# Best Financial Quotes of 2007



## drillinto (8 April 2007)

http://www.financialsense.com/editorials/rubino/2007/0403.html


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## drillinto (8 April 2007)

My pick is:

John Embry, Sprott Asset Management

If a deflationary episode is to be avoided, one of the costs will most assuredly be accelerating inflation in a textbook case of ever more paper chasing a limited amount of real goods and services. In the face of this I find it fascinating that many pundits acknowledge the longer-term attractiveness of gold but persist in trying to call short-term corrections. In markets as seriously manipulated as gold with the incredibly powerful fundamentals that it possesses, trying to be cute on corrections strikes me as a real mug’s game. The good news on the manipulation front is that it has become so blatant that it is revealing distinct signs of desperation, a necessary precursor to its eventual cessation.


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## drillinto (5 May 2007)

Best Financial Quotes of April 2007

http://www.safehaven.com/showarticle.cfm?id=7481&pv=1


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## drillinto (5 May 2007)

My April 2007 pick is:

Ron Paul, Texas Republican Congressman


The fiscal year 2008 budget, passed in the House of Representatives last week, is a monument to irresponsibility and profligacy. It shows that Congress remains oblivious to the economic troubles facing the nation, and that political expediency trumps all common sense in Washington. To the extent that proponents and supporters of these unsustainable budget increases continue to win reelection, it also shows that many Americans unfortunately continue to believe government can provide them with a free lunch.


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## dhukka (5 May 2007)

Mike Whitney from counterpunch in response to the Dow crashing through the 13,000 mark:



> The Dow is like a drunk atop a 13,000 ft cliff; inebriated on the Fed's cheap "low-interest" liquor. One wrong step and he'll plunge headlong into the ether.


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## wayneL (5 May 2007)

drillinto said:


> My April 2007 pick is:
> 
> Ron Paul, Texas Republican Congressman
> 
> ...



Jeez I like that guy! An honest politician... who'da thunk it?


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## drillinto (11 June 2007)

The Best Financial Quotes of May 2007

http://www.dollarcollapse.com/inp/view.asp?ID=54


And my pick is: Adrian Ash, Bullion Vault

A world run on two or three fiat currencies, issued and accepted by diktat...becomes only more likely every time that drug-lords in Moscow trade a kilo of crank. But as a store of wealth for the future, gold keeps winning out. Since the dream of a European single currency became flesh at the start of 2002, gold has averaged 10.3% year-on-year gains measured in Euros. It's risen more than 12% annually against Sterling. In terms of gold-priced devaluation, the Dollar and Yen are now neck-and-neck. Gold bullion has averaged 17.5% gains per year against both since the start of 2002. 

Do business in Euros...but hold your wealth in gold? Under monetary union the trend looks pretty solid so far.


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## drillinto (13 June 2007)

Here it is my candidate for the Best Financial Quote of June 2007

Brian Wesbury(USA): I think the retail sales report will be a nice, strong report after last month's weak report. And clearly energy prices are going to lift the overall levels of inflation that we see. Once we take out energy, we're going to have some subdued inflation, but we're still over 2 percent. With the economy coming back and inflation staying elevated at least above the Fed's comfort zone, I think it's only a matter of time before the Fed does come in and hike interest rates. Lots of people worry about that, Susie, but with discount models that I use, I've already incorporated higher interest rates and I still show the stock market 20 percent undervalued today. That means it's a great buying opportunity.


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## drillinto (29 June 2007)

Who wants to be a millionaire ?

Australia joins top 10 wealthiest
Melbourne Herald Sun, June 28, 2007 

THE number of Australian millionaires is growing at a faster pace than the rest of the world, helped along by a buoyant share market.

According to Merrill Lynch and Capgemini annual wealth report, released this morning, the number of Australians with financial assets of more than $1 million grew by 10.3 per cent in 2006 to 160,600 people, on the back of a robust share market.

The number of high net worth individuals (HNWI) in the world jumped 8.3 per cent in 2006 to 9.5 million people.

Australia joins the Top 10 list

"For the first time, Australia has joined the ranks of the world's top ten countries in terms of total HNWI numbers," Merrill Lynch head of global private clients, Australia, Nick Kalikajaros, said.

"The steady growth in the size and scale of the Australian market represents tremendous opportunities for wealth management firms, especially those that can adapt their service model to the needs of an increasingly sophisticated client segment."

Merrill Lynch said slowing mature markets like the United States were expected to moderate growth in the rest of the world economy.

"With many central banks tightening monetary policy, the period of high liquidity that has so stimulated recent growth may soon come to an end," Merrill Lynch said. 


Global rise in rich

Globally the  number of millionaires in the world increased by 8.3 per cent in 2006, with about 9.5 million individuals now estimated to have more than $US1 million ($1.18 million) in financial assets.

The financial assets owned by the group totalled $US37.2 trillion ($44.05 trillion), an increase of 11.4 per cent from 2005, with Singapore, India, Indonesia and Russia producing the greatest number of new millionaires. 

"Real GDP and market capitalisation growth rates, two primary drivers of wealth generation, accelerated throughout 2006, which helped to increase the total number of HNWIs around the world as well as the amount of wealth they control," the report said. 

The number of Ultra-HNWIs - individuals with financial assets exceeding $US30m - increased by 11.3 per cent in 2006, with the global population of this extremely affluent group now estimated at 94,970 people. 

The financial assets of Ultra-HNWIs increased by 16.8 per cent compared with 2005, the report said, illustrating a trend whereby wealth is increasingly concentrated in the hands of the already wealthy, the report said. 

"Global wealth continued to consolidate in 2006, a trend we have reported for the past 11 years," the report said. 

Capgemini and Merrill Lynch define a millionaire as someone with more than $US1 million ($1.18m) in financial assets such as cash, equities, bonds or funds. 

They do not include the value of an individual's primary residence or private collections of objects such as art, antiques or coins.


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## drillinto (3 July 2007)

US Growth in 2007: Remarkable !


ISM Manufacturing Index  
Brian Wesbury / First Trust Advisors (USA)
Date: July/2/2007 


The ISM Manufacturing index increased to 56.0 in June from 55.0 in May. The consensus expected the index to be unchanged at 55.0.  (Levels higher than 50 signal expansion; levels below 50 signal contraction.)
The index was driven upward by an increase of 4.6 (to 62.9) in the production component. The new orders component rose by 0.7 points (to 60.3).

The prices paid index declined to 68.0 from 71.0, but remains at a high level.   

Implications:  The coffin is closing on low expectations for the U.S. economy. Powered by faster growth in both production and new orders, the ISM index increased for the third straight month in June, reaching its highest level since July 2004. Data reported so far for the second quarter suggest an annual real GDP growth rate of 3.5% to 4%. Norbert Ore, the head of the Institute for Supply Management, says it looks like real GDP growth will be about 4% in 
Q2. “Remarkable,” he said. The economy is entering the third quarter with substantial forward momentum, which we believe will carry forward through next year. Given this strong growth and continued upward pressure on inflation we continue to forecast higher interest rates ahead, across the yield curve.


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## drillinto (7 July 2007)

Brian Wesbury(Chief Economist, FTA) is bullish on the US economy


US: June Employment Report 
First Trust Advisors(FTA)
Date: 7/6/2007 

Non-farm payrolls increased 132,000 in June while revisions to April and May added a total of 75,000 to payroll growth.  The consensus expected a gain of 125,000.

Sectors performing well in June included education and health (+59,000), restaurants and bars (+35,000), and state and local government (+41,000). Upward revisions to April and May were centered in financial services, manufacturing, leisure and hospitality, and retail trade.

Non-residential construction payrolls increased 12,000 in June, while residential construction jobs were unchanged.

The unemployment rate remained at 4.5%. Average hourly earnings increased 0.3% (0.35% un-rounded) and are up 3.9% versus a year ago, consistent with nominal wage gains in the late 1990s. 

Implications:  Today’s jobs report was bullish on the economy. Payrolls were 207,000 higher than estimated last month (132,000 for June plus 75,000 in revisions to prior months), wages are growing at a strong pace, and hours per worker are up. Payrolls have expanded by an average of 167,000 per month in the past year, while civilian employment (adjusted for the payroll concept) is up 177,000 per month. After a lull, the very consistent pattern of upward revisions has reappeared. We now have two revisions for all jobs reports through April and in the prior twelve months the average revision between the original release and final number has been +41,000. Also note that in the past three months the number of unemployed workers who voluntarily left their prior job is up 55,000, a sign that workers are getting more confident in finding new jobs. When combined with the strong ISM reports for both manufacturing and services (released earlier this week), the strong employment report for June suggests that the economy has emerged from its slow-growth-patch, and has regained its strong forward momentum.


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## drillinto (10 July 2007)

Discipline and Fundamentals Beat Uncertainty 
Brian S. Wesbury - Chief Economist, First Trust Advisors - USA 
Robert Stein, CFA - Senior Economist
Date: 7/9/2007 

The biggest problem with basing investment decisions on economic forecasts is uncertainty. Not just ambiguity about how any particular economic outcome will actually move markets, but murkiness about the forecast itself. Even when it seems that a forecast is correct, there are questions about the accuracy of the available data that allow doubt to creep in at any point.

For example, in the past 12 months, there was inversion in a significant portion of the Treasury yield curve, while futures markets priced in Fed rate cuts. This kind of market activity, according to the economic handbook, should precede an economic slowdown.

And that’s exactly what happened. The economy slowed sharply with just 0.7% annualized real GDP growth in Q1 2007, led by a weak housing market. The economic pessimists and the bond bulls felt vindicated. They started to call rising stock prices a bubble.

But the 10-year Treasury bond yield is up slightly from a year ago, the futures market no longer expects rate cuts, the stock market remains strong, and forecasts for the economy have been ratcheted upward. This would seem to support the economic optimists and the bond bears.

But, very few forecasters have changed their underlying assumptions, which turbo-charges uncertainty. Now, the employment data are in question. Some ask, “How can the unemployment rate stay at 4.5%, and construction jobs remain robust in the midst of a housing slowdown?” Some even point to the fact that a smaller share of the overall population is working or looking for a job than in the late 1990s – to them, a clear sign of trouble.

The point is that even when economic data and markets seem to be speaking clearly, there is still a great deal of doubt, ambiguity and uncertainty in any economic outlook.

This is why we fall back on fundamentals. As long as tax rates remain at levels which encourage risk taking, as long as government interference is not overwhelming, and as long as the Fed is not leaning too far one way or another, the economy will be fine.

 It is true that the labor force stands at 66.1% of the population, well below its peak of 67.3% back in 2000. It is also true that if the labor force as a share of the population was still at that 2000 peak, the unemployment rate would be 6.2%. But this is not a worrisome development.

With the US population aging, teenage participation rates falling, women fully incorporated into the workforce, and immigrants reluctant to pop-up on the radar screen, a leveling off in the labor force should be expected.
Also, as we explained in our Monday Morning Outlook on 6/4/2007 “The Construction Job Mystery,” there are a multitude of reasons why the slowdown in housing has not had a major impact on the jobs market.

In the end, in the midst of a dynamic and fluid world order, there will always be uncertainty – about everything. With this in mind, the best advice we can give to those who incorporate economic forecasts into investment decisions is to stay disciplined about watching the true underlying causes of economic change. Employment-population ratios, construction jobs, sub-prime loans, gas prices, the trade deficit, or whatever, are just sideshows.

Policy is what matters. With tax rates low, the real federal funds rate nowhere near levels which preceded prior recessions, a great deal of noise but no action on trade protectionism, and gridlock in Congress on new spending, the fundamentals look good. As a result, we remain convinced that the US and most of the globe[OZ also] will continue to grow nicely in the years ahead.


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## drillinto (11 July 2007)

Neuroeconomics 

Money isn't everything

Jul 5th 2007 
From The Economist print edition


Men with a lot of testosterone make curious economic choices

PSYCHOLOGISTS have known for a long time that economists are wrong. Most economists””at least, those of the classical persuasion””believe that any financial gain, however small, is worth having. But psychologists know this is not true. They know because of the ultimatum game, the outcome of which is often the rejection of free money. 

In this game, one player divides a pot of money between himself and another. The other then chooses whether to accept the offer. If he rejects it, neither player benefits. And despite the instincts of classical economics, a stingy offer (one that is less than about a quarter of the total) is, indeed, usually rejected. The question is, why?

One explanation of the rejectionist strategy is that human psychology is adapted for repeated interactions rather than one-off trades. In this case, taking a tough, if self-sacrificial, line at the beginning pays dividends in future rounds of the game. Rejecting a stingy offer in a one-off game is thus just a single move in a larger strategy. And indeed, when one-off ultimatum games are played by trained economists, who know all this, they do tend to accept stingy offers more often than other people would. But even they have their limits. To throw some light on why those limits exist, Terence Burnham of Harvard University recently gathered a group of students of microeconomics and asked them to play the ultimatum game. All of the students he recruited were men.

Dr Burnham's research budget ran to a bunch of $40 games. When there are many rounds in the ultimatum game, players learn to split the money more or less equally. But Dr Burnham was interested in a game of only one round. In this game, which the players knew in advance was final and could thus not affect future outcomes, proposers could choose only between offering the other player $25 (ie, more than half the total) or $5. Responders could accept or reject the offer as usual. Those results recorded, Dr Burnham took saliva samples from all the students and compared the testosterone levels assessed from those samples with decisions made in the one-round game. 

As he describes in the Proceedings of the Royal Society, the responders who rejected a low final offer had an average testosterone level more than 50% higher than the average of those who accepted. Five of the seven men with the highest testosterone levels in the study rejected a $5 ultimate offer but only one of the 19 others made the same decision.

What Dr Burnham's result supports is a much deeper rejection of the tenets of classical economics than one based on a slight mis-evolution of negotiating skills. It backs the idea that what people really strive for is relative rather than absolute prosperity. They would rather accept less themselves than see a rival get ahead. That is likely to be particularly true in individuals with high testosterone levels, since that hormone is correlated with social dominance in many species. 

Economists often refer to this sort of behaviour as irrational. In fact, it is not. It is simply, as it were, differently rational. The things that money can buy are merely means to an end””social status””that brings desirable reproductive opportunities. If another route brings that status more directly, money is irrelevant


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## drillinto (13 July 2007)

Expansion Plans Lead to Gains for Australian Mining Shares 

Posted by Dan Denning on Jul 12th, 2007 
You may wish to visit ==> www.dailyreckoning.com.au

The list of factors contributing to share price gains in BHP (ASX:BHP) and Rio Tinto (ASX:RIO) keeps getting longer. Earlier this week we mentioned the possibility of a 25% gain in iron ore prices next year. In today’s Australian, Scott Murdoch reckons a 25% gain in iron ore prices would deliver a 10% boost to BHP’s earnings and a boost of 25% to Rio.

The government is keen to get its share. Based on the current corporate tax rate, the Australian Treasury would book AU$480 million in iron-ore relates tax revenues on a 10% gain in ore prices, and a tidy AU$1.2 billion on a 25% increase. That could come in handy in an election year, no?

Earnings increases driven by rising commodity prices are drawing the attention of the world’s pirate equiteers, according to a report published yesterday by Ernst and Young. “Cashed-up private equity raiders could soon add resource giants like BHP Billiton Ltd and Rio Tinto Ltd to their shopping lists, with widespread belief in the longevity of the commodities boom,” reports Financialnews.com

“According to a report by Ernst & Young’s Global Mining & Metals Centre, the traditional barriers to investment in the mining sector by private equity are changing. Ernst & Young Global Mining & Metals Sector leader Mike Elliott said private equity had historically taken little interest in the sector because of its cyclical nature, a perceived need for specialist knowledge and possible lack of exit options.”

This is part of the “revaluation” argument which explains the recent surge in BHP’s share price. It’s a belief that the third phase of global industrialisation is much stronger and long-lived than the first two. “With the demand from China and India to secure resources and the constraints on supply globally, it is generally agreed that mining is now in a new super cycle that is generating higher and more predictable cash flows” Elliott said.

Uh oh. Whenever something is “generally agreed” upon, it’s time to get nervous. Are the big Aussie miners fully, or even over-valued at today’s prices?

Not quite yet. One reason the shares are being re-valued is that the miners have big expansion plans in places where huge mineral ore bodies are already known to exist. Consider just one of BHP’s projects, the AU$6 billion expansion of its prized asset, Olympic Dam in South Australia.

Last year the asset produced AU$634 million in earnings. The new plan - which requires a new airport, a desalination plant, a new railway, and a town of 5,000 construction workers - would expand copper production to 500,000 tonnes per year and triple uranium production to 15,000 tonnes per year. It would also include a new ore processing facility with four times the capacity of the current facility.

Marius Kloppers is ambitious.

But is he over-reaching, betting on commodity prices staying higher, or declining at a slower rate, than previous cycles? Olympic Dam is home to 30% of the world’s known recoverable uranium reserves. BHP is so bullish on uranium’s future as fuel for the world’s nuclear plants that it’s reassessing its uranium assets in Western Australia, even though the current state government under Alan Carpenter supports the existing ban on new uranium mines.

The area where BHP has begun reassessing its assets is Yeelirrie, 500km north of Kalgoorlie, according to Nigel Wilson in today’s Australian. The company reckons the site contains 55,000 tonnes of uranium oxide. Rio’s on board too, exploring the prospects at its 36,000 tonne U308 deposit at Kintyre. No wonder the pirates are interested. Look for the share prices to keep on keepin’ on.

Dan Denning
The Daily Reckoning Australia


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## drillinto (15 July 2007)

"The only thing that overcomes hard luck is hard work"
Harry Golden ( US journalist )


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## drillinto (16 July 2007)

Brian Wesbury is the number one inflation hawk

Data Watch 
US Retail Sales decline 0.9% in June 
Brian Wesbury / First Trust Advisors(USA)
Date: 7/13/2007 


June retail sales declined 0.9% and were down 0.4% excluding autos, both worse than consensus expectations. Retail sales are up 3.8% versus last year, 4.2% excluding autos.

The largest dollar drop in June sales was in autos, which fell $2.3 billion. Other declines included building materials (down $690 million), furniture-electronics-appliances (down $435 million), and gas stations (down $417 million). Stronger components of sales included internet-mail order (up $299 million), health and personal care stores (up $229 million), and general merchandise stores (up $131 million).

Excluding autos, building materials, and gas, sales were unchanged in June and are up 5.2% versus a year ago.

Implications:  The 0.9% drop in June overall retail sales is not as bad as it looks. Most of the decline was due to auto sales which are volatile from month to month and which are subject to large revisions. Retail sales excluding autos and building materials are a direct feed into GDP data (auto sales data come from another source and building materials are counted as investment) and these sales fell only 0.1%. Excluding gas from this metric (gas sales are usually driven by inflation) shows retail sales were unchanged and up at a 3.5% annual rate the past three months. Given this data, real consumption (including services) should grow at about a 1.3% annual rate in the second quarter and real GDP – bolstered by stronger inventory and trade figures – appears set to grow at a 3.5% annual rate in Q2. In other news this morning, import prices were reported up 1% for June, versus a consensus expected 0.7%, and prices were revised upward for May. In the past four months, import prices are up at a 16.3% annual rate. Ex-petroleum, import prices were up 0.2% in June and up at a 3.7% annual rate the past four months. Export prices were up 0.3% (0.1% ex-agriculture). We believe growth remains robust despite today’s data and inflation is the primary economic concern.


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## drillinto (16 July 2007)

Today ASF has 9,941 members

Soon it will reach the fabulous 10,000 mark

Congratulations to Joe Blow and his Wonder Team


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## drillinto (23 July 2007)

Must read on US inflation

http://www.nypost.com/php/pfriendly...by__inflations_ugly_business_john_crudele.htm


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## drillinto (25 July 2007)

U.S. Trade Deficit With China Signals ‘Buy Gold’ 

Posted by David Galland on Jul 25th, 2007 
Source: www.dailyreckoning.com.au

A quick chat about trade deficits seems timely. Starting with the notion that they are inflationary, right?

Well, technically, they don’t have to be. That’s because, in the absence of government intervention, all a trade deficit should mean is that the people of one country are willing to trade their money for something on offer by the people of another country.

In the 1800s, the U.S. ran big deficits and did quite well because our country was full of opportunity and promise, so foreigners invested here, more than we invested there.

The problem comes when a government, say China, steps into the picture and deliberately suppresses its currency to attract businesses to certain sectors of its economy - for instance, city dwellers. That causes an aberration, the result being a lot of U.S. dollars shipping out to China in exchange for all manner of consumer goods… dollars that the Chinese have then turned around and invested in U.S. Treasuries. More on that momentarily.

The massive deficits with China are unstable because, rather than being the result of open trade, they are based largely on political decisions made by a handful of people in the Chinese government.

In time, those people - or their successors - may decide that there is more advantage to spending the dollars. Or they will be forced to do it. Say, to appease other segments of the economy now penalized by the higher cost of foreign goods. Or they might have to spend the dollars to pay the cost of a war or to bail the country out of a financial crisis.

Regardless of the reason, at some point the political advantage of spending those dollars, rather than hoarding them - which the Japanese did to their detriment in recent decades - will reach a tipping point after which those greenbacks will come flooding back to the market, devastating the value of the dollar on foreign exchange markets.


The dollar has already, since 2002, lost about 26% of its value. Of course, a good deal of the pain that depreciation has caused to the wallets of foreigners has been offset by the interest they earned on their Treasuries. But treading water is one thing, and standing by while your pile of cash starts to go up in the flames of a monetary crisis is another.

Viewed from another angle, over time it isn’t the trade deficit that is inflationary. Rather, the trade deficit is effectively a subsidy provided to the U.S. by China… a subsidy that comes from the Chinese having used the river of dollars provided by U.S. consumers to buy the unbacked paper of the U.S. government. That has allowed U.S. interest rates to remain artificially low and forestalled inflation in the U.S. It is as if China is building up a big bank of inflation points. Sooner or later, they are going to spend those inflation points.

Make no mistake, we are in uncharted water; it is unprecedented that the claims represented by the fiat currency of one government - that of the U.S. - have been accumulated in such massive quantities for the reserves of other governments. And we’re not just talking China but virtually the world. And the world is getting nervous.

To quote Thai Finance Minister Chalongphob Sussangkarn in his recent address to the annual meeting of the Asian Development Bank in Kyoto:

“Should the financial markets lose confidence in the U.S. dollar, huge capital outflows from the U.S. could lead to a rapid depreciation of the U.S. dollar, and thus dramatic appreciation of other currencies.”

The whole matter of trade deficits is, unfortunately for investors not paying attention, just one of far too many aerosol cans now roasting in the fire. When they start exploding, you’ll want to be safely hiding behind a wall of gold and silver.

In the final analysis, every day gold goes up and gold goes down, with the movements based on any number of inputs. To avoid being panicked one way or the other, a long-term perspective is required to see these fluctuations in their proper perspective. And, despite all the jagged fits and starts these past few years, and all the nay saying along the way, three years ago, gold was trading for $393 an ounce… 40% lower than it is today.

And the better gold shares have offered exponentially higher returns than that.

While now is the time to begin accumulating your gold and gold share positions - if you have not already started doing so - how will you know when things are about to get really “interesting”? My partner Doug Casey recently made the observation that it is not when the trade deficit is rising that you should be concerned, but when it starts to contract… because that is a sign that the flood of greenbacks is starting to return home.

Regards,

David Galland,
for The Daily Reckoning Australia


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## drillinto (1 August 2007)

Quote of the Day: "the stunning failure of responsibility"
Wednesday, August 01, 2007 

From the author [J. H. Kunstler] of "The Long Emergency", comes this just about perfect summation as to the present situation:

"Last week's stock market meltdown suggested that a financial sector rigged for the falsification of reality eventually enters a danger zone where reality implacably reasserts itself, expectations dissolve, and all that remains is the sour odor of fraud.

This long episode of market mania, running for seven years, was based on the idea that non-performing loans could be turned into money by removing them from their point of origin and dressing them up in respectable clothes -- like taking all the winos in downtown Los Angeles, putting them in Prada suits, and passing them off as the faculty of the Harvard Business School. It was a transparently ludicrous racket and the wonder is that America proved to be so utterly bereft of regulating authority -- not to mention plain decency and self-restraint -- at every stage.

It's really hard to account for the stunning failure of responsibility. What you had was a whole industry that surrendered the standards and norms that brought it into being and enabled it to function in the first place. Mortgage lenders stopped requiring house-buyers to qualify for loans; bankers stopped caring what stood behind the paper they issued; dubious loans were bundled and resold like barrels of rotten anchovies -- in such numbers that no individual stinking minnow would stand out -- and the barrels were traded up the line, leveraged, hedged, fudged, fobbed, and fiddled until, abracadabra, they were transformed into so many Tribeca lofts, Hampton villas, Piaget wristwatches, million-dollar birthday parties, and Gulfstream jets.

It worked for the Goldman Sachs bonus babies, and the private equity scammers, and for the corporate CEOs and their board members, and for the politicians who parlayed their votes into cushy lobbying jobs, and even for the miserable quants in the federal government's termite mounds of statistical reportage. It even worked for about 18 months for millions of feckless US citizens gulled into contracts for houses they could never hope to pay for, under arrantly false and ruinous terms . . ."

Ouch!


Source: James Howard Kunstler / USA


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## drillinto (10 August 2007)

Thoughtful commentary by Brian Wesbury(Chief Economist, FTAdvisors, USA)

http://www.ftportfolios.com/Comment...Wall_Street_Journal_Op-Ed_by_Brian_S._Wesbury


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## drillinto (18 August 2007)

The Economist: rich central banks

http://www.economist.com/finance/PrinterFriendly.cfm?story_id=9621595


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## drillinto (18 August 2007)

Brian Wesbury is the foremost US inflation hawk.
********************

One on One with Brian Wesbury, Chief Economist at First Trust Advisors

Friday, August 17, 2007  

SUSIE GHARIB: Joining us with more analysis, Brian Wesbury, chief economist at First Trust Advisors. Hi, Brian. 

BRIAN WESBURY, CHIEF ECONOMIST, FIRST TRUST ADVISORS: Hi, Susie. Good to be with you. 

GHARIB: Brian, do you think that the Fed action today is going to ease the credit crunch?

WESBURY: Yeah, I want to describe it as a helping hand, though, not a bailout. It seems to me that when I look at the markets, what we have is a lot of fear and fear is driven by a lot of leverage in the system, but underneath it all, there's very little problems in the market. Up through July, commercial paper had been growing at a 22 percent rate, commercial industrial loans are up an 11 percent rate. Even consumer credit is growing at a 5 to 6 percent rate. So there hasn't been a big credit crunch. What we're seeing is a lack of pricing for many mortgage bonds and a lot of hedge funds that are having serious problems because they leveraged themselves too much. 

GHARIB: Do you think that there will be banks lining up to go to the discount window and get some cash?

WESBURY: Probably not. Even though the Fed said there is no stigma, there is and if you are seen going to the discount window, that's a sign you may be weak. In this kind of market especially with hedge funds out there, you're just opening yourself up for attacks. You know, what's interesting is that Countrywide went to the market yesterday, got $11 billion from a line of credit they had already established and the ratings agencies came out and said that that put them in pretty good stead for the next year or so. So it looks to me like there's plenty of credit available. All the Fed was doing was signaling that they're ready if things get worse. 

GHARIB: Now some people were criticizing the Fed saying its action helped Wall Street, but not Main Street, in that it didn't address the underlying weakness in housing or the economy, people who are having trouble getting mortgages. What's your response to that?

WESBURY: I personally know many people who have gotten mortgages in just the past few weeks. The building in my community -- I live in the Chicago area -- continues. It's not as strong as it was. There's not as many houses selling as there was, but, clearly, the market has not frozen up. I keep hearing stories of this, but I just don't see it where I travel. And not only in my neighborhood, but also all over the country where I travel. 

GHARIB: Well, that's not the sense that a lot of -- the feedback that we're getting from others and particularly the economists and there were surveys all over the place today, who were saying that they now expect the Fed to cut interest rates, to deal with business and the economy and the last couple of times you've been on our program, you have been saying that you think the Fed needs to raise interest rates and you're still standing by that forecast and tell us why. 

WESBURY: Right. Well, let me just say this -- the Fed may cut interest rates. I think it would be a mistake to do that because then they would be forced to come back and raise them further, which would risk a recession down the road. In 1987, when the stock market crashed, everybody said we were going to have a recession. We didn't. The Fed cut rates and they were then forced to come back and raise interest rates too far and we ended up in a recession later. The same thing in 1998. 

GHARIB: I know, but--

WESBURY: . to help long-term capital. I think today if they cut rates, they would actually be stoking inflation and causing problems down the road. 

GHARIB: But, Brian, even the Fed in their statement today said the downside risk to growth has increased appreciably. So it sounds like even the Fed is posturing to cut rates. 

WESBURY: What the Fed said was there's risks and they haven't cut rates yet and that's the thing. They could cut rates, Susie, there's no doubt about it. They could. I think that would be a mistake. Think about this. What is a rate cut going to do? It can't help anybody. You would have to drive interest rates all the way back down to 1 percent and then the sub-prime people could get a refinance at a very low interest rate which wouldn't last because the Fed would have to drive rates right back up again. We've had a situation where credit was too easy for too long and now we're paying the price and there's really nothing we can do except accept the losses and move through them and the Fed is trying to make that easier. 

GHARIB: I wish we had more time to discuss this further. We'll have to get you back. Thanks a lot, Brian, for coming on the program. 

WESBURY: Thanks, Susie. 

GHARIB: My guest tonight, Brian Wesbury, chief economist at First Trust Advisors. 

Source:  www.pbs.org


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## wavepicker (18 August 2007)

In the words of one July 20 Melbourne Herald Sun: “There is no systemic risk from the broader subprime mortgage losses in the US. Our financial system won’t even blink. This is not even a million miles from being 1990 revisited.”


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## drillinto (21 August 2007)

Tough love on Wall Street

As lenders hunt for bad loans, Pimco founder and Fortune columnist Bill Gross says the Street is learning hard lessons about disclosure.

By Bill Gross, Fortune
August 20 2007

Goodness knows, it's not a piece of cake for anyone over 40 these days to understand the maze of financial structures that now appears to be unwinding. They were created by youthful financial engineers trained to exploit cheap money and leverage, who showed no fear and who have, until the past few weeks, never known the sting of the market's lash.

They are wizards of complexity. I, however, having just turned 63, am a professor of simplicity. So forgive the perhaps unsophisticated explanation that follows of the way the subprime crisis swiftly crossed the borders of mortgage finance to infect global capital markets.

What Citigroup's Chuck Prince, the Fed's Ben Bernanke, Treasury Secretary Hank Paulson, and a host of other sophisticates should have known is that the bond and stock market problem is the same one puzzle players confront during a game of "Where's Waldo?" -- Waldo in this case being the bad loans and defaulting subprime paper of the U.S. mortgage market.

While market analysts can estimate how many Waldos might actually show their faces over the next few years -- $100 billion to $200 billion worth is a reasonable estimate -- no one really knows where they are hidden.

First believed to be confined to Bear Stearns's hedge funds and their proxies, Waldos have been popping up with regularity in seemingly staid institutions such as German and French banks, and that has necessitated state-sanctioned bailouts reminiscent of the Long-Term Capital Management crisis of 1998.

IKB, a German bank, and BNP Paribas, its French counterpart, encountered subprime meltdowns on either their own balance sheets or investment funds sponsored by them. Their combined assets total billions, although their Waldos are yet to be computed or even found.

Those looking for clues to the extent of the spreading fungus should understand that there really is no comprehensive data to allow anyone to know how many subprimes actually rest in individual institutional portfolios.

Regulators have been absent from the game, and information release has been left in the hands of individual institutions, some of which have compounded the uncertainty with comments about volatile market conditions unequaled during the lifetime of their careers.

Also many institutions, including pension funds and insurance companies, argue that accounting rules allow them to mark subprime derivatives at cost. Default exposure, therefore, can hibernate for many months before its true value is revealed to investors and, importantly, to other lenders.

The significance of proper disclosure is, in effect, the key to the current crisis.

Financial institutions lend trillions of dollars, euros, pounds, and yen to and among one another. In the U.S., for instance, the Fed lends to banks, which lend to prime brokers such as Goldman Sachs (Charts, Fortune 500) and Morgan Stanley (Charts, Fortune 500), which lend to hedge funds, and so on.

The food chain in this case is not one of predator feasting on prey, but a symbiotic credit extension, always for profit, but never without trust and belief that their money will be repaid upon contractual demand.

When no one really knows where and how many Waldos there are, the trust breaks down, and money is figuratively stuffed in Wall Street and London mattresses as opposed to extended into the increasingly desperate hands of hedge funds and similarly levered financial conduits.

These structures in turn are experiencing runs from depositors and lenders exposed to asset price declines of unexpected proportions.

In such an environment, markets become incredibly volatile as more and more financial institutions reach their risk limits at the same time. Waldo morphs and becomes a man with a thousand faces. All assets, with the exception of U.S. Treasuries, look suspiciously like one another. They're all Waldos now.

The past few weeks have exposed a giant crack in modern financial architecture, created by youthful wizards and endorsed for its diversity by central bankers present and past. While the newborn derivatives may hedge individual institutional and sector risk, they cannot eliminate the Waldos.

In fact, the inherent leverage that accompanies derivative creation may foster systemic risk when information is unavailable or delayed in its release. Nothing within the current marketplace allows for the hedging of liquidity risk, and that is the problem at the moment. Only the central banks can solve this puzzle, with their own liquidity infusions and perhaps a series of rate cuts.

The markets stand by with apprehension.


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## drillinto (21 August 2007)

Financial markets need greater policy certainty - not lower interest rates 
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The Fed's Job
By BRIAN S. WESBURY
WSJ / August 20, 2007

Blaming monetary policy for economic and financial market turmoil is a time honored tradition. Maybe the most famous bashing was in 1896 when William Jennings Bryan, an original populist, ranted against hard money and for inflation: ". . . we shall answer their demands for a gold standard by saying to them, you shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold."

 Monetary policy makes an easy scapegoat because printing money (like drinking a cup of coffee) is an easy way to give an economy a temporary boost. But if what ails the economy or markets was not caused by tight money in the first place, a temporary boost will not help. It may cover up the symptoms temporarily, but in the end it does not solve the underlying issue (a lack of sleep).

In fact, easy money always leads to greater problems down the road -- either rising inflation, or a reduced sensitivity to risk, as markets come to expect rate cuts to bail them out.

Lately, modern-day William Jennings Bryans have been loudly calling on the Fed to cut interest rates and inject cash into the banking system. They believe more money would stop financial markets from seizing up any further.

This would make sense if money was already tight -- or to put it another way, if a lack of liquidity was the real issue. But trades are clearing, banks are well capitalized, commercial and industrial loans are growing, credit-worthy borrowers are getting mortgages, and the economy is still expanding.

This was not the case after 9/11, when communication lines were cut to the Bank of New York, a key clearing house for bond trades. Then, liquidity injections were clearly needed. Trades failed and overdrafts mounted, forcing the Fed to inject hundreds of billions of dollars into the banking system.

In contrast, the current turmoil in the financial markets has nothing to do with a lack of liquidity. More importantly, there is little hope that any liquidity the Fed would inject into the banking system would actually get to the sectors of the market where only sporadic, fire-sale pricing of securities is taking place.

Some are arguing that a sharp decline in the three-month Treasury bill yield, to 3.85% from roughly 5% during the past few days, shows the need for a huge infusion of cash that would force the federal funds rate down. But the drop in T-bill yields is a reflection of three issues: a flight to quality, a guess that the Fed will lower rates at its next meeting and a very liquid market.

First, fear and panic has increased demand for rock-solid Treasury debt, driving prices up and yields down. Second, expectations of Fed rate cuts always push short-term rates down. But it's a circular argument to say falling short-term rates, due to an expectation of Fed rate cuts, is any reason to cut rates.

Finally, the liquidity already sloshing around in the banking system must go somewhere and right now it is going into the T-bill market. Low T-bill rates are a reflection of the liquidity already in the system, not a clarion call for more.

The real problem with the financial markets is that extreme leverage and extreme uncertainty have met in the subprime loan market. No one knows how many loans will go bad, who owns these mortgages and what leverage they have applied. We do know that subprime lending is just 9% of the $10.4 trillion dollar mortgage market, and delinquencies are running at about 18%. The Alt-A market is about 8% of all mortgages and about 5% of this debt is delinquent.

As an example, let's take a very low probability event and assume that losses triple from here. Let's assume that 54% of all subprime loans and 15% of all Alt-A loans actually move to foreclosure. Then, assume that lenders are able to recover 50% of the value of their loans. In this scenario, total losses in the subprime market would be 27%, while total losses in Alt-A would be 7.5%.

From this we can estimate a price for the securitized pools of these assets. Without doing any actual adjustment for yields, or for different tranches of this debt, the raw value of the underlying assets would be 73 cents on the dollar for subprime pools and 92.5 cents for the Alt-A pools. Getting a bid on this stuff should be easy, right? After all, the market prices risky assets every day.

But this is the rub. A hedge fund, or financial institution, that uses leverage of 4:1 or more, would be wiped out if it sold subprime bonds at those levels. A 27% loss on Main Street turns into a 100% loss on Wall Street very easily. But because hedge funds can slow down redemptions, at least for awhile, and because they are trying desperately not to implode, they hold back from the market. At the same time, those with cash smell blood in the water, patiently wait, and put low-ball bids on risky bonds. The result: No market clearing price in the leveraged, asset-backed marketplace.

Additional Fed liquidity can't fix this problem. An old phrase from the 1970s comes to mind -- "pushing on a string." In the 1970s, no matter how much money the Fed pushed into the system, it could not create a sustainable economic recovery that did not include a surge in inflation because high tax rates and significant government interference in the economy prevented true gains in productivity.

There is a lesson here. Populism is in the air these days, and the threat from tax hikes, trade protectionism and more government involvement in the economy, is rising. This reduces the desire to take risk. Congress is working on a legislative response to current mortgage market woes as well. And as with the savings and loan industry (forcing S&Ls to sell junk bonds at fire-sale prices), and Sarbanes-Oxley, the legislative response almost always compounds the problems.

The interaction of an uncertain regulatory and tax environment with a highly leveraged, illiquid market for risky mortgage debt creates conditions that look just like an economy-wide liquidity crisis. But it's not. A few rate cuts will not help.

What can help is more certainty. Tax cuts, or at least a promise not to raise taxes, and immunity -- or at least a safe harbor from criminal prosecution for above-board institutions in the mortgage business -- could help loosen up a rigid market in a more permanent way than sending out the helicopters to dump cash in the marketplace.

The best the Fed can do is to stand at the ready to contain the damage. In this vein, their decision to cut the discount rate and allow a broad list of assets to be used as collateral for loans to banks, was a brilliant maneuver. It increases confidence that the Fed has liquidity at the ready, but does not create more inflationary pressures. It was a helping hand, not a bailout.

It also buys some time, which is what the markets need. Every additional month of payment information on mortgage pools, and every mortgage that is refinanced from an adjustable rate to a fixed rate, will increase certainty and provide more clarity on pricing.

Even though many, including Alan Greenspan, continue to argue that the excessively easy monetary policy of 2001-2004 was necessary, it was this policy stance that caused the problems we face today. The current financial market stress is a result of absurdly low interest rates in the past, not high interest rates today. In fact, current interest rates are still low on both a nominal and real basis. Cutting them again causes a further misallocation of resources, and makes the Fed an enabler of the highly leveraged.

What William Jennings Bryan was really complaining about in 1896 was falling commodity prices, especially falling farm prices. What he and the other populists ignored was that these prices were falling because of productivity, not tight money. His "Cross of Gold" speech was a clear stepping stone to the creation of the Fed in 1913. Since then, inflation has been much higher than it would have been under the gold standard. But all that inflation never did save the family farm.

Similarly, even very easy money today can't put off the day of reckoning for subprime mortgage holders who bought homes with no money down and thought interest rates would stay low forever. It can't help overly leveraged investors who thought they were getting risk-free 20% annual returns. Providing enough liquidity to allow markets to function, while keeping consumer prices as stable as possible, is the best the Fed can do. It should be all we really ask.

Mr. Wesbury is chief economist for First Trust Portfolios, L.P.


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## drillinto (22 August 2007)

Fed's Lacker Remains Hawkish

Richmond[USA] Fed President Jeffrey Lacker said "Financial market volatility . . . does not require" a fed funds rate cut. He added, "Policy must be guided by the outlook for real spending and inflation." Lacker has been the Fed's most hawkish official. 

Source: IBD, 21 August


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## drillinto (31 August 2007)

The Economist on global credit crunch
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The world economy 

Rocky terrain ahead

Aug 30th 2007 | WASHINGTON, DC 
From The Economist print edition

How much will the credit crunch hurt the world economy?

THE Teton mountains jut suddenly and majestically out of the Wyoming plains near Jackson Hole. The central bankers and economists gathering there the symposium of the Federal Reserve Bank of Kansas City, an annual meeting of the macroeconomic elite that start on Thursday August 30th face a similarly breathtaking, if less beautiful, change in the global financial topography. In less time than it takes to get a good compass bearing, cheap credit and stable markets have given way to investor panic and a credit crunch.

So far the central bankers have concentrated on stemming panic by flooding financial markets with short-term liquidity and, in the case of the Federal Reserve, by loosening the rules for, and price of, banks’ borrowing from the discount window. These efforts helped stabilise the money markets last week. But many debt products, particularly asset-backed instruments, remain paralysed. Yields on ten-year Treasury bills dropped to 4.52% on August 28th while stockmarkets fell sharply, though shares bounced back the following day. Wholesale panic could quickly return.

Even if that unhappy outcome is avoided, there is much to worry about. Top of the list is gauging what effect the recent turmoil will have on the world economy.

Common sense suggests the biggest impact will be felt in America, home both to the subprime mess and the worst financial dislocations. At first sight, the economy hit the August turmoil in fine fettle. Output growth in the second quarter was strong; business spending looked perky; wage growth was solid and high petrol prices (which had dragged down consumer spending) were falling.

On closer inspection, however, the picture was less rosy. Output boomed in the second quarter thanks partly to one-off factors, such as the rebuilding of firms’ stocks. Consumption growth slowed sharply over the same period, and some areas of consumer spending stayed weak into the summer. Car sales, for instance, fell to a nine-year low in July.

Most important, the economy’s weakest link””the housing market””was in even worse shape than many realised. The pace of new-home construction plunged in July while the backlog of existing unsold houses rose to a 16-year high. House prices have kept falling.

A still-deepening housing bust left the economy vulnerable well before August’s crunch. And that crunch has made the prospects for housing much worse as mortgage instruments have disappeared, or become dramatically more expensive.

Not surprisingly, Wall Street’s seers are chalking down their projections for construction and house prices. A construction bust will continue to drag down output growth. The bigger question is what effect double-digit house-price declines would have in a country where consumer debts have soared on the back of housing wealth. Optimists take comfort from consumers’ resilience so far. That may be a mistake. Consumer spending will be crimped as homeowners feel poorer, particularly if stockmarkets continue to slide.

Most Wall Street analysts are convinced that the damage from financial distress will be limited because they expect the Fed to ride to the rescue with lower interest rates. But the bottom line seems clear. If America faces double-digit falls in house prices, the economy, despite looser monetary policy, looks set to be weak.

The impact on the rest of the world, too, may be severe. Many expect the global economy to be robust enough to shake off American weakness. Such optimism may underplay the potential channels through which the subprime mess can infect other countries. One route is financial contagion. Subprime losses are popping up from Canada to China. The broad spread of losses makes them easier to digest, but also spreads financial nervousness and risk aversion. 

That risk aversion may find surprising victims. In previous financial wobbles, emerging markets often suffered most. This time rich countries, particularly in continental Europe, where some banks have been caught out by the subprime mess, may be more worried. Thanks to fat foreign-exchange reserves and current-account surpluses, many emerging economies are well placed to withstand an exodus of investors. 

Even if direct financial contagion is contained, America’s subprime crisis could spawn psychological contagion, particularly a reassessment of house prices. Although the scale of reckless lending to risky borrowers was bigger in America than anywhere else, house-price inflation has been more extreme elsewhere. Countries such as Britain and Spain are particularly vulnerable to a house-price bust. 

Nor should the world economy’s resilience to American weakness be exaggerated. Although America’s current-account deficit has been declining, it is still almost 6% of GDP. By spending more than they produce, Americans are still a big source of demand for the rest of the world. A sharp drop in that demand would hurt. 

The severity of mountainous terrain becomes clearer as you start climbing. So, too, the economic effects of the credit crunch will become more apparent over time. But as they mull over the challenges they face, the Jackson Hole attendees might take a good look at the Tetons.


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## drillinto (5 September 2007)

Australia says: Mary Ann you are n °1 !
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One on One with Mary Ann Bartels, Chief U.S. Market Analyst at Merrill Lynch
Source: PBS/NBR/USA; Tuesday, September 04, 2007  

SUSIE GHARIB: Despite today's rally, our guest tonight warns investors that September will be a volatile month and that the stock market could go down another 5 to 10 percent from where it's now trading. Joining us to explain, Mary Ann Bartels, chief U.S. market analyst at Merrill Lynch. Hi, Mary Ann. Nice to see you. 

MARY ANN BARTELS, CHIEF US MARKET STRATEGIST, MERRILL LYNCH: Hi, Susie, same here. 

GHARIB: The markets have already had a pretty serious correction this summer. Tell us why you think that there's more of a correction ahead. 

BARTELS: Well, in our report, we say the V bottoms are rare, Ws are more of the norm meaning that you normally get a retest of a correction. So I'm looking for another retest of the low that we had. 

GHARIB: All right. And tell us why. 

BARTELS: Well, what we're seeing in our technical indicators is with the rally that we had off the low, we're starting to move into overbought territory. And we're starting to come into what we call resistance. And having that combination is starting to give us a sense that we're running out of time on this rally. So I think there's a high probability with the seasonal patterns of September -- and what I mean by that is September is what we call the rogue month of the year. It's actually the worst performing month of the year. On average over the past 25 years, the market has corrected around 1 percent. So I think we're setting up for a little bit of a continuation of the rally. Test some of these highs and then go back down and test the lows. That would indicate we could still have another 5 or 10 percent correction ahead. 

GHARIB: So what's your timetable once those lows have been tested and it rebounds back up, what's the timetable on that? 

BARTELS: Well, I think September is going to be the roughest month. We normally make very important lows in the month of October. Although the headlines tend to be very risky or sound very risky in October, we normally get excellent buying opportunities in the month of October. So I'm really waiting to get through this month of September. I think we're going to have more volatility and then look for an important low in October to set us up for a really nice rally going into year end. 

GHARIB: All right, so a rally. You are a long-term bull. Tell us what sectors will be the leaders in that bull market. 

BARTELS: We're still strong believers that this is a commodity led bull market. That positively impacts the energy sector, the materials or what's also known as basic resources and the industrial stocks. [This is the music Australia likes]

GHARIB: And what areas do you think will be weak during this bull market? 

BARTELS: Well, consumer staple stocks and health care have underperformed and I still think they'll be underperformers. But during this market volatility, if investors are looking to invest in the markets and looking for lower volatility opportunities, those would be the sectors that we would go into right now. But I think for the long term, I think you're going to get better performance from the sectors, the energy, the industrial and materials. 

GHARIB: And what about international stocks? They have been outperforming U.S. stocks, at least over the last couple of months. What's your outlook in that area? 

BARTELS: We've been long-term believers that non-U.S. markets will outperform the U.S. They have for several years. We think there's another at least two years of ability for overseas markets to outperform the U.S. So we do think that there's good opportunities overseas. 

GHARIB: So Mary Ann, what's your advice to investors? If it's a good time, if you have money on the side, is this a good time to put new money into the markets? 

BARTELS: Well, obviously I'm looking for a better entry point in October, but it's always very difficult to time the markets. I think investors that have a much longer term view, I think we're set up for a major bull market where we can continue to reach new highs into 2009. 

GHARIB: All right. That's a good place to leave it. Thank you so much, Mary Ann. 

BARTELS: Thank you, Susie. 

GHARIB: My guest tonight, Mary Ann Bartels, chief U.S. market analyst at Merrill Lynch.


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## drillinto (7 September 2007)

Drill's Must Read
::::::::::::::::::::

Credit turmoil ‘has hallmarks of bank run’
By Krishna Guha in Jackson Hole, USA
Financial Times /// September 2, 2007 

The current turmoil in the financial markets has all the characteristics of a classic banking crisis, but one that is taking place outside the traditional banking sector, Axel Weber, president of the Bundesbank, said at the weekend.

“What we are seeing is basically what we see underlying all banking crises,” said Mr Weber, one of the most influential members of the governing council of the European Central Bank.

The comments mark the first time that a top central banker has endorsed the notion that the non-bank financial system is seeing an old-style bank run.

Some Federal Reserve policymakers also privately see comparisons between the current distress in credit markets and the bank runs of the 19th century, in which savers lost confidence in banks and demanded their money back, creating a spiralling liquidity crisis for institutions that had invested this money in longer-term assets.

That scenario ultimately led to the creation of the US Federal Reserve and other central banks as lenders of last resort for the banking system. 

The Bundesbank president said that the market had completely over-reacted to the credit losses in the US subprime mortgage sector. 

“What we are seeing at the moment is a total overreaction,” he said. “There is no overall problem in terms of solvency – it is one of liquidity.” He said the challenge for central banks – which cannot supply liquidity directly to the non-bank sector – was to help banks absorb the influx of assets onto their balance sheets.

However, the tools that modern central banks possess to address liquidity problems can only directly address such runs inside the traditional banking sector, and do not directly touch the non-bank financial sector, which has been hardest hit by the current credit crisis. 

Mr Weber’s analysis highlights the dilemma facing central banks, which cannot channel funds directly to the non-bank financial sector, and may therefore have to resort to easing monetary policy instead. The ECB is due to set its key interest rate on Thursday and the Federal Reserve on September 18. 

Mr Weber told fellow central bankers and economists at the Federal Reserve’s Jackson Hole symposium that the only difference between a classic banking crisis and the turmoil under way in the markets is that the institutions most affected at the moment are conduits and investment vehicles raising funds in the commercial bond market, rather than regulated banks.

These entities were inherently vulnerable to a sudden loss of confidence on the part of their funders because “there is a maturity mismatch” on the part of financial institutions that have invested in long term mortgage-backed or asset-backed securities using short-term finance.

“Most of the conduits are owned by the banks,” he said. In many cases, sponsoring banks are being forced to take risky assets back onto their balance sheets, in turn causing banks to keep hold of their own cash, putting pressure on short-term money markets, he argued.

His comments came as Frederic Mishkin, a Fed governor, argued for a rapid and aggressive monetary policy response to any fall in house prices.

His diagnosis of the financial crisis was echoed by other experts.

James Hamilton, a professor at the University of California, warned that – as in old-fashioned bank runs – sudden demand for liquidity can lead to a firesale of assets that depresses their price, making otherwise solvent institutions insolvent.

Paul McCulley, managing director of Pimco, said there was a “run on the shadow banking system”. He said the shadow banking system held $1,300bn of assets that now had to be put back onto the balance sheets of the banks.

The issue, he aid, is “how it is done and at what price”.


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## drillinto (11 September 2007)

Drill's Must Read

Rogoff foresees interest rate cuts by the FED
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The Fed vs. the Financiers
Kenneth Rogoff 

In his August 31 address to the world’s most influential annual monetary policy conference in Jackson Hole, Wyoming, United States Federal Reserve Chairman Ben Bernanke coolly explained why the Fed is determined to resist pressure to stabilize swooning equity and housing prices. Bernanke’s principled position – echoed by European Central Bank head Jean Claude Trichet and Bank of England head Mervyn King – has set off a storm in markets, accustomed to the attentive pampering lavished on them by Bernanke’s predecessor, Alan Greenspan. 

This is certainly high-stakes poker, with huge sums hanging in the balance in the $170 trillion global financial market. Investors, who viewed Greenspan as a warm security blanket, now lavish him with fat six-figure speaking fees. But who is right, Bernanke or Greenspan? Central bankers or markets? 

A bit of intellectual history is helpful in putting today’s debate in context. Bernanke, who took over at the Fed in 2006, launched his policy career in 1999 with a brilliant paper presented to the same Jackson Hole conference. As an academic, Bernanke argued that central banks should be wary of second-guessing massive global securities markets. They should ignore fluctuations in equity and housing prices, unless there is clear and compelling evidence of dangerous feedback into output and inflation. 

Greenspan listened patiently and quietly to Bernanke’s logic. But Greenspan’s memoirs, to be published later this month, will no doubt strongly defend his famous decisions to bail out financial markets with sharp interest rate cuts in 1987, 1998, and 2001, arguing that the world might have fallen apart otherwise. 

On the surface, Bernanke’s view seems intellectually unassailable. Central bankers cannot explain equity or housing prices and their movements any better than investors can. And Bernanke knows as well as anyone that none of the vast academic literature suggests a large role for asset prices in setting monetary policy, except in the face of extraordinary shocks that influence output and inflation, such as the Great Depression of the 1930’s. 

In short, no central banker can be the Oracle of Delphi. Indeed, many academic economists believe that central bankers could perfectly well be replaced with a computer programmed to implement a simple rule that adjusts interest rates mechanically in response to output and inflation. 

But, while Bernanke’s view is theoretically rigorous, reality is not. One problem is that academic models assume that central banks actually know what output and inflation are in real time. In fact, central banks typically only have very fuzzy measures. Just a month ago, for example, the US statistical authorities significantly downgraded their estimate of national output for 2004! 

The problem is worse in most other countries. Brazil, for example, uses visits to doctors to measure health-sector output, regardless of what happens to the patient. China’s statistical agency is still mired in communist input-output accounting. 

Even inflation can be very hard to measure precisely. What can price stability possibly mean in an era when new goods and services are constantly being introduced, and at a faster rate than ever before? US statisticians have tried to “fix” the consumer price index to account for new products, but many experts believe that measured US inflation is still at least one percentage point too high, and the margin of error can be more volatile than conventional CPI inflation itself. 

So, while monetary policy can in theory be automated, as computer programmers say, “garbage in, garbage out.” Stock and housing prices may be volatile, but the data are much cleaner and timelier than anything available for output and inflation. This is why central bankers must think about the information embedded in asset prices. 

In fact, this summer’s asset price correction reinforced a view many of us already had that the US economy was slowing, led by sagging productivity and a deteriorating housing market. I foresee a series of interest rate cuts by the Fed, which should not be viewed as a concession to asset markets, but rather as recognition that the real economy needs help. 

In a sense, a central bank’s relationship with asset markets is like that of a man who claims he is going to the ballet to make himself happy, not to make his wife happy. But then he sheepishly adds that if his wife is not happy, he cannot be happy. Perhaps Bernanke will soon come to feel the same way, now that his honeymoon as Fed chairman is over. 


Kenneth Rogoff is Professor of Economics and Public Policy at Harvard University, and was formerly chief economist at the IMF.
Source: Project Syndicate, September 2007


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## drillinto (11 September 2007)

Drill's Must Read
Brian Wesbury is a top US inflation hawk
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Unnecessary Rate Cut...On Its Way? To view this article, Click Here
Brian S. Wesbury - Chief Economist / First Trust Advisors
Robert Stein, CFA - Senior Economist
Date: 9/10/2007 

Unnecessary Rate Cut…On Its Way?

Our view is that any Fed rate cut would be a mistake. Nonetheless, a weaker-than-expected August jobs report, pressure from politicians, panicky comments from former Fed officials, and howls of protest from Wall Street, have pushed the Fed into a corner. As a result, the probability of a rate cut, at or before the next FOMC meeting on 9/18, is above 50%. And we believe that if the Fed does cut rates it will do so by a total of 50 basis points before the end of 2007.

In such a short column we cannot deal with every argument being made for a rate cut, so we will deal with just three.

1) – Some say the Fed is just too tight, while others have gone as far as comparing today to the late 1920s – when the Fed ignored signs of deflation and tightened monetary policy anyway, causing the Great Depression.

These concerns are over-the-top hyperbole. Between 1926 and 1929, the Consumer Price Index was declining by an average of 1.1% per year. Gold prices were fixed, but silver prices plummeted. In other words, there were clear signs of deflation in the late 1920s, but the Fed lifted the federal funds rate to 6% anyway, making its biggest mistake ever.

Today is different. Gold and silver prices have surged in the past six years and are pressing higher, consumer prices are climbing in the 2% to 3% range, and the dollar is weak.

The real (or inflation-adjusted) federal funds rate is low relative to any historical pre-recession period regardless of what inflation rate one uses to calculate the real funds rate – the CPI, the “core” CPI, the PCE deflator, or the “core” PCE deflator. Any similarity between today and the Depression are figments of an overactive imagination.

2) – Some argue that during the past 50 years, every time the US housing market has contracted like it has in the past year it translated into an economy-wide recession.

This idea that housing slumps trigger recessions is a confusion between cause and correlation. Every recession since 1913 (the year the Fed was created) has been accompanied by tight money. And because housing is a big-ticket, interest-rate-sensitive, industry, it has almost always reacted early to tight money. It falls first, before the economy as a whole. But this does not mean housing caused the recession. Tight money did.

Both short-term and long-term interest rates, even rates on jumbo mortgage loans (yes, they are still available), are lower today than they were in the late 1990s – when things were so good many called it a bubble (a false boom).

Today’s problems were created because interest rates were artificially low between 2001 and 2004, not because rates are currently too high. The Fed is not tight, its just less loose.

3) – Finally, the credit market is seizing up, and the Fed must cut rates to make it work again.

But loans are available to credit worthy borrowers, corporate profits are still sky-high and the world is awash in liquidity. Risk spreads have widened but remain well within historical ranges. Credit problems are only visible in the highly-leveraged, asset-backed marketplace – a market that was not pricing risk correctly and got itself into trouble because it expected interest rates to stay at absurdly low levels forever.

The bottom-line is that if the Fed eases, it will do so when it is not tight. It will reverse course at the lowest real federal funds rate for any reversal since the mid-1970s. This is dangerous because it will “lock-in” the inflationary pressures it already created. That is what $700 gold, $76 oil and a $1.38/euro exchange rate are saying. An aggressive Fed easing will push commodity prices even higher and the dollar lower.

Most fearful is that leading voices in the political and financial world are so willing to think that Fed policy can save the world. The probability of tax hikes, massive government involvement in the healthcare system and rising regulation against “global warming” are real threats to prosperity. No matter how much money the Fed prints, it can’t offset damage from too much government interference. It’s not a repeat of the Depression we should fear; it’s a repeat of the 1970s.


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## drillinto (11 September 2007)

Rate cuts could lead to ugly inflation woes

http://www.smartmoney.com/aheadofthecurve/index.cfm?story=20070907


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## drillinto (18 September 2007)

The Malaysian miracle
By Joseph Stiglitz
[2001 Nobel Prize in economics]
September 13, 2007 

http://commentisfree.guardian.co.uk/joseph_stiglitz/2007/09/the_malaysian_miracle.html

August 31 marked the 50th anniversary of Malaysia's Merdeka: independence after more than 400 years of colonialism. Malaysia's peaceful, non-violent struggle may not have received the attention that Mahatma Gandhi's did in India, but what Malaysia has accomplished since then is impressive - and has much to teach the world, both about economics, and about how to construct a vibrant multiracial, multi-ethnic, multicultural society. 

The numbers themselves say a lot. At independence, Malaysia was one of the poorest countries in the world. Though reliable data are hard to come by, its GDP (in purchasing power parity terms) was comparable to that of Haiti, Honduras, and Egypt, and some 5% below that of Ghana. Today, Malaysia's income is 7.8 times that of Ghana, more than five times that of Honduras, and more than 2.5 times that of Egypt. In the global growth league tables, Malaysia is in the top tier, along with China, Taiwan, South Korea, and Thailand.

Moreover, the benefits of the growth have been shared. Hard-core poverty is set to be eliminated by 2010, with the overall poverty rate falling to 2.8%. Malaysia has succeeded in markedly reducing the income divides that separated various ethnic groups, not by bringing the top down, but by bringing the bottom up. 

Part of the country's success in reducing poverty reflects strong job creation (pdf). While unemployment is a problem in most of the world, Malaysia has been importing labour. In the 50 years since independence, 7.24 million jobs have been created, an increase of 261%, which would be equivalent to the creation of 105 million jobs in the United States. 

There were many reasons not to have expected Malaysia to be a success. Just as Malaysia was gaining its independence, the Nobel prize winning economist Gunnar Myrdal wrote an influential book called Asian Drama, in which he predicted a bleak future for the region. 

Malaysia is rich in natural resources. But, with few exceptions, such countries are afflicted with the so-called "natural resource curse": countries with an abundance of resources not only do not do as well as expected, but actually do worse than countries without such benefits. While natural resource wealth should make it easier to create a more equalitarian society, countries with more resources, on average, are marked by greater inequality.

Moreover, Malaysia's multiracial, multicultural society made it more vulnerable to civil strife, which has occurred in many other resource-rich countries, as one group tried to seize the wealth for itself. In many cases, minorities work hard to garner the fruits of this wealth for themselves, at the expense of the majority - Bolivia, one of the many rich countries with poor people, comes to mind.

At independence, Malaysia also faced a communist insurgency. The "hearts and minds" of those in the countryside had to be won, and that meant bringing economic benefits and minimising "collateral" damage to innocent civilians - an important lesson for the Bush administration in Iraq, if it would only listen to someone outside its closed circle.

And Malaysia had a third strike against it: for all the talk of the "white man's burden", the European powers did little to improve living standards in the countries they ruled. The dramatic decline in India's share of global GDP under Britain's rule, as Britain passed trade laws designed to benefit its textile producers at the expense of those in its colony, is the most visible example. 

The colonial powers' divide-and-rule tactics enabled small populations in Europe to rule large numbers outside of Europe, pillaging natural resources while investing little in the physical, human capital, and social capital necessary for an economically successful, democratic self-governing society. It has taken many of the former colonies decades to overcome this legacy. 

How, then, does an economist account for Malaysia's success? Economically, Malaysia learned from its neighbours. Too many of the ex-colonies, rejecting their colonial heritage, turned to Russia and communism. Malaysia wisely took an alternative course, looking instead to the highly successful countries of east Asia. It invested in education and technology, pushed a high savings rate, enacted a strong and effective affirmative action programme, and adopted sound macroeconomic policies. 

Malaysia also recognised that success required an active role for government. It eschewed ideology, following or rejecting outsiders' advice on a pragmatic basis. Most tellingly, during the financial crisis of 1997, it did not adopt IMF policies - and as a result had the shortest and shallowest downturn of any of the afflicted countries. When it re-emerged, it was not burdened with debt and bankrupt firms like so many of its neighbours. 

This success was, of course, not only a matter of economics: had Malaysia followed the policies recommended by the IMF, it would have torn apart the social fabric created over the preceding four decades. 

Malaysia's success thus should be studied both by those looking for economic prosperity and those seeking to understand how our world can live together, not just with toleration, but also with respect, sharing their common humanity and working together to achieve common goals. 

In cooperation with Project Syndicate, 2007.


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## drillinto (23 September 2007)

Must read

Commentary by Brian Wesbury on the recent interest rate cuts in the US

The economist Brian Wesbury is one of the top inflation hawks

http://www.ftportfolios.com/Comment...9/20/They_Actually_Did_It_-_Cut_Rates_That_Is


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## drillinto (8 October 2007)

The Banker Looks Back
By JAMES GRANT
Wall Street Journal / September 18, 2007

At one point during his long interview on "60 Minutes" Sunday evening, Alan Greenspan could be seen autographing dollar bills for his smiling fans. Meanwhile, off camera, unautographed greenbacks continue to depreciate against a variety of metals and foreign currencies. A century ago the pound sterling anticipated the dollar's role today as the pre-eminent global monetary brand. But the pound was exchangeable into gold at the bearer's demand. Not since 1971 has the dollar been collateralized by gold or exchangeable at the U.S. Treasury into anything except nickels, dimes and quarters.

Sooner or later, the dollar will lose its luster and finally its value, as paper currencies always do. Striving to understand why people trusted it in the first place, historians will naturally reach for the memoirs of the foremost central banker of his day. But Mr. Greenspan's "The Age of Turbulence" will leave them just as confused as they ever were.

The first reports of the book's contents trumpeted Mr. Greenspan's criticism of the current administration's spending habits and his (approving) sense that the Iraq war had something to do with crude oil. But the real news in "The Age of Turbulence" is what it reveals about the greenbacks to which Mr. Greenspan affixed his celebrity signature and the ways in which the currency has been managed and, especially, mismanaged.

A more self-knowing memoirist might have titled this book "The Age of Credulity." The great public drama of Mr. Greenspan's life is, of course, the work he performed as chairman of the Federal Reserve from 1987 to 2006. That work, in all but name, was price fixing. It consisted (and, under his successor, Ben S. Bernanke, still consists) of setting an interest rate and shoving it down the throat of the world's largest economy. It is a mighty strange work for a "libertarian Republican," as the Maestro styles himself here, let alone a former worshipful member of the inner circle of the radical individualist Ayn Rand. "It did not go without notice," the author writes of his swearing-in as chairman of the President's Council of Economic Advisers in 1974, "that Ayn Rand stood beside me as I took the oath of office in the presence of President Ford in the Oval Office."

The fantastic irony of Mr. Greenspan's career path -- from gold-standard libertarian to federal interest-rate fixer -- seems hardly to have registered on Mr. Greenspan himself. The closest he comes to acknowledging it is his description of how the Fed looked to him from the outside. It was, he writes, a "black box." Having watched his mentor, Arthur Burns, struggle with the chairmanship, Mr. Greenspan notes, "it did not seem like a job I felt equipped to do; setting interest rates for an entire economy seemed to involve so much more than I knew." A deeper kind of libertarian might have added: "Maybe nobody can know enough to set interest rates for an entire economy."

So Mr. Greenspan, a consulting economist of no special attainments (on the eve of the 1974 stock-market collapse, he was quoted in the New York Times saying "it is rare that you can be as unqualifiedly bullish as you can now"), agreed to perform the impossible. Succeeding Paul A. Volcker, he became America's monetary central-planner-in-all-but-name. Mr. Greenspan ruled the roost in 74 fiscal quarters, of which recession darkened only five.

Under his direction, the Fed became a kind of first responder to the scene of financial and economic distress. It soothed taut nerves following the 1987 stock-market break, nourished a crisis-ridden banking system with cheap money in 1990-92, helped to lead the Clinton administration's rescue of the Mexican economy in 1994-95 and engineered the so-called soft landing of the U.S. economy, also in 1995. It famously trimmed its interest rate three times during the Long-Term Capital Management crisis of 1998, succeeding so well in one artfully timed intervention that the stock market, in the final hour of a single session, leapt by 7%. And the market kept right on leaping, all the way to the Nasdaq's own Mount Everest in March 2000. One of those rare recessions followed, after which came the campaign to scotch what Mr. Greenspan was pleased to call "deflation." To fend off the peril of low and lower everyday prices, the Fed pressed its interest rate all the way down to 1% in 2003 and kept it there until mid-2004. Now it was house prices that went into orbit. They were just beginning to return to Earth when Mr. Greenspan retired from public life.

Readers who got one of the fancy new teaser-rate mortgages in 2003 or 2004, and who have lived to rue the day, are unlikely to find much nourishment in Mr. Greenspan's discussion of the theory of financial bubbles or in his self-exculpating account of the Fed's role in financing them with artificially low interest rates. Nobody can identify a bubble as it is inflating, Mr. Greenspan has long insisted -- though, as you will not read in these pages, Mr. Greenspan was so certain that he detected a stock-market bubble in 1994 that he tried to prick it by pushing interest rates up. Strangely, the author's bubble-sensor failed him later in the decade. He did, in 1997, utter the innocuous phrase "irrational exuberance," but that was as far as he went in attacking sky-high equity valuations.

Mr. Greenspan now writes that the enlightened central banker will let speculation take its course. Following the inevitable blow-up, he will clean up the mess with low interest rates and lots of freshly printed dollar bills -- thereby gassing up a new bubble.

Only one of the troubles with this prescription is that it requires an enlightened central banker to carry it out. Nowhere in this book does Mr. Greenspan own up to his role of underestimating the severity of the credit troubles of 1990, or of cheering on the tech-stock frenzy in 1998-2000, or of dangling the most beguiling teaser rate of all during the mortgage frolics of 2004 -- i.e., that 1% federal-funds rate. In February 2004, only months before the Fed started to raise its rate, in a speech titled "Understanding Household Debt Obligations," Mr. Greenspan demonstrated next to no understanding. His advice to American homeowners was not that they lock in a fixed-rate mortgage while the locking was good, but rather that they consider an adjustable-rate model. He who set the rates got it backward.

An only child of divorced parents growing up in New York City in the 1930s, Mr. Greenspan had seemed destined for better things than a career in interest-rate manipulation. He was an exceptional clarinetist, a Morse code enthusiast and the developer of a personal system for scoring baseball games. The boy who would date Barbara Walters, marry NBC's Andrea Mitchell and be knighted by the queen of England was, above all things, lucky. In 1944, a dark spot on the X-ray of his lung made him undraftable. He spent the late war years in the reed section of the Henry Jerome orchestra. Luck still with him, he gravitated to economics, thence to Ayn Rand and thence -- what could Rand have thought? -- to the security of the federal payroll.

Admirers or detractors of Mr. Greenspan's central banking record will turn the pages of the first half of this book -- the story of his life, his loves and his economics -- without once having to stifle a yawn. But few will remain alert while toiling through the public-policy ruminations that pad out the final 200 pages. As Fed chairman, Mr. Greenspan had a habit of inflicting on captive audiences his not always original views on such topics as rural electrification, education in a global economy and the bright promise of technology. Such ponderations are no more scintillating now that he is out of office.

"As Fed chairman," Mr. Greenspan writes, "I was queried by fellow central bankers with large holdings of U.S. dollars about whether dollars were safe investments." The monetary bureaucrats will find no reassurance in these all-too-many pages.

Mr. Grant is the editor of Grant's Interest Rate Observer.


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## drillinto (21 October 2007)

Listen to podcasts by top economists

http://www.bloomberg.com/tvradio/podcast/ontheeconomy.html


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## drillinto (27 October 2007)

The Top Ten Professional Business And Financial Bloggers

By 24/7 Wall St.
Oct 25, 2007

24/7 Wall St. has done a ranking of the Top 25 Financial Blogs for two years in a row. But, this list excluded bloggers who were full-time paid employees of media companies that host and promote their own blogs. So, we decided to look at blogs at the top twenty newspaper websites around the country, major business magazine websites, and large financial websites. Since many of these web properties have several bloggers, we looked at well over 100 blogs. 
As we reviewed these, we ruled out bloggers who cover subjects like the home office, business travel, and environmental topics. The goal was to draw from a list of people who write on business, finance, tech, and the economy. 
Here is out list of the Top Ten Professional Business and Financial Bloggers, in no special order: 

David Gaffen, MarketBeat, The Wall Street Journal. We don't know this for a fact, but MarketBeat must be one of the reasons that readers return to WSJ.com throughout the day. The blog is timely. It covers a wide variety of topics. It has wit. And, Gaffen is liberal with links to smaller blogs. No one following Wall St. should miss this blog. 

Eric Savitz, Tech Trader Daily. Barron's. Those interested in technology stocks and industry trends need to check this blog several times a day. Savitz not only has a deep knowledge of the subject, he must get research reports from several hundred tech analysts. No critical piece of analysis gets missed. He also blogs from major industry conferences. 

Herb Greenberg, MarketBlog, MarketWatch. Investigative pieces. Sharp looks at earnings. CEO beatings, at least from time-to-time. Almost always takes the other side of conventional wisdom. 

Michael Flaherty. DealZone, Reuters. Looks inside the Wall St. deal culture worldwide. Often provocative. Excellent sources. Sometimes a bit nasty, but there's nothing wrong with that. 

Zubin Jelveh, Odd Numbers. Portfolio. Covers economics. Good global perspective. Wit. Broad intelligence. He looks at the economics of everything from the last World War to basketball salaries to IRS penalties. Brilliant. 

Paul R. La Monica, Media Biz, CNNMoney. Old media. New media. This blog covers all of the major companies in these industries. Google. Comcast. The works. He has a finger on trends that most writers miss. As well-researched as any writing on these topics. Has the eye of securities analyst's. 

Bruce Einhorn, Eye On Asia, BusinessWeek. It's hard to get good picture of what is going on in the business community and the big companies in Asia. Part of it is the vastness of the region, and part is the number of cultures. This kind of reporting and analysis is simply not available anywhere else. 

Mathew Ingram, Technology Blog. Globe and Mail. This blogger switch hits. He has his own blog and writes for this Canadian newspaper. Unusually keen insights covering the world of online media and technology. Not from America, but we can waive that. 

Dana Cimilluca, Deal Journal, The Wall Street Journal. This is about as far as you can get into the big heads on Wall St. without being a shrink. A lot of his blogs actually break news. Particularly strong on deal analysis. 

Saul Hansell, Bits, The New York Times. It's very hard to tell when this blogger sleeps. Not much that goes on in the world of technology innovation gets past him. Encyclopedic knowledge of his beat.


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## drillinto (7 November 2007)

For your consideration: article on financial engineering

http://www.prudentbear.com/index.php?option=com_content&view=article&id=4816&Itemid=53


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## drillinto (7 November 2007)

Must read !
Stephen Roach, Chairman of Morgan Stanley Asia, on the subprime outlook for the global economy:

http://japanfocus.org/products/topdf/2556


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## Lucky (8 November 2007)

I had to add these from a previous thread.  A little truth amongst the humour.

*Banking, Credit and the Financial Industry.*

*Subprime, Lending and Sentiment.*
[/QUOTE]


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## drillinto (9 November 2007)

The Times, London, UK
November 8, 2007

Hey, Guv, can you spare us £30 billion quid?

Anatole Kaletsky: Central banks must stand firm against pressure from financiers

Should tens of billions of pounds of public money be diverted from health, education, defence and other social services to underwrite the profits of hedge funds, protect the jobs of international bankers and subsidise stockbrokers' bonuses? 

This is effectively what “government sources” suggested two months ago when they criticised the Bank of England for failing to offer a line of credit to support a takeover of Northern Rock by Lloyds TSB. At the time, the suggestion that bankers were more deserving of public subsidies than coalminers or car workers seemed so preposterous, especially from a Labour Government, that nobody paid much attention to the whispering campaign about the Northern Rock bail-out. It was assumed that government spin-doctors were trying to deflect blame to any available scapegoat.

Pointing to the Bank of England's refusal to finance a Northern Rock takeover was temporarily more convenient than publicly admitting that the management of the Rock had destroyed what was once a good business and the company would have to be wound up.

Yesterday morning it appeared, however, that Alistair Darling and Gordon Brown might actually be contemplating a plan to spend billions of pounds on subsidies to the managers and investors in this dying bank. Is it possible that ministers are now so worried about the few thousand job losses in Newcastle that would follow from the orderly liquidation of Northern Rock that they would seriously consider supporting a “private sector” takeover with tens of billions of pounds of public money?

This seems the only logical explanation for the reports of dismay at the Treasury about Mervyn King's “naive” BBC interview, in which the Bank of England Governor confirmed the grim calculations about Northern Rock's financial requirements. The Governor explained that the Treasury and the Bank of England had jointly rejected offers to “buy” Northern Rock, thereby averting the embarrassing bank-run, because all such “white knight” rescues would have demanded up to £30 billion in public funding to make the figures add up. 

Why should the Government have offered such an immense sum to subsidise a bid from one bank for another? Why, in fact, should the Government have even considered such funding? 

“Banks have to take the consequences of the risks that they undertake,” said the Governor. “That is what happens in any other industry. It is not the role of the central bank to bail out people who takes unnecessary risks, in just the same way as the Government doesn't bail out manufacturing companies that take risks and their product fails. I was asked whether if a certain retail high street bank were to make an offer or a bid for Northern Rock whether we would be prepared to lend that bank £30 billion, at the bank rate, for about two years. So I said this is a matter for government.”

One would have imagined gratitude at the Treasury for these comments. The Governor had confirmed and endorsed the Chancellor's wisdom in refusing to spend a staggering sum of public money to subsidise a private bank. But instead of thanking the Governor, “Treasury sources” busied themselves on Tuesday rubbishing his comments and implying that the failure of a private “rescue” for Northern Rock reflected the Bank's unworldly delicacy about the “moral hazard” of subsidising imprudent private banks.

This is an astonishing reversal. The Bank of England, traditionally regarded as the representative of City interests in the British governmental Establishment, is calling for consistency of treatment between industrial workers and bankers. Meanwhile, a Labour Chancellor is apparently embarrassed to admit that he has rejected a demand for ransom to the tune of £30 billion from City bankers, a payment that would probably have constituted the biggest government support package offered to a private company in any market economy.

What, then, is going on? The answer is fairly clear. Around the world, banks, insurance companies and hedge funds have landed themselves in trouble because of a series of miscalculations, involving not just the US sub-prime market but also the way that mortgage banks, hedge funds and private equity houses have been financed. These miscalculations were ignored for many years because they were so profitable. But now part of the excess profits earned by the global financial industries has to be written off. As a result, investors are seeing the share prices of financial companies tumble, hedge-fund managers are seeing their bonuses jeopardised and some senior bankers are being forcibly ejected, albeit with golden parachutes of up to $150 million. 

The financiers are responding to this shake-out by putting enormous pressure on governments and central bankers on both sides of the Atlantic to reverse, or at least arrest, these costly and embarrassing trends ”” first and foremost, by cutting interest rates aggressively, even at a time when global economic growth is booming and inflation is still looming; secondly, by supporting financial institutions with public intervention, as in the case of Northern Rock or Germany's Sachsen Landesbank or the US Treasury's proposal for Wall Street to mount a bailout for the mortgage vehicles created by Citibank.

The wonder of financial markets is that they can exert such political pressures without any conscious conspiracy on the part of the bankers. They do this by creating an atmosphere of crisis based on exaggerated interpretations of relatively minor movements in shares and currencies. While the US and British economies grow strongly, and most industries, apart from finance and housebuilding, continue to do well, economists prophesy darkly about the chances of a catastrophic global impact from the credit crunch. While global stock market averages have fallen by less than 5 per cent from the summer's record highs, City and Wall Street analysts call for emergency interest rate cuts to shore up the tumbling share prices of leading international banks.

It is of paramount importance that the Bank of England and the US Federal Reserve Board ignore such calls. An article of faith of modern economic policy is that central banks must be independent of politicians. It is infinitely more important that they should be independent of bankers and financiers. As Mr King said in his interview: “The role of the Bank of England is not to do what banks ask us to do; it is to do what is in the interest of the country as a whole.” 

The job of the central banks is to manage demand and stabilise inflation and unemployment. If central banks start to follow the markets instead of leading them, then all the gains achieved by the flexible monetary policy of the past two decades will be jeopardised.


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## drillinto (12 November 2007)

Op-ed in defense of the supply-side. It is a must-read.
*************

The Supply-Side Solution
If tax-cut strategies don't work, why are they so popular abroad?

BY STEPHEN MOORE | Wall Street Journal | Friday, November 9, 2007

I recently spoke with Mart Laar, the former prime minister of Estonia and the godfather of that nation's flat tax. The major opposition to his tax reform, he explained, was not the citizenry; rather it came from the economists and the other Wise Men of government. 
"I was told, 'We cannot do a flat tax. It is untested. It will not work. It will cause budget deficits," Mr. Laar recalls. However, he believed it would work because of what he'd read about it in Milton Friedman's classic, "Free to Choose." And so, in 1994, Mr. Laar ignored the economic pundits and snapped into place a 23% flat tax. Estonia has since experienced one of the most rapid growth spurts of any nation in the world.

There's a lesson here for our country: Revolutionary ideas in economics, especially if they don't leverage the power of the state, are often resisted by the intellectual elite. Ronald Reagan discovered this in 1980 when he was ridiculed by the establishment for proposing cuts in marginal tax rates as a cure for the high inflation and economic malaise of the 1970s. 

Gardner Ackley, a former chairman of the Council of Economic Advisers, famously told Congress that it would be "a miracle" if the tax cuts worked to reduce inflation and increased growth. But reduced inflation (with an assist from Fed Chairman Paul Volcker) and increased growth is what happened in the 1980s. 

Here we are 27 years later--with 40 million more jobs and a nearly $50 trillion higher net worth--yet the left intelligentsia is still obsessed with discrediting supply-side economics. In recent weeks, the New York Times, the New Yorker, the New Republic and many other liberal publications have devoted great space and attention to attacking the entire theory that lower tax rates can increase incentives for investment, saving and work. 

The original champions of these ideas, men such as Arthur Laffer and George Gilder, are not just misguided, they are, according to the New Republic, "deranged," "crackpots," and even "possibly insane." James Surowiecki complains in the New Yorker that supply-side tax prescriptions for the economy are the equivalent of "saying that the best way to treat sick people is to bleed them to let out the evil spirits." 

The quality of this discourse rarely rises above the level of trash talk. Nevertheless, some arguments are repeated with such regularity that they need to be addressed. One is that supply-siders dishonestly claim that tax rate cuts increase tax revenues. Now, we can argue forever whether tax revenues would have been higher or lower without the Bush 2003 tax cuts. But one stubborn fact remains: Tax receipts are up, not down, by $745 billion in four years since the 2003 tax cuts. 
It's one thing for the supply-side critics to have predicted four years ago that the Bush tax cuts would increase the budget deficit. But Mr. Surowiecki tells us, today, that "myriad studies" find that the Bush tax cuts "led to bigger budget deficits." 

Bigger deficits? After the second Bush tax cut of 2003, the budget deficit tumbled to $163 billion in FY 2007 from $401 billion in FY 2003. 

Supply-side economics is also denounced as a flim-flam whose sole purpose is to give jumbo-sized tax handouts to corporations and high-income earners. Since so many upper-income and wealthy Americans are Democrats, however, it's not clear why Republicans would be so preoccupied with helping them. 

In any case, the share of taxes paid by the top 1% and 5% income earners has consistently risen from 1980 through 2007, even as tax rates declined. Today the highest income tax rate is half what it was in the 1970s. Yet the share of taxes paid by the top 1% of income earners is twice (39%) today what it was then (19%). 

Regardless of what one believes about the distributional effects of the Reagan and Bush tax cuts, there's no expunging the reality that the economic growth rate surged after each of these changes--just as they did in the 1960s after President Kennedy's tax rate cuts. Robert Rubin and others reply that the economy boomed in the 1990s too, after Bill Clinton raised taxes. But supply-siders never argued that only tax cuts matter. Trade matters. Sound money matters. Regulations matter. In the 1990s, monetary, trade and spending policies were all leaning in a pro-growth direction, possibly offsetting the negative impact of the Clinton tax rate hikes. 

What the critics have no plausible answer for is this: If the supply-side tax rate reduction model is truly so abhorrent, why are so many nations around the world latching on to it? What explains the Irish Miracle? Why are Germany, France and the U.K. slashing their corporate tax rates? Why are there 18 countries with flat taxes? Are their leaders deranged, or been bamboozled by crackpots? Perhaps a better explanation is that they know intuitively what a new National Bureau of Economic Research study has found: Nations with low tax rates on business have statistically significant higher rates of new business formation, investment and income. 

History is clearly not on the side of the antisupply-side attack dogs, and they're losing the policy debate every day in political capitals around the world. Poland just announced it wants to implement a 15% flat tax by 2009. But the American left's obsession with the notion that tax rates don't matter tells us something important about the future. They are preparing the ground for massive tax increases if and when they capture control of the presidency. 

I asked Rep. Paul Ryan of Wisconsin, a leading economic policy maker in the GOP, how many of the Democrats he works with buy into these screeds against supply-side economics. "Are you, kidding?" he replied. "Every one of the Democrats who sits in the front row of the Ways and Means Committee does. They've already got Charlie Rangel's tax increase baked into the cake." 

Estonia, anyone?

[Mr. Moore is senior economics writer for the Wall Street Journal editorial board.]


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## drillinto (13 November 2007)

Time to Talk Up the [US] Dollar

The more credible the currency regime, the greater the demand for the money issued.

By John Tamny
National Review Online
NOV 12, 2007

While stock markets continue to gyrate amidst domestic and world uncertainty, the dollar’s fall has become an even more pressing issue. Rate hikes initiated in 2004 didn’t arrest its downdraft, just as rate cuts of more recent vintage have occurred alongside further dollar weakness. 

Much of the recent talk about the need to prop up the dollar has centered on the money supply and the Federal Reserve’s interest-rate lever. But very little has been said about the demand side of the money equation, whereby we get the principle: The more credible the currency regime, the greater the demand for the money issued. 

The U.S. learned this lesson the hard way in the aftermath of President Nixon’s decision to close the gold window in August 1971. When currencies around the world fell in response to Nixon’s move, a system of fixed exchange rates was quickly put together. Unfortunately, the dollar’s new position wasn’t taken seriously by the markets, resulting in a substantial flight away from dollars and into the more credible currencies offered by Japan and Germany. The era of floating currencies had begun.

By 1975 floating currencies had created short-term trade advantages at the expense of long-term economic health for the devaluing countries, with the U.S. a frequent miscreant when it came to using devaluation as an export tool. When Carter Treasury secretary Michael Blumenthal communicated his desire for a weaker dollar against the yen in 1977 ”” despite a Fed that was raising its funds rate in large chunks ”” the markets eagerly complied. 

At the time, worried investors sought to move into the most credible currencies available. And with the U.S. not offering up a reliable dollar, other countries would fill the void. For instance, Switzerland’s monetary base grew only 1 percent in 1977. In 1978, however, after making clear its desire to maintain a strong, stable franc, the Swiss money base grew 19.7 percent. The dollar’s base grew 8.2 percent over the same timeframe, yet the U.S. experienced a 13 percent price inflation between 1979 and 1980 compared with Switzerland’s 4.5 percent rate. 

Another seeming paradox emerges when comparing the direction of the dollar in the 1970s and 1980s. It is often said that the Fed’s expansion of the monetary base gave us the inflationary 1970s. But measured in supply terms, the story is much more nuanced. The monetary base did grow 111 percent in the 1970s, but the Fed oversaw nearly identical money growth of 109 percent in the 1980s, the decade in which inflation was tamed. The difference in the latter decade was that a president offered tax cuts and deregulation as a tonic for the growth that was meant to restore the value of the dollar.

And now back to 2007. Portfolio manager Stephen Shipman noted recently that the amount of high-powered money being created by the Fed is actually lower today than it was in May, a situation one would think would equate with a strong greenback. Yet despite this fact, the dollar almost daily tests new all-time lows with no end in sight. What to do? Though Treasury secretary Henry Paulson is on record saying markets should set the dollar’s value, this form of “benign neglect” seems a bit wanting given the dollar’s direction.

Faced with a falling pound in the 1980s, Margaret Thatcher’s Chancellor of the Exchequer Nigel Lawson communicated to the markets his desire for an exchange rate of one pound to three deutschemarks. The markets matched his desires almost instantaneously. While it’s unrealistic to assume Paulson will seek a direct currency link with the euro, a strongly worded communiquÃ© from the secretary that makes plain his unhappiness with the dollar’s fall will at least give traders a story to support resumed dollar buying. It also could present a way out of what could be a painful inflationary episode.

”” John Tamny is editor of RealClearMarkets and a senior economist with H. C. Wainwright Economics.


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## drillinto (14 January 2008)

From The Times, London, UK
January 14, 2008

Goodbye to all that: the worst is over for the global credit crunch
Anatole Kaletsky: Economic view 

Global stock markets have suffered their worst early-January trading since records began in the 1920s. Conventional wisdom is again overwhelmingly gloomy - about the global economy, the asset markets and even the sustainability of the global financial and trading systems. However, conditions are not nearly as bad as the headlines and market pundits suggest. In Britain, there seems to be almost no chance of economic and financial disasters comparable to those suffered from 1990 to 1992. 

In the 17 years that I have been writing these Economic Views, I have devoted my first article in January to challenging, where appropriate, the conventional wisdom about the world economy in the year ahead. Here, then, are five ways in which I think conventional wisdom seems worth challenging in 2008: 

1. I believe that the global credit crisis, far from taking a turn for the worse, is now almost over. Since the beginning of this year, credit spreads in the inter-bank market have returned to normal. This is the first sign of the financial system beginning to heal. In the next six weeks all the leading banks will report their year-end results and will announce further big write-offs to cope with the sub-prime crisis. There is a decent chance that investors will recognise these as the final big write-offs. The banks will then recapitalise and return to more or less normal operations. 

If, however, this market-based resolution of the credit crisis does not occur and investors continue to question the integrity of bank balance sheets, the world’s monetary authorities will, I suspect, come out with a Plan B. At a minimum, there could be some new international agreement on new models for valuing illiquid assets such as the mortgage-backed securities now paralysing the banks. 

At the maximum, the US and European governments will announce public backing for their national mortgage and banking systems – similar to the action already taken by Gordon Brown to guarantee the deposits in the entire British banking system. The credit crisis will have to be resolved by the end of February, if not by the markets, then by governments and central banks. The world economy simply cannot afford to wait much longer for normal service by the banking system to be resumed. 

2. There will be no US recession. Until a few days ago, this would not have qualified as an unconventional prediction, since almost no serious economic forecasters anywhere in the world were predicting a recession. In the past week, however, Merrill Lynch, Goldman Sachs and Morgan Stanley have all publicly said that a US recession this year was very probable and may well have started already. I still believe it will be avoided because US interest rates are so low that businesses and consumers will go on spending – and, even more importantly, the Federal Reserve Board has now indicated a willingness to cut interest rates aggressively and keep cutting until the economy revives. Having said this, I must admit that a recession now looks much more likely than it did even a month ago. Whether a recession occurs or is narrowly avoided makes a big difference, because any market economy is similar to an aircraft that has to fly at a minimum speed to avoid crashing. History shows that the US economy’s “stall speed” is around 1.5 per cent in terms of GDP growth. If it slows any further, it is liable to crash and suffer a period of significantly negative growth. In the remaining predictions, therefore, I will give two variants, depending on whether the US crashes into recession or manages to stay aloft. 

3. Stock markets around the world will rise in 2008. Valuations of many companies are now very attractive, even on the assumption of a severe slowdown in global growth and a year of falling profits. Moreover, investor sentiment is more bearish than at any time since 1990 – suggesting that a lot of very bad news has already been discounted in market prices. This means that if there is no recession, shares probably should stabilise at around present levels, but may not make much progress until the second half of the year. If, on the other hand, the United States does sink into recession, Wall Street will suffer a more severe bear market in the next few months, but prices will start to rebound sharply well before the recession ends. This recession rebound should start once US short-term interest rates fall well below long-term bond yields. This should happen by March, assuming that the Fed cuts interest rates from the present 4.5 per cent to around 3.5 per cent. 

Either way, equity prices are likely to end 2008 at higher levels than they began. In Britain and Europe, interest rates are also likely to be reduced by at least 1.5 percentage points in the 12 months ahead. 

But the rate cuts will happen later and more slowly. This is one reason why the outlook for the US economy and stock market is a lot better than it is for Britain and Europe. 

4. The much-discussed “decoupling” between America and the rest of the world economy will happen in the case of Asia, but not Europe. Asia will continue to grow rapidly this year. However, Asian stock markets will not decouple if the US sinks into recession and Wall Street therefore suffers a full-blown bear market. In that case, Asian equities will suffer even bigger falls than US shares. 

Europe and Britain, by contrast, will certainly be dragged down if the US sinks into recession and will do relatively poorly even if (as I expect) the US slowdown turns out to be less severe. 

The main European economies, apart from Germany, have been powered by exactly the same combination of rising house prices and easy credit as the US economy. They are simply 12 to 18 months behind the US in the same credit cycle. Germany, meanwhile, is very dependent on the strength of consumer demand in the rest of Europe. The best that Europe and Britain can expect, therefore, is a performance in the economy and housing markets similar to America’s in 2007. If the US suffers a recession, the housing and consumer slumps in Europe and Britain will be that much more severe. 

5. In the currency markets, sterling will continue to fall against every other leading currency, partly because Britain is so vulnerable to a serious setback in housing. By the second half of 2008, however, the euro will take over from the pound as the pariah of the global currency markets, since the eurozone will ultimately suffer more than Britain from the slowdown in the global economy because the European Central Bank will resist making the inevitable interest-rate cuts. 

This intransigence by the ECB will cause serious economic and political disruptions in Europe – and could even raise questions about the euro’s survival as a reserve currency in the long term.


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## drillinto (10 February 2008)

*Re: Best Financial Quotes of 2008*

Reuters reports on some interesting comments from Warren Buffett, the legendary value investor, about the troubles facing many of the biggest financial firms: 

The woes in the United States financial sector are “poetic justice” for bankers who designed and sold complex investments that have since gone sour, Mr. Buffett said on Wednesday.

Mr. Buffett, the head of Berkshire Hathaway and one of the world’s wealthiest people, appeared to see irony in the fallout hitting many of the banks who marketed complex investments that have now crashed.

“It’s sort of a little poetic justice, in that the people that brewed this toxic Kool-Aid found themselves drinking a lot of it in the end,” Mr. Buffett said during a question and answer session at a business event in Toronto.

Mr. Buffett also played down worries about a credit crunch by saying that recent interest rate cuts mean low-cost funds are readily available.

Instead, he said, the turmoil that has rocked the nation’s economy in recent months has imbued the markets with a healthy degree of caution, while the rate-cutting response from central bankers has ensured that cheap money remains available for borrowing.

“I wouldn’t quite call it a credit crunch. Funds are available,” Mr. Buffett said. “Money is available, and it’s really quite cheap because of the lowering of rates that has taken place.”

He added: “What has happened is a repricing of risk and an unavailability of what I might call ‘dumb money,’ of which there was plenty around a year ago.”

Source: NY Times, 7 FEB 2008


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## drillinto (20 March 2008)

*Re: Best Financial Quotes of 2008*

Warning signs of a modern depression

http://seekingalpha.com/article/687...on-see-1990-japan?source=d_email#comment_form


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## drillinto (2 April 2008)

*Re: Best Financial Quotes of 2008*

Economic Scene

Can’t Grasp Credit Crisis? Join the Club 
By DAVID LEONHARDT | The New York Times | March 19, 2008

Raise your hand if you don’t quite understand this whole financial crisis. 

It has been going on for seven months now, and many people probably feel as if they should understand it. But they don’t, not really. The part about the housing crash seems simple enough. With banks whispering sweet encouragement, people bought homes they couldn’t afford, and now they are falling behind on their mortgages. 

But the overwhelming majority of homeowners are doing just fine. So how is it that a mess concentrated in one part of the mortgage business ”” subprime loans ”” has frozen the credit markets, sent stock markets gyrating, caused the collapse of Bear Stearns, left the economy on the brink of the worst recession in a generation and forced the Federal Reserve to take its boldest action since the Depression? 

I’m here to urge you not to feel sheepish. This may not be entirely comforting, but your confusion is shared by many people who are in the middle of the crisis.

“We’re exposing parts of the capital markets that most of us had never heard of,” Ethan Harris, a top Lehman Brothers economist, said last week. Robert Rubin, the former Treasury secretary and current Citigroup executive, has said that he hadn’t heard of “liquidity puts,” an obscure kind of financial contract, until they started causing big problems for Citigroup. 

I spent a good part of the last few days calling people on Wall Street and in the government to ask one question, “Can you try to explain this to me?” When they finished, I often had a highly sophisticated follow-up question: “Can you try again?”

I emerged thinking that all the uncertainty has created a panic that is partly unfounded. That said, the crisis isn’t close to ending, either. Ben Bernanke, the Federal Reserve chairman, won’t be able to wave a magic wand and make everything better, no matter how many more times he cuts rates. As Mr. Bernanke himself has suggested, the only thing that will end the crisis is the end of the housing bust. 

So let’s go back to the beginning of the boom.

It really started in 1998, when large numbers of people decided that real estate, which still hadn’t recovered from the early 1990s slump, had become a bargain. At the same time, Wall Street was making it easier for buyers to get loans. It was transforming the mortgage business from a local one, centered around banks, to a global one, in which investors from almost anywhere could pool money to lend. 

The new competition brought down mortgage fees and spurred some useful innovation. Why, after all, should someone who knows that she’s going to move after just a few years have no choice but to take out a 30-year fixed-rate mortgage?

As is often the case with innovations, though, there was soon too much of a good thing. Those same global investors, flush with cash from Asia’s boom or rising oil prices, demanded good returns. Wall Street had an answer: subprime mortgages. 

Because these loans go to people stretching to afford a house, they come with higher interest rates ”” even if they’re disguised by low initial rates ”” and thus higher returns. The mortgages were then sliced into pieces and bundled into investments, often known as collateralized debt obligations, or C.D.O.’s (a term that appeared in this newspaper only three times before 2005, but almost every week since last summer). Once bundled, different types of mortgages could be sold to different groups of investors. 

Investors then goosed their returns through leverage, the oldest strategy around. They made $100 million bets with only $1 million of their own money and $99 million in debt. If the value of the investment rose to just $101 million, the investors would double their money. Home buyers did the same thing, by putting little money down on new houses, notes Mark Zandi of Moody’s Economy.com. The Fed under Alan Greenspan helped make it all possible, sharply reducing interest rates, to prevent a double-dip recession after the technology bust of 2000, and then keeping them low for several years. 

All these investments, of course, were highly risky. Higher returns almost always come with greater risk. But people ”” by “people,” I’m referring here to Mr. Greenspan, Mr. Bernanke, the top executives of almost every Wall Street firm and a majority of American homeowners ”” decided that the usual rules didn’t apply because home prices nationwide had never fallen before. Based on that idea, prices rose ever higher ”” so high, says Robert Barbera of ITG, an investment firm, that they were destined to fall. It was a self-defeating prophecy. 

And it largely explains why the mortgage mess has had such ripple effects. The American home seemed like such a sure bet that a huge portion of the global financial system ended up owning a piece of it. Last summer, many policy makers were hoping that the crisis wouldn’t spread to traditional banks, like Citibank, because they had sold off the underlying mortgages to investors. But it turned out that many banks had also sold complex insurance policies on the mortgage debt. That left them on the hook when homeowners who had taken out a wishful-thinking mortgage could no longer get out of it by flipping their house for a profit.

Many of these bets were not huge, but were so highly leveraged that any losses became magnified. If that $100 million investment I described above were to lose just $1 million of its value, the investor who put up only $1 million would lose everything. That’s why a hedge fund associated with the prestigious Carlyle Group collapsed last week.

“If anything goes awry, these dominos fall very fast,” said Charles R. Morris, a former banker who tells the story of the crisis in a new book, “The Trillion Dollar Meltdown.”

This toxic combination ”” the ubiquity of bad investments and their potential to mushroom ”” has shocked Wall Street into a state of deep conservatism. The soundness of any investment firm depends largely on other firms having confidence that it has real assets standing behind its bets. So firms are now hoarding cash instead of lending it, until they understand how bad the housing crash will become and how exposed to it they are. Any institution that seems to have a high-risk portfolio, regardless of whether it has enough assets to support the portfolio, faces the double whammy of investors demanding their money back and lenders shutting the door in their face. Goodbye, Bear Stearns.

The conservatism has gone so far that it’s affecting many solid would-be borrowers, which, in turn, is hurting the broader economy and aggravating Wall Streets fears. A recession could cause credit card loans and other forms of debt, some of which were also based on overexuberance, to start going bad as well. 

Many economists, on the right and the left, now argue that the only solution is for the federal government to step in and buy some of the unwanted debt, as the Fed began doing last weekend. This is called a bailout, and there is no doubt that giving a handout to Wall Street lenders or foolish home buyers ”” as opposed to, say, laid-off factory workers ”” is deeply distasteful. At this point, though, the alternative may be worse. 

Bubbles lead to busts. Busts lead to panics. And panics can lead to long, deep economic downturns, which is why the Fed has been taking unprecedented actionto restore confidence. 

“You say, my goodness, how could subprime mortgage loans take out the whole global financial system?” Mr. Zandi said. “That’s how.”


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