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Monday, September 29, 2008


As I write this, the bailout bill has been defeated in the House, but Pelosi is trying to get members to change their vote before the final gavel comes down. In general it is the conservative members, Democrat and Republican, who object to the bill and have voted against it; or at least that is what is being said on the radio. And now the vote is final. The bailout has been defeated. The Republicans were alarmed by the Speaker's very partisan speech; just as yesterday at the press conference. About 90 Democrats voted against the bill.

I have mixed emotions on this one. For those who say "Let Wall Street take care of itself," I remind you that this was the decision made when Lehman Brothers was allowed to collapse. That was followed by the largest bank failure in history when WaMu went down. Norway's pension fund lost $800,000,000 as Lehman Brothers went bankrupt. WaMu was bought out, due in part to Treasury pressure on Bank of America. Meanwhile the reverberations go through the economy as loans tighten up, and we are told that you ain't seen nothing yet. Student loans, auto loans, home mortgages all tighten up; and the Dow is down 500 out of 10,500, or about 5% of the capital value funding the pension funds of the American people; and again, you ain't seen nothing yet.

My natural proclivity is to keep the government out of the economy; but the government got us into this mess through encouraging bad business practices. The intentions were good. The goal was to increase home ownership. The result was predictable: a bubble built on bad loans. Now the actual number of forfeits and defaults has not been all that large; but they triggered what amounted to runs on banks, and few banks whether commercial or investment can withstand that. We now have a general crisis in confidence -- and gold is up to $1,000 and ounce.

So: the question is, which is worse: a government bailout, or the continued financial collapse? I find I can make arguments on either side of this question; but it seems to me that no bailout will result in far worse consequences than the bailout would. That may be due to having lived through the Great Depression. I am told that "it can't happen again." Unfortunately the people telling me that are the ones who produced the crisis we are in now. I note that there are reverberations though Europe and Asia, adding to the downward pressure toward Depression.

I note that Al Gore has succeeded in getting about half the orders for coal fired electric plants cancelled, and seems to be encouraging insurrection against the existing coal fired plants. I tell you that energy prices are a key to productivity: given lower energy prices and a big cut in regulations on work and production would bring us an "economic miracle" of the kind that Germany experienced under Adenaur. Alas, I doubt we are going to repeal the Americans with Disabilities Act or the various OSHA regulations, or the other myriad of restrictions on hiring and firing. We probably shouldn't repeal all of those, although surely there are too many now. It hardly matters. We aren't likely to repeal any of them., and without that we won't have any economic miracles.

Barring some kind of economic miracle, what's left to get commerce going again? The bailout was intended to inspire confidence. Without that, what will?


Disclosure: I have stock holdings through Wachovia. Wachovia is now in trouble because it bought a troubled savings and loan company some time ago, and that is dragging it down.


For once I find Barney Frank reasonable: he is speaking now. And he sounds scared.


Be careful

"I note that today's Wall Street Journal editorial page says about what I have been saying for a week. The bailout is horrible. It's not clear what's better, but what is clear is that doing nothing has a fairly large probability of producing disaster. We have to do something, and we have to do it fast."

Er, careful with your rhetoric there. The global-warming movement's assertion is that "doing nothing has a fairly large probability of producing disaster" and that "We have to do something, and we have to do it fast"...

Although, that said, it's rather more obvious that there's an economic crisis than that there's an anthropogenic climate crisis.

-- Mike T. Powers

I understand precisely what you are saying. I am not even entirely certain that something must be done, but people I respect seem to believe so as do both candidates for president. And like you I am far more convinced that there is a great economic crisis than I am that there is a climate crisis that needs drastic and quick attention.

The great thing is not to lose your nerve.


According to Pelosi the entire crisis is due to the Bush administration, and by voting for the bill the Republicans would agree to that. Nothing about CRA and affordable housing. Nothing about the war which Congress approved. It's all the fault of the free market.

I am torn between thinking this is childish, and fury at this narrowminded action.

The problem is simple: no one is sure that a bailout is needed. If a bailout has the effect of empowering those who caused this mess to begin with, then it might make things much worse; and Pelosi's triumphant cackle fixing all blame on Bush does not generate great confidence. If the official Democratic Party view is that there was nothing wrong with the notion of setting up Fannie Mae and Freddie Mac and pushing banks to make bad loans so that we can have more affordable housing and more home ownership, then it is a clear demonstration that the Democrats either do not know, or do not care, what their contribution to this mess has been.

I have no love for the country club Republicans who spent their way into enormous deficits while continuing to fight a war. Guns and Pork. But I have no more regard for the Democrats who don't seem to understand what went wrong and who would, apparently, just do even more of the same.

We sow the wind.

And here we are.


The linked article below is worth reading and reflecting on:

Sweden's version of today's crisis


From the NY Times:

"A banking system in crisis after the collapse of a housing bubble. An economy hemorrhaging jobs. A market-oriented government struggling to stem the panic. Sound familiar?"


Greg French

Of course they have the advantage of a population of Swedes who have not yet entirely lost the old Protestant Ethic (see Weber).

Meanwhile the nation is One Trillion Dollars poorer after the failure of the bill.


One Trillion Dollars lost today; how much will be lost tomorrow? Would we be better off had we simply adopted the execrable Poulson proposal of a week ago?

We are rolling the dice; and already a number of people have been ruined. More will be lost tomorrow. A trillion dollars today. That has probably assured a 1% jump in unemployment. Perhaps more.

I don't know what will happen tomorrow.

The bailout might have cost $500 million if the properties bought had less intrinsic value than expected. It probably would have cost considerably less, and there's even a small chance that it would have made money.  Whatever; but the market loss today was quite real.


Gingrich: "I think Paulson has terminally misunderstood the nature of the American system."


-- Roland Dobbins

It is certainly one view. It may even be correct. I no longer pretend to know what's best here. I do suspect that committing 750 billion to buy bad mortgages (which would mean a loss of no more than 250 billion and might be a lot less -- might even eventually make profit, as some past bailouts have done) would have saved a trillion dollars today, and prevented the pension losses that today's crash portend.

We roll the dice. We bailed out Chrysler and some other major institutions and so far we do not seem to have become mostly socialist. Newt may be correct, but he may not be.

My goal is to minimize the maximum damage.

It's not clear how to do that. The goal is to restore confidence, and that takes a bold and decisive move; stumbling about as if we don't know what we are doing is not going to do that. Perhaps the Swedes had the right of it.

The real question is, is doing nothing better than doing something?  And who is really an expert?





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Tuesday,  September 30, 2008  

It's actually midnight  Monday and I am about to go to bed.

I have a persistent nagging thought: if we had simply adopted Poulson's execrable plan of giving him $750 billion to spend as he saw fit to stimulate confidence in the economic system, the nation would be One Trillion Dollars wealthier today. It's unlikely that Poulson would need the entire $750 billion, or that very much of that would be lost in any event; there's a good argument that the US would end up making a profit from the confidence injection. Now of course some money would be stolen. Poulson might even set aside a pension fund for himself on the theory that this would probably be the last job he would ever hold, and he would probably be hated no matter how successful he might be. Spending that much money would require hiring some people and of those some would inevitably be crooks.

And the nation would be One Trillion Dollars wealthier today. The worst that might happen would be that we would lose the entire $750 billion (although it is very difficult to make money actually vanish by stealing it; you can't get any benefits from the thefts without spending it and that injects it back into the system.) Alas, the money erased yesterday may just plain be gone, as is the $800 million Norway's pension fund had invested in Lehman Brothers.

If we do not restore confidence and liquidity into the financial system, it will get a very great deal worse.

Today is a day for reflection. Tomorrow the Congress meets again. Unfortunately the market will be open today. I fear the evening and the closing bell. All over Europe markets are falling. Asian markets are down. And tomorrow is a new day.


If you are curious as to how we got to this mess, read


and watch



There are two articles in today's LA Times:

Jonah Goldberg on the editorial page

and Tom Petruno's 'No' vote could hit you in your 401(k)

From Petruno:

The anti-bailout crowd got what it wanted Monday: More pain for Wall Street fat cats, to the tune of the biggest one-day drop in key stock indexes since the 1987 market crash.

Unfortunately, that pain also was felt in the not-so-fat 401(k) retirement savings plans of millions of Americans.


Both are worth reading, particularly by those who are more concerned with punishing the guilty than with trying to do something about the coming fiscal slide.

Those who believe that the best remedy for the Great Depression was Hoover's policies from 1929 to 1933 are likely to get their laboratory experiment, only it won't last quite so long. It's quite likely that Hoover and his Treasury Secretary Andrew Mellon were right, and the best way to end the Depression and panic was to let the fundamentals rule; ride it out, let it hit bottom, and build from the low point in a sound way. It hardly matters. The election of 1932 routed the Republicans, and it took World War II to end the Depression. Along the way we got the New Deal, which cost over the long run a few trillion dollars.

Rush Limbaugh is almost speechless as he rails against intervention in the economy. And he is concerned about Federal meddling and the pork for Democrats that will be in the final bailout. You know it. After January 2009 it's likely that we'll have Freddie Mac and Fannie Mae back with a vengeance in all their lobbying and campaign contribution glory; we'll have a new bureaucracy; we'll have a new Hundred Days and a National Industrial Recovery Act (the Mussolini inspired fascist system of price fixing boards -- I think there is still one of them for milk, and the citrus price fixing boards were with us until a few years ago). We will have something like the WPA. If you thought that Poulson's mortgage investment plan -- it would have been better to call it that, rather than 'bailout' -- was bad, wait until you see what is going to happen after next January when the Democrats have both a majority in the House, a cloture-proof majority in the Senate, and the White House.

Of course Pelosi got what she wanted. Monty says:

Subj: Bailout bill failure

I think one could argue that Pelosi knew *exactly* what she was doing, to wit: enraging the Republicans so they'd vote against the bill and the Democrats could then blame the Republicans for its failure.

It's an old Bolshevik strategy for frightening the People into giving Absolute Power to the Party: "The worse, the better."

Rod Montgomery==monty@starfief.com

And apparently the Republicans in the House took the bait.

Bob Holmes points out that this wasn't a bailout, but an investment:

Bailouts versus Investment Opportunities


This morning's failure of the "bailout" bill to pass the House is not surprising, but should have been expected given the following:

1. Paulson sent a three page bill to Congress.

2. Over the weekend, in the hands of Congress, it became 100 pages.

3. The Democrats, with their majority in the House did not have enough votes to pass the Bill.

4. Before the Bill came to a vote Nancy Pelosi gave a partisan speech essentially blaming the Republicans and the Bush administration for the problem.

Of course there is always more than one way to characterize a course of action. In the current case the Press and many Congress critters have characterized the course of action recommended by Paulson as a "Bailout." This is a very poor characterization since in the absolutely worst case in the long term only some reasonably small percentage of the Government funds used to purchase the currently impaired mortgage securities might be lost. The more likely scenario is a fairly significant Government profit. I have seen estimates of a profit of 400 to 500 billion on the investment of 700 billion.

Isn't is amazing what can happen with the use of a single word coupled with moron for a House Speaker!

Bob Holmes

And of course the Republicans took the bait. I would say Pelosi was Machiavellian, not moronic. Now, of course, if we have a new bill it will be a Democrat-attracting bill, with ACORN and Union Members of corporate boards ex officio, and various other such measures and the Republicans will have to vote against it.

The original Poulson plan was called a bailout, but it in fact was an investment: the United States would buy, at prices somewhere near the actual intrinsic value, a number of properties. We would hold them until the panic ended, then sell them off in an orderly fashion.

Rush Limbaugh wants the Republicans to run on principle: no compromises. As Calvin Coolidge said when there was a financial crisis: his advice was "Get religion." It was the right thing to do at the time. It was, on principle, the right thing to do this time, and my good friend Dana Rohrabacher voted against the bill yesterday precisely because he would always vote against that kind of thing.

But this is the United States, and whatever your views of populism, something will be done. As Monty observes, when things get tough enough, the people will, in panic, turn to someone who looks like a strong leader. That happened in Germany as the Weimar Republic floundered, and it happened in 1932 when we gave Roosevelt his 100 Days and New Deal.

I have no crystal ball, but my guess is that you will one day wish we had adopted Poulson's execrable proposal when it was first offered.

Yesterday we lost a Trillion Dollars. I don't know what will happen tomorrow.

As for me, I'll ride it out: I'm not selling. My house is nearly paid for. I can't live on social security and I suspect my CREF pension fund is likely to be worth considerably less than it is even today (which is about 6& less than it was worth yesterday) but story tellers usually survive in bad times. I'll probably have to do a lot more singing for my supper -- thanks to all you subscribers I have had suppers all year despite 50,000 rad burning away at my brain and sapping my energy -- and I suspect all my readers will do well. We are all out on the right side of the bell curve, and we generally will survive; some will do well.

But when this is over, I wonder how many "Reagan Democrats" will be left? The spin put on all this will be that the terrible Republicans and deregulation caused the whole problem. And that is the message most of the people hear.

And I had better get to singing.

On Panic

Reading the above I sound as if I am on the edge of hysteria. I suppose that's a subconscious triggering of ancient memories, soup kitchens and long lines for any job available. Not that I was in such lines -- I was a schoolkid at St. Anne's, and later at Capleville Consolidated (both schools had 2 grades to a room, and both taught every kid in the school to read, but that's another essay).

The problem is this: intellectual arguments about what is the best thing to do about the financial crisis are not going to prevail. We will not do the right thing (whatever that is).

Intellectual arguments about which party should govern are not going to prevail. We will not do the right thing.

If you can keep your head when all about you,
Are losing theirs and blaming it on you --

Then you will probably lose your shirt along with those who panicked. You won't do as bad as they did, nor will you do as well as those who early on sold out and bought gold. And those who tried to do the right thing will be voted out of office.

And that is why I keep looking at what the government ought to do here. Sure, the people who created this mess will come off well if the government now goes out and buys those bad mortgages. Sure, some of the people who bought places they couldn't afford may be bailed out as foreclosures are halted or delayed, and will end up with a windfall that didn't go to the people who saved, made down payments, took out a mortgage that amortized their debt, and never missed a payment. It's about the same effect as we would have had if Fannie Mae and Freddie Mac had never existed and instead we had created a Federal Housing Acquisition Authority that used tax money to buy houses and then sell them to people who could not otherwise afford them. (Fannie Mae and Freddie Mac did that, sort of, but the people who got the houses didn't really own them, and they got them for prices they could not afford).  Now of course that kind of distributist action doesn't sit well -- but it's a hell of a lot better than what we have. I am not half so afraid of giving things in fee simple to people and thus inducting them into the middle class if they can stay in it, than I am of the complex mess we created to accomplish the same result. The Fannie Mae and Freddie Mac method created millionaires selling CD's on How To Become a Millionaire by Flipping Houses. (And at least one would suppose that a "bailout" or investment bill would not rescue those who are not living in the houses they can't pay for.)

My panic is this: Hoover arguably did the right thing in the sense of not changing the fundamental capitalist structure of the US. The result was the election of 1932, the 100 Days, the NIRA and then NRA, and the New Deal; which cost us trillions of dollars, but over time, and not all at once, and didn't end the Depression. It took war to do that.

If the government is not seen -- visibly seen -- to be doing something, I suspect the populace will turn the government out and bring in those who promise they will do something. That happened to Weimar Germany who brought in the National Socialist German Workers Party who promised to Do Something and Do It Fast. It happened in Italy when crises brought in the blackshirts led by Mussolini who lived and died as a socialist, and who originated a number of the policies of the New Deal.

I am listening to the Democrats, as they begin to expand the "benefits" of the bill, with immediate benefit to the taxpayers. God knows what Christmas Tree Ornaments will grafted onto it. Perhaps we will be spared ACORN, but I wouldn't bet on it. After all the Democrats have the power to pass any bill they like, and if the President vetoes it, they can blame the resulting financial panic on the Republicans.


And maybe I'm just getting old. After all, story tellers usually do well in bad times.

The great thing is not to lose your nerve.


Back to computers and technology: the newest mailbag is up at Chaos Manor Reviews.


All the chatter I hear on the radio seems to be more concerned with "taking money from the taxpayers and giving it to Wall Street."

I suspect the market crash will "take money from the taxpayers"; but once the Democrats get in, you will really see "taking money from the taxpayers" and who they will give it to isn't in much doubt. But I suppose that's just my whimsy.


The Dow closed up 500 and more than half yesterday's loss was recovered. I breathe a sigh of relief, and also take heart: apparently many of the investors did not lose their nerve.

I didn't think that would happen, and I am much cheered. I do ask: is this due to the panic among the politicians who, when they saw the crash, vowed to go DO SOMETHING AND DO IT NOW -- ? That is, is it the hope of a new Investment Bill (it is NOT a bailout) that has given Wall Street some hope and halted the panic?

Heck, if a promise of a bill will do it, then promise away and do nothing.....  (I hasten to add that is whimsy, but indeed it corresponds with reality).

And now I really am going to go sing for my supper, which is to say I am going to work on Mamelukes. After that comes LisaBetta, the proposal with Niven on a new Big Book in which we Hit The Earth With Something Large, and the proposal for The Mask on the Wall.  Which is to say I have my work cut out, and none of it is going to result in much income before end of the year. Keep those subscriptions coming.


Incidentally, Obama wants the "Fairness Doctrine". That will kill the Talk Radio Stations. I wonder if it will apply to ME? Will I be required to print anything Al Franken sends? Or excerpts from the Daily Kos?


And a quick truth:

stock loss?? 

I would like to point out an truth about the stock market. No money is lost until a stock is sold. So if you sit tight while others panic you MAY actually come out better. However Calpine, Lehman Bros. and Global crossing demonstrate the downside of this strategy. The bailout was shaping towards a Swedish model bailout when That IDIOT Pelosi gave a speech that derailed it. RICO may be used to some effect in this instance as CEO's used a business to defraud their stockholders. mayhaps we could catch a few congresscritters in this net?

Nuclear Power, It's not rocket science it's PLUMBING !

Thomas Weaver

Unfortunately, if these are held until recovery, the fund that holds them isn't going to be paying a lot of dividends -- assuming it survives. Market crashes are not good.

And yes, we were moving toward the Swedish model in which the taxpayers are not soaked at all, while the market is cleared of cholesterol. But that's gone. My guess is that Pelosi was Machiavellian, not idiotic, and that a number of Republicans bit. Now they will do a Democrat attracting bill with lots of goodies. ACORN may even come back, If they don't need Republicans they can do anything they like.






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Wednesday,  October 1, 2008

0500 Sleepless in Studio City with nothing to say. An ungood situation.

1120: Well, I finally got to sleep, and Roberta got me up at 10:00.

For those who believe no money is actually lost by these crashes, see "Loyalty Pays a Bitter Dividend" in today's Wall Street Journal http://sec.online.wsj.com/article/SB122281847955092407.html . Losses are quite real, as the Irish government decided: it's injecting E400 Billion, which is $563 billion dollars into the Irish financial system to assure stability.

Today things are calm in anticipation of Congressional action. The pressure is on for Congress to Do Something. My guess is that what will be done will be worse, not better, than the Investment/Stability bill that was rejected Monday. It's not that the Monday bill was good, any more than the original Poulson proposal was good; it's that as soon as the politicians get to working on this they will inject ways for each one of them to wet their beaks, and the more complexities inserted the less the Investment injection (it is NOT a bailout; see Holmes above; indeed the Monday bill that was rejected had elements of the Swedish recovery system ) -- the more complexities injected the less confidence it will inspire.

So long as the goal is to punish those who made this happen, and to see that they lose everything, no government action will be able to save the widows and orphans and those who have pension funds who will also be ruined in a market crash. Now perhaps no government action is needed, and the market won't crash -- after all, we lost a Trillion Dollars on Monday but regained $500 Billion on Tuesday -- and all we need to do is nothing. Except that markets are crashing in Europe and Japan (what does that do to the value of free trade?), and there seems to be a general consensus on Wall Street that yesterday's recovery was in anticipation of a new government action, given the horrors of the Trillion Dollar loss on Monday. Incidentally, the government has continued to do piecemeal interventions, some of which are genuine bailouts not investments, ever since the full consequences of letting Lehman Brothers vanish became obvious.

The problem with trying to predict what will happen, and to devise plans to prevent disasters, is that one is trying to predict the effects of those policies on people who do not think as we do; who are not always rational; who often panic, as each thinks he is rational but believes the others are not. I know of no system of statistical inference or logic that gives reliable predictions in such situations. There are lots of economic theories, but none of them is infallible, and some of them have proven themselves wrong. Different theories predict different effects from doing nothing vs. doing various things. I trust none of them. I do note the effects of panic; I do recall the Great Depression and its effects on the nation.

Let's get something straight: $700,000,000 billion = $2800 for each of 250 million people. If we divide by the 2006 population of 299,398,484 it's $2338.02 per person. Divide $700 Billion by 126,316,181 which appears to be the number of housing units in the nation, you get $5,541.65; divided by number of households (105,480,101) you get $6,636.32). I keep hearing claims that $700 Billion would be enough to buy out every first mortgage in America, and I don't think that's true. It's a fair amount of money, but it's not that much. The average value of a housing unit is about $110,000 and I suspect that the average mortgage is well over $100,000. The average mortgage payment is about $1700, so we're talking about 3 months of payment for most households. The funds proposed for the Investment Injection are very large -- a billion here and a billion there and pretty soon it adds up to real money -- but it's not that much. My guess, and it's only a guess, is that it's something like an insurance premium in which you get the premium back, and might even get some interest as well..

And we have seen that the market can crash for a Trillion Dollars in one day -- and while it recovered half of that the next day, it's still down by about half the amount of the Investment Injection.


A Vista question.

Last night I installed a program which put a shortcut on my desktop. I decided I didn't like it, and used the uninstall in control panel to get rid of it. Today I notice that the shortcut is still there. When I try to delete the shortcut, Vista tells me that it no longer points to the program, so you can't get rid of it, Nyah, Nyah, Nyah!  This is somewhat infuriating. Help is, of course, no help at all. I make no doubt that in an hour or so I could find some knowledge base or other tip through Google that would tell me what to do, but I am hoping that one of you has gone through this and remembers what to do. Please?


Second Vista question: it's a minor annoyance, but all my Vista machines take about 5 seconds before they connect with ws-FTP95. They connect fine, the data rate is fine, and sometimes the connection is instantaneous (generally when I reconnect to a previously connected URL); but usually there is a 3 - 5 second latency. It's minor but it is annoying, and it doesn't happen with XP systems. Is there a setting I should change hidden away somewhere, or is this just a consequence of Vista's revamped security system?


McCain is on record as favoring new nuclear plants. Obama seems a bit less enthusiastic, and the Democrats seem even less so.

Interesting statistic: if all the nuclear plants on order at the time of Three Mile Island had actually been built, the United States would be in compliance with Kyoto or very nearly so. I do not believe I have ever heard Al Gore or any of his supporters, or any of the Kyoto supporters, mention this.


Retail sales in San Fernando Valley are down 25% today. The Market is down a few points (i.e. holding steady waiting to see what will happen).

One can hope the 25% fall in retail sales is a very temporary thing. If it's indicative, it's terrifying.


Bob Holmes and Newt Gingrich on Mark to Market and other matters:

Mark to Market Blather and other Financial Melt Down Myths


There have been a number of op ed articles blaming the current financial firm implosion on the mark to market accounting rule and advocating its elimination. While it certainly is true that having to mark to market the mortgage bundles held by most of the failed/failing financial firms as part of their capital structure has caused these firms to fail to meet their regulated capital requirements or to no longer have sufficient capital to continue lending, removing the mark to market requirement is probably NOT a prudent thing to do in the long term.

The mark to market requirement was introduced as an accounting requirement to improve transparency. Many firms were hiding their true financial condition by failing to realize "actual" losses on their loan portfolios in a timely manner thereby giving the market a much rosier Balance Sheet than actually existed. The mark to market rule has eliminated this problem. However, there was no safety net in the rule in the case, as in the current situation, there was NO reasonable market for the assets.

Newt Gingrich recently made a reasonable suggestion on how to handle this situation. For assets that are intended to be held long term, the mark to market price should be a three year moving average rather than the current market price. Of course, this does not take into account assets that are younger than three years. There is, undoubtedly, some easy modification to the three year moving average that will handle this situation.

Those that say that the current situation was caused by inadequate regulation simply do not understand the situation or do not want to understand it.

The root causes of the current crises are in order of their contribution:

1. The Community Redevelopment Act (CRA) which has been used as a regulatory cudgel to force banks to make loans to sub prime borrowers if they wish to open new branches or merge with other banks.

2. Fannie Mae and Freddie Mac, the quasi-governmental firms that purchase and bundle mortgages for resale. (Their willingness to purchase sub-prime mortgages of dubious quality provided an impetus for Mortgage originators to relax credit standards. Fan and Fred's profits from packaging these mortgages encouraged many financial firms to keep the profits for themselves by doing their own packaging.)

3. Mark to market accounting rules that failed to include provisions for valuation of assets when there is No Rational Market.

4. Greed on the part of Mortgage Brokers and other financial firms that saw easy profits to be made by throwing all lending standards "out the window."

I would not include falling real estate prices as a root cause in the current crisis. The excessive run up and current fall back in real estate prices is the result of this over regulation and Government involvement in the real estate market.

What steps should be taken to avoid problems like this in the future?

1. Repeal CRA. If the government wants to increase home ownership among a certain group of citizens, then explicit legislation should be passed and funded to provide this group with the funds necessary to meet this goal. This could be in the form of tax credits or outright grants. In any case it would be an honest approach and not hide behind a myth such as CRA.

2. Provide proper oversight for FAN and Fred and limit their size.

3. Recast the Mark to Market accounting rule to take into account situations where there is not current rational market for securities intended to be held long term.

There is no need to place caps on executive compensation. Stockholders of publicly held companies have the power to provide whatever limits they deem reasonable. Current retirement packages, golden parachutes and stock options are as overblown as they may seem due to another government regulation limiting the amount of regular Executive pay that can be deducted on Corporate Federal tax returns to $1,000,000. Another case of too much regulation rather than too little.

I would say that a close and dispassionate review of the current financial crises leads to the conclusion that the root causes are regulations with unintended consequences and regulations that are Social Engineering in disguise. What is needed is NOT more regulation, but less, that is focused and provides the flexibility to serve the interests of ALL Americans!

Bob Holmes

I can hardly disagree with any of that. Government regulations seldom accomplish what they are intended to accomplish. That is one reason why I was not horrified by the original Poulson proposal. I hated it, but it did not create a new permanent bureaucracy, and it was an injection of confidence into the system by clearing bad loans (which could then be held by the government until those living in the homes could pay for them). I would myself eliminate Fred and Fan entirely; that is, their obligations have already been assumed by the Treasury, and the value of their stock is zero. Set up a mechanism to let them finish whatever it is they still do, and let them vanish.


And now it is time to go back to Tran.


2330: We had a good walk. This afternoon I set up the next scene in Mamelukes, and on my walk with Sable at 10:00 PM I worked out the entire next scene including solving a couple of plot points. It should get me past Part Three of the book, and let me begin Part Four which will end this book. The title should be indicative of where we are going.


I understand that the Senate has passed an Investment Injection bill, with new goodies included. We will see what happens now.

Demand for gold in India, China, and Turkey is very high. It will be interesting to see what effect that will have. Will there be another massive injection of gold into the market as there was last week? In India and China they want real physical gold; where will it come from? I cheerfully admit I am no authority on gold supply; I do know that when times are hard, demand for real, physical gold goes up.



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Thursday,  October 2, 2007

You may find this interesting:

eBay developed/deployed trojanned Skype for the ChiComs.



---- Roland Dobbins


We will see if the House will consider the Senate bill; and if confidence returns to the market. We will know soon enough.

For those who say let it crash, we need the purge, let the rascals die: I point out that the dead will also include most of those on pensions, and those who thought they had savings. For those who say, well, it's your fault for making a wrong investment, I point out that most of those with pensions have no real control over the investments made by the pension fund. Academics, for example, generally are offered the TIAA/CREF pension plan. It has a splendid record: a full professor friend at Stanford gets (or at least got until recently) more per year in retirement than he did before he retired. I wasn't at Pepperdine long enough to build up that large a fund, but my account is -- or was -- fairly respectable. Of course I had no control over how it was invested.

Most people who work for companies with pension plans have no control over how it is invested. But if the market collapses, their pension plans aren't worth much. Norway had a lot of its pension funds invested in Lehman Brothers. That, of course, is all gone.

And those who have been careful to put their savings in insured accounts may find that they are more dependent on a working financial system than they thought. I continue to point out that in 1933 when unemployment was very high, the factories still existed -- indeed America in those days produced a good part of the world output in manufactured goods. The houses did not shrink. Farms were still there. Today that is also true, and all the financial offices that offer financial services are still there. The service industry offices still exist. Surely there can't be a depression and unemployment? That, at least, seems to be what those who say that financial collapses aren't real, nothing is really destroyed, and all is well.

Gollies I hope they are right.


The market has to take a downward adjustment. Nothing should be done about that. I hear that a lot.

When the market does make its correction -- and particularly if it over corrects and things really go south --  the tax base will fall. But revenue will still be needed for the government to continue to pay its employees. After all, the purpose of government is to hire and pay government employees, so money will be needed.

 That's easy enough. Print more money. This is known as inflation. That is a tax on the remainder of savings, and on pensions, and on all those on fixed incomes. These are the people who paid their taxes, saved money, worked most of their lives: clearly the easy way out of this dilemma is to ruin all those people, induce them to commit suicide since they are not needed any longer, and get on with the adjustment. It's all their fault for making the wrong investments and saving in the wrong places, for not getting out there and flipping houses and playing the real estate game. It's all their fault for just quietly getting on with their lives, while their government, in an effort to let more people own houses, set the banks on a course that would end up wiping out investments and savings that had nothing to do with flipping houses or selling books on how to flip houses.

The economic slowdown has already hit Southern California. Sales are down, small business startups are way down. The adjustment is under way. Cheer.


11:30 AM

Subj: What's in a name? Bailout? Investment Injection? Toxic Securities Sequestration?

I understand and partly agree with your reservations about referring to the proposed ... countermeasure? ... to the impending systemic collapse of the financial system as a "bailout".

But I'm not quite ready to accept your proposed alternative, "Investment Injection". That seems to me to put an altogether too positive spin on the proposal. "Investment Injection" would be something like making cut-rate loans to finance construction of a hundred nuclear powerplants. This is more like cleaning up after a toxic-materials spill.

Personally, I like "Toxic Securities Sequestration". The analogy to handling nuclear powerplant waste seems to me to be straightforward: in both cases, one spends some money to put the hazardous Stuff someplace where it won't harm society and then waits for it to decay naturally. In the case of mortgages, one waits for each of them either to get paid off, to get partly paid off and partly written off, or to be written off as a total loss. Futures, options and the infamous "Credit Default Swaps" also have natural expiration dates.

Total write-offs of mortgages should be rare, no? The underlying houses have *some* value that could be recovered in foreclosure, especially if one has a little patience? Unless, I suppose, they have been gutted by copper-scavengers.

Rod Montgomery==monty@starfief.com

Some of the houses will have been gutted by scavengers.

I quite agree that "Investment Injection" is as undescriptive as "Bailout". What started as a 4 page document is several hundred pages, and I am certain that there is a great deal of beak wetting, lots of pork, and a bunch of other stuff in there.

Rush Limbaugh is telling us that there's plenty of money to loan. He even had a bank mortgage loan officer on the air. She said they have a million a month to loan: but in fact they have nothing. "We only service our loans. We don't hold the mortgages."  They sell them to Fannie Mae and Freddie Mac, which apparently are still buying mortgage paper from primary lenders. Of course THEY didn't have money to loan either: they packaged the mortgages, good and bad, into derivative paper and sold that to Lehman Brothers and other institutions as "mortgage backed securities"; which were rated by the (still solvent) ratings companies as AAA until quite recently. Rush is quite certain that there is lots of loan money to be had out there.

The story in Los Angeles is not quite that. Sales are down and falling. Some people have no problems with credit lines, others are in trouble.

But, apparently, all is well, and all is for the best in this best of all possible worlds. I am certainly glad to hear it.

I have mail that says to me:

I am not trying to be insulting. I am merely asking, if you need the money today, why do you have it in a place that can, under any circumstances, lose 3/4 of its value while you sleep? Except in the cases of hyper inflation hard currency or gold is not going to lose value like stocks or even mutual funds will.

This seems to imply that I have control over where TIAA/CREF puts its money, and that I ought not invest in the nation's economy, but rather keep the money in a mattress, or better, in Krugerrands, or bullion; and of course so should everyone else. That would make for an interesting economy.

As I have said before, the government put us into this by putting people in houses who ought not to have been buying them. Meanwhile, the same people who created that have also seen to it that we don't have domestic energy production. The CRA pressure pushed out bad mortgages, Fan and Fred bundled this stuff in with good mortgages and sold it -- not only did it carry great ratings from the expert analysts at the ratings outfits, but it was from a government created company and had the implication that it was government guaranteed. So banks bought it. Some bought a lot of that paper. It was supposed to be as safe as houses. As safe as Treasury bills, but with a higher yield. Under the fiduciary responsibility laws those who did NOT buy some of that paper but instead bought Treasury bills might have been in trouble -- if the system hadn't collapsed.\

Those say the government got us into this are right. Those who say that a lot of greedy people who should have known better are going to get rich out of any -- Investment Bailout? -- are right. But those who say that therefore the government ought now to do nothing so the bad guys will be punished -- well some of the bad guys will be harmed -- well some of the bad guys will lose part of their ill gotten gains -- and we can leave those who didn't take part in this mess to take the consequences of a financial collapse, since of course the factories are still there and the houses haven't shrunk and just let the market take care of itself and all will be well -- well, what they are saying may not be quite so correct. But then I suspect they are younger and do not recall what happens when markets collapse everywhere.

I don't like bailouts. I don't even like government investments. I don't like the CRA that distorted our economy into overbuilding through pushing cheap mortgages, and thus prevented investments in more enduring stuff; but then I don't like the government's actions in making nuclear power nearly impossible through regulations that amount to a protection racket to benefit lawyers and regulators. There's a lot I don't like.

It hardly matters. The 4 page proposal is 400 page now. I suspect it will be 550 pages then it's done: a page for each Senator and Member, plus some other pages of goodies, ten pages to create a bureaucracy, and a couple of pages on actually trying to restore confidence in the economy.  So it goes.


The new bill includes goodies like requiring health care plans to provide as much money for mental health as for physical health. Now that ought to really make things happen! The ability of psychologists (for a short time I had a psychology practice) to absorb money is infinite, and if anyone is wondering what I mean by that, use a dictionary. There is literally no end to the things psychologists can try that might might people better. Ye flipping gods!

It took fifty years for free market ideas to come back to favor after the collapse in 1929 and the Great Depression. One wonders what will happen this time.

If I seem to be dithering with respect to this Investment Bailout, you're right. All my basic instincts are against getting the gov involved, and I still think the original 4 page bill, with perhaps creation of some review board to prevent actual theft, would be better than the 451 page monstrosity we will get now; but I am also persuaded that if the government does as Coolidge did ("Get religion") the resulting panic will produce Depression, and that will lead to an interventionist landslide, a New New Deal, and 50 years of government mucking about in the economy.  The government crated this crisis of confidence; and my horrible suspicion is that only the government can get us out.


And now it really is time to go write on Mamelukes.



About 6 pages today. Pretty good ones, too.







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Friday,  October 3, 2008


has some interesting information.

And this:



Those Wacky Senators

The financial crisis inspires a sublime legislative pun. By JAMES TARANTO

By a vote of 74-25 <http://www.senate.gov/legislative/LIS/roll_call_lists
/roll_call_vote_cfm.cfm?congress=110&session=2&vote=00213>  , the U.S. Senate last night approved a bill aimed at "providing stability to and preventing disruption in the economy and financial system and protecting taxpayers"--popularly called the bailout.

Or, as it is formally known, the Paul Wellstone Mental Health and Addiction Equity Act of 2007.<snip>

If you want to know how an Investment stability or bailout bill got that name, read the article. It's worth reading anyway.

I suspected that after the Monday crash there would be another bill, and it would be far worse than the one rejected Monday. This one mandates mental health payments. It does other things too.

After the Monday panic, it became pretty clear that the public, having railed against the "bailout bill" would demand that the Congress DO SOMETHING. It was also pretty clear that the Congrescritters would find more and more ways to wet their beaks. No surprises here.


And it's 0130 and I need to get to bed. More Mamelukes tomorrow.


0900: Never fear, we will get a bill. And those who commute by bicycle witll get paid $20 a month. Isn't that swell? And insurance for mental illness. And more goodies for everything. And you ain't seen nothing yet: Wait until the House gets through inserting perks for its members. Cheer. The bill was defeated Monday. Cry. What will pass will be worse.


Well, it's a done deal. The President signed it. It's a lot worse than what was rejected Monday, as expected. Maybe it will stop the coming Depression. Except mine. I'm depressed, but I'll get over it.

The End Of An Era


"From where I sit, the United States government has embarked on two pieces of social engineering in the last few years. One was to make oil expensive as expensive as possible to drive people to greater use of alternative energy sources because anything less would be irresponsible and destructive to the environment. The other was to enshrine home ownership (i.e., easy-to-obtain mortgages) as a new American right because anything less would be unequal and racist.

None of us voted on these decisions indeed, neither was even spoken about directly, much less debated. But nevertheless, both became national policy . . .and both have sparked national, now international, crises. Then, once they became crises, both were blamed on 'greedy capitalism', instead of what they really were: legislative interference into market forces."

Worth reading, he says several things which should be said. He does point out some other experiments we are running of this scale, and does some comparison and contrast.


Worth reading indeed. He says little I haven't been saying for some time; although I suspect he is more of an optimist than I am. The remedies needed are obvious, but the way to get there from here is not so obvious. I hadn't previously seen this web site.

And it is now time for me to go work on Mamelukes.


One question: Last night Biden said that "When we kicked Hezbollah out of Lebanon, Barack Obama and I wanted to send NATO troops in to take their place, but..."

I thought I knew something of Middle East history, but I do not have any notion of what he refers to. In 1982 Reagan was persuaded to leave Lebanon (against my advice) by the destruction of the Marine barracks and the loss of 200+ US Marines. I thought at the time that we ought to do as Eisenhower did and stabilize Lebanon (and yes, at the time we did have US national interests there); but the President did not agree. His job, not mine. But I don't recall Senator Biden having any opinions then, and Barack Obama would have still been an undergraduate, so it could not have been then. Obama has been in the Senate for what -- two years? -- and I do not recall Hezbollah being expelled from Lebanon in that time; indeed in 2006 there was what the Israelis call the Second Lebanese War, and I don't think it resulted in the defeat of Hezbollah, nor do I recall Barack Obama suggesting that NATO ought to be involved in that.

So will someone please tell me what Biden was talking about? And why Palin did not ask him about it?

I put this query to Joel Rosenberg. His answer is below.




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Saturday,  October 4, 2008

I will point to this on Monday, since not everyone reads the weekend posts. After I posted my note about Biden, Hezbollah, and the debate, I wondered if I had missed something, so I sent this to Joel Rosenberg:

I posted this today. I am really curious as to what Biden thought he was referring to. You know that area better than me.

Joel replied:

Your instincts/recollection are spot on. It was, simply, a whopper of a lie.

There's nothing -- and I mean nothing -- that happened in our universe that that corresponds to. Hezbollah began, depending on what you use as its start, in 1982 or 1983; Operation Peace for Galillee (which is what preceded the Beirut bombings you refer to) resulted in the exodus/rescue of some of Arafat's PLO, not the Hezzies. Clearly, Hezbollah's influence grew after the power vacuum (well, lower pressure, anyway) created by the removal of Fatahland, but not after some nonexistent US/French operation to rid Lebanon of, well, anything.

But Biden wasn't supporting Reagan then; and, as you point out, if Obama had any opinion about it, it would have been shared with his college classmates, not a Senator on his second (I think) term. I was following things then, and nobody I knew was suggesting a longterm US occupation of Lebanon; the most anybody I heard suggest was some sort of stabilization by backing Jamayel, which might not have been a bad idea, but wouldn't have been supported by the French, anyway. (I had a slightly different take on the reaction to the Beirut bombing than you did. I thought that it was a mistake for US military folks to be put in harm's way to protect the PLO evacuation, but a much worse mistake to retreat once that -- wrong, IMHO -- decision was made.)

Nobody has ever -- nobody, ever -- has expelled Hezbollah from Lebanon, or come close to it. I think it is, technically, doable, but the military force that would be necessary (I'm not sure it would be sufficient) would be bloodier and messier than any sort of "ethnic cleansing" we've seen during my lifetime, and I'm not excluding Darfur.

I'm fond of good fiction; this wasn't good fiction. I'm assuming that Palin didn't know what he was talking about, either, but wasn't sure enough of herself to call him on it.

That said, it's something that McCain should use -- will is another thing -- to point out how incredibly reckless the American people would be to elect a ticket where this fantasist is, relatively speaking, the informed one.

Short form: he was making stuff up. There's nothing that happened in this universe that that's even close to, even if you substitute "Syria" for Hezbollah. (It wasn't the US and/or France that expelled Syria from Lebanon; it was the Lebanese, with some minor help from outside.)

 Which leaves the question, what did Biden think happened? Just what was he referring to? Many people confuse Hamas (a Sunni organization in Palestine) and Hezbollah (a Shia organization that is now officially a part of the Lebanese government), and while experts on foreign policy ought not do that, it's understandable. I recall hearing Roosevelt on radio, and the evening radio programs which took the place that TV has now, but I can understand how those younger than me who have known nothing but television could forget that Roosevelt was never on TV. A minute's thought would correct the mistake; and given that radio was to people in the 30's and 40's what TV was to the people of the TV age, it's an easy mistake to make.

Imagining that Hezbollah has been defeated is another matter entirely, given that Biden is the foreign policy expert.

(Discussion continues in mail.)


The Baikonur Cosmodrone:



Punishing naive loyalty and faith in the system. After all, it's not really lost, is it?



Household statistics




Senators attached a provision repealing a 39-cent excise tax on wooden arrows designed for children to an historic $700 billion financial-markets rescue that passed tonight by a vote of 74-25. The provision, originally proposed by Oregon senators Ron Wyden [D] and Gordon Smith [R], will save manufacturers such as Rose City Archery in Myrtle Point, Oregon, about $200,000 a year.

It's one of dozens of tax breaks benefiting Hollywood producers, stock-car racetrack owners and Virgin Islands rum-makers included in the broader legislation in an effort to win support from House Republicans, whose defection contributed to a rejection of an earlier version of the legislation two days ago on a 228-205 vote.

I told you that we'd get a bill, and it would be hung with Christmas tree ornaments. Not just for Republicans. For a list of some of the hundreds of items, see

It's still better than nothing: and if the buyouts are done cleverly -- there is no reason why they can't be -- it will clear the arteries of the financial system while costing (eventually) little or no money to the taxpayers. The Swedes actually made money in a similar situation, while providing a lot of incentive for Swedish banks to reorganize and save themselves.

In my judgment the first thing that must be done is to separate those horrible bundles, so that the really bad loans can be dealt with: in some cases by foreclosure, in others by renegotiation. At the moment no one really knows who owns what. The kids down the street can't find anyone who will admit owning their mortgage. There's a bank that collects the money ("we service the loan, but we don't own the mortgage") but it can't renegotiate the payments, and the mortgage was part of a bundle that was sold, then rebundled and sold again, so that it's so far been impossible to find anyone to negotiate with. To make it worse than that: the bundling wasn't a case of this mortgage plus another hundred mortgages from various parts of the country. Oh, no. It's maybe 10% of the income from this mortgage bundled with 20% of the income from another (and more soundly made) mortgage and 5% of an absolute crap "stated income, non-verified assets" loan and 1% of the income from another of those plus 19.74% of a refinanced loan from a professor who has never missed a payment in 25 years, plus -- well, you get the idea. So the first thing that must be done is to peel these things apart and get back to real properties.

As to why anyone would buy a thing like that, well, the salesmen were good at their jobs, and the "performance" of the loans looked good because they were based on long term statistics of performance and didn't take account of the tremendous number of bad loans being made as the bubble frothed higher and higher, and there was this need to place money where it would perform better so that the executives managing the money could get their performance bonuses, and the ratings companies that -- so far as I can tell -- paid absolutely no attention to what they were being paid to do, but blindly continued to apply old models to new situations -- who couldn't distinguish between the maps and the territory. So the managers of pension funds and 401(k) funds and IRA's trusted the AAA ratings (and covered their fiduciary obligations thereby) and put people's life savings into those "mortgage backed securities". There are a lot of potential Ph.D. dissertations in finding out why the smartest guys in the room, the Masters of the Universe, bought junk bonds at Blue Chip prices and yields, and doubtless we will see plenty of them over the years; but for now the important task is to get past assigning blame and get on with restoring some confidence and transparency to the system.

Even if it did cost us tax breaks for wooden arrow makers, and payments to people who bicycle to work -- I am wondering if I can't get in on that: I can ride my bicycle from the back door around the block to the front door. Or even inside the house when I go from the Great Hall to the back of the house and the Monk's Cell. I mean, isn't that a commute? -- even if there were a number of silly (and I make no doubt some very pernicious) provisions in the bill, if this egregious bill allows us to unbundle the derivative horrors and get back to mortgages on identifiable real properties occupied by real people with real income expectations, it will contribute to getting our financial system moving; and if the crisis encourages people to get out and MAKE STUFF, that too will be a step in the right direction. Assuming the government will allow you to make anything.

And now I have work to do. I have been commissioned to do a book review for The New Atlantis, a magazine I wasn't familiar with, but which I find very useful; it's both in print (quarterly) and on line, and I recommend it to your attention. In any event, they've asked me to do a book review and I've accepted. I've read the book, now I need to write the review. And Colonel Rick Galloway has a moral problem to solve....  And of course there's the column due next week. It's a full life, Charlie... (And see mail)


If you want a good not-for attribution line: The government will undoubtedly have to cut some programs to pay for the "bailout," over and above printing money. Social services and entitlements won't be cut, particularly by an Obama administration. That leaves the independent agencies, and Defense and NASA are well known to be "Republican" priorities. Since Obama has explicitly targeted missile defense and the Constellation program...





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Sunday,  October 5, 2008

I am getting a column out today. I have a letter accusing me of incompetence in the Biden Affair over in Mail. There was also considerable mail posted yesterday. It covers a number of subjects.


We are hearing more about pirates in the Horn of Africa, and speculation as to what the Russians will do. Cruise ships are using sonic weapons to defend themselves against the pirates. There's a science fiction story come true. Now I need to get back to work.


Hello there. I was rereading one of my favorite webcomics, and saw this strip. I thought it nicely fit the current events.



Indeed. No surprises, of course.












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