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The Crisis Explained

Thursday, October 2, 2008, 7:18 AM

A very nice analogy, found here:

Analogies are never perfect, but here's one using horse racing. Don't expect a perfect correspondence to the banking situation, but I think it is close enough for government work.

Joe goes to the track and bets $2 on a horse.

Two guys standing nearby get into a discussion and Fred says to Sam, "I'll bet you $5 that Joe wins his bet."

Next to them are Bill and Bob. Bill says: "I'll bet you $10 that Fred welshes on his bet if he loses."

Next to them is Sally. Sally says: "For $3 I'll guarantee to Bill that if Bob fails to pay off, I'll make good on the bet."

Sally then goes to Mary and borrows the $7 needed in case she has to ever pay off and promises to pay back $8. She doesn't expect to ever have to pay since she believes Bob will always make good. So she expects to net $2 no matter what happens to Joe.

A quick calculation indicates that there is now 2+5+10+3+7 = $27 riding on the outcome of the horse race.

Question how much has been "invested" in the horse race?


$50,000 by the owner of the horse who is expecting to recoup his investment from the winnings of the horse and other future deals. Everyone else is gambling, not investing.

The issue with the home market is that the only "investor" was the person who bought the home. All those engaged in the meaningless derivatives spun off from this are gambling. You can see how quickly the face value of all these side bets can exceed the underlying investment. Who is holding these side bets?  Not the homeowner. It is the people at the failing investment banks, hedge funds and similar enterprises. Notice that the bailout is being directed at them not the homeowners.

The real world is, of course, even more complicated. Over the last 30 years people have been allowed to place bets on everything starting with the value of stock averages. They might as well bet on the temperature in Newark at 8:00 AM.

So when you hear everybody saying this is a crisis caused by the housing collapse, be skeptical. We are in the midst of a classic pyramid or Ponzi scheme and there is no way out except for people to lose a lot of money. All that is different this time is that it is the taxpayers who are being asked for the cash.

» Read more


National Debt Officially Over $10 Trillion

Wednesday, October 1, 2008, 4:34 PM

Well, we've finally done it.

The national debt, which stood at just $5.73 trillion when Bush took office in January of 2001, is now more than $10 trillion.

This is a stunning 75% increase just since the day Bush became the first President ever to forgo the traditional walk to the podium, preferring to ride in his armored car (perhaps the object-throwing crowds had something to do with that).

Think about this increase for a minute.

By the time Bush leaves, it could easily amount to a perfect doubling of the national debt in the span of only eight years.

To those who now want to rescue the credit markets so we can "get back to how things were" are failing to observe that "how things were" was, most recently, not at all how things used to be.

There's nothing to return to.  A nation that doubles its debts every eight years does not really exist.  It is an illusion built on borrowing. There's no way to "get back to that," because it was just a crazy party, thrown at great expense. But now the rugs are stained, the lamps are broken, and booze is all gone.

Here's what it looks like from a historical view.  Bush's legacy (which is really the legacy of everybody in DC; I do not mean to pick on him alone) is circled in a color I like to call "rug stain yellow."

All of these wild attempts to "stabilize the markets" with a big government borrowing binge are most certainly destined to be ill-fated.

The only realistic way out of this, from a banking system and government standpoint, is to print, print, print.

There is almost no doubt left in my mind that the printing process is either already humming along in the background, or soon to begin.

Oh, by the way?  My mother-in-law reports that today that she went to take cash out of the bank, but greeting her at the door was a hand-taped sign stating that customers are now limited to $1000 cash per day.

Gold and silver were hit again today in the lightly traded access (paper) markets, but good luck finding any physical to buy. It's not impossible, by any stretch, but it's a lot harder than it was last week, and that was harder than last month.  The trend tells the tale.

Congratulations, America, you are now officially a $10 trillion debtor nation. Break out the party hats.

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New Martenson Report for Subscribers

Wednesday, October 1, 2008, 3:34 PM

In this report I review the recent data to conclude that a recession is
here right now.  Don't wait to hear this fact much later on the's time to start spending and behaving like we are at the
beginning of a pretty serious economic decline.

The Recession - It's Here And Now 

Note: This report is for subscribers only. 

» Read more


Another mid-game SEC rule change

Tuesday, September 30, 2008, 5:09 PM

Every possible effort is being made to make our banks healthier.  And if that is not possible, then to at least make them appear healthier.  The SEC just passed a new rule with this second aim in mind.

And I'm not sure how much it is really going to do, since the rule change will allow companies to place higher values on stricken assets that have already been "marked down."  As I point out below, many companies have not yet done this, so how much of a gain will result is questionable.

» Read more


Market pricing broken - no longer free, fair, or believable

Tuesday, September 30, 2008, 10:50 AM

While the actions of the SEC to suddenly change the rules mid-game were troubling, as were the recent Fed decisions to blatantly ignore its own charter, I am seeing something equally worrisome developing out there.

There is a breakdown between what the paper markets (futures, options, stocks, Foreign Exchange, etc) are saying is "the price" and what we are experiencing out in the real world.

Here's one example from the gas shortages plaguing the Southeast: » Read more


Bailout Bill Fails in House Vote (!)

Monday, September 29, 2008, 4:38 PM

The "Bailout Bill" has failed to pass the House by a vote of 228-205.  There were defections in both parties. (By my count, that leaves two individuals not voting - hiding in the restroom maybe?)

This has to mark one of the most important watershed moments for the people of this country.  They were heard and represented over and above those of the well-connected and paid.

From the Wall Street Journal: » Read more


Monday Market Watch

Monday, September 29, 2008, 7:41 AM

I am going to be keeping an exceptionally close eye on the markets today, obviously.  It is vitally important that the world respond 'appropriately' to the US bailout plan.

By appropriately, I mean that all paper assets need to go up in price.

At the outset, it's quite the mixed bag.

As expected, the dollar was bought with a vengeance all night long.  Don't open any economic textbooks, especially those that rely on any theories of "supply" and "demand," for an explanation of why this should be. » Read more


Paulson led bailout of AIG; saved $20 billion for Goldman Sachs

Sunday, September 28, 2008, 10:47 PM

This is another astounding article by the very respectable Gretchen Morgenson of the NY Times.

It is astounding because of all that is revealed in the opening paragraphs.

Two weeks ago, the nation’s most powerful regulators and bankers huddled in the Lower Manhattan fortress that is the Federal Reserve Bank of New York, desperately trying to stave off disaster.

As the group, led by Treasury Secretary Henry M. Paulson Jr., pondered the collapse of one of America’s oldest investment banks, Lehman Brothers, a more dangerous threat emerged: American International Group, the world’s largest insurer, was teetering. A.I.G. needed billions of dollars to right itself and had suddenly begged for help.

The only Wall Street chief executive participating in the meeting was Lloyd C. Blankfein of Goldman Sachs, Mr. Paulson’s former firm. Mr. Blankfein had particular reason for concern.

Although it was not widely known, Goldman, a Wall Street stalwart that had seemed immune to its rivals’ woes, was A.I.G.’s largest trading partner, according to six people close to the insurer who requested anonymity because of confidentiality agreements. A collapse of the insurer threatened to leave a hole of as much as $20 billion in Goldman’s side, several of these people said.

Days later, federal officials, who had let Lehman die and initially balked at tossing a lifeline to A.I.G., ended up bailing out the insurer for $85 billion.

» Read more


Dollar Intervention Risk 'Meaningful'

Sunday, September 28, 2008, 10:17 PM

Having watched the currency markets for long enough to know, I am certain that they are among the most regularly interfered-with of them all.  

In this article it is openly speculated that perhaps a joint support of the dollar is in the works:

Sept. 29 (Bloomberg) -- A growing number of currency traders and strategists are starting to speculate that finance ministers from the world's biggest economies will join to support the dollar.

"We're getting closer to the right conditions for authorities to step in and prop up the dollar,'' said Maxime Tessier, who manages $151 billion as head of foreign exchange in Montreal at Caisse de Depot et Placement. "The nightmare scenario will be a wholesale loss of confidence in the dollar.''

"The central banks of the world have embarked on all sorts of extraordinary interventions,'' said Stephen Jen, the global head of currency research at Morgan Stanley in London. "Currency joint intervention would be the least surprising. And it would probably be the cheapest.''

Link (Bloomberg)

I find it remarkable that they did not find a single quote from somebody who thought that the 9% gain in the dollar against the Euro was already a clear sign of manipulation.

To me it is utterly improbable that the dollar rose, even as the US lost all but two of its investment banks, bailed out its largest insurance company, and suffered the largest bank failure in history. To explain this, I have to assume that whomever was buying the dollar and selling the Yen and the Euro was doing so for reasons that were not economic in nature.

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Breaking news! Bailout turns ugly (satire, obviously)

Sunday, September 28, 2008, 7:35 PM