Category: regulation

Economics Update

No Comments

Normally, I don’t comment on normal swings in the stock market, but there is nothing normal about the Iceland Stock Market, which dropped 77% after trading resumed following a 3 day suspension.

Iceland is in for some very hard times. It’s because the past few years of their prosperity were due to the pseudo-economy of the carry trade, which makes nothing, and so now they will bear the costs of the resultant excesses.

Speaking of excesses, it looks like the Royal Bank of Scotland will be first in line to sell itself to the British government, which is unsurprising as they were at the forefront of complex financial deals and mergers.

It should be noted that U.S. banks are lining up for partial nationalization too.

Additionally, we are having confusing moves by the FDIC on Regulation. It appears taht the FDIC will guarantee, “Senior unsecured debt, such as commercial paper and transfers between banks, issued through June 30, 2009, to help banks fund operations and let the institutions convert maturing senior debt into new issues fully backed by the FDIC.”

There has to be some sort of major blow-up at the center of this, but I am not sure exactly what it is.

In the mean time, oil is down, on expectations of a deep recession and reduction in demand, and so is the dollar, on….I’m not sure, but my hunch is on the realization that Treasury Secretary Paulson is a moron.

That being said, the newly nationalized GSEs are not getting much love with the debt spreads widening on Fannie and Freddie, probably because the Treasury is directing them to buy some really awful financial instruments.

Inflation is the Solution, Not the Problem

No Comments

So, we have noted investor Julian Robertson saying that the US is looking down the barrel of a 10-15 year downturn, and we have concerns that the bank bailouts will cause a period of “hyper inflation”.

I think that these are related, but not in the way that the economic community does.

I think that inflation is the solution, rather than the problem.

The problem right now is that assets are in too many cases worth less than what is owed on them.

The problem is not that assets are currently underpriced, but that they were overvalued when they were purchased.

The solution is to devalue the currency that is owed on these loans, and the word for this devaluation is inflation.

As long as we put in a structure that ensures that wages (not income, but earned wages) for the bottom ½ or ¾ of the population keep pace, so that people can live, people will do OK, and the people at the core of this crisis, banks and entities that act like banks, will pay for their problem by a reduction in the value of their cash hoards.

Retirees and near retirees will take a serious hit, but society as a whole will do better.

I think, given the enormous amount of money pumped into the system by Alan “Bubbles” Greenspan over the past 20 years, and the positively mind boggling amount of money pumped into the system over the past few months by Bernanke and Paulson, that inflation is inevitable anyway.

With 20% inflation, prices would double in about 3½ years*.

One of the problems here is how to reign in the beast before you need a wheelbarrow of currency to buy a loaf of bread, and how you stop inflation once the problem is done.

My suggestion is to do it via legislative fiat: Instead of allowing inflation to come, simply pass a law devaluing the US dollar by 50%.

This law would necessarily ensure that the payments for existing contracts, including wages, would necessarily double, as would regulations such as the minimum wage.

Of course, I I’m an engineer, not an economist, dammit,† and I’m sure that any economist would consider my proposal batsh%$ insane.

*Rule of thumb on interest: If you divide the number 72 by the interest, you get the approximate time to double. It’s called the rule of 72.
†I LOVE IT when I get to go all Doctor McCoy!!!

Sarkozy Opposes Rule of Law With Regard to IP

No Comments

Apparently, it appears that Mr. Congeniality has sent a letter to the European Commission demanding that authorities be able to cut off people accused of violations of IP laws without judicial review.

It seems that a bill going through the European parliment has the following language:

No restriction may be imposed on the fundamental rights and freedoms of end-users without a prior ruling by the judicial authorities.

It also appears that Sarkozy thinks that this is too much of an imposition on the IP dependent industry.

The European commission told him to go pound sand.

I Really Hope that He’s Right

No Comments

William Volk, a long time denizen of the tech industry,* wonders if the financial crisis spells the death of Web 2.0, or more accurately whether it spells the death of the venture capital supported business models for internet companies.

I hope so, because I am sick to death of the kule kidz business model.

What is going on here is that the capital costs of creating an internet presence are vanishingly small, look at the cost of building just one automobile assembly plant, so silicon valley snake oil salesmen are(were) able to get money and line their pockets.

To be fair, there are two groups of people making out like raped apes on this bit of dishonest persiflage, the owners of the internet firms with non-existent business models, and the VC firms that get a commission every time that they spend other people’s money.

It’s been a profitable scam for some time, funded largely by the stupidity of Alan “Bubbles” Greenspan, and now it looks like the the carnival is over.

*He was actually at the legendary meeting where a senior executive doubted the marketability of Teenage Mutant Ninja Turtles in a video game. The company also turned down licensing the Simpsons when they were still just a short bit on the Tracy Ullman Show.

Economics Update

No Comments

If there is any major difference between the US and the European response to the financial crisis, it is that the Europeans have their sh$# together relative to the US.

Britain was already taking equity stocks in banks this morning, and any sensible action by the Treasury department still appears to be weeks away, so it’s not surprising that the dollar is down relative to European currencies.

It is a vote on the confidence that investors have in the relative competencies of the governments involved.

Or maybe it’s the fact that the markets realize that the foreign exchange markets are subject to supply and demand too, and with the central banks of the industrialized world are shoveling dollars out their doors, with the Fed being the most aggressive.

I think that the goal was to lower interbank lending rates, which it appears to have done for a while, at least.

It appears that the markets are still seeing a recession, as commodities are generally down though oil ended up, above $80/bbl, today.

The bit of disturbing news is that it appears that the Treasury is
using Fannie Mae and Freddie Mac to buy $40 billion in junk mortgage securities, which is the wrong thing to do.

It’s why the even the knuckle draggers at the White House are moving from buying the sh#$pile to buying the banks that need recapitalization.

This is what the Swedes did, though they added a lot of F&^% you to bank management that we are unfortunately leaving out.

So NOW Republicans Want an Aggressive FEC

No Comments

We all know about Obama’s small donors.

He’s collected hundreds of millions of dollars that way, and the Republicans won’t stand for it:

The Republican National Committee plans to file a complaint on Monday against Senator Barack Obama’s presidential campaign raising questions about the legitimacy of its small contributions and donations from overseas.

….

But such donations do not have to be itemized in reporting to the election commission unless the donor’s total contributions exceed $200. The lack of information on such donors has been highlighted by watchdog groups as potentially troublesome. The groups have also praised the campaign of Senator John McCain for offering on its Web site a tool that allows a search of all of its donors, including those who gave less than $200.

So Barack Obama is following the law, and the ‘Phants don’t like it, because he raises too much money.

SEC Reauthorizes Faith Based Accounting

No Comments

It looks like the banks lobbying the SEC has gotten the desired results. The SEC has relaxed rules on “Mark to Market” accounting:

The three-page joint statement today from the SEC and the Financial Accounting Standards Board does not do away with fair value accounting provisions altogether.

But it gives companies more leeway to employ estimates and their own judgment in many cases when they deem the market to be “disorderly” or seized by liquidity problems. It also gives companies room to determine whether the impaired value of their assets is no longer temporary, a conclusion that could trigger massive write-downs.

Not to get in to the minutiae of this, but it appears that they largely gutted mark to market.

This will make any final reckoning worse.

Not Enough Bullets, Part 2 of Who Knows How Many

No Comments

Alan H. Fishman. former CEO of the former Bank Wamu, got $20 million for his 17 days on the job:

According to filings with the Securities and Exchange Commission, WaMu threw a $7.5 million bonus at Fishman when it hired him on Sept. 8, and guaranteed him an immediate cash severence of $11.6 million — both of which he gets to keep.

He also was eligible for annual bonuses of up to 365 percent of his annual base pay — set at $1 million — to go with millions of shares of company stock.

Fishman does lose out on a big bonus that would have kicked in had he remained on the job through 2009.

We are paying a bunch of Harvard MBAs to fail, and not surprisingly, that’s what they produce, failure.

Of course, the employees and their pensions….C’est caduc.

House of Representatives Passed New Credit Card Regulations

No Comments

It’s some fairly minor stuff, but it’s a start, though I doubt that it will make it past the Senate, though considering that the distinguished gentleman from MBNA Delaware is otherwise occupied, it’s possible.

Basic provisions:

  • requires a notice period for interest rate increases
  • prohibits interest charges on balances paid during grace periods
  • bars issuers from applying payments first to lower-interest debt while debt carrying a higher interest rate remains unpaid.

The Seeds of the Next Crash Have Just Been Sown

No Comments

The Federal Reserve just eased regulations on minority ownership of banks, raising the percentage of stock ownership allowed to be raised without requiring registration as a bank holding company”

Key changes in the guidelines include allowing an investor to buy up to a 15 percent voting stake instead of the previous 9.9 percent limit. Investors can also buy up to 33 percent total equity interest, including voting and non-voting shares, instead of the 25 percent prior limit.

Allowing greater ownership before regulation, reminiscent of the S&L crisis, when many of these institutions were purchased by developers, who then lent to themselves at unrealistically attractive rates.

Of course, these days, it won’t be real estate developers, but private equity firms who can use this to exert influence over banks for capital.

Case in point, the founder of private-equity firm J.C. Flowers & Co., surprisingly enough a guy named J. Christopher Flowers, is buying the First National Bank of Cainesville in Missouri.

Not enough bullets.

H/T Calculated Risk.