One sure thing on the economy: Nobody knows anything
Wen Jiabao: America's banker is a little worried
The great screenwriter William Goldman once wrote, apropos of the movie business, that “Nobody knows anything. Not one person in the entire motion picture field knows for a certainty what’s going to work. Every time out it’s a guess.”
The longer the nation’s economic crisis goes on, the more apparent it becomes that nobody knows anything about it, either. We’re not the first to make this observation, but the events of the past week underscored its truth.
Nationally, comedian Jon Stewart spent the week gleefully beating up on the CNBC financial network and its star financial analyst, Jim Cramer, for passing out bad advice. Locally, after his firm was sued for misleading investors about the safety of something called auction-rate securities, Ron Kruszewski, CEO of
Jim Cramer, Nobody Knows Anything Poster Child
Stifel Financial Corp., replied, in effect, that we just sold them, we didn’t know what they were.
We’ll give him points for honesty, but that’s not something you really want to hear your financial adviser admit.
There was a lot of dancing in the dark going on in the last two decades. The Federal Reserve board said Thursday that the net worth of U.S. households declined by nearly 18 percent in 2008. That amounts to $11 trillion in wealth that simply disappeared.
Much of it, as we’ve come to understand, was ephemeral, driven by a housing bubble built atop exotic collateralized debt obligations designed by “quants,” quantitative analysts who used mathematics to create risk profiles that turned out to be bogus. “Beware of geeks bearing formulas,” said Warren Buffett, the investment guru who personally lost $25 billion last year.
Now these CDOs are known by another name, “toxic assets,” plaque on the arteries of the international banking system, choking off the flow of credit and making the people who financed this spree — foreign investors — a little nervous.
On Friday, America’s biggest creditor sent a shiver up Wall Street’s spine. Wen Jiabao, China’s prime minister, said at his semi-annual news conference that “We have lent a huge amount of money to the U.S. Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried.”
America doesn’t even want to think about what happens if China starts unloading its $1 trillion in Treasury bills and other assets. For that matter, China doesn’t want to think about it, either, which gives us a little breathing room.
In a way, this is the end result of what happens when we refinanced our homes so we could buy all those Chinese-made plasma TVs and Japanese cars. The mortgage company repackaged our mortgage into CDOs and sold them to banks, who then bought insurance for them in the form of credit swaps issued by AIG.
Now nobody knows anything: Not the value of the credit swaps, the value of the CDOs, the value of the banks or the value of our homes. So we continue printing and borrowing money to bail out banks and AIG because, we’re told, if we don’t things will get a whole lot worse.
This is the Gordian knot that President Barack Obama and his economic team must untangle. No wonder they’re moving slowly. Wall Street is apoplectic at the thought that big banks will nationalized, that somehow the people and institutions holding all those toxic assets are going to get short-changed. Congress is apoplectic that it will have to spend another trillion or so bailing out the same people who started this mess or else see credit collapse and bring on the second Great Depression.
Fed Chairman Ben Bernanke and Treasury Tim Geithner were at pains last week to reassure the markets that a middle ground is being sought. Thus the markets rebounded a bit.
Someone, however, will get stuck holding the bag. Nobody knows anything, but the guess here is that it will be the taxpayers.
Yes! We’re all agnostics, in relatively nearly all matters, including economics. No one knows for sure the sun’s light will shine on our continent tomorrow.
Nobody knows anything, so let’s borrow and blow a trillion dollars. Makes sense to me.
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China should be worried about their dangerous over investment in US Treasury obligations. Washington’s long-term choice is either repudiation or monetization. For monetization to be effective, the depreciation in the dollar would have to be substantial and this in turn would dramatically raise prices of imports for American consumers which would mean a tremendous drop in foreign imports. Debt monetization would cause more disruption to exporting nations than selective repudiation of Treasury debt.
Washington has bailed out the banks, Wall Street & their Washington special interests and much of the cost is added to the national debt to by paid by this and future generations while real estate and investments continue to fall. Find out what a growing repudiate the debt movement could mean for treasury bonds, the dollar, gold and the stock market.
The Campaign to Cancel the Washington National Debt By 12/22/2013 Constitutional Amendment is starting now in the U.S. See: http://www.facebook.com/group.php?gid=67594690498&ref=ts
Thanks, Ron Holland
Americans pay for their stupidity.
Instead of electing Ron Paul who both saw this coming and had the plan to cure it, Americans chose to jerk off about keeping troops in Iraq or were spellbound by Oprah’s fascination with a decent, yet completely inexperienced guy who happens to give great speeches.
THANK YOU TO ALL THE IGNORANT AND DUMB VOTERS OF THIS COUNTRY. I THANK YOU FROM MY PITIFUL APARTMENT.
I find it odd that the Post has put John Stewart in two editorials this week. The guy is a comedian and the purveyer of comedy-news which according to one survey is the source of news for 30% of young people, who will have no David Brinkley or Walter Cronkite and do not read newspapers. I find that sad. His pimping of Cramer, another Ivy League member of the “smartest guy in the universe” club, an Obama supporter who now says, “I didn’t get the Obama I thought I was getting” may be entertaining, but. so what? Pujols only hits three out of ten. The Post endorsed Blagovovich. I’ve invested in dogs and even believed GW Bush was a conservative. Comedy isn’t going to get us out of this mess.
Hopefully, Congress will continue to press the SEC and FASB to modify “mark to market” accounting rules which along with its treatment of expensing stock options was the match that started this fire several years ago. It smoldered for a couple of years and then caught fire last year. There were other matches, one that no one ever mentions anymore is the $4.00 price of gas. How many people with a $600 a month note couldn’t make it when they were spending $200 a month more for gas? Funny how that has been lost in the storm. These “toxic” assets are worth someting. I had lunch today with a couple of smart young guys who are out bidding on these assets and they are buying them for around 20 cents on the dollar and laughing, just not all the way to the bank because they are actually buying them from the bank. If you have cash today, you are the bomb.
After nearly 30 years of “deregulation” in the “markets”, financial and food, we have now generated “toxic” assets both financial and food.
And the RNC and other “free-marketeers” (read the more accurate “freebooters”) are recommending more deregutlation, after all it is only the poor and middle class who suffer.
R,
If you are referring to “mark to market”, it is not that there should be less regulation, but correct regulation. This change in regulations by the Federal Accounting Standards Board post Enron forced companies to present a different picture of their health that was not always accurate.
Today, banks are being required to value market rate securities, auction rate securities, CDO’s etc. at zero because no one is buying them right now. That does not mean they are worth zero. If you have a bucket of mortgages, even a bucket full of low rated mortgages, some will fail, some will perform, albeit with late pay and some will be fine. So, as these assets mature, banks will get something, admittedly less than the face value, but they will get some cents on the dollar. If these could be presented this way, instead of zero their balances sheets would be more accurate and would look stronger than they do now. That’s not less regulation, but more accurate regulation.
This was the best synopsis of the economic situation I’ve read so far and it ends almost prophetically. The taxpayers are bound get stuck paying for the folly of wealthy bankers that should probably be in prison if not the victims of lynch mobs. What amazes me is the dimwits that defame the Presidents efforts to bring investor confidence back and instead, demand more of the same economic scenario that brought this disaster in the first place. It’s like saying John Wayne Gacy was only interested in poplulation control and gee, whatta guy!
Quit blaming politicians, and bankers and rich people for the economic mess. Look out in your driveway, look in your closets, look at your shoes, look at your appliances and see where you are spending your money. If you’re sending your money to a foreign country, YOU ARE THE PROBLEM.
Joe Shmoe… I’m curious: who did you want as the next president back in 1992? Because people elected Clinton (choosing to go with the whole blue-skies-right-around-the-corner routine) when Tsongas was the only candidate who was leveling with the American public. He made it clear we’d have to really buckle down for our country’s long-term gain. But, of course, the American voter never wants to hear that. The American voter always wants to take the road of easy, immediate satisfaction. Now, Obama’s charged with cleaning up this entire mess, the majority of it caused by our last intellectually-challenged president, who shouldn’t even be given the task of presiding over a child’s ant farm.