Market miscellany

A few notes on the troubles in financial markets:

  • I’m not sure why the Fed can’t handle this. They get member banks together to buy these problem securities in an auction format, then accept the securities at the auction prices as collateral at the discount window. To supercharge it, they could drop the discount rate to the 0 to 1% range for six months or so – a step they probably ought to take immediately anyway. The authority is already there. Remember the AIG deal based on the rule allowing the Fed to “discount for any individual, partnership, or corporation, notes, drafts, and bills of exchange when such notes, drafts, and bills of exchange are endorsed or otherwise secured to the satisfaction of the Federal Reserve bank.”
  • The Fed is also one of the top banking regulators. For two years it’s been using that muscle to encourage banks to tighten lending standards. Now it could use that muscle to tell member banks to make more loans to qualified borrowers. The language Helicopter Ben ought to be using is along the lines of “If you won’t make loans to qualified US customers, especially businesses with standing lines of credit, the discount window will not be available to you if you need it – you’ll have to talk to the FDIC.”
  • I’m a little tired of politicians saying that people won’t be able to get loans to buy homes, send their kids to college or buy cars. I just heard Barack Obama say it, but to be fair I think I heard John Boehner or Roy Blunt say it, too. The FHA, USDA RD program, VA, now Fannie Mae and Freddie Mac and a few minor programs are already backed by the full faith and credit of the United States. So much for “you won’t be able to borrow to buy a home.” What difference is the government buying a bunch of loans that aren’t guaranteed going to make to a market that is already guaranteed?

    Student loans? Same thing. Ever heard of Sallie Mae? Again, backed by the full faith and credit of the United States. Federally guaranteed. Almost as safe as Treasury securities for the lender. No problem with borrowing for college. Well, no problem created by this mess anyway.

    Cars? There could be a potential problem here, but I doubt it. The car loan market has always been much more freewheeling than home loans, much riskier. There might be a period of adjustment, but car loans have never needed federal guarantees, even for credit impaired borrowers even in times of economic crisis. Ford Credit, GMAC and others will solve that problem, if there is one and they can always use the $25 billion they already got. If all else fails, there’s the buy-here-pay-here lots.
    Maybe these fear mongering politicians need to remember the words of Franklin Roosevelt’s famous 1929 TV speech, “We have nothing to fear but fear itself.”

  • A lot of the blame has been placed on the idea that people are getting home loans with “less than 20% down” or that people of low to moderate income are just inherently unqualified to own their own homes. People have been getting FHA loans with 3% down for 70 years. FHA foreclosure rates have always been a little higher, but for 70 years the program made money. Low to moderate income people have been getting FmHA/Rural Development loans with zero down for 70 years. In the FmHA program, foreclosures were few and far between until very recently, despite nontraditional credit qualifying, low incomes and zero downs because buyers and the properties themselves were qualified in other ways. The real problem is twofold: problem borrowers that should have been weeded out with good qualifying and problematic loan terms that were designed for a housing market rising at 5% or more per year. Properly qualified low down, low income borrowers buying homes they can afford are not a problem.
  • Does the constant refrain last night of “Congress will be off for the Jewish holiday” bother anybody else? Does it seem like some people are a bit gleeful at the possibility that things might go south while the Jews in Congress are busy praying? Don’t we at least deserve a couple of years of hyperinflation before we start planning a new Kristallnacht? Is it really latent anti-semitism showing its ugly or is it just that the ignorati in the media and political elites thought Hanukkah was the important Jewish holiday?
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How broke is it?

A common sense conservative refrain is “If it ain’t broke, don’t fix it.” So now that the House of Representatives (including 90 some Democrats) have rejected the Mother of All Bailouts and the market is dealing with the news, before the next round of political tinkering we can take the time to ask “How broke is it?”

The talking point has been that “credit is drying up and businesses can’t get funding.” The theory is that somehow what looks to amount to a battle between the healthy banks and the unhealthy ones that will wipe out some investors and enrich others is going to wipe out everybody else in the process.

So, in that environment, venture capital is dried up, bank lending is dried up, it’s all dried up, right? You’re ATM card won’t work and when you go to buy the new cheap gas, you won’t be able to pay at the pump with your credit card, right? Wrong. Digg just raised a round of financing of $29 million which puts a market value on the full company of $175 million. Were the terms especially bad for the company? No. :

The valuation seems about right for the company, which attracted 15.7 million worldwide visitors in August, up from 10.1 million a year ago (Comscore) (click here for Quantcast data, which shows much higher traffic). The financing was a second choice for Digg, which thought it was getting bought by Google for $200 million until a last minute glitch killed the deal. After it was clear the deal wasn’t going to happen, the company pursued a financing instead.

Speaking of Google, how about the Google Plan instead of the Paulson Plan? The artist formerly known as Jane Galt says this:

This means there’s a gigantic asymmetrical information problem: the owners of these securities know much more about them than the Fed. And there isn’t (obviously) a large liquid market for the Fed to check against. So the Fed is likely to overpay, because there won’t be a lot of bidders in any one auction.

And what company has $100 billion in spare cash and a mission of “organizing the world’s information” with a promise to “not be evil”? Maybe these banks just need to post the data on their securities on their websites and let the spiders work. No, I don’t seriously expect Google to fix this. But, seriously there are companies out there with the money and knowledge to buy these assets if those holding them are realistic about selling them. Yes, that will mean more bad banks will fail, especially if the pressure of mark-to-market and current capital requirements continue.

The biggest threat is not bank failures, consolidation in the financial industry or even this so far mostly theoretical “drying up” of cash to finance nonfinancial companies. And it’s not one that private companies can easily fix, but it is one that Helicopter Ben is on the job fixing in a big way.

Why is Ben Bernanke smiling?

Why is Ben Bernanke smiling?

The biggest threat is a threat of deflation. The basic money supply indicators published by the Fed – M1 and M2 – are flat to slightly down the last two months. But the broader indicator – M3 – is estimated to be down 20%. That’s a huge number, in the trillions of dollars, just gone. Today’s Fed action injecting $630 billion into the global banking system (funny how close that number is to $700 billion, isn’t it?) should offset most of that though, as it’s in the form of the M1 and M2 money that banks use to create the other. Basically, the Fed printed $630 billion electronic dollars early this afternoon and banks can turn around and lend that out several times over when they are ready. They can use it to buy other banks that fail. They can use it to pick up mortgage backed securities at bargain prices (with no gain for taxpayers, by the way, since they’ll be borrowing the money at 2.25% from the Fed). I’m still waiting to find out when and where the helicopters will be dropping the cash though, so I can go buy some of these cheap stocks.

In purely political terms, this is a positive thing. Nothing to do with Republican versus Democrat. The American people overwhelmingly showed in grassroots opposition that they were willing to take the risk of a serious economic downturn rather than engage in a huge government takeover of financial institutions. Plenty of smart, free market experts were more than willing to sell their souls on this deal and plenty of people like myself were ambivalent about it all. But the American people overwhelmingly said “no” to this bizarre reverse socialism. I bet they’d say “yes” to some big tax cuts that would allow strong corporations to step in and fix things a little quicker naturally. That’s the medicine this economy really needs.

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Obama's Brown Shirts

The Obama campaign has set up a “truth squad” consisting of prosecutors, lawmakers and a sheriff in Missouri to enforce The One’s version of The Truth. There has been literally no coverage of this in national media which are, admittedly, still abuzz with their latest Palin smears.

In a conference call Saturday with reporters from battleground states, Obama national campaign manager David Plouffe said those who spread lies and mistruths about the Illinois senator have to be “held accountable,” but did not elaborate how.

Apparently the “how” is by Claire McCaskill and her gang of goons operating under color of law to deny Missourian’s civil rights. (The goon squad appears to include: St. Louis County Circuit Attorney Bob McCulloch, St. Louis City Circuit Attorney Jennifer Joyce, Jefferson County Sheriff Glenn Boyer.)

There has been a little national coverage, though not near enough, of the Obama campaigns threats to the licenses of TV stations that run a new NRA ad. That ad follows. I’ve also set up all the videos from YouTube’s NRA channel to post each day on my multimedia blog. For those who are interested, I’ve done the same things with both campaigns YouTube videos in my nonpartisan 2008 election site.

You don’t have to be bitter to know Obama is not the kind of change we need:

Blunt, GOP say Obama ‘truth squad’ seeks to squash free speech with police power

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Huh? What's Kudlow thinking?

Folks, I’m puzzled by this from the normally sensible genius Lawrence Kudlow on his blog Kudlow’s Money Politics:

Why should a successful bank — whether large, medium, or small — give up ownership and allow pay-caps for executives?

My immediate reaction was:

Why should a successful bank — whether large, medium, or small — be asking for a government handout?

If they need bailed out – they are not, by definition, successful. And if they don’t need the money, they don’t have to take any strings that are attached.

There may be good arguments against pay caps (such as how to make them actually work), but this isn’t one of them.

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