Last week was a remarkable week for an economist. Short selling of stock were halted and financial markets are effectively frozen and losses of big financial institutions are socialized. We witnessed how Lehman Brothers was filing for bankruptcy and finally bought by Barclays.


This is not surpricing for economists that have followed these sites

1. Crosscurrents August 2008
2. Elliott Wave International: Expert Market Forecasting using the Elliott Wave Principle

since 1999.

Links:
Morning Brief: The $700 billion dilemma | FP Passport

BusinessWorld Online: Corporate Watch By Amelia H.C. Ylagan: "Banca rotta"

AFP: End of era as Goldman, Morgan Stanley agree overhaul

elliott wave - Google News

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I think the concept has backfired and the stock exchange is heading further downwards

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At least the persons behind the two links mentioned above (1. and 2.) will agree with you as far as I know.

Fareed Zakaria has written an interesting book "The Post-American World" and make some interesting interviews.

I watched this interesting yesterday where the video may be included later.

Facts: http://www.interbrand.com/best_globa...px?langid=1000

My own opinion.

1. This is not a characteristic of a market bottom.
2. Governments can postpone and hopefully soften the developement but it is difficult to control the social mood.
3. When everybody hates the market and there is silence, you may be close to a bottom.

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The rotters left CTABUK off the list

We feel that the real crash will be in October.

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Essentially from what I have been reading the government is going to set up the equivalent of the Resolution Trust Corporation which existed during the S&L crisis. This entity will buy up bad debt, which, from what I have read is mortgage debt gone sour.

In any event I just find this amazing because mortgages are fairly well secured. First they're secured by the debtor (who has apparently defaulted), then they are secured by the land/property (which apparently has declined in value), and, at least in the case of sub prime loans where the debtor put up less than 20%, the loan is further secured by PMI which is essentially mortgage insurance that the debtor pays to the lender for the benefit of the lender. (What were all of these people paying PMI for to begin with?); essentially between foreclosure and the insurance company, that just isn't enough, they need the government bailout too.

It seems that the markets have become prone to bubbles; whether its stocks, housing, commodities....

I opine that the root of the problem is wanton speculation.

To reign in speculation, I suggest increasing the short-term capital gains tax. As many of you know, if you hold an asset for less than a year, its essentially taxed like income. If you hold it for longer than a year it gets taxed as a long term capital gain (which is a much lower rate). Housing is an exception because you must hold it for two years and you get an exemption on your primary residence of up to $500K for a couple and $250K for a single individual.

Notwithstanding, the rules could be changed to lengthen the time to qualify for long term capital gains and/or the rate on short term capital gains can be increased.

I suppose the 'they're too big to fail' argument works, but this bailout seems to be becoming a habit....

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Oh, and by the way, when the government says $700 billion, multiply by three, they don't know how to estimate costs. Guaranteed, five years from now it'll come in at over $2 trillion.

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IMO a good proposal.

1. A new story under the headline "the end of the titans" Goldman Sachs and Morgan Stanley are being transformed from investment banks to traditional banks regulated by the Federal Reserve System. This reminds me of the Norwegian Banking crises where some went bust and others were take over by the Government for a periode.
2. Sometimes, in extraordinary situations, markets must be tamed.
3. In my opinion prioritizing are important. Since losses are socialized a sort of insurance system are imposed on the part of the population that can stand it via the tax bill.
4. It should be possible to make a temporary Financial institution backed by this social insurance system - the tax bill - that buys the bad loans in the housing sector so ordinary people can keep their homes.
5. Individual plans must be made so that it is possible to pay the periodic annituities until the sitution (that still may last for years) gets better.
6. That was done after the war here in Norway. Den Norske Husbank was invented for social house building. Loans were granted on an individual basis based on needs.
7. Now a similar bank / financial institution can be invented so people can keep their homes.
8. Message, don't only socialize company losses, but losses for the average citizen as well.
9. I have seen that some short selling has been halted. May be a tax should also be imposed on such transactions as long as it is needed.
10. So prioriticing correctly is important. No nation has so many Nobel Prize winners as the USA, so you should have the availble brain power to get out of the crisis. Political ability or will is another story. What happens in your country will have transmission effect to the rest of the world. The worlds monetary system is tightly integrated.

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Yes, they filed to become holding companies so that they can take deposits from people.

The person they need to put in charge of this fiasco is obvious to me. Governor Jon Corzine (my state, NJ).

He's been spending his term touring NJ trying to convince voters that the tolls need to increase on the NJ Turnpike and Garden State Parkway. Frankly, governor of a state is a job beneath his talents.

He's a former co-chairman of Goldman Sachs.

His business credentials should appeal to Republicans, his party affiliation to the Democrats.

Since this obviously will take a bipartisan effort, and both Republicans and Democrats have indicated support for the bailout; the man to spearhead the effort, ie. the bailout 'czar', should be Corzine.

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I tend to agree, the purpose of free markets is to find that 'optimal' market equilibrium price. If prices are fueled by speculative bubbles; it sends incorrect price information to economic decision makers (ie. we don't know if we're coming or going!). Oil's rise to $147, then down to $92 really illustrated this point. There shouldn't be sudden 50% price swings when supply is relatively stable.
That is correct, it will come from the 'general fund' meaning that we will all pay in accordance with our contribution to the overall tax bill. What bothers me is that these costs have already been socialized with the 'PMI' (albeit private insurance). To a certain extent its almost as if the general tax fund is being used as a massive 'last resort' re-insurance company.

This is what they are going to do. They will set up the equivalent of the Resolution Trust Co.

I'm not sure what you mean here. Any asset that is continuing to pay isn't going to be sold since by definition, its not 'bad debt' - if the bank owns some sort of annuity that isn't paying, they will sell it lock, stock and barrel to the federal institution.

They have similar programs here. If you look at the focus of HUD (Housing and Urban Development), they will guarantee certain loans made for the construction of low to moderate income housing.

The best they're going to do is to convert ARM mortgages into conventional mortgages. If the individual still cannot pay the mortgage, they will probably (at best) permit a 'short sale' meaning, essentially they will let the house get sold below the actual mortgage amount and let the homeowner walk away.

The funny thing here is that this is actually the realm of the various state governments. Its not under state control. Different states will do different things. At one point in time, California did not permit what are called 'deficiency judgments' - what this means is simply. Let's say you have a house for 500K, you also borrow 500K to buy it. The house declines to 400K in value (you still owe 100K). Now you lose your job and can't pay; the bank forecloses. You lose your home and technically you would still owe 100K on the mortgage. In certain jurisdictions, this isn't permitted and the cost of 'deficiency' judgments is spread automatically across the market since it ostensibly costs more (in intangible risk) to issue mortgages to homeowners.

PMI is also supposed to secure the loan. Although its private insurance, it doesn't make it any less collective in nature.

If you want to make a bet, go to a casino. You should not be betting for negative outcomes. Essentially be short selling your betting that the price of a certain stock will decrease. This is ludicrous. Your choice of a stock should be based on the underlying fundamentals. If you don't think the companies' fundamentals justify its price, you simply shouldn't buy it.

I understand your point, the person will need to be intelligent of course (my choice would be Corzine), but really there is going to need to be some sort of institutional addjustment and the person will need the ability to manage an institutional solution capable of forming consensus not only with Congress, but also the financial community. At the end of the day its going to be difficult to find an equitable solution that balances the needs of the financial community, the affected homeowners, and the taxpayers.

The political will will be there, from what I have read, the Democrats are in (critical of the situation of course, but apparently understanding that its necessary)

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May be the Norwegian word "annuitet"=interest + part-payment, is different from the American / English word annuity.

At least there is:

• Annuity (US financial products - Wikipedia, the free encyclopedia)
• Annuity (European financial arrangements - Wikipedia, the free encyclopedia)

an US and an European meaning of the word.
Aside from obvious spelling errors, I simply mean:

1. The representative house owner (individual) should get an arrangement so it is possible to pay the monthly or quarterly interest + part-payment on the house loan. Part-payments may even be set to zero for a longer or shorter periode.
2. A private profit maximizing financial institution will increase the interest rate for bad loans. That may be one root of the problem in the short run.
3. As economists we know that in case of externalties (e.g. like extraordinary market situations and periods of financial fragility) there may be a large difference between the social and the private optimum. For that reason, a governmental institution could set a lower price of loans (that is interest rate) than a private institution would take.

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Now, I understand, you're just referring to the stream of mortgage payments as an annuity. You're correct, essentially it is an annuity (for the bank). Usually I think of annuities as something that you buy from the bank and then they pay you a stream of payments.

Nevertheless, what you described is, at least in some small measure, a part of the problem. There were people who were taking interest only mortgages (never pay anything against principal), for say, the first three years. These were the 'adjustable rate mortgages' with 'teaser' rates. Well, when the adjustable rate began to adjust, UPWARD, and the value of the home declined, well, now you see where the problem is.

And yes, there is at least some talk of just simply converting these mortgages into fixed mortgages. Banks have been signing off on 'short sales'

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1. Start taking Elliott Wave analysis serious: Interesting reading Robert Prechters: "The Elliott Wave Theorist" August 15, 2008.
   "We continue to believe that, by the end of this bear market, money - whatever of it survives - will be king".
   
   The main problem is not the stock, but the credit market. Elliott meant the the stock market would reach it's top in 2012. That is even possible if you know what an expanded flat is. According to his theory, it will not be similar to the 1930 correction.
2. Our background written in 2004 / 2005.
   
   "The personal view of me, who have written this page.
   
   There are two candidates to the Nobel Prize in economics, Ralph Nelson Elliott (post mortem) and Arnold Zellner".
3. Personal view: This is not about democrates, republicans, USA, Europe, Asia. It is about social mood of homo sapiens - in short mass psychology.
   
   

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9/11 -

http://www.nypost.com/seven/02052007...m_topousis.htm

$3 billion

http://www.usatoday.com/news/sept11/...1/pentagon.htm

Pentagon repairs - $700 million

Four Airliners

Assuming Boeing 737 Next Generation - $50-$85 million per unit = $340 million

Now of course the absolutely tactless part is placing a value of lives. I have read that the EPA places an internal value of a life at $8 million. In other words, if the cost of regulation can save lives at an $8 million per life saved rate, they consider it efficient, if not, then they consider the regulation burdensome. Nevertheless, we'll say 3,000 * 8 million = $24 billion

TOTAL DIRECT COST OF 9/11 = $28 billion

Now of course there are other factors and major indirect costs, but in response to this we sent an army half way around the world.....Wall Street makes Al-Qaida look like mostquitos.

I'm not trying to belittle 9/11 - just really ticked off about this bailout thing...in case you haven't noticed....

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I think this article supports your position: Herd mentality rules in financial crisis - Yahoo! News

Seems we're no better than lemmings after all

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Herd mentality is an important element in the Elliott Wave fractal / principle.


Yesterday, the USA market lost 1.2 trillion USD, the greatest one time loss in history. An Elliottician will say that the bottom is reached once the pattern is complete at the relevant wave degree. It may take some study to understand that. EWI has the following related sites:

• Socionomics Institute
• Elliott Wave International - Elliott Wave Dot Net

"Sector deflation" is now a fact in the housing and the stock market. Purchasing power is eroded and the deflationary press may become general. I see that there is some vorry on Cnn that China will withdraw their investment from USA. European banks are already being bailed out and the global credit crisis has triggered the rescue of five leading European banks and a near-shutdown of the region's credit markets. This is starting to look ugly. With a background in nonlinear mathematics, fractals and chaos things can develop fast.

Look at the first chart of this http://www.cross-currents.net/charts.htm market mania, and you will see that it started around the middle of 1995, Bill Clionton's presidental periode in USA.

Now it is much more serious, the housing and the financial system are at risk. One good reporter at Cnn said. The credit market is a great machinery that lack oil, that is money. Is this and what is happening in Europe the tip of the iceberg?

The question now seem to be. Shall main or wall street or both if any be bailed out?

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In my mind, I am pinning this on Greenspan. He lowered the rates to historic lows in the wake of 9/11 - this fueled the housing boom. People saw great rates and they took them. As long as the housing prices were increasing, no worries, if you couldn't afford it, just sell it and walk away with the profit.

People actually saw this coming a mile away - and did nothing...people saw the value of homes increasing faster than income. Logic dictates that at some point there is going to be a sticky point where the disposable income just isn't there to support the mortgage.

Now we're of course in a situation of extreme volatility. Very dangerous. Nobody knows the actual value of anything, not the dollar, not oil, apparently not the stocks and certainely not the mortgages.

How can economic decision makers make rational decisions in such an environment?

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But what happened in Europe (see above links)? Was it an effect of the frozen US credit market or deeper fundamental internal causes? Institutions are responsible for their own corporate and credit risk.

Yes as long as the markets lack a clear direction. I think it does not lack direction for an elliottician.

At least, there is a good book "Buying and selling volatility" that explains how it is possible to succeed in a volatile market.

There are people and fund managers with cash. Once they find more permanent value, some of them may enter the market.

On Norwegian News. Anglea Merkel says that it is up to the USA to fix the markets. I think that is a too simple story.

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I will defer to you on this one, inasmuch as you are 'closer' to the situation and most likely pay more attention to it. Nevertheless, I would say that its plausible that the banks in Europe are suffering because their portfolio of dollar denominated assets has decreased in value, in some instances in absolute dollar terms, and in other instances solely in Euro (or Pound/CHF/Kroner) terms.

A quick chart only goes back to 2003. But I was actually in Europe in 2001, right after 9/11, but before Greenspan lowered the rates. I assure you $1 bought more than 1 euro. Now of course, the exact opposite is the case.

Nevertheless, if you were a European in 2001 and you bought a $1 US Security (impossible of course), you probably would've paid about 1.10 euros for the asset.

Even assuming that the security earned interest and you were able to sell that particular asset (in dollar terms), for say $1.40, you'd still only have an asset that is valued at a euro (essentially you lost .10 euros in the example)

By lowering interest rates, Greenspan puts significant downward pressure on the dollar.

I'm not sure exactly how European central banks responded, but I am sure that a euro/dollar exchange rate of 1.60E/1USD would make many European exporters concerned-->this peak was relatively recent before the recent resurgence of the dollar....

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I miss a deeper analysis of what happened (happens) here.

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Yahoo!

Nice video explaining it clearly....

First time I heard the 't' word uttered (trillion)....

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I watched some of the videos.


What would happen if nothing is done? The credit market will implode. I have never heard that word used about a market. Aside from that, I did not see an explanation of what happened in Europe. There are two terms that are used in empirical finance:

• heat wave effect
• meteor shower effect

The heat wave hypothesis assumes that volatility has only country specific autocorrelations, while the meteor shower hypothesis allows volatility spillovers from one market to the next. So this credit / financial crisis is most probably a meteor shower effect.

Links:

Where Does the Meteor Shower Come From? The Role of Stochastic Policy Coordination

http://www.frbsf.org/econrsrch/workingp/wp99-09.pdf

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I was skyping a good buddy of mine - the infamous Kevin Riley - he lives in Osaka in Japan and he told me that recession is already there. 3 Banks have gone, empty apartments, building projects scrapped and sites left abandoned.

$700 Billion is a sticking plaster over a mile long cut. It was greed that caused it and only one Country to blame. The USA - We had USA Lenders here paying massive procuration fees to brokers who were encouraged to break UK Law on Mortgage selling (I am a UK Broker and fought against it with National Press) they door to door canvassed and sold loans to people who simply could not afford to pay it back. There will be a crash and $700 Billion is in fact nothing more than a money printing exercise - and thet will create more doom and more gloom - not immediatly, there may even be a celebration period - but give it 6 months.

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Bailout, rescue... quite frankly I don't care what you call it it's little more than putting a small bandaid in something that requires stiches.

Anytime you remove the possibility of "failure" from the equation you remove something I believe to be critical to the decision making processs. Folks who believe that they are not going to be "allowed" to fail will do stupid things. I think we're seeing what's been over a decade in the making come to fruition.

My biggest issue with this whole "package" is that it depends upon the very same folks who caused or escalated this problem to begin with, not to make the very same mistakes again with no additional incentives or changes to disuade them from doing so. Greed is a powerful motivator and likely the most powerful influnce if folks believe that they're not going to be allowed to fail.

We even have banks not willing to lend to other banks. What does that have to say about the faith they have in their very own practices? Deregulation passing in 1999 literally allowed the financial sector to further invest in their own investments. Literally, banks loaning money and then investing in the securities of the very same money the loaned. No diversity. This adds up to one sector dragging all the others down with them with any downturn. One large basket and a whole lot of eggs and now that basket has a gaping hole in it.

Dave

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House prices are now falling here too and for the first time in four years, house prices are falling in Singapore ("Asia's Switzerland"). It is a global problem.

I agree with David, USD 700 Billion is not enough to fix the problem. My own view is thay the biggest risk takers should go bust. Here the bad house loans (subprime mortgages) are compared to a man selling apples. He sells a box of rotten apples covered with a few good covering the top layer. Lehman Brothers had tons of mortgage backed securities that fell in value as house prices started to fall. Some of these loans were pushed by aggressive sellers / financial (dis)advisors.

The most critical issue is that the (global) credit market must function for the economy to function. So

1. Let the most irresponsible institutions / companies go bust. That is how a capitalistic system functions. There should be no free lunch. High risk has a high price.
2. Central banks must supply the necessary liquidity to the more responsible and risk adverse institutuions.

In my view, global deflation may now be a more serious threat than inflation. Sector deflation is a fact. There are downward pressure on energy prices and food prices may follow. Then it is a question of time before US domestic deflation is a fact and like a meteor shower it may spread across your borders to become a global problem. Cash is king in times of deflation.

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We all appear to agree - that is cool. What is needed is for someone to listen to George Soros

http://www.guardian.co.uk/business/feedarticle/7842492

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Agree.

Let's also not forget that in the US lenders are required by federal law that a certain percentage of their loans be high risk. I believe it's around 30%. Now, I understand the principle behind it but let's face it, some folks/businesses should simply not be extended credit. This needs to change.

Dave

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I agree, if you're in the business of extending credit, you should know who is credit worthy. Of course, 15 years from now, we'll be bemoaning the fact that poor people don't have access to the credit markets.

As much as I am ticked off here, it still needs to be put into its proper perspective. We are talking about mortgages here. Not gold mines; not highly leveraged stock plays....

I think an equitable long term solution would be to require 'deficiency judgment' insurance if you take out a mortgage with less than 20% down. In this way, if you're in a rising market and default, you can simply turn around and sell (and walk away with the profit), but if you're in a declining market (ie. upside down), you can sell and the bank is secured by the insurance, ie. you can sell and walk away.

This way you also have two entities assessing the credit risk - the bank and the insurance company.

Of course the insurance company needs to make an accurate actuarial risk calculation!

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Speaking now not as a Mod in WPW but as a regulated Mortgage Broker to the UK Government Homebuy Scheme - A failsafe Insurance Policy would carry with it a commission - In order to have such a policy the Insurer would know in advance that the perspective buyer would be 'being sold a loan' as opposed to having gone looking for one. It's a total non starter - maybe the US has different insurability factors - but when I was 'at Lloyds' the basis of all insurance warranties is to have an insurable risk. Placing cover based on future house/property prices falls into a different remit entirely. You can index link upwards - but not downwards - the only avenue would be on a 'like for like' basis.

The US Lenders who operated in this Country used Brokers who 'used high pressure tatics' in order to force sales. Greed - it was always doomed to failure and I went on record on that years ago.

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George Soros has many thoughtful provoking ideas worth listening to. Bloomberg is another that shared his view on Cnn yesterday. Warren Buffett calls this crisis a financial Pearl Harbor. I disagree, since it is first and foremost an internal American problem. Personally I have mentioned a negative saving rate as a main American problem that is intimately related to credit culture. My personal view is that USA will come out of this crisis with a stronger market economy. Part of the problem is also related to internet business. Aside from permission, what do you need to run an online bank? A small staff and some stable secure computers. Here Microsoft / FAST: New search milieu to Norway. is a related thread.

We don't need to go to the USA to find them. You find them here, too. Young well dressed men that give you a flower and disappear once the contract is signed.

This classic book was mentioned yesterday on Cnn:

Extraordinary Popular Delusions and the Madness of Crowds

"Sober nations have all at once become desperate gamblers, and risked almost their existence upon the turn of a piece of paper. To trace the history of the most prominent of these delusions is the object of the present pages. Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one."

- Charles MacKay, 1841

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I would say that virtually any risk is insurable. In the US, when you buy a house, you must also purchase 'Title Insurance' (if you're taking a mortgage), which is essentially insurance that the deed that you're getting is valid. The most common claim is on relatively minor boundary disputes, but in certain areas where land is expensive, minor boundary disputes carry with it a large price tag. The insurance company wouldn't be just insuring against future home values. Essentially they're insuring a sufficient debt/equity ratio when the home sells. It would definitely kill 'interest only' mortgages.

I have no idea how the UK performs a real estate closing, but in the US, the buyer is typically represented by an attorney and if you're getting a mortgage you're pretty much going to need an attorney if for nothing else but to be a conduit for the mortgage funds to get to the seller.

I have performed many real estate closings in NJ and as part and parcel with any contract, there will be a mortgage contingency clause which will contain specific provisions about what constitutes an acceptable mortgage.

Between initial offer and the actual date of the closing, there is a considerable gap of time. There is plenty of time to review everything; not sure where 'high pressure' fits into that equation. Nobody can sell you a mortgage until you want to buy a house.

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And now Germany's second largest lender, Hypo Real Estate is granted a 50 Billion Euro (69 Billion USD) in a rescue plan.

It is now called credit crunch 2.

Credit crunch 1 was about Northern Rock that was heavily exposed to the American sub prime mortgage market.

There is a great difference between the US and the EU system. USA has one central system to save banks, while the European system is based on the home country of the financial institution. Now coordinated action is called for.

Related links:

Rock to focus on debt management

Mortgage madness

"The worrying thing about the crunch for us is that there are still people who insist on clinging to the view that it will never hit us much like the famous ostrich example hiding its head in the sand".

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This is excellent

http://unrepentantcommunist.blogspot...work.htmlont-w

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There was a USA TV programe (sorry no link) that showed a Black family being sold a mortgage that they could clearly not afford. The husband was 'out of it' he simply signed on the dotted line. Over here many of these High pressure salesmen supplied the Solicitors to conduct the conveyance. In The Sunday Times back in 97 Jeff Randall now with Sky News wrote the famous article 'Thatcher warned of Home Deals' - Jeff named me as the source. Mrs Thatcher and I had 'words' in public at the Conservative Party Conference. So you can trust me on this.


Here was a warning from one Local Authority on one such Broker

Council warning on right to buy
A district council has written to its tenants warning them to seek advice when considering a right to buy scheme.

Waveney District Council took the step after some tenants said mortgage firm Diamond Lifestyle's representatives claimed to be working with the council.

Waveney said it did not endorse firms while Diamond Lifestyle said it did not deal directly with local councils.

Diamond works with third parties who must obey a code of conduct and said it would investigate the allegations.

David Howson, Waveney's principal service manager for housing, said: "Waveney District Council (WDC) does not endorse any company.



Me again - Diamond went bust. They were funded by Preferred Mortgages owned by Lehman Bros. They door to door canvassed pretending to be Council Authorised selling Mortgages.

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Iceland - just went 'Ooops a daisy' I feel sorry for them, small economy.
Trading in Icelandic banks halted pending announcement - Telegraph

This will send our side downwards even further..

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The Iceland bank Glitnir has acted like agressive vikings. Now the bank pays the price: 75 Stake Taken As Glitnir Is Nationalised (from The Herald )

And the snowball continues rolling:

BNP Paribas to buy 75 pct of Fortis Bank Belgium-PM

"BNP Paribas will pay 9 billion euros in stock and 5.5 billion euros in cash for 75 percent of Fortis Bank Belgium, all of the Belgian insurance operations and 67 percent of Fortis's bank in Luxembourg, ....
Bloomberg.com: Worldwide

Is this just the beginning or the beginning of the end is the big question ...

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Here's something interesting to read...

Will credit default swaps cause the next financial crisis? - Sep. 30, 2008

Anyone who didn't think that Wall Street played a major role in this debacle might rethink their position.

Dave

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That link is broken. Here

"AN UNREPENTANT COMMUNIST.....": Ten Reasons Why the Fed's Bailout Won't Work

is the link.

Good illustration. Did you watch John Stewarts daily show about the bailout? Some very good points there.

"3.LIBOR, the rate at which banks lend to each other, since the bailout was passed is in fact higher. The 3-month Treasury yield has dropped again".

As the bill passed the house, short money became cheaper for a while, but when the US unemployment rate was published it rose again.

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Great post - loved this
THERE'S ANOTHER BIG difference between trading CDS and casino gambling. When you put $10 on black 22, you're pretty sure the casino will pay off if you win. The CDS market offers no such assurance. One reason the market grew so quickly was that hedge funds poured in, sensing easy money. And not just big, well-established hedge funds but a lot of upstarts. So in some cases, giant financial institutions were counting on collecting money from institutions only slightly more solvent than your average minimart. The danger, of course, is that if a hedge fund suddenly has to pay off on a lot of CDS, it will simply go out of business. "People have been insuring risks that they can't insure," says Peter Schiff, the president of Euro Pacific Capital and author of Crash Proof, which predicted doom for Fannie and Freddie, among other things. "Let's say you're writing fire insurance policies, and every time you get the [premium], you spend it. You just assume that no houses are going to burn down. And all of a sudden there's a huge fire and they all burn down. What do you do? You just close up shop."


Thank the Lord for 'The Drive' Earphones On - bum in England ears in Chicago LOL

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lol David... Actually, listening to it right now as well.

BTW... The estimate of how much money is tied up in CDS is really nothing more than a guess that could easily be off by as much as $10 Trillion. Think this exposure didn't take AIG down? They had to write down over $11B in the 4th quarter due to their own CDS.

What's lovely, is that it's little more than insurance, it's not called that ergo no regulation or requirements so there's no reserve that's necessary for them to set aside. A market that's estimated to be larger than the national debt and the World GDP basically allowed to operate any old way they want. Talk about sheer speculation.

Dave

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I can tell you what happens. At the bottom, there are some big sharks with cash.

"Professor Øyvind Norli at business college BI said that a 10-year period with no gains is "highly unusual," but can't be ruled out".

Market turbulence wipes out oil fund's stock gains - Aftenposten.no

If you invested in the US stock market in 1929, you would have the same nominal amount 25 years later.

In a secular bear market, you have to have a very long horizon if dollar cost averaging shall be profitable.

From David's link: "AN UNREPENTANT COMMUNIST.....": Ten Reasons Why the Fed's Bailout Won't Work

"8.Kenneth Rogoff Professor of Economics and Public Policy at Harvard University believes that “The plan’s central conceit is that government ingenuity can disentangle the trillion-dollar “subprime” mortgage loan market, even though Wall Street’s own rocket scientists...(who shared more than $36bn dollars in bonuses last year, thanks to the huge profits these institutions “earned” on their risky and aggressive business strategies)….have utterly failed to do so. Let’s ponder this. Investment bankers have been losing their cushy jobs because they could not figure out any convincing way to price distressed mortgage debt. Otherwise, their firms would have been able to tap the trillions of dollars now sitting on the sidelines, held by sovereign wealth funds, private equity groups, hedge funds, and others. Now, working for the taxpayer, these same investment bankers will suddenly come up with the magic pricing formula that has eluded them until now.”

My bolding.

That is part of the glamour culture. Everybody is a genious in a bull market. It even goes into our ministry of Finance, where the finance minister from the socialist party (SV) told us on Tv that the Central Bank's Govenor's wage had to increase so much because of good return on our oil fund. My question has always been:

Do these persons have to pay back or accept a lower wage when the market and the funds decline? There are few genious left in a bear market.

Daves link: Will credit default swaps cause the next financial crisis? - Sep. 30, 2008

That chart of rising risk reminds me of a classic bubble.

"It has even become possible to purchase a CDS that would pay out if the U.S. government defaults. (Trust us when we say that if the government goes under, trying to collect will be the least of your worries.)"

This is serious. My children and nobody here has belived me so long. Now they are silent. Let us face it.

Worst case (some will call it doomsday) scenario is a return to barter economy for a shorter or longer periode.

And I don't envy the next president of the USA his job. Whether it is Obama or McCain, he will have much to live up to. There is no easy and fast solution.

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I hate to be a smart Alec - But I saw the writing on the wall 3 years ago. I guess just talking to lenders and watching the Ferarris everywhere - so we switched to Shared Ownership and on Wednesday - Leslie and I are at the big seminar on this with the London School of Economics as one of only 8 UK Brokers to be accepted.


In case you are wondering what Dave and I were talking about - it's the greatest Radio Station anywhere
http://www.wdrv.com/

Enjoy

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Buy a small farm near the ocean if you can afford it. Even if you don't need it, it may be fine to be there on your holidays.

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Joking apart, we grow all our own vegetables and we enough trees to keep the fires burning and we replant as we go along - and wine making etc etc.

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I have heard, because of global warming, you make good wine in UK now. So the next "champagne" may be produced in England.

Bad news here yesterday. Iceland's prime minister said on our Tv yesterday that Iceland risks bankruptcy.

That has happened with other countries before and the country is set under IMF surveillance / administration. Bad if that happens to a democracy.

I also noted that the DJIA had an intra day low of 800, even bigger absolute loss than the one cited above, but closed down only 366 points. Ceters paribus, that is a bullish sign. I have not seen how the markets open today, but this may indicate a short term bottom.

I look forward to watching the discussion with McCain and Obama 01.00 GMT to night. My friends say that I wake up with the DJIA and go to bed with it. That is not quite true, I watch the news through the night. Exiting times.

Here

BigCharts - Interactive Charting=

is a great place to get a good technical picture of the DJIA, other indices and stocks like Google (GOOG).

1. Symbol field: DJIA
2. Time: 1 month
3. Frequency: Daily
4. Chart style: Candlestick
5. Draw chart.

It is a delayed chart. At present it is down today.

If you keep the template you can instantly view a stock like Google. There are a lot of other technical indicators and information there, like volume (the second dimension), Bollinger Bands, short interest, Insiders, news etc. etc. I miss the Precision Profit Float indicator often named the third dimension of a stock.

Note: There is no guarantee that there is not errors in the quotes, so I would not trade / invest on the information presented on the site.


Breaking news on our Tv.

1. To night, Iceland said no to help from IMF. They would not be treated like a developing country.
2. A new Icelandic bank under administration today.
3. They have asked about help from Russia.
4. Norway will help our neighbours. IMO, that is more important than seeking the Winter Olympics in 2018 that was dropped yesterday.

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1. Economic theory is important.
2. Econometrics, giving empirical support to economic theory is also important.

In Denmark there has been a fairly extensive research on

boligmarkedet i den penge politiske transmisions mekanisme

housing market monetary transmission

My question is? Have the economic models for this sector been good enough?

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I think everybody knew that housing price increases were a disconnect with the growth in real incomes. If you think about it, this really goes back to Greenspan's response to 9/11 which was to essentially lower the rate to 0....made buying a house really attractive, and essentially put off what turned out to be the relatively minor 9/11 recession into what we're facing today which from the looks of things appears to be the 'perfect storm'

Its precarious because its a double shock; the industrial giants (GM/Ford/Chrysler) haven't adjusted to premium energy prices and now yet another problem....

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1. Are these houses empty now?
2. If yes, would it not be better to bail out huse owners?
3. Regarding the financial crisis in Iceland. There was a discussion on our Tv yesterday stating that that crisis is marginally related to the US housing crisis. The message was that Icelandic banks were too agressive in their expansion.
4. Gordon Brown and Englishmen are very angry. A lot of them had deposits (probably to good rates in Icelandic banks). People on Iceland are fairly desperate:
   - Whow own their house?
   - What about their bank deposists?
5. The central bank of Norway has granted Iceland NOK 4 billion i loans.
6. Iceland has asked Russia for (additional?) loans.
7. The paradox is that now, Russia and Norway may help English depositors

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I am sure that you will find some that are empty. Overall you will find that most are currently occupied. Most are probably trying to sell and trying to get their bank to accept a 'short sale' - this is where it becomes problematic; even if they find a buyer to buy at the new lower prices, they still cannot close because there are insufficient funds available to actually close. Whether a bank permits a short sale or not is entirely up to the bank. Usually the bank will weigh the cost/benefit of permitting the short sale versus going through foreclosure (which in NJ costs on average about $60,000.00). Remember, the three largest reasons for foreclosure remain loss of employment and death.

Well, it would definitely be direct, but if that happened, well, why shouldn't everybody default? Essentially my understanding is that the government will buy the bad mortgages and put them into the equivalent of the Resolution Trust Corporation that they had set up in the late 80s/early 90s to essentially administer the mortgages. At that point they have to turn the proverbial lemon into lemonade; so which will be better? Restructuring the mortgage so that it can be paid or permitting short sales at whatever price the house will fetch?

Leverage, works well on the way up; never looks good on the way down. Looks like Iceland is getting one nasty 'margin call'

Well, what they OWN the house subject to a mortgage. If they can't pay the mortgage, eventually the bank will own it. As for their bank deposits, you're correct, they're going to have to worry about runs on the banks. Its a small country so perhaps the equivalent of FDIC will not work as well.

Very nice of Norway. At what interest rate?

Because Russia is sitting on the 2nd largest foreign currency reserves from all those 'petrodollars' (whether its euros or dollars is beside the point)
Yes, but the Icelandic banks are going to be hungry for cash, look for them to start selling the acquired assets. English soccer teams are going to be off the menu for a while.

This looks a lot like what happened to Japan except on an international scale.

Overall I tend to see the problem as one of an economic system (globalism) without any central control. You see the problem more acutely in Europe where you have the euro controlled by more than one central bank. But internationally, the problem is the same, USD/GBP/JPY/EUR/CHF are all controlled by different central banks.

It has all become incredibly complex. It even seems at times that we have evolved complex intelligence to handle needless complexity!

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I don't know. Personally I would have set it to zero real rate. You don't make money on a friend in need.

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Interesting article: Business/Innovation opportunities in a slow economy | Blue Screen of Duds

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