You CANNOT be Serious

Not too long ago the US Government (that’s you and me, dear reader) paid billions of dollars to the vampires at Goldman Sachs to ensure that they would be made whole on some exotic financial instruments they were involved in. Seems like the company guaranteeing the value of those instruments (AIG) was going belly up, and wouldn’t be able to completely fulfill their obligations. That meant that Goldman, Citi and others would – GASP – lose money on their investments.

But for some reason, the US Government, Bush was still in power at the time, but Clinton or Obama would’ve done the same, PAID FULL PRICE for these toxic assets. We had to make sure that the contracts which were in place were honored to the letter.

But now, as the Great Liquidation (a nifty little term coined by the Trustafarians at Fortress Investment Group) gets underway, hedge funds are buying impaired assets from banks for pennies on the dollar. One of the biggest classes of financial assets that are being bought are Collateralized Debt Obligations (CDOs) the nasty things that we bailed Goldman out of for FULL VALUE when everyone in the world knew they were worthless.

A couple of points to take from this:

1. Banks sell assets for far less than their book value all the time. It’s a common practice. It’s called getting a hair cut. The Fed didn’t give Goldman and the rest of the gang a hair cut because former Goldman execs ran and run the Fed. Simple conflict of interest. Not a conspiracy.

2. At the time, Goldman and others put up fancy arguments for why they should be paid in full. Never believe that kind of crap. For all the complexity of any given financial instrument or any particular deal, financial markets are wonderfully simple in this respect: the golden rule is in force. The party with the gold makes the rules. Never, EVER, believe a fancy justification. It is always a lie.

3. Wallow in the over arching hypocrisy of Wall Street. They storm around telling everyone that it’s a hard world, and you have to take your losses, but when they are faced with losses, they get made whole. They deserve scorn and contempt.

William Kristol is Opposed so Quantitative Easing Must be OK

We are not political. However, when a political hack like William Kristol takes a position on economic policy, it’s got to be wrong. An open letter in today’s WSJ by “economists” takes issue with the Fed’s recent approach to monetary policy of buying up Treasuries (this is what is called “quantitative easing”) saying that it will debase the currency and drive up inflation. I put economists in quotes because although they were billed as the authors of the letter, it was signed by gasbags like Kristol as well.

Since the goal of this site is to translate this sort of nonsense into something understandable, let’s start with a couple of easy observations.

First, there are economists on both sides of the argument. There is NO agreed upon position by economists as to the efficacy of this approach.

Second, there are Fed economists on both sides of the argument. While this is closely related to the first point, it is worth noting that in this case, the Fed isn’t a monolith. In fact, there are right-leaning economists at the Fed who support the policy.

Third, one impact of this policy that nearly everyone agrees on is that the dollar will be devalued. What that means for ordinary working people is that our exports will be less expensive overseas, and we should be able to sell more of them. That should translate into more jobs.

Fourth, there is no indication that this will lead to rampant inflation. The economy is very weak at the moment; a situation which will act as a damper on inflationary pressures.

Bottom line: Many US economists adhere to a mantra of keeping inflation down at all costs and at all times. This is not a universally shared outlook. There is no reason to think that the second round of quantitative easing will lead instantly to rampant inflation. None.

Oh, and for what it’s worth, the dollar rose today, as investors put their money in this safe haven currency as problems continued in the Euro Zone. I guess the people who wrote this letter were disappointed in that.

Republicans Disagree With the “Free Market”

Turn on the radio and you’ll hear one thing in common from the Republican talk shows: Quantitative Easing is wrong, will lead to rampant inflation and is obviously bad for the economy.

Wait, there are two things you’ll hear from every Republican talk show. The second one is that the free market, embodied by the stock market, is always right. It is the perfect reflection of rational choices made by people’s wallets and so has to be right. That’s nonsense, but that’s what you’ll hear.

What to do about the big runup in the stock market since the Fed’s $600 Billion purchase of treasury bills (the purchase of treasury bills by the Fed is one example of Quantitative Easing)? The stock market has gone up more than 10% since the Fed’s move, and the move up was widely seen as related to the repurchase, which was larger than expected.

How could the stock market respond positively to something that is so fundamentally and obviously bad for the economy? Good question. Maybe someone on talk radio will look at this problematic fact.

If You Don’t Get in Line They’ll Lock You Away

Since the financial meltdown, we’ve all heard of Moody’s. It’s one of the two largest credit rating agencies in the world. The other is Standard & Poors. Each has about 40% of the market for these services.

The most relevant services they provide are rating the credit worthiness of financial instruments. Boring, you say. Maybe, but highly relevant. It was Moody’s, along with S&P, who rated so many derivative backed securities as triple A debt. You know, rock solid. The kind of debt that just cannot fail. Of course, billions or trillions of dollars of derivative backed securities either failed or were bought up by you and me before they could fail.

At a minimum, these organizations failed miserably in their primary function. If you or I performed so miserably, we’d be canned. Immediately. Probably shown the door by security.

So, Moody’s analyzes and then rates securities which are then offered for sale to the public. A high degree of trust and independence are involved in that, right? Let’s put aside trust for the moment and look at independence. Who pays for the ratings? The companies whose securities are being rated.

Think about that for a moment. You’re a major issuer of debt, say Enron or Wachovia, and you want a good rating on your next debt offering so the public will buy it (and yes, I mean the public, corporate debt makes up a large portion of many 401(k) portfolios). You can go to either of two places for the ratings. Let’s say you think the guys at Moody’s are too harsh on debt offerings such as yours. What do you do? Maybe you suggest to the guys at Standard & Poors that you’d like to shift your million dollars of business to them. And maybe to keep the business, the guys at Moody’s agree to relent a little.

This is the way business works. It’s not a conspiracy.

So this guy, Kolichinsky, starts to point out that this sort of compromising activity went on in the process of rating securities which had a lot to do with destroying our economy. If you don’t think it did, then you’re left with the alternative that Moody’s is wholly, completely incompetent.

Here’s the kicker. Guess who is the primary owner of Moody’s? None other than that avuncular finance wizard Warren Buffet himself!

Warren Buffet, a man who makes his billions through ownership of publicly traded companies, and whose company is publicly traded itself, owns one of the two largest firms that rates public debt.

A system set up by the rich, for the rich, that led to a major financial setback for nearly everyone in the country.

The current system is rigged. You should know that and act accordingly.