Tuesday, November 25, 2008

We All Pay A Big Price

Unfortunately, talking about economics is very different than talking about two plus two or gravity. If a mathematician or a physicist appeared on one of the many news shows on TV and said that two plus two is no longer four, or that the law of gravity is suspended during the present administration, most people would say something out loud or under their breath, but few if any would just sit there and accept it. This is not the case when it comes to economics or for that matter a discussion of the present financial and economic crisis.

For the most part, the talking heads on TV news programs are just that, talking heads. They pick up some of the jargon and they ask sometimes a few very good questions, but for the most part the politicians that appear on their shows and talk about economics, the markets and regulations that have been “burned”, don’t know what they are talking about, or, have a political philosophy that they cling to, regardless of how stupid that philosophy might sound, when measured against the reality of the present financial and economic situation.

If I was the producer of these TV news shows, I would add in addition to the political analyst, an economist with a knowledge of banking and the markets. Unfortunately, Paul Krugman has another job teaching economics at Princeton University, or he would be my first choice, and I would tell him not to pull his punches. When Krugman is on one of the TV news shows he is so careful to be polite. TV news needs more not less economic commentary from people who know economics. Politicians and political analysts do not know economics, but they might think they do.

There are still people appearing on TV news show telling the audience that regulation is the problem and no one is brought on to rebut this nonsense.

Building a house with 50% fewer supporting studs than structurally required and then placing a heavy tile roof on top of such a structure and being surprised when the weight of the roof brings down the house, is about what we have in our surprise of the shape of the present financial crisis. The asset-backed bond market was built on bond ratings that did not support the “weight” of these poor quality bonds. When the bondholders ran for the door to sell their asset-backed bonds, the buy side had no interest in bidding on the junk they had sold.

They, the TV commentators, talk about Wall Street and Main Street, as if they are two separate places, is a little misleading. Wall Street underwrites the securities and sells them, and Main Street buys them. The people on the sell side of the investment business have always thought they were smarter than the people on the buy side. Wall Street sells on the “ask” side of the market and buys on the “bid” side, while Main Street buys on the “asked” side and sells on the “bid” side. The difference is the spread that the Wall Street firms, the brokers and traders, make on one side of the transaction. They put up their capital, the firm’s capital, to position their inventory. When their inventory becomes almost worthless, they need a bailout.

“Burning” up the guidelines that were set down in law in the 1930’s and 1940’s that dealt with investment securities has lead to the present financial crisis. Anyone who tells you that regulation, oversight and transparency is not needed in the investment securities industry is full of shit. Much of what has happened to this country, its people and their economy could have been avoided had the current administration and Congress had an understanding of financial markets and a little more knowledge of economics. Stupid people pay a big price for their stupidity, and for all of us, it is running into the trillions.

Stay tuned.


Butch said...

Wow! Very pointed and very good. Wall Street and Main Street are the same. I never did understand how they were being seperated.

I, being on the DUMB side or the Buyer side, feel even dumber now. Not because of your comments here but because of what has happened. We are always told to "down size" the risk side of the portfolio as we get older. We need to remove some equities and replace them with some more bonds. I realize there is risk in everything and yet buying good investments should make that risk lessen, however, are corporate or government bonds as safe as they were before and by before I have no idea of a time frame. Definitely something over 2 months ago.

Good video from CNBC with Alex Taylor from Fortune Magazine. A bit over 6 minutes in length.

moneythoughts said...

Government bonds and notes and T-bills are all issued by the U.S. Treasury and they carry a AAA rating. They are a safe haven when things get rough. However, notes and bonds can go up and down in price, which is the same as saying market value. Corporate bonds and notes are rated by the rating agencies and have ratings from very good (AAA or AA) all the way down to a single C. So, a corporate bond's rating is a reflection of its willingness and ability to pay principal and interest in a timely manner. Naturally, a corporation that get into trouble or is an industry that gets into trouble will most likely see the market value of their bonds and notes go down in price. Some times cash is not trash. While at other times sitting in cash may well feel like cash is trash. The best thing to do is work with a good broker or money manager that knows something about how to diversify a portfolio for someone your age. Good luck.

Butch said...

Thanks. Right now I think I will keep with government issues. Not trusting too many companies lately what with all their "surprise, did we tell you...." pieces of info. I figure the government can make the money it would owe you.lol

Did you get to watcht the video yet?

moneythoughts said...

Honestly, I don't know that much about the American auto industry. I do have a few opinions. First, they are in trouble because of the sudden rise in the price of oil, and secondly, because the financial crisis has made a lot of people worth less and auto loans are harder to get. All this comes together to mean fewer new car and truck sales. Once people regain their confidence in their job and their investment account, they will go back into the show rooms and buy cars. Fear has driven buyers away from the market. The present administration didn't and doesn't, in my opinion, give a damn. The result is the disasterous economy we now have.

Robert said...

US government bonds and T-bills are now seen as a safe haven, but ironically the government has the biggest debt of all.

I wonder if the government will ever run out of money to cover its debt obligations? If that ever happens, watch out.

I know the government borrows from individuals, institutions and overseas, but it's mind boggling that so much money is that easily available from those sources.

I wonder if the government is safe because it can also create new money via the Federal Reserve?

Eventually creating new money would lead to inflation, but in the short run it keeps the bills paid.

When I start trying to figure out where all the money they keep promising for bailouts, stimulus packages and so forth with out raising taxes comes from, my mind goes into a blur.

moneythoughts said...

Robert, you ask some very good questions. The short answer is that printing money will eventually cause inflation. However, there is also the possibility that a serious recession could cause deflation. So, we have a stand off. In my opinion, inflation will win out. You might want to keep some of your money in gold coins, but right now that looks rather expensive. The other asset play might be art, but that brings with it risks too. What art is in can change and as tastes change so does the price. Real estate is a hard asset that with inflation will go up in value, but right now many are afraid to buy or sell or lend. Baseball cards may be an option. A basket of world currencies is another play. Having lots of money that is worthless is no fun, but maintaining purchasing power is a tricky business. That is why they are suppose to pay those guys and gals the big bucks.

Butch said...

Moneythoughts: What is a bear rally and why is it considered something negative to bonds? I heard this on one of the financial channels tonight.

moneythoughts said...

I have never heard of a bear rally. If I have heard of it, I have forgotten what it means. I have heard of a "bear trap". That is when the market starts back up and people start to get back in only to get caught when the market goes back down. May be they are talking about that. My favorite expression as it applies to the market is "dead cat bounce". I apologize to all you animal lovers out there. I have a cat, Chubbs, and she sleeps with me every night in my bed, so don't be writing me about how mean I am.

Paul Volcker is now on Obama's economic team. Volcker knows what he is doing. If he is listened to, we are on our way out of this mess.

Butch said...

Maybe that is what the individual meant. People are always trying to coin new phrases. I quess, if the market hadn't really turned and yet the indices were moving in a favorable direction you might be inclined to get back in too soon and "get trapped" thus a rally that was still a bear market and you would be trapped. The commentator went on to say that bonds weren't going to be your friends.

Yea Volcker!

Yea moneythoughts, thanks for the help. If you need to know something about the auto industry or cars (I'm slightly a gearhead) let me know.

Happy Thanksgiving. I'll be down your way (Loveland) this afternoon.