as we had before all of the deregulation. The tools are to restore openness and reserve requirements, and to regulate the hedge fund, private capital, and state-sovereign capital markets the way we used to regulate such things -- more like the stock market is regulated. Letting the derivatives evolve into an entire underground, unregulated, largely invisible financial market was the first big mistake. It's made me queasy since it first started, in the early '80s. As Warren Buffet said in the midst of the dot-com boom, when he basically pulled out of making new ventures, he didn't understand how this new marketplace worked, or how it could function. I didn't, either, but for a different reason: he's in the loop, I'm totally out of the loop, and I don't know anything about what these guys do in back rooms and at power lunches. The fact that he was in the loop and didn't understand it was the sign to me that it was all a bunch of hot air.

So there are going to be consequences to having $7 trillion evaporate practically overnight, but Janszen's scenario is just one possible one. It won't happen behind closed doors next time. The non-contrarian position would be that the pain does not have to accumulate, even if we suffer a prolonged recession as a result of the present bubble collapse. It does mean that we'd all better be skeptical as hell and put pressure on Congress to regulate it and to fund the SEC investigative arms. Reagan just starved the beast, and the first Bush and Clinton followed suit. The current Bush doesn't even know the difference between the good beasts and the bad beasts.

-- Ed Huntress

You also have to consider that the chicken really did come before the egg here. The demand that led to questionable lending practices was generated by hedge funds with tremendous inflows of new money from things like 401K's and the like. They had to find places to invest that fit their charters. Mortgage backed securities - illegal in the US before the S&L crisis of the 80's - were seen as rock solid and rated highly so the push was on to generate them. The demand was for more product to sell investors, not more demand for housing......

LOL But were they Golden Eggs? Perhaps that's really what happened to Dinosaurs. It would be a shame, shameful even, to see another extinction level event in the mortgage bond industry. Or not....

Bingo John

============== If those are brown and smell bad, most likely those ain't eggs....

BRASS BALLS OF THE YEAR NOMINATION!

After endless lobbying, and pitching several "hissy fits," the financial/banking industry got Glass-Steagal-II repealed, the bankruptcy laws revised, and most of the regulations affecting pesky things like reserve requirements amended or ignored.

I just came across a more-or-less follow-on story that qualifies Credit Suess and JP Morgan for the "brass balls of the year award."

The "masters of the universe" that run these trans-national financial powerhouses now are rattling their tin cups and wanting the US taxpayers, via Washington, to bail them out of the mess they created.

============ Banks to ask government to take bad loan risk: report

Thu Feb 14, 7:31 AM ET

NEW YORK (Reuters) - The banking industry is proposing to members of the U.S. Congress and the White House that some of the risk of troubled mortgages should be shifted to the federal government, according to a report in the Wall Street Journal on Thursday.

One proposal has been advanced by officials at Credit Suisse Group (CSGN.VX) and would let the U.S. Federal Housing Administration guarantee mortgage refinancings by some delinquent borrowers, said the report.

The Credit Suisse plan would open the way for nearly 600,000 sub prime borrowers, many of whom are delinquent on their mortgages, to refinance into loans backed by the FHA, said the Journal, which cited a Credit Suisse spokeswoman.

============

So much for "rugged individualism," and "limited governmental involvement in the private sector."

Unka' George [George McDuffee]

------------------------------------------- He that will not apply new remedies, must expect new evils: for Time is the greatest innovator: and if Time, of course, alter things to the worse, and wisdom and counsel shall not alter them to the better, what shall be the end?

Francis Bacon (1561-1626), English philosopher, essayist, statesman. Essays, "Of Innovations" (1597-1625).

Aw horse feathers, John.

Dinosaurs laid eggs LONG before chickens came along.

Robert Reich was discussing this yesterday on NPR. This is what "If it's good for GM, it's good for America" looks like without proper controls and oversight.

They were lawyer eggs

See above. :(