Posted on 09/20/2008 3:57:33 AM PDT by SeekAndFind
“We have outlived the short-term and are suffering from the long-run consequences of [Keynesian government] policies.” --Ludwig von Mises ---------------------------------------------------------------------------------------------------------------
In 1918, at the end of the First World War, Randolph Bourne wrote his famous line, "War is the health of the state." Now, 90 years later, in the midst of a financial world war, we can expand that quote to say, "A Wall Street crisis is the health of the state."
What! The SEC under Republican “conservative” Chris Cox bans short selling.
The Bush adminstration and Congress seek to create a new Resolution Trust Corp. to buy up and eventually liquidate bad investments in real estate.
Congress wants to extend Federal deposit insurance on money market funds.
In sum, the Federal government is engaged in a massive intervention in the financial markets to keep the market from collapsing. The result is nothing less than a collectivist state. Collectivism is not quite socialism, where the government owns and operates the economy. Rather, it requires businesses to be regulated for some theoretical "common" good. It is free in name only because the government so heavily regulates private enterprise.
Financial crises and economic turndowns tend to increase the power of the state.
-- The Great Depression brought us the Securities and Exchange Commission and the The Glass Steagall Act, which created the Federal Deposit Insurance for bank deposits and separated banking and brokerage businesses.
--The scandals of Enron and Worldcom brought us Sarbanes-Oxley Act, the draconian and expensive accounting rules, in 2002.
It’s uncertain at this point what kind of straight jacket Wall Street institutions and Main Street investors will face when Congress and the Fed get through this crisis.
Who is the Real Culprit?
Part of the problem is that most of the media and government officials don’t understand the true cause of this crisis. Judging from recent statements by the presidential candidates (both Obama and McCain) and business leaders (such as Donald Trump), they are blaming this entire crisis on greedy corporate leaders, speculators and short sellers. Keynesian economists blame it on the “inherent instability” and “animal spirits” of greedy capitalists engaging in excessive speculation and leverage in enticing new but unregulated financial instruments, such as subprime ARMs (adjusted rate mortgages), CMOs (collateralized mortgage obligations) and CDOs (credit default swaps).
The real culprits, however, are government agencies (Congress, Fed, SEC) which created the boom-bust excesses in real estate in the first place. Congressional leaders constantly promoted through new legislation home ownership by high-risk borrowers (sub-prime lending).
The recently government-imposed “mark-to-market” accounting regulations didn’t help either. It forced mortgage companies and banks to write down mortgages to zero simply because they couldn’t be sold, even if they were still being paid by customers. As a result, we’ve seen financial tornadoes causing institutions to be downgraded and in some cases to completely collapse.
Governments both here and abroad attempted to heat up the economy through easy money, beyond the natural capacity of technology, saving, and capital formation. The broad-based money supply (M2) grew by double digit rates in developing countries and even faster in emerging markets (Russia, India and China). The Fed cut short-term interest rates to 1% in 2004, far below the natural rate of interest, and thus caused an artificial boom in real estate, junk bonds, and other assets.
Now we are witnessing the unintended and perverse consequences of their contrived agenda. Yes, there was corporate greed in response to the bad incentives created by government agencies. Normally, as Adam Smith and other classical economists point out, the commercial society moderate the passions of greed, but when government intervenes, greed can get out of hand.
Inflation and easy money are never neutral in its effects. Followers of Ludwig von Mises and Friedrich Hayek of the Austrian school of economics have long warned about the risks inherent in artificially stimulating the economy by cutting interest rates below the natural rate and inflating the money supply. It can cause an unsustainable surge, destabilize the economy in unexpected ways, and threaten a wholesale depression and crash on Wall Street. Today the Austrian theory of the business cycle offers the best explanation of what’s going on. (For more information, see my book “Vienna and Chicago, Friends or Foes?”)
Real Financial Reform
What’s the solution to this crisis?
First, let’s return to sound money. The Fed should stop shifting back and forth from easy money to tight money, from lowering interest rates to raising them. The Fed and other central banks must adopt a systematic policy of stable money. The price of gold should be a good barometer in providing monetary stability and genuine growth.
Second, the government should be reluctant to come to the rescue of every major corporation or bank. When the state socializes losses, it creates what economists call “moral hazard,” which encourages businesses and banking institutions to take on excessive risk in their ventures, knowing that the government will cover up their mistakes. Government guarantees, including insurance on bank deposits and brokerage accounts, can be costly, encouraging irresponsible behavior in the future.
I was glad to see the Bush administration refuse to bail out Lehman Brothers. In the 1990s, the giant investment banking firm Drexel Burnham Lambert was allowed to go under, and the economy survived and prospered. It’s an important lesson.
It would also be great if the new president would preserve the 15% tax break for dividends and long-term capital gains, and reduce the corporate income tax, following the trend in Europe and Asia. These measures would help strengthen the dollar and create jobs. But with Obama leading in the futures markets, the outlook for tax breaks for investors isn’t good.
These are real changes. While waiting for them to be implemented, investors should ride out the storm by investing conservatively, being well-diversified both here and abroad, and holding a safe haven in cash and gold.
For those who bought the Proshares Financial Ultrashort ETF (SKF) in anticipation of a drop in financial meltdown, tough luck, you are banned from selling this ETF by the power vested in the SEC ( even as it had dropped the past two days ).
http://seekingalpha.com/article/96387-here-go-the-short-etfs
Things like this make me wonder what country I am in.
I’ve received many emails and yes, Ultrashort Financial (SKF) is halted and it looks like we are stuck with it until October 2nd. At which time the government can decide if the peons can trade it again. If not they can push out the short ban for 30 more days.
Which will take us to November 2nd.
Which I believe is election day.
How convenient.
Update: ProShares announcement. You are now free to sell at a 35% loss. I still think they’ll keep the short selling ban until the election.
Update: Reports both SKF and SEF halted due to lack of counterparties.
Yesterday, at the gym, I had a financial advisor tell me (sarcastically) that he could now be a Government employee and have all kinds of cool benefits and retirement.
You know this “meltdown crisis” seems overblown. How is this a crisis when it only seems to be effecting those financial institutions which were playing fast and loose with loans and derivitives. It really seens very localized. McCain was right the first time, the fundmentals of the economy is strong and it would get stronger if the weak big companies would be allowed to go their natural course. I fear that the actions being taken will have the result of deflating the economy.
We'd better get ready to fight back or there will be a new “New Deal” coming and you really won't like this one.
Second, the government should be reluctant to come to the rescue of every major corporation or bank.
Why not just say they shouldn't aid every bank?
No
ProShares is not an up and up company in my opinion. They may not actually short the stocks but use puts, leverage, and other methods to simulate double shorting. Their expenses are high so even if you are right about the direction of a stock you may not make any money. I wanted to short the ultra-short China FXP at 140 a few days ago, and would have been up over 40% now, but it’s not available for shorting. Shorting a ProShares short would be a good way to go long because then their high fees work in your favor.
As someone who has witnessed the changes over the past 70 years, we are now in a new collectivist state. Government (Federal and state) agencies (EPA, FEMA, IRS, etc) now rule by fiat. May God help us when we actually have a major nationwide crisis.
Remember, that our enemies watch us continually for a fatal weakness. Recall the art of fighting without fighting is a strategy.
That is ludicrous. I’ve traded SKF in the past. Our liberty has been taken away from us without even a peep of debate.
Stop the bailout.
http://www.stopthehousingbailout.com/
I wrote my Congresscritters and I urge all others who see this as a threat to the capitalist system to do the same.
If you agree that the government must step in because AIG is too big to fail, then you must agree that no corporation must ever get "too big to fail" because it risks everything.
That's key here. The government must put an immediate stop to mega-corporations that are anywhere in the money chain.
Let's see you get that legislation passed.
Those with cash that can buy something before the governments start printing money are sitting pretty. The price of oil would certainly drop. The march of socialism would be set back 50 years. If the feds are so concerned about this bubble bursting they should have passed laws for free before the bubble developed. Had they required 20% down on real estate purchases 8 years ago I don't think this bubble would have gotten so out of hand.
If you will allow me to answer. AIG would have gone into bankruptcy court, a federal judge would have stopped all of the calls on its debts, which would have immediately reassured markets, and then the judge would begin the orderly sale of its assets to pay the debts, or some other workout approved by the creditors, leaving the shareholders whatever was left over.
In short, we have a system for dealing with corporate insolvency. Bankruptcy is actually established by the Constitution. It's a time tested system that works just fine.
Did the bankruptcy of Lehman Brothers cause the Apocalypse? No, in fact, the markets reacted with cautious optimism to the news.
I'm a corporate and tax lawyer of many years. This is a play by revolving-door investment banking types like especially Henry Paulson to save their buddies' bacon at the taxpayers' expense. It's an outrage that threatens the very existence of the capitalist system. It must be stopped.
You could have simply gone long FXI.
Not being able to short is not the fault of ProShares. It probably just meant that your broker had no shares to lend.
I wonder if it would be practical to establish diversification rules for backing assets and the assets that back those. It seems that one of the problems here is that fractional reserve banking requires that asset failures be statistically independent. If a bank has 10% reserves and a thousand different assets each of which has a statistically-independent 1% risk of failure, the likelihood that 10% of those assets will fail is quite small. On the other hand, if half the bank's assets are dependent upon some other single point of failure, and that point of failure has a 0.1% chance of collapse, then there's a 0.1% chance that the bank will go severely underwater.
I think that some sensible risk rules must be applied. I get the feeling that risk managers in the industry had some sense this mess was out there, but that no one listened to them.
This happened with S&Ls, Junk Bonds, The Dot.coms and the next will be?
If I were Bush, I'd ask the egg heads to deconstruct and then pin the map at the place the tipping point occurred, and then use that to establish rules and incentives for diversification for industries.
Given today's computing power, I wonder how hard it would be to produce periodic reports(*) listing all of the hard assets that back particular securities, along with the percentage of each, and then figure out the total value of securities backed by each asset. I would expect that there would be some hard assets which aren't backing up much of anything, and others that are backing up an amount which would vastly exceed even the most optimistic estimate of their worth.
(*) The reports wouldn't be printed on paper, but would be generated 'virtually' as input to the process that would evaluate is being backed by each hard asset.
I really don't mind paying a corporate CEO $100M if he does a good job running a thriving company. I most emphatically object, however, to the fact that the Fannie/Freddie executives are making lots of money while shafting taxpayers. IMHO, the bailouts should take the forms of loans secured by the flesh of the CEOs involved.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.