I have an idea: LET'S SCARE THE CONSUMERS AS MUCH AS POSSIBLE. Then tomorrow we can run a story about how the economy is tanking because consumers are scared. I know it's bad, but, this "Great Depression" talk isn't helping anybody.
What’s aggravating is I just pretty much save my money, put it in T-bills or triple A rated bonds (municipal or schools), and I’m going to get hosed? I’ve got fiscally conservative friends going “Jesus, Smed, what’re you stuffing it in your matress?”
The sweeping change to two decades of tax policy escaped the notice of lawmakers for several days, as they remained consumed with the controversial bailout bill. When they found out, some legislators were furious. Some congressional staff members have privately concluded that the notice was illegal. But they have worried that saying so publicly could unravel several recent bank mergers made possible by the change and send the economy into an even deeper tailspin.
There is a common error with contrarian investing. It is not a question of identifying things that people believe that are wrong, but finding things that people rely on that are wrong. Reliance is the critical component. I don’t care about what people think if they don’t have any skin in the game. When someone relies on a certain result happening (or not happening), then there will be series of behaviors that happen as what he believes in fails, from intensifying the bet in the early phases, to throwing in the towel in disgust at the end.
I’m going to take this idea and twist it a different way tonight. One thing that the Democrats and Republicans (except Ron Paul) agree and rely on is that they know how to avoid a repeat of the Great Depression. The textbook answer is:
Don’t Raise Trade Barriers
Ben Bernanke learned this as a young college student, and built it up in his Ph. D. dissertation. He has the same moral certainty about this that George Bush, Jr. does about fighting terrorism. And, I’m going suggest that Bernanke, and most of the political establishment (which hasn’t really changed in the last few days) are wrong.
What is a bubble? My definition: a bubble is a self-reinforcing cycle where monies invested obtain a negative return in aggregate over the long haul. It is characterized by significant borrowing at low rates to invest in already appreciated assets in order to profit from a momentum-driven market. When cash flow is insufficient to pay the interest to finance the bubble, the bubble pops, and a self-reinforcing bear market ensues. When that bear market encompasses most of the financial system, we call it a depression.
What is a depression? A severe recession where the banks are impaired. In an ordinary recession, lowering the Fed funds rate can stimulate the banks to lend. Not so now; the banks are licking their wounds, and letting profits grow by financing at lower rates, and sucking in bailout cash to shore up their balance sheets against future real estate lending losses.
The Great Depression ended when the Debt to GDP ratio dropped below 150%. When enough debts were extinguished by payoff or default, the system could once again be normal. Virtually none of the efforts of FDR focused on eliminating debts; in my opinion, he lengthened and intensified the Depression by not encouraging the liquidation of bad debts. And now we do the same thing. We perpetuate the misallocation of resources by trying to keep house prices high, by bailing out institutions that should go through the bankruptcy process. This fails to convert bad debts into equity in newly solvent businesses.
All the US government is doing is creating a bigger bubble. What will happen when the Treasury auctions fail, or, stretch the yield curve so wide that there is panic. We don’t want our financial institutions to fail, so we are willing to wager the creditworthiness of the nation in order to save them. I don’t like that bet. Many empires have died choking on debt. Is the US to be next?
One of the great lessons [of investing] is beware of platitudes, such as "There has never been a national decline in home prices." If you believe that there has never been a national decline in home prices and that there never could be, then you bid home prices up to levels that don't allow for the risk of widespread losses, because you concluded it could never happen. Then the fact that they are at those new high prices introduces, in itself, the risk of a national home-price decline.
So the actions of people relying on history change history, and that is what people lose track of. [em added]
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