17 thoughts on “The Confusion”

  1. From the 1970s’ Hee Haw:

    “Gloom, despair and agony on me-e!
    Deep dark depression, excessive misery-y!
    If it weren’t for bad luck I’d have no luck at all!
    Gloom, despair and agony on me-e-e!”

    Remember the number to call is BR-549!

  2. He doesn’t use the term “confusion,” but “frustration” and “panic” cross Paul Krugman’s lips [1]:

    Many analysts agree. But among people I talk to there’s a growing sense of frustration, even panic, over Mr. Obama’s failure to match his words with deeds. The reality is that when it comes to dealing with the banks, the Obama administration is dithering. Policy is stuck in a holding pattern.

    Here’s how the pattern works: first, administration officials, usually speaking off the record, float a plan for rescuing the banks in the press. This trial balloon is quickly shot down by informed commentators.

    Then, a few weeks later, the administration floats a new plan. This plan is, however, just a thinly disguised version of the previous plan, a fact quickly realized by all concerned. And the cycle starts again.

    I remember watching He-Haw re-runs on the small antenna TV upstairs, at my grandparents’ farm.

    [1] http://www.nytimes.com/2009/03/06/opinion/06krugman.html?em

  3. i think the banks “misunderestimate” obama. well, truthfully, i think obama overstates the problem to some degree.

    the banks are playing chicken. their argument:

    “if you nationalize one of us, you bankrupt all of us. a cascade of debt rating plunges and defaults will ensue, which will finally make what almost happened after lehman finally happen after whoever it is you nationalize.”

    this leaves obama with few options. a) nationalize and run risk of total financial collapse; b) wait for banks to bleed a little more and allow traders to unwind deals with the sick or dying, then natlionalize; c) declare that there never will be any nationalization and prop the banks up no matter what.

    i actually think the obama administration is doing b). and i think krugman knows it, and that is why he is providing political cover for them from the left (et al).

  4. i should mention, i don’t think the risk of total financial collapse is really that high. i think it was in sept of 2008… i think it isn’t now. there is approximately 9T in cash in the US alone, on the sidelines right now. last fall is was about 7T.

    asia and EU each have about 10T split between them. last fall, their combined number was 5T-ish.

    we went from 12 to 20 in cash in a couple of months. all combined, this cash amount is the greatest amount of liquid wealth in the history of the world. never before has so much cash been on the planet. it is a staggering sum of liquidity just waiting to burst damn.

    in my view (and again, i’m heavily biased), this close to 20T (an extra 8T from fall), represents the largest vulture fund in the history of the world. everyone of these pennies (at least half of the full amount) will be attracted to distressed assets or distressed debt.

    there are plenty of banks in the US that are nearer to solvency than insolvency. these will be the banks that receive a great portion of 10T or so that is just sitting around in a stew right now.

    the problem is, the damn will never burst until a major bank is nationalized. once that happens, there will be some serious selling like you’ve never seen before, but the smart money will start trickling back in and will quickly reach a critical mass.

    i would expect within 90 days of total market capitulation and the first major bank nationalization, about 6T of cash will be invested in distressed assets of various kinds. and with that amount of investment, you’d be hard pressed to call the assets distressed.

    in other words, i think there is plenty of capacity to deal with a major bank nationalization in the money markets at present. i think that had this happened in the fall, you’d be talking about 1-2T of distressed investment post-capitulation.

    i think the markets are ready for this now. i just don’t think obama has the political clout to pull it off yet. he needs more selling in the financial sector.

  5. Well, I think he’s doing c. Why? Cause it rhymes with C.

    You do not agree with commentators who say up to 49% equity is effectively nationalization?

    If vultures get hungry enough, they will try to eat warm, quivering flesh.

  6. tdaxp, historically they actually called this situation a panic. Thinking that caused too much panic, they switched to something less panicky: DEPRESSION.

    This is a panic. It’s way over the top.

  7. Fed X,

    Well, I think he’s doing c. Why? Cause it rhymes with C.

    Let’s hope so!

    You do not agree with commentators who say up to 49% equity is effectively nationalization?

    Effectively in some ways, not for other.

    The greatest percentage decrease in the value of an investment is from 1% to 0%.

    sonofsamphm1c,

    tdaxp, historically they actually called this situation a panic. Thinking that caused too much panic, they switched to something less panicky: DEPRESSION.

    This is a panic. It’s way over the top.

    Certainly the market is perpetually irrational, and so arguing for irrationally low prices should be right, say, half the time.

    You’ve been making a qualitative argument along this line for a while. However, does anything back it up?

    As assets of all sorts have declined remarkably in value over the past year, why is there any reason to think that the value of MBSs should be higher as a percentage of bubble-value than, say, oil, especially considering that (unlike oil) the total value of a mortgages can be lost, as a ruined house is worth less than the value of an empty lot.

  8. Well, I would say vultures perched on the high wires with 20 trillion cash dollars stashed under their wings indicates the carcasses are highly desirable to somebody. They just have to be convinced the price is only going to get higher in the future, and they will happily swoop in to commence their glutinous feast.

    Old horse trading rule: never leave money on the table.

    My DNA captured Mt. Suribachi. I’m for the USA.

  9. Of course, the average investor in cash right now is not a vulture. they are a scared little field mouse. but you get the pic right i think.

    we have an unprecedented amount of distressed debt deals getting floated right now. but a lot of people are passing. why? terms? no. terms are fine. everyone wants a slice of the big action: banks and autos. when one of those goes down, a floor will be found in distressed finance, and everything is cyclical from there.

  10. there has been talk of housing destruction and “greenification” of the burbs via grants and federal work projects. if we get too far north of 10%, i think that is a strong possibility. give people jobs tearing down the homes that we gave mexicans jobs to build.

    but i don’t see us getting that far north. in the end, what is happening is what has already happened: the midwestern industrial heartland is emptying out.

  11. Fed X,

    Thanks for the comment.

    there has been talk of housing destruction and “greenification” of the burbs via grants and federal work projects. if we get too far north of 10%, i think that is a strong possibility. give people jobs tearing down the homes that we gave mexicans jobs to build.

    The same meme has been going around the comment threads here.

    It’s interesting to hear such class-war rhetoric from the speculative class. Better to keep our equity, than allow you to live in a house!

    but i don’t see us getting that far north. in the end, what is happening is what has already happened: the midwestern industrial heartland is emptying out.

    You could leave out “industrial,” and the sentence is still true. About ten years ago Governor Janklow offered to tear down abandon buildings in small town for free — the population base has been shrinking since the 1930s (excluding the rise of Sioux Falls), and many structures sat abandoned until they were uninhabitable.

    A chalk-rock house in a small town I’m familiar with was on the market for $5000, last time I checked.

  12. “It’s interesting to hear such class-war rhetoric from the speculative class. Better to keep our equity, than allow you to live in a house! …” tdaxp

    tdaxp, nobody is disallowing homeownership. Houses are still selling. In January, 29458 houses sold in California, a very significant 53% year-to-year increase. Sales are up in California because of significant loss of value; they are asking far less.

    We just went through 8 years where practically anybody could buy a house. It didn’t work very well.

    Obligatory South Dakota note – my father’s former ranch by Gann Valley had two cattle baron mansions -probably dating from early 1900s. One rotted into the ground. The other became a dwelling at a Hutterite Colony.

  13. sonofsamphm1c,

    tdaxp, nobody is disallowing homeownership

    The whole plan of destroying houses is to reduce the number of people who can buy houses, forces competition over less resources to raise the price.

    We just went through 8 years where practically anybody could buy a house. It didn’t work very well.

    Indeed. A variety of techniques (fraud on liar’s loans, the criminialization of some GIS applications, etc. [1]) served to warp the market.

    However, while the last few years allowed anyone who was willing to lie to buy a home, destroying housing stock has the effect of preventing those who would otherwise be able to buy (or at least rent) a house from doing so.

    Obligatory South Dakota note – my father’s former ranch by Gann Valley had two cattle baron mansions -probably dating from early 1900s. One rotted into the ground. The other became a dwelling at a Hutterite Colony.

    I will need to take pictures, next time I am up, of the two no-longer-lived-in great houses on the country road, to my grandparents’ old farm..

    [1] http://www.tdaxp.com/archive/2008/12/24/did-geographic-ignorance-accelerate-detroits-decline.html

  14. I’m not an advocate of home destruction-unless it is substandard housing – slums, and I’ve been on that for a long time. So I think we agree that tearing down new houses is not the way to go. In Dallas, more than a decade ago, the argument was put forth that seeding the suburbs with former slum dwellers would significantly devalue the suburbs. Ironically, now it might help stabilize values.

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