Why Greenspan Caused The Financial Crisis

Today I have an article on mises.org explaining why Greenspan caused the current economic problems by answering the arguments of the people that deny this.

Morning Update/ Market Thread 12/31

Happy New Year’s Eve! This will be just a quick update to end 2010 and to provide an open thread for comments as there is no significant economic data released today. Markets are open, however, and equities are opening lower, bonds are higher, the dollar is lower, oil is continuing to correct lower and is now at $89 a barrel, and gold is slightly higher while silver hovers at the $30 an ounce mark! Silver, by the way, began the year at $16.50 an ounce thus gaining nearly 82% on the year! Gold gained about 29%, while oil is up nearly 13%. And thus the money we work to earn is worth less. Price the stock market in gold, and it is worth less not more.

I found “Guestimator’s” number analysis of yesterday’s Weekly Unemployment Report both interesting and very pertinent. He simply compared last year’s data for the same week to this year’s, and here is what he found:
“Last year's SA (seasonally adjusted) number for this week was 454,000, and NSA (non seasonally adjusted) was 556,000. That was SA adjustment of -18.3%.

This year's SA number for this week is 388,000, and NSA is 521,000. That is a SA adjustment of -25.5%.
While the NSA number is only 35,000 lower than this time last year, the SA number is 133,000 lower!

This doesn't make much sense.”

Indeed! That doesn’t make much sense and it shows that the actual numbers are lower than last year’s, but not by very much. Yet the reporting of the numbers is twisted to make it appear much lower due to the huge seasonal adjustments the Department of Labor is using.

And that pretty much sums up all the data I see. The dollar was devalued tremendously in 2010, thus data priced in dollars APPEARED to improve. The financial system is still just as bankrupt as ever, more and more fraud is being uncovered all the time yet we don’t prosecute anyone meaningful and we don’t change anything meaningful, we simply continue to use mark-to-fantasy accounting along with other types of accounting frauds to sweep the very real problems under the rug.

The rug is bulging. It’s going to be a very interesting 2011!

Euro-Pound Parity?

Traditionally, the U.K. pound has always been the most valuable currency in the world, apart from briefly the currencies of a few small third world currencies. The odds are however now increasing that the pound might soon be valued less than the euro. It has fallen relentlessly in recent weeks and has traded today at near €1.02/£.

It didn't seem long ago when I noticed how the pound had fallen below €1.25 (which in inverted terms means the euro rose above £0.80), a time when I noticed that the pound had fallen from €1.38 when I first called for its decline. And it wasn't that long ago that the pound was valued as high as €1.5.

While the pound was clearly overvalued at €1.5 and €1.38 and even to a lesser extent €1.25, it is now starting to look undervalued from a fundamental point of view, even factoring in how the more inflationist attitude of the Bank of England relative to the ECB will debase that fundamental value. Which is why while I think it is possible and even likely that the euro will briefly reach a higher value than the pound, we are getting close to the peak of the euro's rally against the pound, at least provided that the Bank of England doesn't opt for some kind of radical inflationist "solution" for U.K. economic problems.

Morning Update/ Market Thread 12/30

Good Morning,

Equity prices are roughly flat heading into the open this morning. Bonds are lower, the dollar is lower, oil, and gold are also slightly lower. The Yen continues to gain strength and has already passed previous areas that have triggered intervention. You can see on the weekly chart below that it has fallen below the bottom of the falling wedge and is nearing previous lows – down on this chart equals stronger yen:

Weekly Unemployment Claims came in at 388,000 for Christmas week. Of course the media is touting it as a big deal, but of course it is just another contrived holiday week number where seasonal adjustments made it look far better than it actually is. Without those seasonal adjustments, the actual number of claims, even with the holiday, ROSE by 24,879! Here’s Econospin:
In what the government describes as a clean report, initial jobless claims fell a very steep and very surprising 34,000 in the December 25 week to a suddenly sub-400,000 level of 388,000 (prior week revised 2,000 higher to 422,000). Adjustments become a big factor during the shortened weeks of the holidays which focuses attention on the four-week average, and the average confirms improvement in the labor market, falling a steep 12,500 to 414,000.

Results on the continuing-claims side are mixed. Slightly more received continuing benefits in the December 18 week than the prior week and the unemployment rate for insured workers rose one tenth to 3.3 percent. A drop in the four-week average is the positive news, down slightly to 4.120 million and down more than 150,000 from the month-ago comparison.

The month-ago comparison for initial claims shows a dramatic 50,000 improvement with the four-week average showing a less flashy but meaningful decline of about 15,000. The Labor Department's confidence that calendar and related adjustment factors are not at play gives today's report special importance. Yet declines in claims during November didn't add up to improvement for underlying payroll growth, that and yesterday's data on consumer confidence, where assessments of the jobs market deteriorated, will limit confidence that payroll growth has picked up this month.

I read the same report from the DOL as they do… they did not say anything of the sort about them being “confident” that there were no special factors – in fact they are simply silent about it. While it would be nice if this number could get below 400k and stay there, I suspect that this week will prove to be an outlier due to the holidays. The trend is certainly down though, and year over year numbers are only down slightly. Note that the RATE actually increased in this report which tells me that games are being played with the figures and possibly the size of the workforce. Bottom line is that this number still shows continued job losses, not job creation – it needs to get below 350k and stay there to indicate job expansion.

The Chicago PMI is released at 9:45 Eastern this morning and will be followed at 10:00 by Pending Home Sales. I’ll report both inside the daily market thread. Tomorrow is New Year’s Eve, markets will be open but there are no scheduled significant economic releases until next week.

Yesterday was the last scheduled POMO of the year. They will pick up again next week on Tuesday January 4th, and will run every day of the week through Friday. This must eventually end, but can it? And what will be the result if it does? Sad and frustrating to watch our government let/encourage private banks take over our markets. This does the exact opposite of promoting a healthy and dynamic economy. It allows pig companies that have failed to still exist and thus block out innovation and true competitiveness.

Meanwhile the markets drift higher on nothing volume. Severe divergences are in place on all time levels up through monthly. The RSI divergence on the weekly charts is as large as at the ’07 top. Can POMO hot money keep markets aloft indefinitely? I think 2011 will answer that question – and I think the action in gold and silver already have.

Obama Economic Plan Explained

At the National Review blog The Corner, I found this great explanation of the Obama economic plan, using an Abbott & Costello routine:

Abbott: The economy's a wreck. People have a lot less money now then they did three months ago.

Costello: No problem. The federal government's going to spend $1 trillion to put more money in our pockets.

Abbott: But the government doesn't have any money either. The federal deficit's already around $1 trillion. And the federal debt's around $11 trillion.

Costello: No problem. The government will use tax money.

Abbott: But that's our money in the first place. And we don't have any more money.

Costello: No problem. Then the government will just borrow the money.

Abbott: But the people who usually loan the money don't have any more money either.

Costello: No problem. The government will just print all the money we need.

Abbott: But that will make the money worthless.

Costello: Yeah, but at least people will have money in their pockets.

Abbott: But they won't be able to buy anything with it.

Costello: No problem. We'll just blame it on Bush.

Abbott: Sounds like a plan.

Crisis Is A Failure Of Government Intervention

Caroline Baum has a good column where she points out how the crisis was the result of government fixing the price of short-term loans and bailing out bad financial companies. And that despite all the talk of deregulation, the small army of regulators overseeing banks now has failed to stop the problems.

Morning Update/ Market Thread 12/29

Good Morning,

Equity prices are higher this morning, yesterday we did not receive the large price move called for by the small move in the McClelland Oscillator, so a large price move today should be expected. Bonds are roughly flat after a large move down yesterday, the dollar is lower this morning, both oil and gold are higher.

We have hot money pushing the price of oil near $92 a barrel, this is simply not a supply/demand phenomena, it is money fresh off the printing press phenomena. We know this is true because gold and silver are also zooming. Copper is at an all-time high, again, not due to some explosion in demand, but rather due to an explosion of hot money. This only makes things more expensive for consumers. Gasoline at $3 a gallon now, and the CEO of Shell just said he thinks we’ll see $5 a gallon gasoline by 2012! This will simply make the vast majority of Americans poor… a disaster.

The hypocritical Mortgage Banker’s Association was scheduled to release Purchase Application data today, but is declining citing the holidays. They say they’ll combine weeks and give us a report next week. In other words, the data was so bad even their own trumped up reporting methods would look horrid. There’s no other scheduled data releases today, but there’ll be a slew of reports tomorrow.

Yesterday we had a very weak 5 year auction as the demand for debt wanes world wide. The state of Illinois is discussing borrowing $14 billion FROM WALL STREET in order to keep paying their bills! Talk about loan sharks and mobsters, Illinois is a fitting place for a transaction like that. Loan shark debt on top of tremendously excessive debt, now there’s a “solution” that’s sure to last.

But that’s exactly what’s happening all across Europe right now too, as just yesterday the ECB had trouble sterilizing all the debt it wanted to. Too much debt, so the solution offered inside of the debt pusher’s debt backed money box is to pile on new debt while they print up money to cover it. It’s like watching a slow motion train wreck, and you know the outcome’s not going to be pretty.

Meanwhile our largest creditor, China, is attempting to take the last bastion of true manufacturing from the United States and we’re letting them take it. In fact GE, a company who the tax payers just bailed out and who should have been allowed to fail, is now giving the Chinese the technology necessary to compete against Boeing commercial aircraft:
China Squeezes Foreigners for Share of Global Riches

General Electric Co. is finalizing plans for a 50-50 joint venture with a Chinese military-jet maker to produce avionics, the electronic brains of aircraft. The deal with Aviation Industry Corp. of China would give GE access to a Chinese government project aimed at challenging Boeing Co. and Airbus in the civilian-aircraft market.

For those who think that being in debt to China poses no real risk, you should talk to a Boeing worker about that. And you can bet that it won’t be long before they are taking this technology and using it to take the other last bastion of American manufacturing, namely producing weapons. Evidently America is hell bent on only producing worthless paper.

Krugman, Teetotaller Hangovers & Austrian Theory

Paul Krugman is at it again, denouncing what he calls the hangover theory, which is to say his straw man version of Austrian business cycle theory.

He first claims that Austrian theory can't explain why there isn't increased unemployment during the boom phase or why almost all sectors experience difficulties during the slump, which is not true, as I pointed out in a previous post.

Krugman proceeds to note that in the top ten of states that experienced the biggest housing bubbles along some of the states that experienced the biggest housing bubbles, such as California, Nevada and Florida, are states like Georgia, Alabama and the Carolinas which supposedly didn't have a housing boom, something which he appears to regard as evidence against "the hangover theory". But first of all, it is not really true that there were no housing boom in the states he points too, at least no cyclical one. Because of slower population- and economic growth their structural growth is slower than in for example Nevada, meaning that even if their aggregate housing boom were modest, it could still be a cyclical element in that boom.

But more importantly, it is not inconsistent with Austrian theory to expect other states than the ones with the biggest bubbles, like California, Florida and Nevada to suffer from the bust. It would only be inconsistent if states had been economically isolated from each other with no trade or capital flows across the states. But in reality there is a very high level of economic integration between states. And as many companies in for Georgia were selling goods to for constructors and others in Florida, they will naturally take a hit if their customers stop buying their goods. Their investment in output meant to serve customers profiting from the housing bubble were as much malinvestments as the houses built during the housing boom.

Similar reasoning can be applied to explain the apparent mystery of why not just countries with big housing bubbles, like the U.S., the U.K. and Spain are affected by the current global downturn, but also countries with weak housing markets like Germany and Japan are affected. The Economist referenced the problems of Germany and Japan with Krugman's "hangover theory" term, as "the teetotaller's hangover".

As Germany and Japan borrowed the bubble countries the money they needed for the housing boom and centered their economies on selling goods to bubble countries, they are of course affected when the booms turn into a bust. Germany's decision to raise its value added tax (which taxes imports, but not exports) and at the same time lower its payroll taxes (which taxes exports, but not imports) in an attempt to increase its export dependence don't look that smart now. This is also aggravated by exchange rate effects in the form of the extreme strength of the yen, which are knocking out even many Japanese exporters that might have been able to survive the general slump alone, as well as the extreme weakness of the U.K. pound, which are hurting German exporters in particular.

Morning Update/ Market Thread 12/28 - Bubbles Revisited...

Good Morning,

Equity futures were gaining ahead of the open with the dollar lower, the Yen making a large advance, bonds lower, oil back above $91 a barrel, and gold higher as well.

There was a small change in the McClellan Oscillator yesterday, thus we can expect a large directional move either today or tomorrow.

Case-Shiller Home Prices showed the largest drop in prices in over a year, falling 1.2% in the month of October on a not seasonally adjusted basis and .9% when adjusted. Here’s Econoday:
Home prices are falling at an accelerating rate according to the S&P Case-Shiller report that shows a minus 0.9 percent headline for October's 10-city adjusted composite. Note this index is a three-month average, which in this case smoothes out the depth of October's decline. Declines in the unadjusted readings, reflecting price discounting during cold months, are slightly more severe. October's drop follows three prior declines for the adjusted index: minus 0.8 percent in September, minus 0.5 percent in August, and minus 0.1 percent in July.

Year-on-year, sales are up 0.2 percent for the 10-city adjusted index but are down 0.8 percent for the 20-city index which is being depressed by mid-single digit declines for Atlanta, Detroit and Portland. Phoenix, Charlotte and Seattle, also part of the 20 index, also show sizable on-year declines.

The appearance of on-year declines in this report, which is noted for its breadth and accuracy, raises the risk of a pivotal downshift in home prices. Yet the outlook for home prices isn't completely negative given price gains in last week's reports on existing homes and new homes and also the FHFA house price index. Markets are showing no significant reaction to today's report.

I believe home prices have further to fall and will do so over the next few years.

Consumer Confidence for December cratered again, this time falling to yet another depression era read of 52.5 when 57.4 was expected. This is down from November’s 54.1.

I think it’s important to remind people about the supposed increases in retail sales numbers… those numbers are biased in two ways – first they are measured in dollars, and second they contain substitution bias because they fail to account for stores that have gone out of business. Thus we need to take the comparisons that are offered of this Christmas season to years past with a large grain of salt.

The VIX climbed significantly yesterday despite a rise in stock price, yet another divergence that says some large players are lining up for a reversal. There are 5 distinct waves up since the June low, a higher level correction is coming soon:

Those five waves up are either wave C up of a large A,B,C correction, or they comprise wave 3 up of a primary bull market. If it is a wave C, as I suspect, then next will begin a series of lower lows. If, however, the more bullish stock scenario is playing, then we will get a wave 4 next with a more shallow decline which would then be followed by a higher high. The only way that happens, in my opinion, is if the rampant fraud is continued to be covered up.

I know there are a ton of bulls out there and they now can point to rising prices from March of ’09 which is approaching two years of the bears being on the sidelines. During those two years the markets have been artificially propped with trillions and trillions in artificial support, the markets subverted by the “Fed” and the members that comprise it. Most Americans no longer participate in the market as they know it is trumped up and they have seen what can and will happen when the accounting rules change or when the bankers decide that they are not getting their way. Thus the market is not sustainable, valuations do not support it, incomes do not support outrageous debt levels, and thus it will come to an end, again, in my opinion.

But this is the way with all bubbles, as Hyman Minsky observed and as I wrote about in my book Flight to Financial Freedom prior to the peak in home prices and long before the last crash. I think it’s time to review the Seven Bubble Stages versus today’s stock market once again, I’ll place my current comments within brackets [ ]:
The late Hyman Minsky, Ph.D., was a famous economist who taught for Washington University’s Economics department for more than 25 years prior to his death in 1996. He studied recurring instability of markets and developed the idea that there are seven stages in any economic bubble:

Stage One – Disturbance:
Every financial bubble begins with a disturbance. It could be the invention of a new technology, such as the Internet. It may be a shift in laws or economic policy. The creation of ERISA or unexpected reductions of interest rates are examples. No matter what the cause, the outlook changes for one sector of the economy.
[The innovation and widespread use of derivatives sparked the former bubble, it was the fuel to the fire. What was the latest major change? The unprecedented bailouts of the banking industry, the resumption of mark-to-model accounting, and then the “Fed” began “Quantitative Easing” as a new policy tool, i.e. money printing which now provides the new fuel for the fire]

Stage Two – Expansion/Prices Start to Increase:
Following the disturbance, prices in that sector start to rise. Initially, the increase is barely noticed. Usually, these higher prices reflect some underlying improvement in fundamentals. As the price increases gain momentum, more people start to notice.

Stage Three – Euphoria/Easy Credit:
Increasing prices do not, by themselves, create a bubble. Every financial bubble needs fuel; cheap and easy credit is, in most cases, that fuel. Without it, there can’t be speculation. Without it, the consequences of the disturbance die down and the sector returns to a normal state within the bounds of “historical” ratios or measurements. When a bubble starts, that sector is inundated by outsiders; people who normally would not be there. Without cheap and easy credit, the outsiders can’t participate.

The rise in cheap and easy credit is often associated with financial innovation. Many times, a new way of financing is developed that does not reflect the risk involved. In 1929, stock prices were propelled into the stratosphere with the ability to trade via a margin account. Housing prices today skyrocketed as interest-only, variable rate, and reverse amortization mortgages emerged as a viable means for financing overpriced real estate purchases. The latest financing strategy is 40, or even 50 year mortgages.
[Since the world is now saturated with credit, the latest innovation is to simply print money and buy up the markets. This WILL eventually fail as a market is not a market when there are only a very few participants.]

Stage Four – Over-trading/Prices Reach a Peak:
As the effects of cheap and easy credit digs deeper, the market begins to accelerate. Overtrading lifts up volumes and spot shortages emerge. Prices start to zoom, and easy profits are made. This brings in more outsiders, and prices run out of control. This is the point that amateurs, the foolish, the greedy, and the desperate enter the market. Just as a fire is fed by more fuel, a financial bubble needs cheap and easy credit and more outsiders.
[I think we were seeing this particularly in the second half of this year. We are also seeing this again in commodities. Note that China just released its initial commodity allotment for 2011, which is about 15% less than 2010.]

Stage Five – Market Reversal/Insider Profit Taking:
Some wise voices will stand up and say that the bubble can no longer continue. They argue that long run fundamentals, the ratios and measurements, defy sound economic practices. In the bubble, these arguments disappear within one over-riding fact – the price is still rising. The voices of the wise are ignored by the greedy who justify the now insane prices with the euphoric claim that the world has fundamentally changed and this new world means higher prices. Then along comes the cruelest lie of them all, “There will most likely be a ‘soft’ landing!”
[This is the key paragraph that I want to point out. I see fewer and fewer “wise voices” and believe that due to the duration of the current run up in stocks that they are being ignored once again. This is soooo typical of bubbles, it is a hallmark. Those wise voices look foolish in the face of rising and rising prices, only they are proven right in the end. Here’s a wise voice who is being ignored now:

Will he be proven wrong? I don’t think so. In the end the foolish will look as foolish as they always do when a bubble is in full blossom.]

Stage Five is where the real estate industry is today [2005/2006]. This stage can be cruel, as the very people who shouldn’t be buying are. They are the ones who will be hurt the most. The true professionals have found their ‘greater fool’ and are well on their way to the next ‘hot’ sector, like the transition from real estate to commodities now. Those who did not enter the market are caught in a dilemma. They know that they have missed the beginning of the bubble (gold, silver, and oil today [2005/2006]). They are bombarded daily with stories of easy riches and friends who are amassing great wealth. The strong will not enter at stage five and reconcile themselves to the missed opportunity. The ‘fool’ may even realize that prices can’t keep rising forever… however, they just can’t act on their knowledge. Everything appears safe as long as they quit at least one day before the bubble bursts. The weak provide the final fuel for the fire and eventually get burned late in stage six or seven.
[This and Stage Six is where the market is now. The “Fed” is quite intentionally attempting to sucker new entrants into the market. They have even stated that is their intention publically.]

Stage Six – Financial Crisis/Panic:
A bubble requires many people who believe in a bright future, and so long as the euphoria continues, the bubble is sustained. Just as the euphoria takes hold of the outsiders, the insiders remember what’s real. They lose their faith and begin to sneak out the exit. They understand their segment, and they recognize that it has all gone too far. The savvy are long gone, while those who understand the possible outcome begin to slowly cash out. Typically, the insiders try to sneak away unnoticed, and sometimes they get away without notice. Whether the outsiders see the insiders leave or not, insider profit taking signals the beginning of the end (remember who has sold their rental properties?).
[Are insiders sneaking out the door now? YOU BET THEY ARE! And they have been for quite some time. They have been selling to the “Fed” as they fully realize that the true market fundamentals cannot be supported once the “Fed’s” false accounting tricks and phony money are removed from the market.]

Stage seven – Revulsion/Lender of Last Resort:
Sometimes, panic of the insiders infects the outsiders. Other times, it is the end of cheap and easy credit or some unanticipated piece of news. But whatever it is, euphoria is replaced with revulsion. The building is on fire and everyone starts to run for the door. Outsiders start to sell, but there are no buyers. Panic sets in, prices start to tumble downwards, credit dries up, and losses start to accumulate.
[This has already begun in the credit markets, but has yet to begin in equities. It will.]

This is where you may see the “lender of last resort” who is usually the government. The government, although they were talking up a soft landing, are now forced to step in to prevent the crises from spreading to other sectors. Ironically, this is where the savvy investor who profited before, really profits now. With government backing, they are asked to step in and return “normalcy” to a now damaged sector.

The government’s attempt to “put out the fire” usually works. However, the conditions beyond the year 2010 will require oceans of water that the government does not posses. You must be ready!

And here we are… Remember that the “Fed” is NOT the government. At some point the true government, Congress, will be required to step in and clean up the mess in some REAL regard. This has most certainly NOT occurred yet. The true market will be observed in the end…

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