bostonbubble.com

[balor123]

Did anyone watch the crash of 1929 show on PBS yesterday? It was was interesting. The causes for the crash of 1929 and 2008 are very similar. What surprises me is that the solution is also the same - get credit flowing again by lending to banks. It didn't work in 1929 so I don't know why Bernake thinks it will work now. Like 1929, people are still in denial about what is happening to this economy. What can separate this recession from the Great Depression is employment. If we keep it high, then we'll certainly come out poorer but at least we'll all be able to eat and have a place to live. I don't know why Bernake isn't concerning himself with that issue, which is much more important than keeping banks solvent. People need to find new jobs in more productive areas outside of housing and finance.

[admin]

I didn't see the program, but maybe I'll try to catch a rerun of it.

Anna Schwartz, co-author with Milton Friedman of the ostensibly definitive "A Monetary History of the United States", has said that it is a misnomer that the current crisis is due to a lack of credit:

[balor123]

Credit caused the rapid increase in prices and so lack of credit causes the rapid decrease in prices. Providing access to credit will treat the symptom but not fix the problem. In fact, it will likely make the problem worse.

The government should be focusing on finding new jobs for people who are employed in formerly necessary but currently and going forward unnecessary occupations.

I think the liquidity injections were given for a few reasons. First, to stop the deflationary spiral in housing. Humans, by nature, are momentum investors. No one wants to invest in housing that when it has been decreasing in value rapidly, with emphasis on "has been". Anyone who did has already placed their bet and lost. The spiral will stop when people no longer care about the prospect of losing money, which could be because it falls to a point that it is cheap relative to income or when rent becomes too expensive. Second, to spur job growth. Businesses can't grow without access to credit and banks won't lend to anyone both because of the risk of widespread deflation and because of their need to horde cash to cover losses from housing. Last, to try and ease the suffering of those who bought houses that they couldn't afford or who could but can no longer.

Rising inflation will solve the problem but causes new problems. If wages don't rise, then housing becomes cheaper but remains unaffordable. Worse yet, everything else becomes unaffordable. Also, lenders will become more reluctant to lend because they now have to factor in the risk that the US might intentionally increase inflation. Pumping money into the economy has a way of causing targeted inflation to occur in undesirable places, like housing and internet startups. My guess is the next bubble will be alternative energy, even though it appears that the solar bubble is already popping.

Paulson is providing cash to banks in hopes that they'll start lending it but not dictating to them that they have to or even how to. I think this is in part due to his history with the banking firms and his desire to keep their business models in tact. In reality, he is fueling the compensation bubble that has appeared with the liquidity driven growth of the past 5 years. Engineers saw the same bubble appear during the last bubble but the situation quickly corrected itself when funding disappeared for companies. The correction isn't happening very quickly now because the injections have made it unnecessary, thereby fueling further inefficiency in their business models.

In any case, in the worst case they banks use the money to write off bad mortgages and continue high compensation. Writing off the mortgages stems impending doom but doesn't make their businesses any more viable so is not an effective way of spending money. Some lenders are using the money to directly bail out homeowners (Fannie and Freddie). If we want to bail out homeowners, then we could simply write checks to them and avoid the costs, which are huge now, of going through banks. In the best case they'll lend it to new businesses but those have always been regarded as risky and in a recession even more so. They don't want to do that. The only businesses receiving cash right now are the weakest ones - the ones that should be out of business.

What scares me the most is that Paulson, as of this morning, appears to have no plan as of yet on how to solve the problem and he's already spent a significant amount of the money. We've spent our resources trying to put out fires hoping to save infrastructure from damage. I don't know what the right solution is but by spending all this money now we're potentially making our hole deeper in the future. If the bailouts don't work, then we'll not only have a severely messed up economy but we'll also have no options for restarting it like we did in the 30s. The problem is that we seem intent on avoiding even a recession at all costs.

It is hard for Americans to grasp but we can't move forward until our economy fundamentally changes. We need to stop building houses and moving money around and start innovating. That means fewer real estate agents and fewer bankers. Worse yet, people need to get used to having lost the money in their houses. Given the large number of people and who are currently employed in those fields and the large amount of money that people stand to lose, it is understand that this conclusion is hard to accept.

[john p]

After reading your post, what comes to mind is that each paragraph could serve almost as a definition for a new financial term.

The way we have terms in science relate to the properties, the elements and the behavior i.e. photosynthesis.

In politics we name things after politicians favorite subjects (themselves) Graham Leachy, Hawley Smoot Tarrif, Glass Stegal, etc.

What needs to happen now is for people to start to define terms based on behavior so it removes the political nature and we can talk in pure mechanics and hopefully people will trust the nature of the load bearing capacity of the logical framework and rely less on the trust in the men i.e. the "Paulson Bailout". People that don't like or trust Paulson will fight it based on that.

We don't have enough men and women of integrity or ability to create superheros. Even Obama isn't a superhero.

Baylor and Admin and others, I know you're smart guys (gals?), if you could take a try at inventing a few words that you feel define the dynamics and statics of the situation, I think it might help find the next level of words; the name of the antidote.

This is what I'd do boys:

I'd start looking at the inverted pyramid of liquidity:

http://commons.wikimedia.org/wiki/Image:The_inverted_pyramid_of_global_liquidity.gif

Now imagine this as atmospheric and the bottom of the pyramid, liquid and solid and the top gaseous. My philosophy I call "trickle-down economics" analyzes the pressures of the different states of solid/gas/liquid. What are the internal pressures that uplift like a tornado force and suck upward and what behavior is needed to make it rain baby, rain on me, show me the money, have a caytalist to start the trickle down economics. I think that although they flooded the economy with money we never got the trickle down rain or gas to water because we expanded the space of derivatives. We didn't get the compression of the gas that would have pressurized it to make rain. We expanded the space of derivatives and foreign investment so it actually sucked the wealth upward. Now we need to have it fall back down and water the crops.

The next thing I'd look at is the behavior of forces and how the changes in states of matter deform and modify behavior. This is called Rheology.

http://encyclopedia2.thefreedictionary.com/Rheology

So basically the analysis of forces has to do with following flow and forces through a vertical strata of liquidyt and morphing and refracting pressures and states.

What do you think?

[admin]

[john p]

Guy's that's totally right.

Think about cause and effect. If we say we're going to buy these troubled assets, just the statement changes the properties of the market. Now the market behaved on those positions.

http://www.boston.com/business/articles/2008/11/12/regulators_urge_banks_to_fight_crisis_by_lending_1226503897/

Now we get into the whole line of bailout handouts everyone is waiting in like like a soup kitchen. Now that government is looking out the door and seeing the Auto Industry, a politician see's Michigan's electoral votes. The value structure is based on politics/votes. There is this political overlay. Now the problem is in order for people to get things passed they need to grease everyone and you get tons of pork to get the votes to target one group.

Getting into the business of bailouts changes the properties of our resolve, it changes the risk tolerance as Admin put it. Government now has become the shock absorber and toxic waste dump. My problem with Obama was that he wasn't the stone cold capitalist George Jefferson. Would George Jefferson have bailed out someone?

http://www.museum.tv/archives/etv/J/htmlJ/jeffersonst/jeffersonst.htm

Now, by absorbing this risk, we have changed the properties of government by changing its role and changed/lowered the risk factor for those that gambled and failed. Obama seems to be predisposed to pandering to those in need, so guess what, we've got a line down the street of those that are upside down in their credit cards, house payments, failed business plans, etc. Voting for Obama was like ringing the dinner bell for every person who took on too much risk and failed.

Now, I hope I'm wrong. I hope Obama stands firm and starts to promote personal responsibility and individuals accepting the risks that they signed on when they had hopes for a short cut to wealth. People get excited and rise up like yeast and he just pumped up and inflated people's hopes during a time when people needed a bucket of cold water. I don't suppose he would have gotten elected if he talked about personal responsibility; his campaign would have been a snoozer. So now all the people that supported him are getting in line for a hand out. That changes the properties of our economy. You don't rise up in today's politics by saying no, you rise by saying yes. Obama voted "Present" during tough votes and voted 97% of the time with his Party. If he continues his career in this manner it's handout city and the sled dogs in our society will eventually decide that the math doesn't work and the guy that rolls the dice can win and if they fail the worker has to pay for him anyway, so it will just be prison rules.

I wish we could distill the politics as much as reasonable and have a financial plan and structure so when political pressures come knocking we can benchmark to some model of a healthy economy and evaluate it based on how it impacts the flow and structure of it.

[CC]

Thanks for Admin for the following link:
http://online.wsj.com/article/SB122428279231046053.html

According to the article, the government is trying to save the banks, but the problem is the banking system, not those banks made wrong decisions. However, I think those guys are smart. If we can understand this, they can understand it too.

I believe the truth is it has nothing to do with troubled banks or banking system. Actually they are trying to save their banker friends!

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John P talked about Obama..... well... I think he will create a much higher inflation. It's hard to believe he'd also like to save the auto industry which I believe it's problem is way too big to be saved.

[admin]