Tuesday, September 30, 2008

The Bush-Paulson-Bernanke Shock Doctrine Failed

Like many of you, I recently called my Mom to discuss protecting her nestegg of mutual funds and bonds. She commented that the entire hysteria and the supposedly pressing need to pass fascist legislation reminded her of The Shock Doctrine: The Rise of Disaster Capitalism by Naomi Klein.

I immediately concurred, for the Bush/Paulson/Bernanke "panic" and "plan" to hand unlimited funds and power without judicial or congressional oversight was ripped straight from the "Chicago School's" playbook of inducing a financial panic in developing nations and then moving in to "reform" the system into crony capitalism, a.k.a. corporate and political fascism joined at the hip--all covered with a veneer of propagandistic appeal to "restoring confidence in the market."

As Klein carefully documents, the key elements in such a takeover are threats of financial collapse and a false urgency--both key drivers of the Paulson Plan. Lapdog Bernanke performed like any well-trained circus pup, mouthing absurdities, i.e. substantial benefits would flow to the taxpayers were we to grossly overpay for toxic assets held by insolvent banks.

The meltdown is already underway, and handing control of trillions of dollars in taxpayer funds to a handful of insiders at Treasury will not stop that process. The phony urgency and Bailout would have transferred financial control to a handful of Treasury cronies of Paulson; and while that wouldn't have stopped the meltdown--the price of decades of grossly obvious excesses--it would have enabled a relative handful of bankers and key players a "secret passage" to recovery of their fast-vanishing wealth--Paulson being Suspect One.

As noted here before: told we had only hours til the Apocalypse on Thursday, Sept. 18, we find the world still working 12 days later. Look, trust has been destroyed by the institutions which are failing--the banks, the Treasury and the Fed. Bailing out the most worthless "assets" held by private lenders and investors will not restore trust.

So global markets fall: rather than panic, we should say, bring it on. All sorts of "responsible" voices are calling for an end to mark-to-market accounting. The theory is that if we allow the banks to hold fictitious assets on their books for a few years, then eventually those assets will "regain value" and they can magically be sold for vast sums of money.

Note to "responsible" pundits: the value of this property will not be higher two years hence, and neither will the mortgage, MBS or CDO based on it:
Thank you, correspondent Allan J. for sending me this prophetic, sad photo.

That was Japan's guiding principle in 1989, too--and how did that work for them? How about a 19-year long recession, briefly interrrupted by amemic growth resulting from global bubbles in credit and housing. This is all part of the insanely anti-market notion that "we like markets only when they go up."

Here is how frequent contributor Harun I. put it this past weekend:

In his speech the other night, POTUS (President of the U.S.) warned that stocks might fall in value affecting retirement savings, house values may decline and jobs would be lost and banks would fail en masse. What he implied is that stocks can never go down again by more than a certain amount, and ditto for home values. Banks that make poor lending decisions must not be allowed to fail. In other words there can be no major downside to anything ever again without the taxpayer intervention. (Emphasis added: CHS) I would like to denounce this in some highbrow way but it needs to be called what it simply is: nuts.

As I write this I hear one of CNN's talking heads say that individuals and businesses won't be able to get loans unless we pass the bailout. No, they will be able to get loans but at much higher interest rates and for businesses that will degrade profits. For homeowners and sellers that means lower prices. (Emphasis added: CHS) Considering the distortion in prices, much lower. But the prudent will be rewarded with affordable prices and come back into the market.
Reframe the question.

What is really happening in the credit markets? The word is that there is no market for MBS. At the current prices that is true. If the entities holding these assets were to sell these assets at market prices and accept the inevitable consequences the credit markets would begin to function again. Instead they are trying to hold the economy hostage in hopes of a ransom (bailout) will be delivered that maintains as close to status quo as possible.

To be sure, the pain from all this will be severe but to think that there is an easy solution to skirt the effects of such a tremendous degree of greed and avarice is simply childish.

On a similar note, Frequent contributor U. Doran recommended this piece by Bill Fleckenstein: What's next, a ban on stock sales? Prices aren't to the government's liking, so it's changing the rules on the fly, and no one knows where or when new lines eventually will be drawn.

I spent an extraordinary amount of time last week discussing the human responses to betrayal and loss of trust. The reason is simple: these are the bedrock of human interactions and transactions which, once destroyed, cannot be rebuilt except via a painstaking, arduous, patient process of trust incrementally being earned, not bestowed.

The SEC's embrace of a ban on mark-to-market is based on an enormous fallacy: That letting banks keep fictitiously valued "assets" on their books for few years will magically enable them to make huge profits and re-capitalize via profits.

As correspondent J.F.B. has often asked: how are banks going to make money as lending and credit tighten and a recession removes the need, desire and ability to borrow? It seems all too clear: they can't make money with distressed assets which are doomed to depreciate far further, and in a recessionary era of over-extended credit and consumers.

The answer is not to enable fantasy-based accounting and then hope that worthless assets magically gain value: the answer is mark to market, and let buyers price the distressed assets. Every firm which is insolvent should be allowed to go under; buyers will appear at bankruptcy court auctions, and trust can be rebuilt, slowly and in baby-steps, with new regulators, new enterprises and new players.

It's called creative destruction, and it is the beating heart of capitalism.

Reader Essays:

The No Banker Left Behind Bill(Chuck D., September 29, 2008)
I have been mulling over the proposed bailout bill (which I have decided should be called the No Banker Left Behind Bill). I have the feeling that no matter what they do, something big this way is coming. I just don’t know what form it will take.

There Is Ultimately No Gaming the System: When the Micro Crash Reflects the Macro Crash (Zeus Y., September 29, 2008)
The proposed 700 billion dollar bailout cannot really “work” from a system level. I know it’s real intention is to cover the butts of Wall Street investors, but you have the same problem in macro that homeowners have in micro. Nobody knows what homes are worth right now, so buyers are sitting it out. It isn’t about restricted credit (even though that is a factor). It isn’t about being too cash strapped to make a down payment (though that too is a factor). It’s about not wanting to be suckered into buying something that may still be overpriced.

Thank you, Ryan L. ($25), for your very generous donation to this site. I am greatly honored by your ongoing support and readership.

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Monday, September 29, 2008

Can Taxpayers Actually Expect a Profit on the Bailout?


A veritable hurricane of "happy talk" has swept through the Mainstream Media as everyone from President Bush to "gummit bailout and bond king" Bill Gross is talking up the expectation that not only will the bailout eventually cost taxpayers nothing--it will turn a big profit!

All sorts of fantastic claims are being giddily bandied about by "experts" such as Mr. Gross (ahem, isn't it these self-styled "experts" who apparently saw no risk in a decade-long credit bubble until two weeks ago?) that taxpayers can purchase distressed assets at somewhere between "mark to maturity" (i.e. the full value of the mortgage if it was paid off in the future) and "mark to market," (i.e. a horrible, terrible ghastly "fire sale" price which an investor might offer at open auction).

Commentators such as John Mauldin are basically whining that bundled mortgage bonds (mortgage-backed securities) are selling for far less than their "real value":

Last week, I wrote about a formerly AAA-rated residential mortgage-backed security (RMBS) composed of Alt-A loans, better than subprime but less than prime. About 5% of the loans were delinquent, and there are no high-risk option ARMs in the security. It is offered at 70 cents on the dollar. If you bought that security, you would be making well over 12% on your money, and 76% of the loans in the portfolio of that security would have to default and lose over 50% of their value before you would risk even one penny. Yet the bank which is being forced to sell that loan has had to write down its value. As I wrote then, that is pricing in financial Armageddon.

The bank is offering the bond at $.70 because it knows there is quality in the security. They are being forced to sell. And guess what? There are no buyers. An almost slam-dunk 12% total-return security with loss-coverage provisions that suggest 40% of the loans could default and lose 50% before your interest rate yields even suffered, let alone risk to your principal – and it can't find a buyer. Rather than bemoan the lack of ready buyers and talk up what a "great deal" this RMBS is, perhaps Mr. Mauldin should consider the awkward realities which might be causing buyers to avoid such "investments", starting with the fact that the mortgages ultimately rest not on paper but on real, physical properties such as these:

Please go to www.oftwominds.com/blog.html to view the photos and charts.

What is never mentioned in all this giddy talk of taxpayers "profiting" from buying the most distressed mortgages (and the MBS which bundled them) is that the future value of many of these properties is a negative number: that is, even if a buyer paid only $1, the house requires tens of thousands of dollars in repairs just to become habitable again. And an uninhabitable house has literally no value except scrap value for the materials.

In many cases, the scrap value will be less than the cost of the diesel fuel consumed by the bulldozer and truck taking the scrap to the dump.

It is difficult to find a reliable estimate of how many of the properties which underlie these "toxic" mortgages require massive inputs of cash to become habitable again, but a guess in the millions might well be low.

As I have covered here for years, abandoned houses which aren't stripped of copper wiring, plumbing fixtures, etc. still "go to seed" as demonstrated by the ruined pool above, and it costs tens of thousands of dollars just to fix the decay caused by abandonment.

Millions of abandoned/foreclosed homes in the U.S. are no longer worth fixing up. With qualified buyers scarce and the viability of collecting rent a huge question mark, potential investors would be taking huge risks even in acquiring properties like these for $1. Labor and materials are not cheap in the U.S.; even minimal rehab projects can cost over $50,000. And meanwhile, property taxes have kicked in on day one and are costing the new owner regardless of any other expenses.
While it may sound fun to Mr. Gross to spend 15 minutes calculating the "real value" of a mortgage-backed security, his analysis will be statistical and not at all based on any "on-the-ground" survey of reality.

Mr. Mauldin seems to believe that any bundle of Alt-A mortgages is really really fine, but look at this chart of re-sets. Hmm, aren't all those millions of Alt-A mortgages about to re-set in the next few years?

Now Mr. Mauldin is clearly a very smart, experienced individual, but it does seem as if he too has been seduced into believing that mortgages and MBS are just paper assets and can be adequately analyzed as such. But even if you naively think mortgages are merely paper assets, a glance at this chart should give you pause. This is why nobody wants that wonderful bundle of Alt-A loans, Mr. Mauldin: the risk is visibly incalculable.

Other breathless accounts of vast profits just ahead for the "lucky taxpayers" footing the bill include heaping portions of gobblydegook about "senior tranches" and the like, all of which is purported to show how "the taxpayer really can't lose."

Question: if all these toxic (i.e. essentially worthless) mortgages are such a great deal, then why aren't Gross, Bush, Bernanke, and Paulson rushing out to snap them up themselves? Whys isn't Hank liquidating his $700 million portfolio and buying up all these wonderful deals?

In other words: if this debt was so risk-free and profitable, then private capital would already be snapping it up. These MBS are sitting unsold at 70 cents on the dollar and not even catching a bid at 55 cents on the dollar because private capital has made the intuitive assessment based on the following charts that there is a huge risk of losing most of your money trying to "catch the falling knife," i.e. buying residential real estate debt (mortgages) long before the bottom is finally hit.

Furthermore, smart investors know that buying a bundle of hundreds or thousands of mortgages is simply bad money management; these are real houses and properties in actual towns and cities, and a savvy investor would want a report on each property, its neighborhood, local rental rates, estimates of repairs needed, and so on.

Inescapable conclusion: millions of these residential properties are a risk at even $1, much less Bernanke's absurd "mark to maturity" pricing. Abandoned properties aren't worth anything in many markets, and so as Paulson and Bernanke stand ready to buy a $200,000 mortage for "only" $150,000, based on the idea that splitting the difference between "mark to maturity" and a fictionally inflated "mark to market" is wise policy, please understand the taxpayers will not be making a profit--we will end up losing far more than any current estimate.

If it were that easy, then private capital would have long since snapped up the "bargains." If it were really as easy as buying up "cheap" mortgages, waiting a few years and then selling them for a big gain, private money would already be in the game.

Question 2: who is going to buy a trashed shell of a house in a few years, or pay good money to rent it? Answer: no one. Value of the property a few years hence: zero. The passage of a few years will add no value to abandoned houses. That fantasy is being sold as the fundamental reason why buying toxic mortgages will reap big profits for taxpayers.

If you don't buy "the passage of time will add substantial value to abandoned properties" argument, then you can't swallow the "taxpayers will profit" happy talk.

Reader Essays:
The No Banker Left Behind Bill(Chuck D., September 29, 2008)
I have been mulling over the proposed bailout bill (which I have decided should be called the No Banker Left Behind Bill). I have the feeling that no matter what they do, something big this way is coming. I just don’t know what form it will take.

There Is Ultimately No Gaming the System: When the Micro Crash Reflects the Macro Crash (Zeus Y., September 29, 2008)
The proposed 700 billion dollar bailout cannot really “work” from a system level. I know it’s real intention is to cover the butts of Wall Street investors, but you have the same problem in macro that homeowners have in micro. Nobody knows what homes are worth right now, so buyers are sitting it out. It isn’t about restricted credit (even though that is a factor). It isn’t about being too cash strapped to make a down payment (though that too is a factor). It’s about not wanting to be suckered into buying something that may still be overpriced.

New Book Notes: My new "little book of big ideas," Weblogs & New Media: Marketing in Crisis is now available on amazon.com for $10.99.
"Charles Hugh Smith's Weblogs & New Media: Marketing in Crisis is one of the most important business analyses I have ever read. It is the first to squarely face converging global crises from a business perspective: peak oil, climate change, resource depletion, and the junction of key social cycles will radically alter the business landscape in coming decades...."

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Saturday, September 27, 2008

History in the Making
September 27, 2008

It is a rare experience to be living in a present which we know will have momentous consequences. While many of us refer back to the trauma of 9/11 when we think of "history in the making," I think more of the Watergate era, which like the current financial "credit crisis" took many months to unfold and then play out to the endgame.

Let's step back to the stagflationary misery of 1979. Chrylser Corporation was essentially bankrupt, and over howls of protest, proclamations of irresponsible largesse and a Rubicon being crossed, the Federal Government extended Chrysler a loan of a then-stupendous amount: $1.2 billion. In today's dollars, that would be $3.6 billion.

Chrysler eventually paid back the loan, with interest, by the mid-80s. (Restricting Japanese-made imported vehicles in 1981 helped.) Nonetheless it is instructive to recall the great debate and general horror at the government "bailing out" a private enterprise with taxpayer funds.

Almost 30 years later, President Bush and his gang of cronies now demand that $700 billion in taxpayer funds be given--not lent--to private enterprises: a sum 200 times the size of the horrendously controversial Chrysler bailout. As the saying goes: Where is the outrage?

History is being made this weekend, dear readers, for the bailout, should it pass, will mark a Rubicon in the demise of American capitalism and lock in the coming Depression. The Depression lies just ahead, regardless of what version of the bailout is passed into law; but the bailout will lengthen the Depression and deepen the pain which will be inflicted on taxpayers/wage earners.
In a masterstroke, Paulson and Bernanke birthed this "emergency" just as members of Congress were anxious to go home to campaign. With multiple guns thus held firmly to their sweat-soaked little heads, congressmen/women will likely pass a hasty, ill-contrived bailout of some sort by Sunday just to get home and try to hold their seats by campaigning how they "did the responsible thing" and "saved the economy."

A few stalwarts will be able to claim they "tried to kill the bailout" but alas, their courageous efforts were for naught. But even these stalwarts will be glad to have the issue behind them so they can begin campaigning in earnest.

In a just world, every incumbent of both parties would lose their seat in the November election as their reward for enabling this monstrosity. But if the past is any guide, standard-issue voters will hold their noses and re-elect about 95% of incumbents, thus justifying the congressional intuition that voting for the bailout was the "safe" thing to do.

Meanwhile, for the rest of us with a few bucks in a retirement account, the question boils down to: how can we avoid losing our shirt/blouse in the coming Depression? Let's start with a look at the one-year chart of the Dow Jones Industrial Average (DJIA).

Please go to www.oftwominds.com/blog.html to view the charts.

It looks like Wall Street is expecting a nice fat "relief rally" when the bailout is passed Sunday.

Here are a few observations: and as usual, please read the HUGE GIANT BIG FAT DISCLAIMER below; this is not investment advice, just the off-hand notes of an amateur chart-watcher.

1. The DJIA has been in a downtrend for about a year. To signal a sustainable uptrend, the DJIA would need to clear the 11,722 resistance and then move decisively above its 200-day moving average at around 12,200.

2. The last-hour 120-point jump Friday suggests players want to be long to pick up the huge gains they anticipate will result from the bailout being approved. If players are fearful/uncertain, they exit positions on Friday for the safety of cash. Buying stocks at the close suggests a supreme confidence that the bailout will not only pass Sunday but that it will trigger a massive "relief rally" now that the "market uncertainty" is supposedly cleared.

3. There are bullish indications that a rally is likely. weak buys in MACD and the stochastic readings are visible, and ADX is trendless/neutral. Furthermore, there is a bullish divergence in MACD (i.e. it is rising even as the market fell).

4. A wedge has formed, suggesting a major break up or down is imminent. If we subtract any fundamental bias, we would have to conclude the evidence suggests the break will be up--at least for awhile.

Bush and Co. (and of course McCain and Co. as well) would like nothing better than a massive rally running into the election, to secure their party's hold on administrative power, and we can anticipate that Bush appointees/cronies Paulson and Bernanke will pull literally every trick in the book to accomplish that goal.

Thus we can also anticipate the possibility of a "surprise" Fed rate cut of a half-point announced Sunday evening, so that the "good news" will goose Asian stock markets, insuring a giant rally Monday morning in U.S. and European markets.

Nonetheless there are a few flies in the ointment of a sustainable rally. Note how MACD rose very bullishly from late January through May, but price never even reached the previous high set in December. Also note how the market has tried again and again to break through the congestion formed by the Jan. 2000 high of 11,722 and the Jan. 2008 low around 11,500.
The January 2008 high around 12,800 seems awfully distant--1,700 points, requiring a full 15% rally from 11,100.

Let's refer back to the longer-term chart from earlier this week:

The overhead resistance around 11,700 is mighty. If the stock market is truly a discounting time-machine which looks ahead six months, we have to inquire: which companies will be earning fatter profits six months hence? What could possibly justify the expectation of higher profits and more generous price-earnings ratios?

Put another way: what are the market Bulls smoking/imbibing? Handfuls of Euphorestra? Having destroyed whatever shards of trust remained after eight years of legalized looting by Wall Street, does any rational observer really believe there will be a resurgence of faith and trust and confidence in Wall Street or indeed, in its partner in theivery and lies, the U.S. Government?
Just as a semi-random guess, I'd anticipate one more "bailout rally" which will push the DJIA back up to 11,700 resistance. There it will fail as the inefficacy and unintended consequences of the bailout become painfully clear. The market will then head for 7,200, a 35% decline. The only question will be: will it fall 35% in a matter of days, weeks, months or years?

As the saying goes: better keep your eye on the dealer.

Thank you, David D. ($50), for your outrageously generous donation to this site. I am greatly honored by your ongoing support and readership.

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Friday, September 26, 2008

Fantasyland II: Betrayal, C'est Rien (it is nothing)
or, RMS Titantic: Lifeboats shifted from steerage to 1st Class, stock market cheers

September 26, 2008

In the Bailout-Fantasyland members of Congress are being pressured to enter, betrayal of trust, betrayal of integrity and betrayal of fiscal responsibility are, as the French would say, "c'est rien"--it is nothing.




In other words, all the conditions which created a debt bubble of some $51 Trillion--yes, that's the Fed's own total of consumer, commercial and corporate debt in the U.S.--that is, fraud, collusion, disinformation, leverage, trillions in derivatives, risky assets held off the balance sheets, and all the rest of the practices which constitute the largest fraudulent wealth transfer in human history--are all no big deal. That the financial sector betrayed its clients and the nation's citizenry--it's nothing. Let's repair those balance sheets like nothing ever happened.

Not so fast. Betrayal of trust is a most serious offense; once our trust has been violated, most of us can never ever trust that person/institution again; and the rehabilitation process, if rehabilitation is even possible, takes many years, or even decades.

Hey, forgive and forget. Let's move on, people, and start trusting the very banks and institutions which created, aided and abetted a debt and credit bubble of astounding, unprecedented size and reach.

Have you ever been betrayed? Were you ready to trust the person who betrayed you a week later? The world can no longer trust the U.S. financial sector, and with good reason--and neither can U.S. citizens.

Absolutely nothing in the bailout bill addresses the root causes of the "crisis." (Quotations denote just how contrived the whole "emergency" really is; they had a year to do something useful and all they did was throw tens of billions down various ratholes and then lie, lie and lie about how "sound" the U.S. financial system was.)

The SEC, FDIC, the Fed and the Treasury--all agencies sworn to protect the citizenry-- all failed miserably in their sworn duty: bank reserve requirements were lowered to near zero (1%), leverage limits were relaxed (30-to-1, no problem! Go for it!), Fannie and Freddie were given free passes to 150-to-1 leverage, the Fed kept interest rates so low that when inflation was figured in, rates were actually negative, zero oversight of the ratings agencies--we got your AAA rating right here--the list goes on and on.

Common sense and prudence were discarded; now a price will be exacted, and we the people are supposed to pay it rather than the crooks, embezzlers, colluders, fraudsters and Wall Street gurus who perpetrated the betrayal. Yes, those who borrowed more than they could afford deserve what they get, too--but they're getting it. They're losing their houses, their credit is being impaired, etc. They are paying the price for their folly (or in many cases, fraud via liar-loans).

Unfortunately, the same cannot be said of Paulson and his pals. (Paulson reportedly has $700 million in Goldman Sachs stock--shouldn't he be banned from office for simple conflict of interest?)

Note to Congress: you are feeling the outrage of a nation betrayed by its government and by its financial system. Do not assume the betrayed are ready to trust the betrayers just yet--or ever.
So how do we strike back at the betrayers? Pay off your credit cards and then cut them in half. Save up and buy your next auto with cash. If you have a credit card with zero balance, pay it off every month--leave them no way to make money except the transaction fee. And you can take that away by paying cash.

If possible, pay off your mortgage early; or just rent and opt out of the "ownership society i.e. debt serf" scam. Move your funds to an online account like Ameritrade; leave nothing in former investment banks' accounts for them to manage and leverage.

Oh, and you can walk away from debt serfdom. Since nobody's proposing a $700 billion bailout for you, then why remain a debt-serf? Correspondent/author Ken Kappel just published a guide, Choose Foreclosure: The Case For Walking Away. Ken says:
The book is easy reading and gives a comprehensive overview of the financial situation today, particularly why we are in such acute financial straits. Whether you’re a homeowner right now or not, you’d be very well served to read the 19 page Free Book Excerpt in the upper right corner.

Funny, isn't it, how the "sanctity of debt" is on every banker's lips when the borrower defaults, but when the banker is about to lose his/her bonus, stock options and investments in debt, then the first words out of his/her mouth is "give us a taxpayer bailout, or we'll kill the U.S. economy!"

This is the very acme of hubris, hypocrisy and chutzpah.

If Congress foolishly passes this travesty of a mockery of a sham of a bailout, we must hold them accountable for the unintended consequences, i.e. the final destruction of global trust in the U.S. and the takedown of the U.S. economy.

Our president and Fed Chairman Bernanke are fomenting fear by stating that if we don't bail out the corrupt banking sector, then we'll suffer a recession.

Note to Bush and Bernanke: we are already in a recession which is gathering downward momentum, and you are the only two liars left claiming otherwise. (OK, three liars--there's Paulson.)

We are threatened and cajoled with the specter of recession--as if that's not already baked into reality by a massive housing and credit bubble, higher energy prices, etc. It's already here, Mr. President, so your threats sound astonishingly moronic.

On to analogy 2: the Titanic. The "crew" of the RMS Titanic, i.e. the U.S. government, is truly shameless. They have stripped steerage/3rd class of all lifeboats and shifted them all to 1st Class, drawing huge cheers from the stock market for this betrayal.

We are told in endless propaganda loops that this is all about "restoring trust." If your business partner just ripped you off, and did so on the sly, continuously and without remorse, are you going to focus on his pleas to "restore confidence and trust"? How about focusing first on the betrayal of trust?

Here are a few reader comments on the same topic: of trust violated and then "hurry up, pass the bailout before the world implodes!"

Did you watch Bush's speech last night? This is one where watching is just as important as reading the transcript. The scared-looking group of democrats earlier this week (especially Pelosi on the viewer's right) is another good example. This entire "emergency" has been avoidable from the start. There could have been a gradual tighterning of the credit spigot, but there wasn't. "Why?" becomes the big question.

We spent 15 years with a building boom followed by 15 weeks where it comes to a complete stop? No one saw this coming? Really? A lof of sharp people on the Net saw this in 2006. Other than watching my own spending, I have zero financial skills and I saw this coming, too. Are we to believe these guys who deal with shuffling $billions for a living didn't see this coming? BS. This is a huge con and the middle class are about to get screwed as soon as they stand up to pull their thumbs out. Before they even have a chance to independently point the finger, they'll be on all fours --fast.

This "financial crisis" has a very contrived feeling to it. Americans are really not very good actors when it comes to Kabuki or Russian Theater. However, many American viewers are too passive to not only soak in the subtleties of plot, but what's going on backstage and under the stage.

Meanwhile, in the real world inhabited by real Americans, here is one reader's account:

After last night's pitiful address to the nation, I came into work this morning feeling like a hopeless american. I am one of the millions struggling with an out of control mortgage and could have used a break long ago. I have taken a substantial loss in my income, while trying to gain control of my ever rising mortgage. I cannot afford my mortgage now, and will soon begin the process of removing my three boys from their childhood home as well as their schools.

I've contacted the mortgage company and filled out numerous forms and statements pertaining to my situation, and they reduced my payment by $21/ mo. I'm sure you heard this all before, but what can us little guys do to be heard? I am in total agreement with allowing the banks to fail! We need to be heard!

My own proposal for a bank bailout is based on "do unto others as you would have them do to you": let's give each bank or institution $21, and require them to fill out all kinds of forms and disclosures to get the $21. Oh, and let's also require that they return every cent of profit they "earned" in the past seven years as a condition of qualifying for their bailout.
If they no longer have the money, that's OK--you can owe it to us taxpayers, with interest. Say, prime plus five?

More reader comments:

Harun I.
What we are seeing plays out in the markets all the time. Analysts and economists are wrong and yet people still listen to them. All the people who have been proven wrong 100% of the time now insist that they are right about what we must do and how fast we should do it. This is absurd.

The rhetoric they are using is true, people are going to lose their jobs, people won't be able to purchase homes (at least not on the terms of the past few years) and the economy is going to slow to a crawl. But even if the taxpayer picks up the bill all these things will happen anyway. Bill Maher said that, "Americans are too stupid to be governed." I certainly hope that he is wrong.

Shah of Plano gave me a good laugh with this one:
Bush says if we don't sign onto his BAILOUT it's a SLAM DUNK that WE are going to all SUFFER (sounds familiar)
Paulson meets with Bush for 30 minutes = 700 Billion Bailout.
Tenet meets with Bush for 30 minutes = IRAQ WAR.
I hope he does not spend 30 minutes with a LIFE INSURANCE AGENT or we are all going to end up owning a WHOLE LIFE POLICY.

And the Shah's latest:
The Gangsters of Wall St & D.C. tried to make it look like a DONE DEAL but it was NO DEAL.
The American People are rising up against the Oligarchy.
No matter how hard the Wall St. Shills and the Democrats in Congress with their Buttons in the Media try to sell this - IT DOES NOT SELL.
President Bush embarrassed himself again. Selling a TAKE IT OR LEAVE IT proposal.
This is a TURNING POINT in America - MOM & DAD are SICK of the SHILLS & The D.C. Gangsters.
To paraphrase Bush "you are either with the American People or against them" - well the Oligarchy is against them.
The Wall St. Shills & D.C. Gangsters have delcared war on the Middle Class and the Middle Class is fighting back - FINALLY!

Unix Ronin
So, the "grand plan" these geniuses have come up with seems to be, in broad strokes, $700bn to buy up all these mortgage backed securities, and, through some magic of the market, expect that they'll get some kind of return on the investment, so that it ultimately doesn't cost us $700bn; perhaps only $200-300bn.

Right? Is that what they're getting at here?

Did everyone miss the key point? The mortgage backed securities arn't really the problem here! While they are a horrifically stupid idea, they were doing alright as long as the mortgage payments kept rolling in. Am I hallucinating to suggest that this whole tragic stupid catastrophe was precipitated by the ARM resets and resultant foreclosures?

Why is no one talking about fixing the foreclosure mess instead?

Wouldn't it be more prudent to NOT purchase these crippled securities and let the banks keep them? I'm not suggesting we don't need to fix this somehow, but why don't we use that $700bn to buy up all the _MORTGAGES_ and renegotiate the terms. Sure, all of us who did the right thing and have mortgages we can afford will be pissed that some people are getting a "free ride", but wouldn't that ultimately repair the damage these mortgage-backed securities are causing?
Frankly, if my tax dollars are going to vanish somewhere, wouldn't it be better if they vanished into equity in my neighbors house, instead of going up in a puff of hyperinflation? (And speaking of inflation avoidance, why in the hell haven't we raised the bond rates!? Government needs money badly! Bonds are a great way to get people with a little excess money to give it to the government for a little while!)
Am I missing something?

Albert R.
Years ago, here in Argentina, there were two remarks credited to wealthy people who did not have the palest idea of what would happen should communism ever take over it our country. The first was "if communism comes I will go and live in the ranch" . Wealthy people in Argentina normally owned large ranches...the other was "if communism comes I will be all right, adding to what I own now what I will get in the sharing". I have not hear either of these in many years now, but they were brought to mind when I think of so many people in the United States right now who seem to have no idea of what is going on. A lot of thing which many people take for granted will just disappear completely. If there is a collapse there will be no retirement funds, no government health benefits,etc. And I see people concerned about student loans! There will be no student loans! And that is just one thing there will no more of...

CHS--my latest letter to my senators:

Dear Senator:
According to the Federal Reserve report released on September 18, just one day before the President announced the Administration’s $700 billion bailout proposal, the Fed estimates that the nation’s mountain of interest-bearing debts has now grown to $51 trillion.

So what good will throwing $700 Billion of borrowed money into a select few hands do? NOTHING. Please think about the other $50 TRILLION in debt it does not address.
Borrowing $200B for Fannie and Freddie, $85B for AIG and $700B for this phony bailout could double or triple the federal deficit in a very short period of time.

Such a dramatic increase in the deficit would drive up the cost of borrowing not only for the U.S. Treasury, but also for other bonds and for millions of Americans seeking a mortgage or other credit, since Treasury yields are the benchmarks against which most borrowing is based.
To the degree that the Federal Reserve purchases U.S. government securities for its own account to help support bond prices, it would devalue the U.S. dollar, risking a dollar collapse and the flight of much-needed foreign capital from the U.S.

Ultimately, either of these outcomes — sharply higher U.S. interest rates or a U.S. dollar collapse — could seriously aggravate the very debt crisis that the bailout plan seeks to address.
THIS BAILOUT ONLY MAKES THE PROBLEMS WORSE--IT SOLVES NOTHING. YOU WILL BE RESPONSIBLE FOR THE UNINTENDED CONSEQUENCES OF THE BAILOUT IF IT PASSES.
sincerely,
charles smith

A few books of related interest:
The Long Emergency: Surviving the End of Oil, Climate Change, and Other Converging Catastrophes of the Twenty-First Century by James Howard Kunstler
The Misbehavior of Markets
The Black Swan: The Impact of the Highly Improbable by Nassim Nicholas Taleb
Extraordinary Popular Delusions and the Madness of Crowds by Charles MacKay
Manias, Panics, and Crashes: A History of Financial Crises by Charles Kindleberger
Against the Gods: The Remarkable Story of Risk by Peter L. Bernstein
Devil Take the Hindmost: A History of Financial Speculation by Edward Chancellor
The Great Crash 1929 by John Kenneth Galbraith The Crowd by Gustave Le Bon
When Genius Failed: The Rise and Fall of Long-Term Capital Management
The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities
Fiasco: The Inside Story of a Wall Street Trader
Web of Debt
Financial Armageddon: Protecting Your Future from Four Impending Catastrophes

Reader Essays:
A 70 Trillion Dollar Counterfeiting Ring(Zeus Y., September 23, 2008)
According to several sources the market for so-called “credit default swaps” last year alone was nearly equal to the total global GDP, around 70 trillion dollars by some estimates. Yet these derivatives have no discernible “origin” or value.

The MacRib is Back!(Chris Sullins, Septmber 23, 2008)
I want to assure you this is not a viral ad campaign. There is going to be a point to the title because it contains a small story within a much larger one. Also, the title contains a unique spelling for a reason.

New Book Notes: My new "little book of big ideas," Weblogs & New Media: Marketing in Crisis is now available on amazon.com for $10.99.

"Charles Hugh Smith's Weblogs & New Media: Marketing in Crisis is one of the most important business analyses I have ever read. It is the first to squarely face converging global crises from a business perspective: peak oil, climate change, resource depletion, and the junction of key social cycles will radically alter the business landscape in coming decades...."

Thank you, Adam M. ($5), for your much-appreciated donation to this site. I am greatly honored by your ongoing support and readership.

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Thursday, September 25, 2008

What Crisis? a.k.a. Creative Destruction Is The Beating Heart of Capitalism
September 25, 2008

The well-oiled propaganda machine that is the mainstream media would have you believe the world was mere moments away from complete financial Apocalypse last Friday. Yet here we are, a week later, and the world still exists. So we have to ask: what crisis?

It is instructive to remove ourselves from the breathless propaganda for a moment and refer back to the core of Capitalism with a Capital C: creative destruction. Yes, destruction, as in closing the doors, going bankrupt, folding, game over.

Let's be honest. This entire crisis is best summarized like this: players leveraged 30-to-1, bet big and lost. End of story. Nice try, pal, now clear out and let another player take your still-warm chair.

Let's turn to Joseph Schumpeter for an apt summation of creative destruction:
The process of Creative Destruction is the essential fact about capitalism. Every business strategy acquires its true significance only against the background of that process and within the situation created by it.

This is a long entry but an important one, so let's dig in.
Let's be clear about four critical points:


1. Banking and lending are essentially low-profit commodity businesses. Banks accept deposits, and then lend out the cash to qualified borrowers at an interest rate above what they pay on deposits. There is no magic in that, and the qualifying process is basically automated now so transaction costs are low.

How did Wall Street generate huge profits off an essentially low-profit commodity business? With huge leverage and 2+2=5 legerdemain/trickery. If you leverage $1 into $30 (yes, they all went for 30-1 leverage) and make 10 cents on a deal, thanks to leverage you made $3 instead of 10 cents--300% rather than 10%.

To mask the inevitable risk, then you have to present the "financial instruments" with a veneer of low risk, which the ratings agencies were pleased to provide for a fat fee. You also need to re-package the vanilla mortgages into instruments which enable you to charge huge fees, so you slice the low-yield mortgages into tranches which can be sold with hefty premiums. Then you sell derivatives (CDOs) based on the tranched mortgage-back securities, and you've effectively turned a commodity into a high-value "family" of instruments, the selling of which generates stupendous fees.

Now that the game is over, leverage has been shut down and the business has been forced back to a low-profit commodity model. Wall Street will not "come back" any more than the $100,000 condo in Florida will suddenly jump back to fetching $400,000. The outsized profits are gone, and the share of U.S. corporate profits will fall back to a much more modest slice--say, 1% rather than 4%:

2. Creative Destruction can be likened to a forest fire which burns away the deadwood. The President, Federal Reserve, Treasury and alphabet-soup agencies under their control have tried for years to stamp out any "blazes" of creative destruction as soon as the smoke was visible. They succeeded, but now the "forest" of our financial system is piled so high with flammable deadwood it will take a huge conflagration to clear it out and let the "forest" regenerate in a healthy fashion.

The devastating fires that swept Yellowstone National Park in the early 90s were the result of just this sort of short-sighted "any creative destruction is bad" forest management, and now Paulson, Bernanke and their boss, President Bush, are all desperately trying to beat out the flames licking at the bottom of an entire vast forest piled high with dry deadwood.
It won't work. They've "backstopped" and "saved" the system for so long that only a massive conflagration will clear the financial deadwood. Nothing they can possibly do will change the fact that the U.S. economy is loaded with the deadwood of unprecedented easy (and thus high-risk) credit:

Bernanke keeps bleating about "we need to free up credit," but he ignores the inconvenient fact that nobody needs to borrow more; they're already maxed out.

Various pundits have gleefully noted evidence that Americans are now starting to spend less and save more, but this is like gathering a few twigs from 100-square mile 10-foot thick tangle of branches and claiming the forest is now clear.

As noted yesterday, the reality is not quite so rosy: Consumers are increasing their debt burden even as they pay less and less on their credit cards. Card payments fell 6.2% YOY (year over year) in July, for the 9th month even as consumer borrowing on credit cards grew at 4.8% YOY.
Nothing they do will change the fact that there are millions of existing dwellings without residents or buyers, or the fact that the housing bubble was enabled by "qualifying" millions of previously unqualified buyers. With those millions now once again excluded by tightening lending standards, there is literally nothing to prop up a housing market which clearly exceeded all previous extremes:

As is supposed to happen in free-market capitalism, excessive supply and plummeting demand has led to a free-fall in prices:

3. Creative destruction is like natural selection: the unlucky, the mismanaged, and the foolish get wiped out, clearing the market for faster, better, cheaper competitors. I know it's not polite, but the reality is a free market for goods and services is Darwinian: you mess up, you fail.
If you take huge risks and/or you're dumb, you typically are at a big disadvantage, as illustrated by the painfully amusing Darwin Award Winners "who improve our gene pool by removing themselves from it."

In a similar fashion, firms which are no longer competitive or solvent do the economy a favor by closing. Bailing out dying/badly-managed companies is a horrible misallocation of scarce capital, and that robs the economy and taxpayers: failing firms don't pay taxes, further burdening remaining taxpayers. Capital poured down the rathole of insolvent firms is capital that is no longer available to healthy firms seeking funds to grow.

The banks that gambled and lost deserve to die, and those who gambled in the Ponzi Scheme and lost should also suck their losses.

4. There is no "crisis" in banking: well-managed banks like Wells Fargo which did not indulge in leverage and gambling are in fine fettle, ready and able to lend to qualified borrowers. A great number of banks which were managed prudently are quite solvent and in no need of bailouts.
In Capitalism, they should be rewarded by the disappearance of insolvent competitors. With the losers cleared out like deadwood, then the healthy, prudent firms can expand by offering their competent, well-managed goods and services.

Hindering this process will destroy any economy, and that's precisely what Paulson and Bernanke are seeking to do in bailing out the losers and the fools who just happen to be their buddies and pals.

The moment I read that Warren Buffett said the Bailout should be passed, I lost all respect for the man, who sadly has sunk to being a Toadie and Propaganda mouthpiece for Paulson.

Correspondent Mike D., who has lived and worked in China for many years, raised a possibility that many have pondered: the bailout is fundamentally a bailout of non-U.S. investors, without whom our bond markets would cease to function:

I fully agree that Paulson's $700 billion bailout plan looks like a Fascist power grab, but I wonder whether you aren't looking far enough into this. Is this really a Wall Street inspired coup attempt or is the whole thing being forced on America by its creditors?

China, and other foreign governments, were sitting on the majority of Fannie and Freddie toxic waste and Paulson dutifully bailed them out. I suspect that foreign US creditors would be further seriously damaged if your big banks were to tumble, hence the proposed bailout.

In the real world, I am sure China and Japan are not sitting back wringing their hands and wondering what solution Paulson et al will arrive at -- they are surely proactively involved in the decision making process. Wouldn't you be?

The very big stick that China and Japan have, of course, is to sit out the next Treasury auction and the enormous stick they have, is to dump the greenback. With these guns pointed at his head, I am sure Paulson is focussed, first and foremost, on keeping the wobbly wheels from falling off the wagon -- a certainty if he doesn't keep his overseas creditors sweet.

Well-said, Mike, thank you. My view is: overseas holders of "agency" (Fannie and Freddie) debt and various derivatives are screwed regardless of the bailout. Look at how the market reacted to the bailout: the dollar immediately tanked. So if Chinese and Japanese banks are bailed out of their agency losses, then they will lose even more as the value of their Treasury holdings plummets along with the dollar.

You can look up the numbers via a web search, but as I recall China holds about $350 billion in mortgage-backed U.S. debt and about $1.2 trillion in Treasury bonds. The Japanese hold about $250 billion in mortgage-backed debt and about $500 billion in Treasuries. The key point is their Treasuries and thus their positions in the dollar dwarf their U.S. mortgage holdings.
I have a problem with the assumption that the Chinese and Japanese banks were too ill-informed and blind to know that bubble assets contained risk, regardless of ratings agency games. What sort of due diligence did these smart guys do?

Commentators such as myself were warning of extreme valuations in U.S. real estate in major media publications as early as 2003: Bay Area Real Estate: All Signs Point To A Top (S.F. Chronicle, 2003)

The charts were readily available, as was the history of financial bubbles; to say the Chinese and Japanese bankers had no access to evidence the bubble was dangerous and unsustainable is simply wrong. They bought the agency debt and dollars for their own self-interest, to wit, propping up the American consumer so he/she could continue to buy Chinese and Japanese exports.

So now that the bubble has burst, they're whining to U.S. officials, demanding they be made whole? Sorry, folks, you knew exactly what you were getting into, and it wasn't for charity purposes. You propped up the global shell-game for your own enrichment, and now that the bets have been lost you want a bailout? Sorry, Capitalism doesn't work like that.

So as Mike D. noted, the threat is the Chinese and Japanese central banks will no longer prop up the U.S. bond markets by buying T-bills and other dollar-denominated debt. Well, as the global recession deepens, they won't have as many dollars anyway, so that decline is inevitable.
And if Congress is spineless enough to pass the bailout, then the dollar falling will wipe out hundreds of billions of value from the $1 trillion+ Chinese and Japanese hoards of T-Bills and other debt.

As the street saying goes: "They get you coming and going." The non-U.S. holders of dollar-denominated debt have already lost, and nothing Congress or the Treasury can do will change that. If the bailout hands them $200 billion, then the dollar decline the bailout will trigger will take away the $200 billion (or even more) from the value of their Treasury holdings.
Non-U.S. players would be better off demanding "no bailout" and seeking a fundamental "clearing out" of bad debt which would eventually strengthen the dollar.

The proposed bailout makes no sense for other reasons. Longtime correspondent Nurse Dorothy points out one glaring one the MSM completely ignored/missed:

I'm firmly against the 700 Billion dollar bailout for two reasons. One, it will not work and two, I do not trust Henry Paulson or the Federal Reserve. Paulson was quoted as saying that if there are too many conditions to the bailout he is afraid that financial institutions will not participate. If that's the case, then how bad off are we really? If you are a bank and about to fold and this is your last resort, why would you not participate? Paulson will have you believe that we are days from a meltdown but yet he's afraid Wall Street won't participate! Somehow that just doesn't make sense. (CHS: emphasis added)

We use to be a country with a free market that was allowed to grow and contract as a healthy market should. Instead we we have a government that artifically props up markets so that they can completely fall apart later on. This bailout will only draw this fiasco out even further and it will be far more painful in the bitter end. Let the market filter out its own weaknesses so that it can eventually become strong once more.

Well-said, Dorothy, thank you. Next up, correspondent L.D. who files this report based on his experience within the bowels of the credit/housing bubble:

Sorry to contribute to a world of hype, but I feel I must say something. In addition to being the only Californian who refused buy an oversized mortgage to get into a wildly overpriced house during the past six years, I witnessed some part of the insanity when I worked at Countrywide for three years at the peak of the mortgage finance insanity. At that time I decided to rent and not buy another home because houses were wildly overpriced. I still rent and pay taxes. Lots of taxes. Really.

When I took the corporate training on mortgage finance at Countrywide, I asked the trainer why the whole of secondary marketing wasn't a giant Ponzi scheme. She asked what department I worked in and what I did. I said I was a business analyst working in Secondary Marketing. She tried to answer intelligently but eventually said, in so many words, that it was.

Then I went back to my desk and looked at the portfolios we were supposed to write computer programs to pool for Freddie and Fannie. When one dug into the loans, it was obvious that much of what was originated after 2002 would never be paid off. The only way they could be paid off is if housing prices rose indefinitely and the ratio of median home price to median income in my neighborhood was already in double digits, a completely unsustainable and rather severe bubble by historical standards.

I predicted systemic failure of Freddie and/or Fannie (the GSEs) and reinsurance industry and told my co-workers. They thought I was crazy. And I predicted that taxpayers would pay the price for the magical thinking upon which the mortgage finance system was based. I told my friends at Countrywide that it was a house of cards that would collapse and might even take the US economy with it. They were too busy buying bigger homes that cost 8-12 times their annual income and feeling rich, rich, rich! (I didn't buy a mortgage, I bought puts on FNMA, FRE, CFC, WM, IMB, PMIA, and others).

And Countrywide didn't care. They made profits by originating and servicing loans that were then packaged and sold to investors. I will repeat that in simpler terms. Countrywide took the profits and sold the risk to someone else. The someone else is now about to be bailed out by the taxpayers. Our job in secondary marketing was to make sure the loans were properly wrapped for sale, with a nice bow and a few blemishes removed or made less visible. The price of these mortgage backed securities was set by the rating agencies that were paid by Countrywide, the seller of the securities.

I will repeat that in simpler terms. The price of what we were selling was set by companies we paid to rate our products. After the securities were sold they were sliced up further in collatoralized debt obligations or CDOs that were sold to hedge funds, China, retired school teachers, your city and county, and everyone else. This was/is the industry standard. The ratings agencies are private and paid by the seller to rate their bonds and securities. The securities are sliced up and sold to people who have no idea what they are buying. By 2005, the majority of mortgage backed securities were sold to China and Japan.

Yes, China's economy may fall too even though, unlike us, they still make stuff and didn't base their entire economy on selling each other overpriced houses and generating a giant Ponzi scheme for the past six years. The US model, engineered by the finance industry and protected by lobbyists like Phil Graham, who was McCain's chief economic advisor until his unfortunate comment a few weeks back, is completely and wholly unsustainable.

Any system that privatizes benefits and socializes costs is unsustainable. Such systems will inevitably be mired in the kind of excesses seen in mortgage finance from 2001-2006. The finance industry didn't specifically penetrate the current white house like Enron did to craft the Bu$h approach to protect its excesses, but it does have the largest lobby on K Street.

And the finance industry is better than anybody at hiding the true state of their finances. Afterall, their entire existence is nothing more than the ability to play shell games with money. That is all they do and they have thousands of very smart people working on it day and night. Thus, I was certain they could stave off the inevitable collapse at least until after the election. Now, it is clear they cannot even do that. The situation is so bad that it is crashing right before our eyes, faster than a McCain speechwriter can update the stuff on their boy's teleprompter.

The legacy of Alan Greenspam has hit our global economy with a vengeance a mere 6 weeks before a referendum on the disasters known as Bush foreign policy, Bush environmental policy, Bush energy policy, Bush social policy, Bush anti-education fundamentalist hysteria, Bush war on science, and now Bush anti-regulation policy. Things are bad. Maybe shortly after the election, the Trillion Dollar Disaster of the biggest Ponzi scheme in history will be in the headlines. Maybe the US dollar will collapse. Maybe a cup of coffee will cost $10 and a loaf of bread will cost $15 for a while. Maybe oil will be priced in Euros if we cannot stabilize the dollar.

Long story short, study up on the 1930s. We will be living it soon. Soup kitchens will appear near you soon. In LA, I think the burn zone from the "civil unrest" will go west of the 405 this time. If you want a simple explanation of how the CDOs and Alan Greenscam and the credit default swaps destroyed the global economy and resulted in millions of foreclosures, check out "This American Life" episode 355 called "The Giant Pool of Money".

Listen to the whole thing and let the absurdity sink in. And do what Ira's listeners do. Laugh. Life is too short to worry about your life savings, your currency, your home, your national security, your health care, and your basic safety. All have been jeopardized by this basic republican behavior of privatizing profits and socializing costs (risk).

The "I got mine and screw you," or SUV mentality as I refer to this particularly American style of greed, has risen to its post Reagan pinnacle and brought us to financial ruin. Our grandchildren will be paying for this fiasco. It will cost more than the disastrous Iraq war (although the inevitable blowback from that will likely kill more of us). It will cost more in inflation adjusted dollars than WW II.

Some of the Obama people get it; they understand that the rating agencies have to be nationalized and investment banks allowed to fail, but don't expect Obama to hold forth with such strong stuff at this point in the election year. He will promote regulation of the industry, which is definitely lacking. McCain will not. Every time you hear McCain touting the wonders of "deregulation," just laugh and know that it means that taxpayers subsidize corporate profits that might trickle back down to them (if they aren't too busy snatching up oversized mortgages or whatever the next shiny thing is).

Yes, these crooks are killing our country and a large part of the world too, but the delicious foolishness of their basic philosophy is just too good not to laugh at. Just laugh. Then vote.

That raises one last key point: you cannot eliminate risk from free-market capitalism, as that is the very essence of creative destruction. This has been illustrated in great depth by mathematician Benoit Mandelbrot in his seminal book The Misbehavior of Markets

Frequent contributor Harun I. made these cogent points about the impossibility of ridding the market of risk, as the bailout proposes to do:
bloomberg.com

When I heard Bernanke say this yesterday I knew for the first time that he has no idea how markets work. His suggestion is essentially that these bonds be bought at par value regardless of market value. He wishes to disregard the risk that bond investors have to navigate every day. While I will not elucidate on this much because of the complexity let's suffice it to say that buying a bond and holding it to maturity is not a risk-less venture. The risk here is simple: buying these bonds at or close to par does not guarantee a sale at or above par.

In fact, whether intentional or not this is a foolhardy attempt at price control. The alternative of letting private investors purchase these assets at market pricing is not even being discussed.

The symptom of overcapacity and extremely inflated values will persist. This is the single reason why this bailout will fail. As long as prices are out of line with incomes (inflated) and there is overcapacity either we go back to flawed lending practices or there is no reason to expand until the inventory is cleared. The clearing of this inventory, no matter who owns it, will be done at prices the market can bear. The underlying problem is our economic philosophy that says essentially we must inflate, borrow and consume to grow.

Fractional-reserve banking renders a bank insolvent immediately. And the Federal Reserve's haphazard artificial pricing of money and printing money out of thing air while charging interest is foolish and criminal. Without changing this flawed belief system we are left trying to rebuild and re-inflate the Hindenburg. Clearing the banks balance sheets will not create velocity unless of course we reinstitute the lending practices (reckless expansion of debt) which got us in this predicament.

The paradox is (and this is what they will not say) that reckless expansion of money and credit is now required in order to expand. Stated another way, under this flawed economic model and under the current circumstances, what we need kills us but without it we die.

Note to Congress: Bailouts, regardless of their structuring, will not work. Stop debating it because it is a false solution. And just for a refresher, here is the chart of the Dow Jones, which looks poised to break support at 10,700 and head lower--much lower. It's called creative destruction, and it is the beating heart of Capitalism.

A few books of related interest:
The Long Emergency: Surviving the End of Oil, Climate Change, and Other Converging Catastrophes of the Twenty-First Century by James Howard Kunstler
The Misbehavior of Markets
The Black Swan: The Impact of the Highly Improbable by Nassim Nicholas Taleb
Extraordinary Popular Delusions and the Madness of Crowds by Charles MacKay
Manias, Panics, and Crashes: A History of Financial Crises by Charles Kindleberger
Against the Gods: The Remarkable Story of Risk by Peter L. Bernstein
Devil Take the Hindmost: A History of Financial Speculation by Edward Chancellor
The Great Crash 1929 by John Kenneth Galbraith
The Crowd by Gustave Le Bon
When Genius Failed: The Rise and Fall of Long-Term Capital Management
The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities Fiasco: The Inside Story of a Wall Street Trader
Web of Debt
Financial Armageddon: Protecting Your Future from Four Impending Catastrophes

Reader Essays:
A 70 Trillion Dollar Counterfeiting Ring(Zeus Y., September 23, 2008)
According to several sources the market for so-called “credit default swaps” last year alone was nearly equal to the total global GDP, around 70 trillion dollars by some estimates. Yet these derivatives have no discernible “origin” or value.

The MacRib is Back!(Chris Sullins, Septmber 23, 2008)
I want to assure you this is not a viral ad campaign. There is going to be a point to the title because it contains a small story within a much larger one. Also, the title contains a unique spelling for a reason.

Thank you, William S. ($15), for sixth generous donation to this site. I am greatly honored by your ongoing support and readership.

Read more...

Wednesday, September 24, 2008

Welcome to Fantasyland I
September 24, 2008

You are now entering Fantasyland, where an all-powerful god known as The U.S. Treasury will sweep away all the bad things in life and make everything right again--if only we grant it unlimited power and an unlimited budget. (Hitler's "Playbook for instituting fascism in a republic," page 1)

To alleviate the depressing reality that Congress is fiddling with the deck chairs of the Titanic as its bow slips ever lower into the cold waters of financial fascism, I've assembled an image-centric post today.

Reader comments follow.

Please go to www.oftwominds.com/blog.html to view the charts and humorous images.

Here's the reality you are leaving as you enter Fantasyland:

Consumers are increasing their debt burden even as they pay less and less on their credit cards. Card payments fell 6.2% YOY (year over year) in July, for the 9th month even as consumer borrowing on credit cards grew at 4.8% YOY.

Leverage will drop from 30-to-1 to 10-to-1 overnight, and stay there, greatly decreasing money floating around looking for a quick return.

Global confidence in the U.S. is utterly broken and cannot be repaired in a few months. Given our dependence on foreign capital inflows, that's an economy-killer.

The fact that this bailout is so haphazard, so hasty, and demands so much power for the Treasury with no counterbalances by the courts or Congress will lower confidence even further, not repair it.

It's the Iraq War and the Patriot Act all over again--hasty, stupid, based on lies and a phony propaganda build-up of "emergency," with many unintended side-effects--that's what the drop in the dollar and the rise in gold and the market's plummet is telling us. Some are looking out to a new Administration, hoping for a "bottom" and a "rebuilding of confidence," but 25 years of excess cannot be unwound in 6 months or even 6 years.

If the Devil seeks to destroy the U.S., He wouldn't pick a wild-haired anarchist--He would pick someone like Paulson: a smooth liar, a "trustworthy" insider. He is the ideal Devil's Mole, and his actions speak loudly that he is truly the Devil's Pawn. A few books of related interest:

The Long Emergency: Surviving the End of Oil, Climate Change, and Other Converging Catastrophes of the Twenty-First Century by James Howard Kunstler
The Misbehavior of Markets
The Black Swan: The Impact of the Highly Improbable by Nassim Nicholas Taleb
Extraordinary Popular Delusions and the Madness of Crowds by Charles MacKay

Manias, Panics, and Crashes: A History of Financial Crises by Charles Kindleberger
Against the Gods: The Remarkable Story of Risk by Peter L. Bernstein Devil Take the Hindmost: A History of Financial Speculation by Edward Chancellor
The Great Crash 1929 by John Kenneth Galbraith
The Crowd by Gustave Le Bon
When Genius Failed: The Rise and Fall of Long-Term Capital Management
The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities
Fiasco: The Inside Story of a Wall Street Trader
Web of Debt
Financial Armageddon: Protecting Your Future from Four Impending Catastrophes

Reader Essays:

A 70 Trillion Dollar Counterfeiting Ring(Zeus Y., September 23, 2008)
According to several sources the market for so-called “credit default swaps” last year alone was nearly equal to the total global GDP, around 70 trillion dollars by some estimates. Yet these derivatives have no discernible “origin” or value.

The MacRib is Back!(Chris Sullins, Septmber 23, 2008)
I want to assure you this is not a viral ad campaign. There is going to be a point to the title because it contains a small story within a much larger one. Also, the title contains a unique spelling for a reason.


excerpt from Weblogs & New Media: Marketing in Crisis :

3. The Kondratieff Cycle suggests that the global asset bubbles which are just starting to deflate have a long way to go before the next cycle of financially healthy/stable growth can begin.

The Kondratieff Cycle captures the cyclical nature of debt accumulation through excessive borrowing, and the inevitability of debt repudiation as the end-state of that extreme leverage/euphoria, which is then renounced in a lengthy crash/depression that lays the foundation for a new cycle of productive growth.

What is truly unprecedented is that this low point (which typically corresponds to global depression) coincides with a global crisis in energy supply and a demographic time-bomb in which the retired/elderly are so numerous that there will soon be only two or three workers for every retiree in an era of double-digit growth in healthcare costs.

No asset class which has experienced a bubble--real estate, stocks, non-energy commodities and even bonds--will be spared from severe depreciation as assets are sold to fund retirements and as the global "glut of savings"/low-cost lending of surplus dollars dries up in a global consumer recession/depression.

Pensions both public and private which were once considered well-funded will be revealed as woefully underfunded and unable to pay out the benefits and pensions which were expected.
As capital pools and consumer spending both contract, government's ability to borrow or raise ever-larger sums from taxation will decline even as demands for promised entitlements increases sharply in both developed and developing nations.

Thank you, Strawgold ($25), for your wry, witty and much-valued support of this site. I am greatly honored by your friendship and readership.

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Tuesday, September 23, 2008

Paulson & Bernanke: The New American Fascists
September 23, 2008

It's fashionable to toss the word "fascist" at one's political opponents, but I am deadly serious in accusing Paulson and Bernanke of attempting a fascist coup d'etat in which the central authority of the U.S. Treasury rules uncontested, with no judicial or legislative counter-balance or authority--not even for oversight.

In a constitutional system which carefully counterbalances Federal powers between judicial, legislative and executive, how can the Treasury department claim extra-legal powers and banish oversight by both the courts and Congress, and not be blatantly unconstitutional?

Yet here is the bill's key point:

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

Lest you think I indulge in hyperbole, let's go through the definition of fascism and Paulson's power-grab step by step.

Definitions of fascism:

Most scholars agree that a "fascist regime" is foremost an authoritarian form of government.
Note that Paulson's Power-Grab Bill claims total authority for the Treasury, and specifically excludes Congressional or court oversight. What else is that but authoritarian? Sure, it "reports" to Congress, but that is meaningless since Congress has no authority to question or over-rule Treasury's disbursements of taxpayer funds.

Several scholars have inspected the apocalyptic, millennial and millenarian aspects of fascism.
And here we have Paulson and Bernanke squealing that Congress has to grant them virtually unlimited powers to borrow and spend taxpayer funds immediately or a financial Apocalypse is at hand. Nice, but where have they been for the last year? Bleating at every opportunity how "sound" the U.S. banking system is.

They had the responsibility and the opportunity for over one year to address the fundamental rot at the heart of the U.S. financial system, and they did nothing but cover the tracks of their banker pals and loan out hundreds of billions to failed banks. They should both be fired immediately for gross incompetence and Treason. Our dithering President is also grossly incompetent and fortunately he will be replaced in January. But the damage he wrought in appointing and pandering to these two incompetents has already been done.

Here is President Franklin Roosevelt defining fascism in 1942 as the U.S. was in a literal fight to the death with three fascist regimes in World war II:

The first truth is that the liberty of a democracy is not safe if the people tolerate the growth of private power to a point where it becomes stronger than their democratic state itself. That, in its essence, is fascism--ownership of government by an individual, by a group, or by any other controlling private power.

Note that the Federal Reserve is a private bank, and that the "group" F.D.R. warned us against resides in the office of Treasury Secretary Paulson, who will have sole power to disburse trillions of dollars to whomever he pleases, without recourse, oversight or control by the courts or Congress. That is fascism, pure and simple.

Here is the best single analysis of the Power-Grab Bailout Bill: The Mother Of All Frauds (Karl Denninger)

You probably read Mish and Denninger already, so you know what needs to be done: email, call and write your elected representatives in Congress and demand they vote against any and all iterations of this caving in to Fascism Bill.

Regarding the power of language:

Let me make an additional suggestion: that just as President Reagan correctly identified the U.S.S.R. as an "Evil Empire," then clearly identify the Paulson Bill as fascist, and identify Paulson and Bernanke as fascists bent on grabbing extra-legal unconstitutional powers and authority under the phony guise of an "emergency."

Hitler used this same tactic again and again, loudly declaring an "emergency" and grabbing what he wanted as the bleating, frightened sheep ran about in disarray. Paulson and Bernanke have torn a page from the Hitler playbook and are working the fear and hysteria to perfection, demanding an "immediate approval" of their power-grab.

It's not considered "polite" to label someone a fascist, but the time for politeness is long past.
The toothless mainstream media stood idly by for the past year like a drooling village idiot mesmerized by the brightly colored tinfoil Paulson and Bernanke waved in their faces. Now they cravenly report the "emergency" without a shred of skepticism; Goebbels would have been delighted by their complete spinelessness in the face of a truly Evil danger to the Republic.
How about we go one step further and call this plan and its perpetrators Evil with a capital E. Anyone who purposefully tries to ban legislative and judicial oversight via a phony "emergency" is essentially a traitor, for they are attempting to destroy the very essence of our republic and our constitution.

So let's stop pandering to a propaganda machine all too willing to wag its finger in disapproval at anyone stating the truth: Paulson and his Bill are fascist. Just look up the word, read the bill, and then tell me it isn't a match.

In Christianity, that's called "speaking truth to power." The first step to rooting out Evil is to correctly identify it with the proper words.

If it isn't fascist to strip the courts and elected officials of any and all powers over a small unelected groups' secret actions in the Treasury, then what the heck is it? It certainly isn't American democracy.

So let's call this Power Grab and Paulson and Bernanke by their proper identities: fascists, all.
I know, the bill "expires" in two years--but since they can spend $700 billion, offload whatever toxic assets they bought, draw down another $700 billion, then rinse and repeat, they could easily saddle our children and grandchildren with $3-4 Trillion in debt and in the meantime enrich their buddies and pals in the process.

If you're still unconvinced, then just start reading. Here are three articles sent in by correspondent Craig M., and one submitted by frequent contributor U. Doran:
"Friends of Hank get more special favors from the Fed:"
Fed Allows Goldman, Morgan Stanley to Become Banks
Dollar May Get `Crushed' as Traders Weigh Up Bailout
U.S. Treasury Widens Scope of Plan to Buy Bad Debt
"How, given these changes, can the administration and Federal Reserve believe they are being forthright in their unrevised expectation of future losses?"
Lies From Paulson Keep Stacking Up: What You Can Do About It (Mish Shedlock)

Bottom line: contact your congresspeople and demand they vote against this bill or any permutation of it. Otherwise, Welcome to the Fascist States of America, where a small group in Treasury will be acting in secret, giving away your tax money and your children and grandchildren's money, with essentially unlimited authority to blow trillions of our future tax payments bailing out their buddies and pals.

You want to get tough, Hank? Then ask Congress for the authority to sue all CEOS of failed banks for civil damages (for fraud, collusion, etc.) equal to their salaries and bonuses from 2001-2008. Oh, and don't forget to authorize suing yourself, too; how much did you rake off as head of Goldman? $400 million? Or was it $1.2 billion, if you count stock options and all the other goodies?

Remind me again why Paulson is qualified to be Treasury Secretary. Because nobody understands a con like a con-man?

Footnote: Just as a reminder of how much Federal (taxpayer) money has already been thrown down the rathole: Paulson Bailout (thanks to Craig M. for the link)

By my count, the Federal Reserve has already extended something on the order of $455 billion in loans collateralized by some of these same troubled assets, namely $125 billion in repos, $150 billion in the term auction facility, $50 billion in "other loans", $30 billion from the Bear Stearns deal, and $100 billion in "other Federal Reserve assets". That $455 billion total does not include this week's $85 billion loan to AIG, nor the $180 billion in reciprocal currency swap lines. That's $720 billion, plus Fannie and Freddie and shadow loans to Merrill, Lehman, etc. Shall we round it up to $1 Trillion and counting?

New essay by Chris Sullins: The McRib Is Back!

Thank you, Edward B. ($25), for your very generous contribution to this site. I am greatly honored by your support and readership.

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Mark Your Calendars: The Crash of October 7, 2008
September 22, 2008

If you believe the pundits and mainstream financial press, the Big Fat Giant Bailout has fixed everything and a Bull Market is now running. Let's examine that thesis before swallowing it whole.

Please go to http://www.oftwominds.com/blogsept08/crash9-08.html to view the charts.

Tongue gently in cheek I am predicting the wheels come off the fake rally on October 7. My reasoning is presented below, but of course the exact date is unknown; October 7 is as good a guess as any other, but October seems to be the right month.

Correspondent azvitt first alerted me to the possible significance of 10/7/08 by sending me this link: urbansurvival.com. Regardless of the day, there are plenty of fundamental reasons to expect the wheels to fall off shortly after the quarter closes on Sept. 30, as fund managers will be desperate to manipulate the market upwards so they can avoid reporting huges losses to their stunned customers/clients. But events may have moved even beyond "big money's" ability to foment their usual close-of-the-quarter rally.

Also, the Great Crash of 1929 occurred on a Monday and Tuesday, with Tuesday's climax earning the moniker "Black Tuesday." That is also one reason I have selected Oct. 7 as the Black Tuesday of the Great Crash of 2008--but it could be Monday, October 13, or Sept. 29. Only time will tell.

Also, the Great Crash of 1929 occurred on a Monday and Tuesday, with Tuesday's climax earning the moniker "Black Tuesday." That is also one reason I have selected Oct. 7 as the Black Tuesday of the Great Crash of 2008--but it could be Monday, October 13. Only time will tell.
Please read the HUGE GIANT BIG FAT DISCLAIMER below. This is not investment advice, it is informed guesswork, a dart tossed in the darkness that is the future, etc.

The The Big Picture ran a chart of the October 1929 crash, but I'd asked frequent contributor Harun for a similar chart even earlier. Let's start with that chart:

I've marked the chart up a bit. Please note the following:

1. Depending on how much rosy fantasy you're willing to swallow, there are two possible analogous points in this chart of the DJIA 1929 and the present: the right shoulder which preceded the Crash, or the first bounce off the Crash.
2. A clear head-and-shoulders top was in place on the DJIA before the Crash.
3. Just for discussion, let's assume 10,460 was not the final low of this Bear Market. In that case, then it is unlikely we've just experienced the "blowout low." But even if you think we have, note how the market bounced and then promptly fell to a much lower low.

In other words, whatever analog point you pick, the results are still the same: a huge drop to a catastrophically lower low. Now it could be argued that Sept. 2008 is in no way analogous to Sept. 1929, but there are fewer and fewer "buyers" of that complacent Fantasyland view.
Note that though the DJIA seemed to "recover" nicely in the aftermath of the Crash, the "real economy" entered a devastating Depression which was only ended by the unprecedented fiscal stimulus of World War II, 12 years hence.

Harun made these exceedingly incisive comments when he forwarded the chart:

The market did recover to levels above the that of the 28th but the economic malaise caused by government intervention lasted until WW II. Part of Paulson's grand new scheme of the government purchasing all the bad debt is lauded as having precedence in the 1930 and the S&L debacle. But buying all the bad paper didn't end the depression and the S&L situation was marginally successful because of a secular bull market that enable that property to be sold over time at a profit or break even.

So the market recovered in 1929 rather quickly but not because of sound economic fundamental but because that is the way markets work. Short covering and those sensing a bottom fueled the "rally". But in the end we face the same problem as then: no velocity. Nothing worked, not the make work projects or purchasing of bad debt; all the schemes failed to lift us out of the depression. And there is no telling how long it would have lasted had it not been for the outbreak of WW II.

The headwinds are different this time. We are not energy dependent nor are we a industrial juggernaut. But without at least re-industrialization, which will have to be done in the face of peak oil, it's back to fraudulent accounting and counterfeiting money (credit expansion) type expansion.

I overheard on CNN that all this is about confidence and therefore largely psychological. Funny, I thought insolvency is a state of being, But I guess if you are broke but confident you can still buy a McMansion, have 2 luxury SUV's and eat steak at Ruth Chris every night.

Given all the uncertainties and complete lack of confidence that "everything's fixed now," then it sure looks possible that the Paulson-Bernanke "save the bankers" rally was nothing more than another right shoulder in a downtrend.

Let's consider a 3-year chart of the DJIA 2006-08 for more data:

1. What slaps us upside the head first is the painfully obvious head-and-shoulders formation and the equally obvious overhead resistance now posed by the 200-day moving average.

2. When a major moving average crosses beneath a longer-term moving average, it's called "the cross of death" because it confirms a major downtrend. Here we have the 20-day MA absolutely crashing through the 200-day MA, with the 50-day MA dropping not far behind.

All three of these basic technical factors pose huge headwinds to any sustainable rally. Recall that stock market valuations are supposedly based on future profits. Exactly where will future robust profits flow from in a wrenching consumer and credit recession? What fundamental expansion in spending and profits will drive a Bull Market from here? To even posit such a rally is ludicrous in the extreme and virtually meritless on every fact-based market driver.

3. Eerily, the DJIA finally surpassed its dot-com-era bubble high of 11,722 (posted January 14, 2000) almost exactly two years ago. On top of the cross of death, the 200-day MA and the head-and-shoulders formation, this previous high now poses huge resistance--resistance that the DJIA has failed to breach multiple times: July 23: 11,623July 30: 11,583Aug. 6: 11,656Aug. 11: 11,782 (broke thru but didn't hold)Aug. 22: 11,628Aug. 28: 11,715 (close but no cigar)
Six attempts and every one failed. The current "rally" may well run up and bounce off the 11,722 level one more time.

Once again: exactly what fundamental, sustainable uptrend in future profits would justify a new Bull Market? Hint: Banks being able to borrow from other banks does not mean profits will suddenly leap.

4. When we look at other indicators, we do not see the extremes which usually mark real bottoms. Stochastic readings are far from oversold, and DMI- is well below its recent highs (DMI- is a measure of negative trend, DMI+ a measure of positive trend). The MACD divergence is also at neutral, meaning it is also far from marking a bottom.

The last time the 20-day MA crossed the 200-day MA was October 2001--the beginning of a Bear market which took the DJIA from over 10,000 down to 7,200. The 20-day MA did not cross above the 200-day until late 2003--over two years hence.

And the hangover from the Y2K/dot-com party was child's play compared to the credit crisis/housing bust/global recession we face now.

5. Virtually all sustainable rallies run from a solid double-bottom. The very best Bull case still requires at the very minimum a retest of 10,460, and the sooner the better.

Question: what if Paulson and Bernanke hold a Credit Fix party and nobody comes? What if there is still great reluctance to lend to other institutions come next week? Since Paulson and Bernanke have already pulled the last rabbit out of their magic hats, then what's left to stem the next crisis of faith/credit crunch? Answer: nothing.

Do ya reckon market players are keenly aware of this? If credit begins tightening once again after the champagne euphoria of the "rally" fades into hangover, then what will every responsible player do? SELL SELL SELL, exiting long positions as fast as possible, especially in financials.

Why? Because there is no way now to hedge the long positions with a corresponding short position. Having banned evil shorts, there won't be any "short covering rally" to stem the cascading sells. It's called "unintended consequences of hastily made, ill-planned financial rescues."

Skeptics of a Crash, please review the following charts for the context of what awaits us. Here are five charts without which the present crisis cannot be properly understood/contextualized:

1. total credit as a % of GDP
2. the housing bubble
3. plummeting housing values
4. financial profits as % of GDP
5. U.S. national debt (just toss another trillion on there, wouldya, Hank? Oh, heck, make it two.)


Add these up and what do you get? Asset deflation, credit deleveraging, consumer recession, corporate profits crash and thus stock market crash. There really is no alternative result of the sum.

For more context, here is a summary of Wall Street Crash of 1929 (Wikipedia)

After an amazing five-year run when the world saw the Dow Jones Industrial Average (DJIA) increase in value fivefold, prices peaked at 381.17 on September 3, 1929. The market then fell sharply for a month, losing 17% of its value on the initial leg down. Prices then recovered more than half of the losses over the next week, only to turn back down immediately afterwards.

CHS NOTE: Hmm, sound familiar?

The decline then accelerated into the so-called "Black Thursday", October 24, 1929. A record number of 12.9 million shares were traded on that day. At 1 p.m. on Friday, October 25, several leading Wall Street bankers met to find a solution to the panic and chaos on the trading floor. With the bankers' financial resources behind him, Whitney placed a bid to purchase a large block of shares in U.S. Steel at a price well above the current market. As amazed traders watched, Whitney then placed similar bids on other "blue chip" stocks. This tactic was similar to a tactic that ended the Panic of 1907, and succeeded in halting the slide that day. In this case, however, the respite was only temporary.

CHS NOTE: Check the action around Sept. 29, 2008.

Over the weekend, the events were covered by the newspapers across the United States. On Monday, October 28, more investors decided to get out of the market, and the slide continued with a record loss in the Dow for the day of 13%. The next day, "Black Tuesday", October 29, 1929, 16.4 million shares were traded, a number that broke the record set five days earlier and that was not exceeded until 1969.

William C. Durant joined with members of the Rockefeller family and other financial giants to buy large quantities of stocks in order to demonstrate to the public their confidence in the market, but their efforts failed to stop the slide. The DJIA lost another 12% that day. The ticker did not stop running until about 7:45 that evening. The market lost $14 billion in value that day, bringing the loss for the week to $30 billion, ten times more than the annual budget of the federal government, far more than the U.S. had spent in all of World War I.

An interim bottom occurred on November 13, with the Dow closing at 198.6 that day. The market recovered for several months from that point, with the Dow reaching a secondary peak at 294.0 in April 1930. The market embarked on a steady slide in April 1931 that did not end until 1932 when the Dow closed at 41.22 on July 8, concluding a shattering 89% decline from the peak. This was the lowest the stock market had been since the 19th century.
The crash followed a speculative boom that had taken hold in the late 1920s....

A few books of related interest:
The Long Emergency: Surviving the End of Oil, Climate Change, and Other Converging Catastrophes of the Twenty-First Century by James Howard Kunstler
The Misbehavior of Markets
The Black Swan: The Impact of the Highly Improbable by Nassim Nicholas Taleb
Extraordinary Popular Delusions and the Madness of Crowds by Charles MacKay
Manias, Panics, and Crashes: A History of Financial Crises by Charles Kindleberger A
gainst the Gods: The Remarkable Story of Risk by Peter L. Bernstein
Devil Take the Hindmost: A History of Financial Speculation by Edward Chancellor
The Great Crash 1929 by John Kenneth Galbraith The Crowd by Gustave Le Bon
When Genius Failed: The Rise and Fall of Long-Term Capital Management
The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities
Fiasco: The Inside Story of a Wall Street Trader
Web of Debt
Financial Armageddon: Protecting Your Future from Four Impending Catastrophes

New Book Notes: My new "little book of big ideas," Weblogs & New Media: Marketing in Crisis is now available on amazon.com for $10.99.

"Charles Hugh Smith's Weblogs & New Media: Marketing in Crisis is one of the most important business analyses I have ever read. It is the first to squarely face converging global crises from a business perspective: peak oil, climate change, resource depletion, and the junction of key social cycles will radically alter the business landscape in coming decades...."

Thank you, Jennifer K. ($25), for your wondrously generous contribution to this site. I am greatly honored by your support and readership.

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