Tuesday, November 25, 2008

Federal Reserve and Monetary Policy: The Struggle for Freedom and Democracy around the Globe.

Citigroup gets a federal government bailout (Nov 24 2008). Ford, GM and Chrysler will get a federal government bailout. This country is so fragment I do not believe they will get a bailout this year unless they include some sort of UAW give-back (FAT CHANCE). I do not make policies however, I believe these companies should declare bankruptcy before the US of A government steps in and provide funds. Boeing can no longer manufacture a plane. Boeing will be the next in line for a bailout due to their outsourcing of jobs and safety.



Let’s go back to the bailout of Fannie and Freddie and speculate on what would happen if these GSE’s were to declare bankruptcy. This can still occur. One can image that Congress would have to swiftly act on any legislation to provide funds during a bankruptcy. However, equity holders would get a big fat zero for their stock. The biggest concern is the debt holders of which $1,561 billion is held by foreign investors (Sept 2008 release of Flow of Funds PDF pg 123). It could be hard to get US of A’s financial institutions to invest in mortgages. It will be very hard to get the confidence of foreign investors. Hence, all of Wall Street’s drivel about LIBOR rates gets transformed, not into lower interest, but into the carry trade and increasing inflation. The good news, with this result, would be a vigorous effort in achieving wage pressure. The bad news is housing prices will continue to decline and overshot a reasonable floor until pent-up demand breaks through.



I have doubts repealing “mark to market” will achieve financial stability. It is price fixing by the US of A government. "Mark to market" is really a virtual process. Money changing hands is the “real economy” The auction system is a virtual process which can be represented by groups with complex entries. A person, firm or government’s risk to reward policy is a virtual process. No real money changes hand, yet a behavior can be changed. This behavior change is due to a change in the time between a risk’s expiration and the reward has been fully realized. A car loan having been paid off is a good example.



The US of A government is now in the used car business. Paulson has expanded the TARP to include consumer loans (Nov 25 2008). The US of A has now leveraged the US of A tax payer by 10:1. Losses over the agreed percent get paid by the US of A tax payer. Under these circumstances it might be tempting for the US of A government to repeal “mark to market“. If this happens, the America Dream of owning your own home dies. The price of a house will be determined by the US of A government, not by the local economy. This goes beyond company towns but, smacks right into the feudal system of the Middle Ages.



The correct mechanism to fixing the US of A’s mortgage mess is to provide a process in which packaged securities can be taken apart. This will allow the “good” to be kept: the “bad” to be priced and the “ugly” to be auction. The correct mechanism to fixing the US of A’s economy is creating jobs that can pay the bills and not ones which rely on low interest rates. This mechanism will not only stop people worry about their 401Ks but, will also bring back the confidence of investors.



I bet the Neo-conservative mind set is in a tizzy. They set about creating a mechanism in which a fiscal policy is in place and it becomes the Federal Reserve’s job to steer the US of A’s economy. This mind set replaces the one in which an adminstratation micro-manages the US of A’s economy. Only to have fraud, collusion and lack of fiduciary responsibility ruin it all.



I guess this is a good time to subtitle this entry as “I WISH I HAD THE MONEY AND SHORT THE DOLLAR” part 3. The US of A’s dollar is once again weak because the Federal Reserve is “Printing” money with no counter moves by other central banks. The mentality of “Do not fight the Fed” has once again brought dollar denominated inflation back into the world. One can expect “Rice Riots” to flare and weak governments begin to fail. The “Free Market” does not like Global Instability and the US of A will once again begin the slide into a global depression.



Obama is going to become President with half of US of A’s citizens hating the other half. This was emphasized by the McCain/Palin campaign in which they pleaded to ” Real, Loyal Americans” Obama was a “Communist, Terrorist Hugger“. The right wing is now stirring up the pot and throwing in the “Tree Huggers”. If Uncle Sam is going to tell US of A car manufactures which type of cars to produce then there is no stopping Uncle Sam in setting the price of a home.



The struggle for Freedom and Democracy begins anew.




Got to love those topologic invariants.


Viva La Revolucion!!!!!

Thursday, November 06, 2008

Federal Reserve and Monetary Policy: Does President-Elect Obama have a path out of this mess?

If one looks back at history and tries to pick a moment in time in which current crisis can match with past crisis then that moment in time is mid 1930’s and things are looking bleak.

Here are 2 conflicting view points of the Great Depression; Futurecasts point of view and
New Deal Policies and the Persistence of the Great Depression: A General Equilibrium Analysis Harold L. Cole and Lee E. Ohanian, The Great Depression in the United States From A Neoclassical Perspective Harold L. Cole, Lee E. Ohanian

I believe Futurecasts’ analysis is much closer to the truth. If one substitutes the US of A for Germany during this period then one can gain a sense of certain inflationary events that has befallen on the US of A. Events such as the “printing” of money to keep Germany’s economy from crashing to the fleeing of investors out of Germany producing no new infrastructure/production. Last year’s decision by the Federal Reserve to lower Fed Funds target rate is an example of “printing” money. There was no consensus, by other Central Banks, which then lead to 128 days of dollar weakness. Dollar weakness lead to dollar denominated inflation. Wall Street’s advice to their investors/clients lead to massive capital leaving the country, for what Wall Street firms’ called “better returns”. Their advice is the same events that lead toward Germany’s poverty and the meteoric rise of Hitler. If one also subsitute China for the US of A and the US of A for Germany then one can look at the effects of Hawley-Smoot. China is currently in violation of its World Trade Organizations obligations of opening up its market to foreign companies. The US of A really needs the labor output of US of A factories and service companies going toward the 1 billion consumers of China.

One may cherry pick. I will, from FDR's policies prolonged Depression by 7 years, UCLA economists calculate By Meg Sullivan;
NIRA's role in prolonging the Depression has not been more closely scrutinized because the Supreme Court declared the act unconstitutional within two years of its passage.
"Historians have assumed that the policies didn't have an impact because they were too short-lived, but the proof is in the pudding," Ohanian said. "We show that they really did artificially inflate wages and prices."
Even after being deemed unconstitutional, Roosevelt's anti-competition policies persisted — albeit under a different guise, the scholars found. Ohanian and Cole painstakingly documented the extent to which the Roosevelt administration looked the other way as industries once protected by NIRA continued to engage in price-fixing practices for four more years.
The number of antitrust cases brought by the Department of Justice fell from an average of 12.5 cases per year during the 1920s to an average of 6.5 cases per year from 1935 to 1938, the scholars found. Collusion had become so widespread that one Department of Interior official complained of receiving identical bids from a protected industry (steel) on 257 different occasions between mid-1935 and mid-1936. The bids were not only identical but also 50 percent higher than foreign steel prices. Without competition, wholesale prices remained inflated, averaging 14 percent higher than they would have been without the troublesome practices, the UCLA economists calculate.


Doesn’t the above parallel certain sectors like the big major oil companies having no real competitors. Also does it not parallel the housing mess with respect toward price fixing by the likes of Fannie, Freddie, and the rating agencies like S&P and Moodys during Bush‘s first term? For a couple of financial companies that had knowledge of the housing market, they sure “missed” the effect of Fannie and Freddie’s fraud on the user cost of capital.

As one can sense, I’m not convinced by the Cole and Ohanian’s point of view. Their argument is based on an isolated US of A labor force. It can be shown that Neoclassical Theory is an economic model on a manifold and one must use a transformation between counties. In other words, there is no data as to the strength of global trade which would provide a gauge as to how much Germany‘s inflation and that country‘s destabilized nature had on wages in the US of A.

Got to love those topologic invariants.

So what is the correct path out of this mess? That depends on what President-Elect Obama opinion on the course China and Russia are taking. Questions like; does Russia’s extortion, by the use of its vast oil and natural gas reserves, pose a threat to NATO. Does Russia’s eye on some of the Ukraine’s territory, which Putin consider as Russia, destabilize Eastern Europe? Liquid natural gas can be process in the US of A and shipped to Western Europe to replace Russian natural gas. Does the US of A need a policy of containment with respect toward Russia? How much did Putin know about prior USSR dealings with Iraq? In particular, how much did Putin know about previous uranium yellow cake sells?

Is China really moving toward a Democracy and a Free Market or have they “pulled the wool” over some economist and others? Does the US of A need to emphasize to Chinese Communist Party members; Taiwan is the model of their future? Does the US of A need a policy of containment with respect toward China? Does President-Elect Obama have want it takes to remove China’s Normal Relation status and kick China out of WTO?

Viva La Revolucion!!!!!