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This blog is all about me.

Everything I do here is to make me feel better about myself, or is my misguided attempt to influence someone, anyone, to believe the things that I want them to. The reason I want to make them believe what I want them to is I want to influence them to action that I desire.

So you should know something about me.

I am an entrepreneur. I built an Internet business from nothing to something that supports me well.

I was a lawyer with experience in finance. I worked in a firm in lower Manhattan that would legitimately be included in the term “Wall Street law firm.” I served as lawyer in deals involving hundreds of millions of dollars. When I flew into some minor city like Minneapolis, I was greeted as the New York lawyer; as in “the New York lawyer is finally here.” When I arrived in Michigan I overheard the line workers say, “the suits have arrived, the company is being sold”. They were often right.

I went to one of the top ten law schools in the country. I did very well. Before that I was an underachiever. I was lower half of the class in a high school so undistinguished that the guidance counselors told me not one student from the beginning of time ever gained a slot in Princeton.

My high school record was dismal. I went to a third or forth rate college. I went out into the world and worked for stupid people. I was smarter than the people I worked for but I had very badly worked the system. Poor grades in a poor high school and a nothing college leads to a pretty sad job. I suffered for six years.

Then I went to law school (a field I had a natural advantage in as I thought like a lawyer). I could not get into one of the top ten national law schools as my college transcript was poor. My first try applications were to the big name schools only; they all rejected me. The second try a year later, my near perfect LSAT and years out of school helped me get into a good regional school. I ended up in the top ten students at the end of the first year. I transferred to a bigger name national law school. I ended up on Wall Street and was quite proud of myself.

I have no formal training in economics or finance, other than an undergrad course. Of course neither does Obama or McCain.

Now I have seen the future.

Remember destruction of the ozone layer? It was on the nightly news, in movies, comics made jokes about it and people actually talked about it over the dinner table. It was a great exercise in mass delusion but with little practical effect.

Global Warming was next. The premise of the panic: we are unintentionally destroying the Earth. Everyone who can get face time in the media is on the same page. Government money becomes available to appease the public’s fear. The Feds subsidies ethanol so lavishly some believe it is increasing the world price of corn and indirectly causing global hunger. NJ is out of money but will be funding experimental offshore wind farms.

Bailout 2008 of Wall Street is the current panic.

So what will be the next panic that will cause an emergency five hundred page law passed in a few days on a take it or leave it basis? Of course, Medicare. One day soon, the till will be empty. Plus all the over investment, all the thousands of buildings in towns dedicated to physical therapy, rehab, outpatient surgery, pain clinics, botox, cosmetic spas, elder care, pharmacies, etc. will be empty.

Television will be full of stories of untreated people. Cancer with no chemotherapy, kidney failure outside a locked dialysis clinic, infections causing amputations and death. Followed by emergency nationalization of health care. You have never seen power until you start begging a bureaucrat for a cat scan for your wife. You believe the symptoms are something serious, but the nurse-bureaucrat across the desk from you doesn’t really like you very much and thinks the shadow on your wife’s x-ray is nothing.

OK, soon any large company in America, financial or non-financial, will have a US Dollar printing press. Simply write an IOU (90 day commercial paper) to the Treasury’s new NY subsidiary. The large company hands in a note and gets newly minted cold hard cash. There is a big difference between handing your paper over to Vanguard in exchange for some investor’s hard earned cash and handing your paper over to the Treasury for some of the newly created stuff, namely creation.

(As an aside, who will be doing due diligence at the Treasury’s subsidiary on this paper? I mean if General Motors shows up every half hour with ten zeros behind the dollar sign . . ? Maybe there will be a GS-9 bureaucrat in charge of approving the purchase or rejection of the paper. The Treasury has no expertise here.)

Now, if you want to stop a credit implosion you do need to inject massive amounts of liquidity. As the bubble grows, it requires more and more money to sustain. So to stop the credit contraction the Treasury is doing the exact right thing. It must produce exponential liquidity as time goes on and the bubble gets larger and spreads through more markets.

OK, stay with me now. Suppose the Treasury is successful and manages to reinflate this imploding bubble. Suppose the dog catches the bus. What then? Credit starts flowing again. Assets at their present unrealistic highs do not plunge any further. If the Treasury shuts off the money we are back to implosion. There is no soft landing for a credit fueled bubble. So the new credit expansion, on an even larger scale, is off. What will be the next bubble?

I mean when you get mucho dollars and the liquidity freeze is finally over (and probably the Treasury has not closed down the print dollars window yet), you have to do something with the money. The freeze is over, you want to make some return.

Bidding up residential or commercial real estate seems unlikely. That was the last bubble and people have at least short term memory. Commodities is a possibility, but that was pretty much coexistent with the real estate bubble and a too recent memory. Stocks? NASDAQ burned so many so severely recently and even the DOW today is being unkind, to say the least.

You know what has not had a bubble in recent memory? Gold and collectible cars. Now I hope the next bubble is collectible cars because I am long super high performance Italian sports cars. But I suspect that gold might be the next. Gold has an advantage over housing, oil and other commodities in that increased price will not lead to increased supply. Gold was off the radar since Volker defended the dollar breaking the back of gold. I doubt that the powers that be can allow interest rates rise to twenty percent in the present world. Finally, gold will work as the basis of a new monetary system should the Dollar and Euro collapse. The way the Treasury is injecting Dollars and the Euro-zone is unable to agree on anything makes those two events possibilities.

I never thought if it this way:

Two is that most debasement today takes the form of insured credit expansion: debt that is guaranteed explicitly or implicitly by the government. Any loan which will be repaid unless the US financial system collapses is as solid as the dollar by definition. This is obviously true of sovereign debt, such as Treasury bonds, but implicit guarantees now cover many forms of private risk. By assuming responsibility for defusing financial crises and assuring continued prosperity, the Fed has converted vast reams of otherwise dubious paper into the effective equivalent of dollars. Because it is hard to even define this guarantee, accurately measuring debasement is impossible.

Unlimited US Government guaranty of all money market funds converts all MMF ballances into dollars. In other words the corporate commercial paper purchased and held by the MMF are now yankee dollars. The paper used to be a promise by a company that had to go out and earn dollars to pay it off, now it is an obligation of the USA. The money supply just went up a few trillion with no change in production, productivity or asserts.

The average house will decline by about 33% in value. Many people will not be paying back HELOC’s or purchase money mortgages. The collateral eventually foreclosed upon will not cover the debt. Money borrowed and not repaid, due to fractional reserve banking, will lead to destruction of the money created when the loan was made. The money supply will shrink.

The slightest whiff of deflation will cause people and industry to hoard money. Everything will cost less tomorrow. People will only exchange money for goods that they absolutely have to buy. Business will not borrow because loans have to be repaid in the more valuable dollars of tomorrow.

We Got the Bailout and We are Still in the Same Mess.

Comment at Berry’s Place

Posted by: SteveC | Oct 3, 2008 5:41:20 PM

The market better go up or they might declare martial law!

They will be back. A credit expansion caused bubble in assets has to keep expanding or collapse. There is no stasis, no stable point. You cannot keep inflating a $7 trillion plus asset bubble with an influx of $700 billion. This $700 billion will be horded by the banks that receive it and the asset implosion will continue even faster. There is no way to lend cash on an asset when the asset will almost certainly be worth less tomorrow. Very soon the Secretary of the Treasury will realize that a larger bailout will now be needed (I can’t wait to hear the spin in the media). Even that will not prop up asset values from a deflating bubble. Japan tried that for dozens of years. Did not work. Perpetual recession.

Goldman Sachs was founded in 1896. It has pretty much followed the same business model for the last fifty years. Citicorp operates pretty much the same way it did in 1985 when I graduated from law school and Sherman & Sterling was their main outside counsel.

In those days the titans of the computer industry were Digital Equipment Corporation and National Cash Register. Who remembers the dominance of Wang word processing equipment? I once read that banks are merely information processors; and that the average laptop computer now has the processing power to run a full bank.

The meltdown is evidence that our financial institutions are obsolete. The rapid growth of hedge funds and private equity are evidence that our financial institutions are obsolete. If the credit markets freeze up it will present a great opportunity for new financiers using new ideas. Government trying to shore up an obsolete industry is throwing money down a hole.

Regulation never made a lender prudent about the loans he made. What makes a lender prudent is fear of loss of capital. This bailout plus the insuring of money market funds and backing swaps with the full faith and credit of the US government will make lenders less prudent no matter what regulations are imposed. Lenders now think they can never lose money.

Lets see. The government is going to purchase hundreds of thousands of home mortgages. Wall Street needs the cash in a week at latest. You know exactly what is going to happen.

Somewhere in D.C., at a lower rent office building like the one I used to work in, thousands of boxes will be delivered. A civil servant will peek in one out of curiosity. He will rush into his bosses’ office and blurt out an amazing story. The documentation is junk. The people unloading the mortgages just threw papers in the boxes. There is no way to tell which document relates to which property, whether we have all the amendments and assignments relating to any given property, whether the mortgage was perfected by filing, even who the debtor is today. It would take a team of a thousand clerks maybe ten months to do due diligence on these mortgages, to even know what we bought.

His boss, a wise old bureaucrat, will say: close that box and never tell anyone you peeked in. The government money for these mortgages has to be delivered in days or the financial system will freeze up. Our job, from now on, is to prevent anyone from ever looking into any of the thousands of boxes we have. When someone finally looks in, the shit will definitely hit the fan, and I hope to be retired before that day.

Here’s what I think happened. The masters of the universe (MOTU) on the Street were watching the climate change people scare the pants off the public with tales of global warming, saw that the press had no ability to evaluate the claims, and watched the climaters belly up to the trough and about to take over all transportation and industry with the help of carbon allowances. The MOTU said to themselves, the next time a financial panic strikes we all get on the same page, tell everyone it is the end of the world, the press being ignorant will not be able to evaluate our claims, then we belly up at the trough and make the taxpayer take all the losses.

Only thing people are more scared of than accidentally destroying the Earth is another Great Depression. Now the climaters are in the back seat. Everyone is worried about financial meltdown.

That 700 billion is a made up number. It will take infinite money to stop the present asset price bubble from deflating.