|
Inevitable and Disgraceful, but Still
Unpredictable |
Paris, France
Friday, November 28, 2008
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*** Why not charge a proven
deflation-fighter with running the Treasury?...the ‘rescue’ teams are
short-handed…
*** A pretty tame Black Friday…the
biggest government project in the history of mankind – do you think
there will be some waste, fraud and abuse?
*** The $1 trillion deficit for 2009
may be underestimated…paging Mr. Gono…and more!
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“I think Obama should get Gideon Gono on his
new team,” writes a friend.
Never heard of Gideon Gono, dear reader?
Well, he is one of the best economists who never won a Nobel prize.
Why? Because Mr. Gono is a proven
deflation-fighter. No one knows more about avoiding deflation that Mr.
Gono. That’s why he was such an obvious choice for Secretary of the
Treasury. If America’s top financial challenge is preventing a
deflationary meltdown – as everyone says it is – than Mr. Gono is our
man. Other economists – notably, Ben Bernanke – have studied the
question academically, but Mr. Gono has years of practical experience in
the field.
He probably should have stayed in the field.
Perhaps hoeing tomatoes. Instead, five years ago, the old crony was
appointed to head up Zimbabwe’s central bank.
Reuters reports on the results: “Zimbabwe's
inflation estimated at 89.7 sextillion percent
“Johannesburg - Zimbabwe's central bank
Governor Gideon Gono has been re-appointed for a second five-year
term.... Appointed in December 2003, Gono's term has spanned the
economic collapse of once-prosperous Zimbabwe, highlighted by shortages
of basic goods and the highest inflation in the world, which the
government put at 230 million percent in July. Washington-based Cato
Institute foundation estimates Zimbabwe's inflation at 89.7 sextillion
percent.
“In an effort to deal with hyperinflation,
Gono has introduced higher denomination notes and lopped a total of 13
zeros off the currency - 3 zeros in August 2006 and 10 in August 2008 -
but it has continued to lose value. Currently, the highest denomination
banknote is Z$1 million, not enough to buy a loaf of bread and consumers
have to carry huge amounts to make simple purchases.”
But instead of bringing in someone who really
knows how to keep prices from falling, Obama has appointed Timothy
Geithner to head up the Treasury department. As head of the New York
Fed, Mr. Geithner was practically in the room when the ‘bad stuff was
going down.’ He was the G-man...the government’s eyes and ears...right
on-the-scene when Wall Street was packing its pipe bombs with subprime
debt...filling its molotov cocktails with unsecured commercial
debt...building its WMD with more than $400 trillion of derivatives.
Apparently, he didn’t see a thing!
Two of our English colleagues went to see
economist Robert Shiller (of the Case-Shiller real estate survey) at the
London School of Economics this week. They report that Shiller says he
sent warnings to the NY Fed, while Geithner was in charge. But the feds
didn’t seem to care for his gloomy messages and stopped asking his
opinion. Then, Shiller studied Geithner’s remarks during the bubble
period and came to this conclusion:
“He had no idea.”
Now, Wall Street has blown itself up...and the
whole U.S. economy seems to be caving in. Bring in Gono, is our
advice. There’s a man who knows how to gin up a little inflation when
you need it. Or even a lot.
*** “Black Friday,” they are calling it.
Today is usually the biggest shopping day of
the year. Many people take the day off. Traditionally, they’ve got
time on their hands and money in their pockets.
But not this year. According to one report,
consumers are so tight “the holiday shopping season is already over.”
“It’s pretty grim,” said an American friend
with whom we had Thanksgiving dinner last night. “But at least people
are reacting. That’s what’s nice about the U.S....people react. You
can make deals. You can fire people. You can try to get back on your
feet. Here [referring to France] it takes so long and costs so much
money to fire someone that businessmen figure the recession will be over
before they get rid of anyone. And cut prices? It’s against the law!”
Our friend had just bought a new car. It’s an
Audi, made in Germany, only a few hours drive from here. But he bought
it in America. Now, he’ll ship it back to back to Europe.
“Is it worth it...I mean, with the shipping
costs? And then, you’ve got to reconvert it...to European standards...”
we wanted to know.
“Oh yes...they will make you a very good deal
in America. I saved a lot of money this way...”
*** Meanwhile, the rescue teams are at work.
They’re trying to squander hundreds of billions of dollars. But they’re
short-handed, says the Wall Street Journal. Apparently, a lack of staff
is keeping the pork in the barrel.
“It’s not just that,” continued our friend, a
government contractor. “Everybody expects instant results. But it
doesn’t happen that way. They have procedures that have to be
followed...definition of the work...engineering and architectural
designs...bids...legal and administrative hoops you’ve got to jump
through. It will be two years before any of these projects are actually
begun.
“Of course, they can streamline the process,
like they did for the Iraq War, but that just results in a lot of waste
and corruption...”
Waste and corruption? No!
But you ain’t seen nuthin’ yet. This is the
biggest government project in the history of mankind. Bigger than the
pyramids...bigger than WWII. And there will be no overseers whipping
the slaves...and no visible enemy threatening rape and pillage.
Mightn’t some grease help the whole process of spending? Will a few
dollars slip through the cracks? Will a few insiders score some
sweetheart deals? Will a billion here...and a billion there...possibly
end up the hands of people who really don’t deserve it...maybe even the
very same people who are most to blame for causing the problem in the
first place?
Oh dear reader...that’s too easy...ask us
something harder!
*** After the turkey had been put away,
Americans started thinking...what’s all this rescuing going to cost?
The $1 trillion deficit forecast for 2009 may
turn out to be underestimated, says Forbes.
At the beginning of the week our old friend,
Jim Davidson, had this calculation:
“Here's how this bonanza breaks down:
• $29 billion for Bear Stearns
• $143.8 billion for AIG (thus far, it keeps growing)
• $100 billion for Fannie Mae
• $100 billion for Freddie Mac
• $700 billion for Wall Street, including Bank of America (Merrill
Lynch), Citigroup, JP Morgan (WaMu), Wells Fargo (Wachovia), Morgan
Stanley, Goldman Sachs, and a lot more . On top of $45 billion for
Citibank, comes a guarantee of $306 billion in bad loans.$800 billion to
buy mortgages issued or backed by Fannie Mae, Freddie Mac, Ginnie Mae
and Federal Home Loan Banks.
• $200 billion for the auto industry
• $200 billion to buy securities tied to student loans, car-loans,
credit card debt and small business loans.
• $8 billion for IndyMac
• $700 billion to $1 trillion stimulus package (from January)
• $50 billion for money market funds
• $138 billion for Lehman Bros. (post bankruptcy) through JP
Morgan
• $620 billion for general currency swaps from the Fed
“The numbers change so fast, it is hard to
even add them up. Rough total: $3,651,800,000,000 .00
“Note: This list will almost assuredly be
out-of-date when you read it.”
He was right about that...by the end of the
week, it was out of date. Kathleen Pender at the San Francisco
Chronicle reports:
“The federal government committed an
additional $800 billion to two new loan programs on Tuesday, bringing
its cumulative commitment to financial rescue initiatives to a
staggering $8.5 trillion, according to Bloomberg News.
“That sum represents almost 60 percent of the
nation's estimated gross domestic product.
“Most of the money, about $5.5 trillion, comes
from the Federal Reserve, which as an independent entity does not need
congressional approval to lend money to banks or, in ‘unusual and
exigent circumstances,’ to other financial institutions.
“Only about $3.2 trillion of the $8.5 trillion
has been tapped so far...”
*** Let’s see, Mr. Market has almost cut stock
prices in half. And he’s taken about 20% off housing prices. That’s a
loss of about $11 trillion. Hmmm...the government might be a little
short.
Or looked at another way...how much spending
has been taken out of the U.S. economy? Americans enjoyed “home equity
withdrawal” of about $800 billion per year – at the height of the bubble
two years ago. And they saved nothing. Now, their saving rates must be
going up fast (we have no data on this...yet)... and home equity
withdrawals have almost disappeared. If the savings rate were to go to
10% of GDP that would mean about $1.4 trillion taken out of the consumer
economy. Minus also the $800 billion in home equity withdrawal that no
longer happens. If the government wanted to replace this, it would have
to spend about $2.2 trillion MORE each year. That would be on top of
the budget deficit for 2008 – about half a trillion.
How about a deficit of $2.7 trillion?
Does anyone have Mr. Gono’s phone number?
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The Daily Reckoning PRESENTS:
Here at The Daily Reckoning, we take the part of the underdog...the
downtrodden and the despised. Who fits that description now? Who is
held in lower esteem than child molesters? Who gets less respect than
smokers? Who is in a lower caste than hewers of wood and drawers of
water? We’re talking, of course about the toilers on Wall Street. So
today, we take their part, because no one else will.
Read on…
INEVITABLE AND DISGRACEFUL, BUT STILL
UNPREDICTABLE
by Bill Bonner
Who’s to blame for the worldwide financial
meltdown, a crisis that has so far wiped out a notional $30 trillion
dollars...give or take a trillion or so?
“Lax central bankers...reckless investment
bankers...the hubristic quants,” says Niall Ferguson, writing in Vanity
Fair. “Regulate them,” is the universal cry. “Tax them,” say the
politicians. “Hang them,” say investors.
First, let us look at the charges:
They skinned millions of investors – with
their outrageous bonuses, spreads, fees, incentive shares, performance
charges, salaries, and “profits” – leaving the financial industry
severely under-capitalized...and unprotected.
Guilty as charged.
They ginned up “securities” that no one really
understood and sold them to unsuspecting investors, including widows,
orphans, colleges, pension funds and municipal governments.
Uh...guilty again.
They put the whole financial world in a spin –
churning positions back and forth between each other in order to collect
commissions...leveraging...flipping...stripping assets...securitizing...derivatizing...making
wild bets based on flim flam mathematics....
No point in going on about it...guilty.
Yes, the financial hotshots did all these
things. And more. They sold the world on ‘finance,’ rather than making
and selling things. Then, it was off to the races. Everybody wanted to
bet. Perfecta, place bets, odds-on...double or nothing. Of course,
investors would have been better off at the race track. The track takes
about 20%. In the financial races, Wall Street took 50% to 80% of all
the profits.
Before 1987, only about one of every 10
dollars of corporate profits made its way to the financial industry – in
payment for arranging financing, banking and other services. By the end
of the bubble years, the cost of ‘finance’ had grown to more than 3 out
of every 10 dollars. Total profits in the United States reached about
$6 trillion last year; about $2 trillion was Wall Street’s share. What
happened to this money? Other industries use profits to build factors
and create jobs. But the financial industry paid it out in salaries and
bonuses – as much as $10 trillion during the whole Bubble Period. And
now that the sector finds itself a few trillion short, it waits for the
government to open its purse.
But Wall Street’s critics have missed the
point. Yes, the financial industry exaggerates. But so does the whole
financial world. Both coming and going. It’s madness on the way up;
madness on the way down. Investors pay too much for “finance” when the
going is good. And then, when the going isn’t so good, they regret it.
This regret doesn’t mean the system is in need of repair; instead, it
means it is working.
The financial industry was just doing what it
always does – separating fools from their money. What was extraordinary
about the Bubble Years was that there were so many of them. There is
always smart money in a marketplace...and dumb money. But in 2007 there
were trillions of dollars so retarded they practically cried out for
court-ordered sterilization. What other kind of money would pay Alan
Fishman $19 million for 3 weeks work helping Washington Mutual go bust?
Whence cometh this dumb money? And here we
find more worthy villains. For here we find the theoreticians, the
ideologues...and the regulators, themselves, who now offer to save
capitalism from itself. Here is where we find the bogus statistics, the
claptrap theories and the swindle science. Here is where we find the
former head of the Princeton economics department, too, Ben Bernanke...
and both Hank Paulson and his replacement, Tim Geithner. Here, we find
the intellectuals and the regulators – notably, the SEC – who told the
world that the playing field was level...when everyone could see that it
was an uphill slog for the private investor.
“Six Nobel prizes were handed out to people
whose work was nothing but BS,” says Nassim Taleb, author of The Black
Swan. “They convinced the financial world that it had nothing to
fear.”
All the BS followed from two frauds. First,
that economic man had a brain but not a heart. He was supposed to
always act logically and never emotionally. But there’s the rub, right
there; they had the wrong guy. The second was that you could predict
the future simply by looking at the recent past. If the geniuses had
looked back to the fall of Rome, they would have seen property prices in
decline for the next 1000 years. If they had looked back 700 or even
100 years...they would have seen wars, plagues, famines, bankruptcies,
hyperinflation, crashes, and depressions galore. Instead, they looked
back only a few years and found nothing not to like.
If they had just looked back 10 years, says
Taleb, they would have seen that their “value at risk” models didn’t
work. The math was put to the test in the LongTerm Capital Management
crisis...and failed. Their models went sour faster than milk. Things
they said wouldn’t happen in a trillion years actually happened while
Bill Clinton was in still in office.
In the real world, Taleb explains, things are
stable for a long time. Then, they blow up. Then, all the theories and
regulators prove worthless. These blow ups are inevitable, but
unpredictable...and too rare to be modeled or predicted statistically.
“And they are almost always much worse than you expect.”
Enjoy your weekend,
Bill Bonner
The Daily Reckoning
Editor's Note: Bill Bonner is the founder and
editor of The Daily Reckoning. He is also the author, with Addison
Wiggin, of the national best sellers Financial Reckoning Day: Surviving
the Soft Depression of the 21st Century and Empire of Debt: The Rise of
an Epic Financial Crisis.
Bill's latest book, Mobs, Messiahs and
Markets: Surviving the Public Spectacle in Finance and Politics, written
with co-author Lila Rajiva, is available now by clicking here:
Mobs, Messiahs and Markets
