Links 2/25/09


  1. Anonymous

    Thanks Yves for this great blog, one few which get the extent of the problem.

    This short story (from an old water hose monetary analogy) captures the essence of this crisis.

    There once was a nation of farms that experienced booms and busts as water availability varied in the land. Some farms managed better than others by conserving and prudent planning, while some failed and caused much hardship. The government decided to manage the water supply for the nation’s farms. They promised a great moderation in the cycles of boom and bust.

    A small group decried the redistribution of water resources, and warned that those closest to the outlets would be the only beneficiaries. They were ignored, as the vast majority trusted their government. And so the government took charge of much of the nation’s water resources. They brought the water to one vast federal reserve, and created a distribution outlet called Water Street.

    At some point, an influential group successfully pressed for a hands-off approach to distribution of these resources from Water Street. Some insiders argued the reserve needed to closely regulate the waterways, but they were shouted down in the name of business freedom. Most others were just happy to trust the government to do the right thing.

    Predictably, a set of farms close to Water Street had control of the water supply, and soon indulged in over-consumption and waste. They started to sell the water to speculators and other non-productive water users. Little of the water directly reached the rest of the nation’s farms, but many readily received water on credit from speculators to keep their farms going. The Water Street beneficiaries built huge farms and even bigger speculative businesses that relied on an endless supply of free water.

    With time an entire economy was built on free government water. Creative new businesses loaned water, sold water futures, got farms into debt, and mushroomed. Although everyone praised the new innovations, this economy was unsustainable and showed clear signs of excess. But every time risk-taking caught up to these huge Water Street farms and speculators, the reserve provided ample free water to recover from their mistakes. This ensured the problem only grew bigger.

    Once every few years government water reserve managers realized they had to slow down the water output, or risk running out. This latest time, they knew many were addicted to free water and tried to slow down the outflow very very slowly to avoid hurting the wasteful farms and speculators. Even so, Water Street farms were the first to be hit. Without ample free water, these huge farms with their water speculation arms were simply not viable. Soon they were in full blown crisis. Worse, they threatened to disrupt the waterways that supplied other farms. The government stepped in to save the system, and deluged Water Street with as much water as possible.

    But this time it was too late. The Water Street farms started to hoard water, as did the speculators, for many had made open-ended promises to supply cheap water. No water was reaching the nation’s farms, which were failing and defaulting, deepening the crisis. The government continues to deluge Water Street like water was going out of style. A long term solution still eludes the nation.

    Moral: If you must redistribute, regulate like a hawk.

  2. Anonymous

    That is a gross picture, I hate dogs with babies pictures — it’s just too much for me. I’d like to see the baby photoshopped out of this scene and some other animal pasted in place; not to mention that arm off on the right side that belongs somewhere else, like maybe on a person that is devoted and focused to either taking care of a dog or a baby, but not letting the dog act as parent or focal point.

    Can I post this again, instead?

    American Banker Friday, March 3, 2006

    Regulators at the conference restated their commitment to flexibility and said they expect bankers and examiners to be creative and innovative.

    “We regulators will need to consider doing things we have never done before,” said Office of Thrift Supervision Director John Reich.

    Comptroller of the Currency John Dugan said he had instructed examiners not to “second-guess” the decisions made by bankers when renegotiating loan terms with customers.

    Regulators also finalized CRA guidelines on Thursday that say financial institutions will be granted community development credit for loans, investments, and services to distressed areas.

    The guidelines say that investing in middle- and upper-income areas (particularly in rural areas, to attract businesses or residents) that revitalizes a designated disaster area will also satisfy CRA standards. The guidelines extended to three years, from one, the period for making such CRA loans in a disaster area.

    In a speech in New Orleans, Comptroller of the Currency John Dugan said Thursday that a longer extension might still be granted.


  3. Swedish Lex

    On AIG:

    “Feb. 25 (Bloomberg) — American International Group Inc. lost 85 percent of market value since Chief Executive Officer Edward Liddy said five months ago “the mess we’re in is solvable.”

    “AIG’s problems have been underestimated by everyone looking at it,” said Marshall Front, who oversees $500 million as CEO of Chicago-based Front Barnett Associates and sold his stake in the company last year. “The exit strategy from here is extremely murky; each time we seem to have temporarily fixed a problem, additional severe problems have emerged.”

    That it would be impossible, or almost so, to orderly unwind AIG by selling big chunks of it and get good prices when the global markets were in free fall, were obvious.

    Plan A is thus obviously not working and “additional severe problems” will continue to emerge all the way down to the bottom.

    As per Yves’ post of yesterday regarding AIG, it is time for a new approach. If the survival of a bunch of European banks still hinge on AIG not going bankrupt, lets get the Europeans involved too. A trans-atlantic conservatorship with “taxpayers international” getting stakes. The EU will regulate the CDS market going forward. Part of that whole packaged would probably have to involve the orderly dismantling of AIG over time, with emphasis on the time that would be required.

  4. Independent Accountant

    I agree with Kedrosky and have said so for years. Higher inflation is coming. Got gold? Get more.

  5. lineup32

    RE:Krasting. Thanks great link

    “The PMI/AIG/FNM connection is understood by Geithner. Lockhart and Bernanke. They are aware of the entire PMI time bomb within the Agencies. That they are allowing this to continue today does not evoke much confidence in Bernanke’s claim to end the Reckless Lending Standards of the past.”

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