Links 11/1/08


  1. ndk

    Wonder where they’ll dump us monkeys, and how comments on your blog will decrease once we’re gone.

    The Kedrosky thought experiment was excellent. One he didn’t mention, which I’ve saltated myself, is actually the lack of a gold standard. It may limit our ability to deliver an intelligible, palpable shock to savers in order to force them into investment and spending. Behavioral economics is a dangerously underappreciated field, and I’m not in the least satisfied with a blanket explanation that “people are stupid.” I trust billions of years of trial and error much more than a few decades of critical thought.

  2. doc holiday

    The FOMC on the way to a meeting where they will make the MBS market kinda like a rating agency thing:

    Having Fannie and Freddie compete as private firms — perhaps after breaking them into smaller units — would eliminate the conflict between private shareholders and public policy, diminish risks to the overall economy and financial system and allow them to be more innovative by operating with less political interference, Mr. Bernanke said. But “whether the GSE model is viable without at least implicit government support is an open question,” he said.

  3. Richard Kline

    Paul Kedrosky has his finger on the pulse, as always, in a cogent and easy to follow summary of the conference regarding which he posts. A few further thoughts, re:

    He highlights a major point not hitherto expressed as such that in the 29-33 Crash, the major investment banks of the day _were not themselves_ excessively leveraged. Now, they did take heavy damage when some among the numerous highly leveraged customers to whom the lent in a wildly leveraged environment busted out and failed to repay. However, many of the big financials then had money to put to work as equities dropped down low. Today, by contrast, all of the major ibanks and the like are max leveraged, and none are coming through the present trial in their original form. There is money on the sidelines, in less concentrated form, which is a good thing. But in contrast to the Great Depression, where the lack of backstop lenders decimated small and moderate banks, today the problem is focused on over-big money center banks who all over-levered and are losing body parts on the delever (or were until Paulson gave them the promise of unlimited public funds to play with). The _shape_ of the implosion is thus different this time.

    Paul K. passes on the observation that the most extreme property bubbles at present ‘are in Moscow and the Gulf,’ with Britain, Spain, and Ireland heel to toe in the queue behind. Now, in the absolute sense this is true, but I think it is misleading. For example, individual markets in the US were as bubbled as some of those mentioned; SD, CentCal, LostVegas, Miami: these all pumped up to what will likely prove to be twice their sustainable prices, so %100 over-shoot. If the Gulfies and Britain as countries are likely in absolutely higher parabolas then the US, the tremendous volume of US losses swamps those of other areas combined, and will do us as much injur and more. Don’t be surprised if Spain makes a better recovery from its frightscape bubble than the US does.

    Also, I fully expect that we will get default _conditions_ in major countries in the course of this Crash, though it may take two-three years before we’re there. I say ‘conditions’ because the international community will do much up to and past the limits or reason to avoid recognizing losses as such, in my opinion. We are already in default ‘conditions’ regarding five purportedly minor participants: Iceland, Ukraine, Hungary, Poland, and Pakistan. Oh, they are being ‘loaned’ funds, backed by dollare printing from the US ultimately, and repayable by ???? means? I don’t expect Ukraine or Pakistan to be in a position to repay anything to anyone for quite a few years; really, take a look at their political problems and economic smash-ups. Defaults of larger countries can be ‘papered’ over by coordinated international action—if there are not too many of them, and if coordination remains operative. The evident refusal—refusal because it hasn’t happened—of the US to make dollar swaps available to Russia is the shot across the bow that when push comes to shove coordination will find its arms linked on vacuum and “The cellular customer you have requested is unavailable.” Again, defaults are likely two plus years off, but don’t kid yourselves that they can’t happen: they will have to be actively _prevented_ from happening.

  4. River

    We are all headed for BK in a wheel barrow…


    Wall St pigmen rounded up in wheel barrows because the US cannot afford to import crude oil…


    Lots of chimps, er, chumps are us…


    These chimps qualified for million dollar homes and after two years have been evicted…Don’t worry, their mortgages are being modified by JPM…

  5. Anonymous

    Chaos in the currency markets is another problem that needs to be addressed. May I suggest, horror of horrors, a return to the gold standard? Critics of this and possibly latter day central bankers misunderstood its management and finally brought it down in 1971.

    Your own New York Nathan Lewis has been a strong advocate of its return and his article in, of all places Pravda, is worth a read:

    “Making Currencies That Last”


  6. Tortoise

    Specter of deflation: NYT versus Dean Baker. I have to say that I fully agree with Dean on this one.
    The bad news is that the deflation problem (if it existed) would have been easier to solve than the over-indebtedness and housing-equity loss problems that our economy is actually facing. Whether a “liberal” or “conservative” solution is applied, there will be pain.

  7. River


    Consult the Japanese regarding ‘how easy it is to solve the deflation problem’.

    BTW, the ‘housing eqity loss problem’ IS deflation, regardless of how Dean Baker or anyone characterizes it.

  8. River


    Not to worry. Churchill once said that the Americans invariably do the right thing…after they have tried everything else.

    The gold standard will return because that is the only way the confidence in money will be restored after the train wreck.

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