Economics

Credit Default Swaps (CDS) are one of the financial instruments at the center of the financial maelstrom. I came across an interesting fact about them:

Blythe Masters made her career early on by recognizing the potential for credit derivatives, hedges that banks use to offset the risk of loan defaults. Despite her youth, she had enough gravitas to convince regulators around the world of the essential soundness of the little-known financial instruments.

Investing legend and Presidential economic adviser Warren Buffettt, “the Oracle of Omaha”, last week released his annual letter to shareholders of his holding company, Berkshire Hathaway. The resulting headlines were focused on Buffett’s prediction for 2009: The economy will be in shambles.

One of the justifications for the US goverments panoply of bailouts is that a recessionary environment forms a vicious cycle. Here’s Tokyo Rose himself, pimping for porkulus last month:

With the private sector so weakened by this recession, the federal government is the only entity left with the resources to jolt our economy back to life. It is only government that can break the vicious cycle where lost jobs lead to people spending less money which leads to even more layoffs.

Last Tuesday I listened to the current President fog his way through a non-State-of-the-Union speech. At this weekend’s Conservative Political Action Conference, an opposing blowhard orator had the podium. In the interest of fairness and balance, I would like to hear how these words were delivered:

I want everyone in this room and every one of you around the country to succeed. I want anyone who believes in life, liberty, pursuit of happiness to succeed. And I want any force, any person, any element of an overarching Big Government that would stop your success, I want that organization, that element or that person to fail. I want you to succeed.

Sounds like change I can believe in.

My political views were not so long ago described by a fellow community activist as, “to the left of libertarian.” I took it as a compliment. Contradictory to the common stereotype that libertarians are conservatives who like to get high, lefties and libertarians share much common ground. Or they used to. Leftyism used to be about personal freedom, non-violence, and making sure government “keeps its laws off my body”.

I cannot possibly be the first to offer this snark:

After September 11, 2001, the stock market (DJIA) hit a low of 7286. As I type, the Dow is at 7285.

The current President has crashed a loaded jetliner into the US economy.

The previous President made sure the plane was ready for take-off. Last week, Congress made sure it had $800B of fuel on board. And Barry is the pilot aiming it at Wall Street.

Corporations and their executives are often harangued for focusing on short-term profits over long-term profitability. Greed is seen as the core of evil, responsible for every lost job and every foreclosed house.

Focusing on the short-term is bad management. At least if the immediate goals jeopardize or sacrifice distant and enduring goals. But this myopic affliction of greed is not limited to the boardroom or the trading floor:

President Tokyo Rose Obama has been lying. Economic conditions require no urgent action to “avoid catastrophe”:

For the second consecutive month, the index of leading economic indicators rose, gaining 0.4% in January, following a downwardly revised 0.2% in December.
 

"The second half of 2009 may see a period of anemic growth," said Ken Goldstein, economist at the Conference Board. "In fact, a return to robust growth may not occur until well into 2010, even if the long climb starts a few months from now."

If there was any urgency, it was political.

Another bit of evidence contrary to the current sky-is-falling headlines:

Apparel sales picking up at some stores

Sales have likely picked up at Urban Outfitter Inc.'s Anthropologie stores, Limited Brands Inc.'s Victoria's Secret and American Apparel Stores Inc., said Todd Slater, an analyst with Lazard Capital markets.

Businesses are required to track their income, expenses and obligations according to a standard set of rules. The rules are called Generally Accepted Accounting Principles, or GAAP. Although there are complexities and abuses, following GAAP allows businesses to be reliably compared against competitors. GAAP helps the Securities and Exchange Commission deter management from manipulating the books to overstate profits or hide liabilities.

$900,000,000,000 (porkulus plus 1st-year interest cost)
÷    300,000,000 (estimate of US legal population)
=        300,000 (cost of bill per person)


Congress is borrowing an additional $300K per American.

THREE. HUNDRED. THOUSAND. DOLLARS. PER. PERSON.

Truth is not the halfway point between two untruths.

Quoted from: Ludwig von Mises

Banking problems are not currently a headline issue. When raised, the tone is almost invariably anti-bank. Barney Frank, Barry, and the chorus of talking heads are upset that banks aren’t making loans. As though these evil, greedy people are padding their fortunes by stuffing cash in their mattresses and somehow vicitmizing the hard-working middle class.

Balderdash.

Barney Frank needs to get one piece of information firmly lodged in his brain - to a bank, deposits are liabilities and loans are assets. It's not that banks don't need and want to lend the money they have. It's that they don't want to lose the money they have, because then they will have to pay it back from their assets that are still good, thus suppressing lending further to good credit risks.

It is essential to recognize a distinction between merely working and working to create wealth. A policy goal to create jobs, to put people to work, is a formalization of the old joke about hiring half the people to dig holes and then hiring the other half to fill the holes. Everyone is working a job, but nobody is better off. No wealth was created through shifting dirt.

Today’s headline: Economy Shed 598,000 Jobs in January

President Tokyo Rose using the data as justification to feed his pet pig spending bill: “And if we drag our feet and fail to act, this crisis will turn into a catastrophe.”

The prophets of Peak Oil have fallen silent. A price collapse and drop in global demand have allowed other paranoids to push to the headlines. But their voices will rise again. When that happens, remember this:

North Dakota and Montana have an estimated 3.0 to 4.3 billion barrels of undiscovered, technically recoverable oil in an area known as the Bakken Formation.
…

Tom Blumer does a better job making a couple of my recent points:

Before its release, experts predicted that the economy’s gross domestic product (GDP) had contracted by an annualized 5%-6% during that period. The actual annualized -3.8% from the Bureau of Economic Analysis (BEA) was not nearly that bad.

If the porkulus bill hasn’t snorted away all your oxygen this week, you might remember last weekend’s top catastrophe, “GDP contracts 3.8% as inventories limit downturn; Fourth quarter marks worst performance for U.S. economy in nearly 27 years.” I heard different version of the “worst since when” comparison, ranging from the 1980s to the ominous Great Depression.

Politicians and their hired-gun economists are aiming their stimulus proposal at the wrong target. With sights zeroed by lazy Keynsian theory, they desire to stimulate consumption (aggregate demand). But consumption doesn’t make us richer.

Steve Sailer sees the true target and punches out the 10 ring:

There’s an interesting exchange posted over at The Conspiracy to Keep You Poor and Stupid. It’s an investigation of the economic fallacies in the “Porkulus” proposal now snorting its way through the Senate.