Re: Report: biggest decline in prices since the Great Depression

[David Farber <dave () farber net>]

Begin forwarded message:

From: dewayne () warpspeed com (Dewayne Hendricks)
Date: February 14, 2009 5:19:13 PM EST
To: Dewayne-Net Technology List <xyzzy () warpspeed com>
Subject: [Dewayne-Net] Re: Report: biggest decline in prices since  
the  Great Depression

[Note:  This comment comes from friend Steve Schear.  DLH]

From: Steven Schear <schear.steve () googlemail com>
Date: February 2, 2009 3:02:40 PM PST
To: "Andrew M. Odlyzko" <odlyzko () dtc umn edu>
Cc: Dewayne Hendricks <dewayne () warpspeed com>, nelson () crynwr com,   
David Farber <dave () farber net>
Subject: Re: [Dewayne-Net] Re: Report: biggest decline in prices since  
the  Great Depression

Andrew,

I am sure there have been and will continue to be circumstances when
markets fail even when essential laissez faire. On occasion either
large private parties (for example, J. P. Morgan in 1907) or
government entities may be needed to step in and lend a hand to
restore order in a reasonable time frame. But these exceptional
circumstances should not be used a wedge to enable all manner of
economic and monetary intervention or regulation under the aegis of
providing safety for citizens or market participants.

As I have written earlier in this and similar threads, the type of
economic slump currently underway was both predictable (eventually),
perhaps even inevitable, when economic and monetary principles with
fundamental deep flaws but an insidious attraction to statist
economists, politicians and central bankers who pursue mercantilist
agendas at the expense of everyone else. The result are massive
problems with no good, short-term, solutions, such as the foolish
good-bank, bad-bank proposals.

The bad bank (aggregator bank, super SIV) idea can't possibly work,
because there is no end in sight to the exponential growth of illiquid
level 3 assets.

Ordinary citizens are trying to hoard money and are not consuming,
Consequently, prices of real estate and of durable goods in inventory
are dropping. The large institutional investors are also hoarding
money (sideline cash) and are not buying assets. This results in more
assets becoming illiquid, and in the prices of those assets dropping
as quickly as the aggregate number of those distressed assets is
growing. The banks classify these problem assets as level 3. The banks
either bought or loaned money on these "assets" that now have no
marked to market value.

Level 3 assets are not assets at all, but are, in fact, liabilities.
They are actually losses that the banks refuse to recognize as losses.
Therefore, the growth of level 3 assets, is, in actuality, an increase
in bank losses. If banks were forced to take writedowns on these
illiquid assets (losses), the size and scope of this toxic waste is so
large, that if current regulatory standards were invoked, the banks
would be forced to shut down for having a lack of reserves. It should
be very obvious by now that Paulson and Bernanke were outright lying
when they told Congress that the TARP money was for "strong" banks,
when, in fact, the money was needed in order to keep the largest and
most inolvent banks afloat.

We are only in the primary stages of what is rapidly developing into a
world wide epidemic of deteriorating, mark to worthless, assets. No
"bad bank" could be built that could be large enough to hold all the
distressed assets presently in the system, let alone a bad bank large
enough to hold the exponentially growing number of bad assets that
will manifest themselves in the future. JP Morgan purportedly has a
$92 trillion derivative liability. The rule of thumb is that 10% of
that will implode. We know that Lehman's $400 billion derivative
unwind resulted in a $5.2 billion shortfall. So, If the 10% derivative
rule holds, JPM, alone, will have to be saved from a $9 trillion
derivative shortfall. Throw in the derivative exposure of all the
other banks, and we won't even be able to get around to sequestering
the bad mortgages, commercial paper, asset backed securities and
consumer debt that need to be quarantined in this fictional bad bank.

Anyway, the first banks that admit they are riddled with these
cancerous assets, will, in essence, have publicly announced their
insolvencies. With most of the larger banks having created their own
secret bad banks with their off balance sheet assets, one might say
that the world has already become one big bad bank. There is no need
to second guess Nobel laureate, Joseph Stiglitz, when he calls
Bernanke's bad bank idea "cash for trash". As far as creating "good
banks", how can there be any good banks when all we've got are bad
bankers?

Steve

On Sat, Jan 31, 2009 at 9:29 AM, Dewayne Hendricks
<dewayne () warpspeed com> wrote:
> [Note:  This comment comes from Dave Farber's IP list.  DLH]
>
> Begin forwarded message:
>
> From: odlyzko () dtc umn edu (Andrew M. Odlyzko)
> Date: January 31, 2009 7:56:32 AM CST
> To: nelson () crynwr com
> Cc: dave () farber net
> Subject: Re: [IP] Report: biggest decline in prices since the Great
> Depression
>
> Speculation in commodity food was not illegal, not by any means.  In  
> fact,
> lots of things that are illegal today were not illegal then, such as
> insider trading.

I actually don't see anything wrong, per se, with "insider trading",
as one of the primary purposes of markets are to discover the true
value of what is being traded. There will always be people with more
information than is known via widely used news services, for examples,
blogs. To keep known, material, information that is being discussed on
blogs from being used in trades and therefore hampering accurate price
discovery is a stubborn consistency.

An example I like to cite is the (fictional) short
> story, "The Glenmutchkin Railway," written at the height of the  
> Railway
> Mania in 1845,
>
> < http://www.dtc.umn.edu/~odlyzko/rrsources/glen6.pdf>
>
> It's well-written, amusing, and takes about 15 minutes to read.  And
> it presents a pretty good picture of the dot-com-like atmosphere at
> the height of a bubble.  A key element is that nothing that the two
> protagonists do there was illegal in those days at the height of the
> laissez faire era.
>
> But to get to your point, yes, "[s]peculators will buy excess in  
> boom years
> and sell excess in bust years," at least in many cases.  But that  
> will not
> always even out prices, sometimes it will accentuate the swings.   
> It's not
> just that some crops cannot be stored (a much more important factor  
> in the
> early 19th century than now, since refrigeration was not available,  
> and it
> was hard to protect stored crops from rats and mice, at least no
> effectively).
> The main thing is that it is hard to anticipate the future, and in  
> addition
> speculators are subject to herd mentality.

Steve
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