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EJ
06-20-08, 01:16 PM
http://www.itulip.com/images/flyingmoneyfireeconaward.jpg2008 Flying Monkeys of the FIRE Economy Award

You've heard it all. FIRE Economy (http://www.itulip.com/forums/showthread.php?p=6738#post6738) economists play a critical role to misinform the public about the true nature and condition of the US economy. They do for the FIRE sector industries what doctors did for the tobacco industry for decades before we all came to our senses

by Eric Janszen

In 2001 we granted the Professor Irving Fisher Award for Accuracy in Stock Market Forecasting to Abbey Joseph Cohen (http://www.itulip.com/abby.gif) for her timely and prescient market calls in the year 2000. So exactly did events contradict her forecasts that anyone acting on her advice not only forfeited a fortune but likely as much as any investor working eagerly to maximize losses could possibly hope to achieve. In that same year we granted the Flying Pig Award for Economic Predictions Least Likely to Come to Pass (http://www.itulip.com/flyingpig.htm) to Martin Baily, chairman of president Clinton's three-member Council of Economic Advisers. On January 13 of that year he stated: "We think the fundamentals are strong and we are not going into a recession," just in time for the US economy at large to descend into recession and the technology industry, the fulcrum of that particular asset price inflation, to collapse into a deep depression.

Economist and professor Ruediger Dornbusch of the Massachusetts Institute of Technology on March 18, 2001 said of that recession, "We are now experiencing a wonderful soft-landing after five boom years. By the summer, this cleansing storm will have passed." Readers, especially those in the high technology industry, will recall the years that followed as less than economically pacific.

Opportunities to grant these two grand awards are legion in the wake of the collapsing housing bubble, a marvel of political and financial engineering (http://www.harpers.org/archive/2008/02/0081908) designed by the Greenspan Fed to pull the US economy from the edge of the abyss and give Wall Street new products to sell. As is well known now, new forms of securitized mortgage debt was pitched to youthful and credulous pension fund managers from Florida to Munich and the financial markets were polluted with credit risk (http://www.itulip.com/riskpollution.htm).

Enchanted fixed income assets promised a holy combination of high yield and low risk, like a motorcycle that gets safer to ride the faster you go or a high calorie desert that makes you thinner the more you eat. These products happened to perfectly fit the profile in duration, yield, and risk of an asset that pays neatly into a pension fund manager's carry, based on an industry standard formula. Why, it's as if it were designed with that in mind. Also, they were modeled by financial engineers to not blow up on the bond salesman's watch but on the next guy's – in, say, five years or so. In this fact is the answer to the question we often get: how did Bear Sterns, Lehman, et al, do so well for so long only to get into so much trouble? Why are they now booking revelatory losses after years of fat profits? What went wrong?

This is the story we have pieced together from a dozen conversations with industry insiders over the years – there is more to it than mere lack of accountability as reported recently by NPR and others: adding a sales channel alone did not create the problem.

Consider the mischief that can be accomplished in your industry if Sales and Marketing ran the company with Engineering reporting to it. So it was across the financial services industry after the Fed and other regulators first took on the role of regulator then abandoned it as a third party sales channel, without account to long term performance, was added to the sales process. Imagine Sales is then able to dictate to Engineering the following product requirements: make a financial product that is too good to be true, more than any pension fund manager or other money manager might dream of, like a light bulb that shines twice as bright on half the electricity consumed compared to any other. The financial engineer, also known as a quant, says that the trade-off cost for this fantastical performance is a financial product that will burn out and become worthless at some point, a limitation not in the sales literature nor even precisely known at the time of sale due to the complexity and ambiguities of financial modeling, known in other industries as "product testing." The only real guarantee these products carried was to time-out after Sales collected sales commissions and the sales people had left the company, and so they did. Now we read about (http://money.cnn.com/news/newsfeeds/articles/marketwire/0407134.htm) the FBI chasing a few of them down to try to get some of the money back.

Add to this the normal condition of competition that occurs in any market. The Fed itself reported when looking into the matter of the exploding volume of credit default swaps, used to insure these new products against losses, were used to expand the banks' balance sheets not to diminish the risk of the existing high risk assets. This is logical. In an unregulated market, market participants must use all means available to compete, including the piling on of risky assets on top of risky assets if that is what the competition is doing, otherwise profits will suffer along with the stock price. A more efficient machine to mass produce bad debt has never before existed. It ran full throttle for years on end.

Free versus free-for-all market

In a financial system organized, if that is the word, by ideological rather than practical principles the result was much the same as the conduct of war by ideology: many poor decisions are made, corruption is commonplace, and the whole thing blows up. This was followed by the Fed's "surge" of discount window lending to bail the system out much as pallets of hundred dollar bills were dumped on Iraq. The Fed's special facilities are also, like the Iraq invasion, sans exit plan. Will the discount window be left open for 100 years?


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<embed src="http://www.youtube.com/v/9fMlGGABcHs&hl=en" type="application/x-shockwave-flash" height="344" width="425"></object>

In the resulting atmosphere of mischief and malfeasance, our old dot com era Flying Pig and Irving Fisher awards are too quaint. The Flying Pig goes to politicians who dabble unsuccessfully in economics, the Irving Fisher to industry shills. New circumstances compelled us to create our Flying Monkeys of the FIRE Economy award to recognize egregious and brazen politically motivated misrepresentations of economic fact that help foster and maintain the system.

The Flying Monkey's message is always the same and with like intent: hold on to the overpriced asset, don't panic and sell.

"The stock market is not over-priced or risky," they said during the tech bubble. "Home prices are not too high and, in any case, home prices are regional and never fall across the entire nation at once," they said at the height of the housing bubble. "The credit crisis is contained, limited to a small and insignificant corner of the bond market," they said after sub-prime mortgages blew up but before Alt-A, Auction Rate Securities, and other debt products followed. "Inflation expectations are moderate, confined to volatile energy prices," they said before milk and wheat prices doubled. "Oil is a speculative bubble about to pop," they said in 2004, in 2005, in 2006, in 2007, and now again in 2008.

You've heard it all. FIRE Economy (http://www.itulip.com/forums/showthread.php?p=6738#post6738) economists play a critical role to misinform the public about the true nature and condition of the US economy. They do for the FIRE sector industries what doctors did for the tobacco industry for decades.

Once upon a time, more doctors smoked Camels than any other cigarette. At least, that’s what the RJ Reynolds tobacco company claimed. From the 1920’s through the 1950’s, many cigarette manufacturers used images of medical professionals and their implied endorsements to help sell their products. Tobacco companies even advertised in the New England Medical Journal and other respected medical journals.

The Alabama Museum of the Health Sciences at UAB’s (University of Alabama at Birmingham) Reynolds Historical Library presents a display of cigarette advertising titled “When 'More Doctors Smoke Camels'… A Century of Health Claims in Cigarette Advertisements.” The exhibit was prepared by Dr. Alan Blum, professor of family medicine and director and founder of the Center for the Study of Tobacco and Society, part of the University of Alabama College of Community Health Sciences, Tuscaloosa.

“Ads from this period often carried wide-ranging medical claims and depicted cigarette-touting physicians in the company of endorsers such as movie stars and sports heroes,” says Blum. “Some ads paid tribute to medical pioneers in an effort to associate themselves with great advancements in science.”

The museum display features 25 ads selected from thousands that Blum has collected. One 1946 ad tells you “24 hours a day, your doctor is on duty ... a few winks of sleep, a few puffs of a cigarette …and he’s back at the job again.” Other ads claim cigarettes promote good digestion, or beat stress.

The exhibit also includes examples of cigarette advertising aimed directly at physicians. A 1949 ad in the Journal of the American Medical Association boasted that scientific studies showed Phillip Morris cigarettes were less irritating, and suggested that physicians should recommend them to their patients.

“In the early 1950’s, 67 percent of physicians smoked,” says Blum, “although they were among the first group to quit as the scientific evidence of health risks began to mount. But cigarette advertising appeared in medical journals as late as 1983.”

The last ad in the exhibit is for Omni, introduced in 2001 by the Ligget Company and advertised in People magazine as having less carcinogens.

“This is just the latest incarnation in a long line of false advertising,” noted Blum. “It’s pure, unadulterated hokum and just as deceptive as Ligget and Meyers ads from the 1950’s that proclaimed, ‘Stay safe, smoke Chesterfield’ and ‘L and M, just what the doctor ordered.” - When More Doctors Smoked Camels (http://main.uab.edu/show.asp?durki=46398)No one today questions the health hazards of cigarettes, government mandated warning labels, laws that restrict cigarette sales to impressionable minors or prohibit cigarette advertising on TV where a steady stream of high production value images showing happy healthy young couples smoking and prancing through fields of spring grass combined over the years to unconsciously convince millions that smoking is youthful, romantic and athletic. There was a time when big tobacco convincingly claimed that government interference will irreparably damage the competitiveness of the US tobacco industry resulting in lost jobs, a major hit to the US economy, and giving US competitors a leg up in the global market.

You do not see ads for cigarettes in medical journals anymore. Big Tobacco has been on the run for years but the US economy has survived. Government regulation of the industry has been highly effective, reducing the cancer rate in the US by double digits since they were enacted. Other analogies include restrictions on the dumping of toxic chemicals into the environment and mandated auto safety features in cars which first Volvo and then others turned into competitive differentiators. But suggest government mandated warnings of the hazards of complex loans sold to the financially uneducated who are desperate for the American dream without the income needed to support it, warning labels on financially dangerous loan products that increase in cost at a time when the buyer can least afford the increase, or restrictions on sales of credit cards to students on college campuses who have never attended a single class on household finance, or prohibitions against advertising home equity debt on TV as the road to a carefree high net worth lifestyle and the cry arises: "Oh, no! You can't do that! That's anti-free market. What about the poor banks?"

Some day when the FIRE Economy no longer dominates our political system, media, and corporate life, and the system of economic rent extraction that weighs down on our economy is lifted, we will recall ads for complex mortgages on TV and heaps of direct mail credit card offers the way we do cigarette ads from the dark ages when Big Tobacco controlled Congress and covered the ad budget for ABC, NBC, and CBS.

Triumph of ideology over common sense, opportunity for opportunists

Naivete or incompetence root a Flying Pig Award winner’s inaccurate forecasts. Some even brag about it as when John McCain told reporters December 17, 2007 in New Hampshire: "The issue of economics is not something I've understood as well as I should," punctuated by, "I've got Greenspan's book." So do we. As Groucho Marx said of a book by an author he did not admire that he was asked to review: “From the moment I picked your book up until I laid it down I was convulsed with laughter. Someday I intend reading it.”

FIRE Economy economist analysis and forecasts are anything but naive or incompetent. They are made under the influence special interests and, we suspect in cases of expositive that is noisily contradicts glass clear evidence, hard drugs as well.

At a wealth management conference at the New York City Athletic Club put on by Reuters recently, I participated on a panel with Barry Rhitholtz and Henry Blodget (http://link.brightcove.com/services/link/bcpid1507785436/bclid1507859923/bctid1511163436). Barry and I were asked by an audience of fund and wealth managers why our web sites tended to have a better record of forecasting accuracy than mainstream business media. When the mainstream television business media covers an event that impacts the banking, real estate, or financial services industries how do they do it? Barry had fun with this one. Below, I elaborate on his comments.

Take debate over the housing bubble between 2004 and 2007, for example. First, the producer seeks out a representative of real estate industry for "expert" opinion. The producer may or may not be aware that the real estate expert, employed in the real estate industry, getting a pay check from a real estate industry dependent company whose share price and fortunes depend on a positive public impression of the real estate industry, and whose future earning potential is correlated to positive assertions about the future of the real estate industry, might – perhaps – not have an entirely disinterested opinion on the subject of real estate. If this doubt does arise in the producer's mind, for balance and to represent “the other side of the issue" the producer dutifully locates an inarticulate and disheveled academic of a college no one has ever heard of. If none is available, an astrologist, conspiracy theorist, or other crackpot is located who has less credibility than Paris Hilton training Ben Bernanke on the subject of hedge funds. Scratch that – maybe Paris can help Ben out. If the antagonist does not arrive at the studio wearing a tin foil hat, one is provided.

The perception of counterpoise is created and the objective is achieved: to make the FIRE Economy expert look smart and his or her position the only one a rational mind can accept. Major advertisers from the banking, real estate, and financial services industries are happy; the show’s anchors are happy; the FIRE Economy expert is happy; viewers are satisfied to hear how smart they are for buying expensive real estate – at least for a time – and the fine patina of respectability that veils the rotting structure of the Forth Estate lies unperturbed.

Everyone is content, except down the road the hapless homeowner who is once again blind-sided by predictable outcomes of excess.

This is why many mainstream news and analysis outlets are in trouble. It’s not only that Craig’s List made off with all of the classified advertising revenue. There are ways to solve that problem. The greater challenge is that conflicts of interest between the FIRE Economy trade press and its customers have led inexorably to a pattern of reality disconnects with the result that no one believes them anymore.

Systemic error

Beside the intentional misreporting of fact, the Flying Monkey may be awarded for the business media practice of economic data misreporting which, if not for its flawless consistency, might be mistaken for ineptitude. The panel I referred to above was asked at the event mentioned above why this is the case. My response was that reporters behave as if they want to leave the door open to some day go work for the firms they are reporting on. But there is another factor. A business reporter told me, after we'd spent an hour on the phone during which time I attempted to explain why using a home equity loan to buy a car was a bad idea, that if he understood enough about finance and economics to report on it the way iTulip does he'd be in the finance industry making real money. Fair enough. If this is true of business reporters in general, it may explain a lot about why economic data is reported as awfully as it is.

Take retail data reporting and analysis, for example.

http://www.itulip.com/images/monkeygunSM.jpgRetail sales rise "unexpectedly" in Q2 every year

Every year for as long as we can remember, in the spring with the first bloom of crocuses we are treated to the following story about retail sales.
March retail sales unexpectedly rise 0.2 pct (http://www.reuters.com/article/topNews/idUSN1227939120080414)
April 14, 2008 (Reuters)

WASHINGTON (Reuters) - U.S. retail sales unexpectedly rose 0.2 percent in March, pushed up by a jump in gasoline sales, a government report released on Monday showed.

Sales at gasoline stations rose 1.1 percent, the Commerce Department said. Excluding gasoline sales, retail sales were flat last month.

Retail sales jump unexpectedly in May (http://www.latimes.com/business/la-fi-retail6-2008jun06,0,3595187.story)
June 6, 2008 (LA Times)

Costco and Wal-Mart benefit greatly from the 3% boost at chain stores, according to the International Council of Shopping Centers, as shoppers carefully spend their tax rebates.

Shoppers, some armed with tax rebate checks, spent more than forecast at discount and wholesale stores in May and boosted U.S. retail sales.

Analysts had anticipated a slow month as people grappled with the housing slump, stringent credit and skyrocketing gasoline prices. Even as checks from the federal economic stimulus package began arriving, many Americans funneled the money into savings or paid bills, and those who ventured into stores exercised caution, experts said Thursday.
http://www.itulip.com/images/retailNSA0408.gif First, retail sales data are reported without accounting for cyclical factors. The only way to account for meaningful changes in retail sales is to note differences over the same period in previous years. The question a story on retail sales needs to ask is whether consumers are buying more clothes and appliances and home furnishings last month or last quarter as compared to the same month or quarter in the previous year. The question is not whether they are at the mall buying more stuff in the spring versus in the winter. They always do, and not only because of the weather.

There are three parts to the annual "retail sales unexpectedly rise" reporting farce.

For as long as the retail data go back the retail industry has been driven by a cycle of holiday and credit-driven gift-buying sales around the winter holidays when retailers pull out all the stops for Black Monday, the Monday after Thanksgiving when retailers hope to go turn a profit and go into the black and out of the red to turn for the year. Like clockwork the first quarter of the next year follows like a New Year's consumption hangover as households start paying off holiday credit card debts. The pattern is not haard to spot if you look at the non-seasonally adjusted data for all retail sales, in the chart to the left.

The cycle is even more profound for items typically purchased as holiday gifts, such as electronics, as shown in the chart below.


http://www.itulip.com/images/retailNSAelec0408.gif


Second, retail sales data measure dollar volume not unit volume. The report above states without humor, “U.S. retail sales unexpectedly rose 0.2 percent in March, pushed up by a jump in gasoline sales.” During inflationary periods, such as we are enjoying today, inflation is reported as increased retail sales.

The following graph of consumer gasoline expenditures shows why rising costs reported as rising sales tends to give a misleading impression of the retail sales picture.


http://www.itulip.com/images/gasexpend1959-2008.gif
Selling lots of gasoline by dollar not unit volume. The economy must be doing great!


Naturally, the retail sales figures for items that, unlike gasoline, are not essential are not rising. More on that later.

Third, retail is all about consumer credit; when you report retail sales it never hurts to mention the consumer credit picture because they are mirror images. Note the correlation between retail sales and consumer credit in the chart below going back to 1967 that shows the percentage change in consumer credit versus the same period last year (blue) compared to retail sales dollar (red).


http://www.itulip.com/images/creditvsretailcycle.gif
The retail cycle is the credit cycle


Note that the series is discontinued. This is unfortunate because it makes long term trends difficult to analyze. Some of our favorite series have been discontinued and replaced with new and, supposedly, improved series. We're not so sure.

Fourth and final point: why would "analysts" fail to expect an increase in May retail sales when households started to receive tax rebate checks? Wasn't that the whole point of the rebate, to get household out for one final shopping spree before the presidential elections?

Retail sales activity declining for years

In our example of FIRE Economy economic data misreporting we’ve buried the lead. The real story not told in the retail number is not the lack of acknowledgment of seasonal cycles reported as surprise retail sales increases every year, that rising inflation is reported as rising retail sales, or that a report on retail sales is a report on cyclical consumer credit. The big story is that the rate of growth of retail sales has been declining year over year ever since the housing bubble topped out in 2006.


http://www.itulip.com/images/retailSA0405-0408.gif
Retails sales growth has been slowing since 2006

The last time retail sales growth slowed similarly, briefly turning negative, was during the last recession.


http://www.itulip.com/images/retailSA0408.gif
Retail sales growth slows during recession (red box) and since mid 2006 (yellow box)


Retail sector analysis

A deeper dive into the data reveals the specific character of our recession. Before we take one, as a quick aside, we point out that understanding US retail trade data is not as easy as it looks. Readers may think it's a matter of going to a government data site, cutting and pasting the data into iTulip's excel graph format and – viola!

First of all, the data are often bad. Take the data on Beer, Wine, and Liquor stores. All we wanted to do was disprove or confirm the theory that we all go boozing during recession. I was asked this by a reporter for a national magazine doing a story on recession-proof business ideas. All we need is reliable and consistent retail sales data. No such luck.

Starting with the Census Bureau's data based on the NAICS system, here's the non-seasonally adjusted data going back to 1992.


http://www.itulip.com/images/beerwinebaddataNSA.gif
Goofy non-seasonally adjusted Census Bureau data. What's that spike?


Are we supposed to believe that monthly booze sales after ranging from $1 billion to $2 billion a year since 1992 spiked to over $4.7 billion in Dec. 2007? That was some New Year's party they were having over there at the Census Bureau. Then there is the Bureau's seasonally adjusted data.


http://www.itulip.com/images/bearwinebaddataSA.gif
Goofy seasonally adjusted Census Bureau data


Yikes! Sales really fell off a cliff on a seasonally adjusted basis, didn't they? This does not inspire confidence in the data.

The next problem is that there are often multiple government groups collecting and analyzing retail. Of course, they do not agree with each other.

After making some assumptions, we corrected the Census Department and compare it to the BEA and Census data. Do booze sales rise during recessions?


http://www.itulip.com/images/beerandwinegood.gif
Who to believe?


Census Bureau data say booze sales are off -8% from a year ago last year while the BEA data says they're up 5%. Who's right? Generally, we trust the BEA data as the most accurate. It says booze sales are up since the recession started end of 2007. We'll drink to that.

When you see a chart on iTulip it often represents as many a dozen hours of work that has to be done to make sure the data are not garbage, because – in case you hadn't noticed – our government churns out a lot of goofy and contradictory data. There is an upside for FIRE Economy flying monkeys: they can cherry pick the data to come up with "facts" that support their ideology and thereby give the impression that their employers want them to convey.

Retail sales: Show me the pain

On to the data that tell us how the Monthly Payment Consumer (http://www.itulip.com/glossary.htm#M) is holding up. First stop, we see a big drop in the sales of furniture that isn't needed to fill the floor space all of those MacMansions that are not being sold.


http://www.itulip.com/images/retailhomefurnature0408.gif
Who needs new furniture?


No surprise there. How about car sales?


http://www.itulip.com/images/auto1992-2008.gif
Auto sales off but further declines to go


Car sales are showing a negative growth rate, but we are not in 2002 yet. We suspect most of the sales are of the trade-to-small swap of Ford Explorers for Honda Civics variety. This report SUV and Pickup Truck Buyers Now “Owners for Life” (http://www.itulip.com/forums/showthread.php?p=38222#post38222) from one of our favorite sites http://www.thetruthaboutcars.com offers anecdotal evidence.

As we mentioned before, you can't talk about retail without talking about credit, and the reason why auto sales are holding up better than you'd otherwise expect is not only the trade-to-small trend but also consumer credit for car loans is still holding up.

Also not surprisingly, used goods are selling well.


http://www.itulip.com/images/usedgoods1992-2008.gif
Used goods sales are up


What you may be hearing about the restaurant industry, that rising costs and recession are hitting it with a double macro-economic whammy, is consistent with the data.


http://www.itulip.com/images/restaurants1992-2008.gif
They stopped eating out


In fairness, the retail story has not been mangled by every business media outlet. Bloomberg covered the retail sales data well.

U.S. Retail Sales Increase Twice as Much as Forecast (http://www.bloomberg.com/apps/news?pid=20601068&sid=a4lLplU3OdWo&refer=home)
June 12, 2008 (Bob Willis - Bloomberg)

Retail sales in the U.S. rose twice as much as forecast in May as Americans used their tax rebates to shop at electronics and department stores, and record gasoline prices swelled service-station receipts.

The surge in fuel costs is "a structural change, not just a cyclical change,'' General Motors Corp. Chief Executive Officer Rick Wagoner said June 3 as Detroit-based GM said it would close four North American pickup and large SUV factories and focus more on making small, fuel-efficient cars.

"Many of our customers need to live from paycheck to paycheck," Wal-Mart Chief Financial Officer Thomas Schoewe told reporters last week. "The amount they're spending on basics is a big portion of the total basket."

"This good report suggests the tax rebates are having an impact," Mark Zandi, chief economist at Moody's Economy.com in West Chester, Pennsylvania, said in a Bloomberg Radio interview. "As these tax-rebate effects fade, the weaker job market is going to take over."Retail sales expectedly surge due to rebate checks? Energy cost increases are structural (http://www.itulip.com/energyandmoney.htm)? Unemployment and inflation to cancel out the stimulus of Inflation Tax Abatement Checks (http://www.itulip.com/forums/showthread.php?t=3846)? Makes sense to us.

http://www.itulip.com/images/FMFE2008.jpg And the winner is...

This year's Flying Monkey of the FIRE Economy prize goes to the general of the army of FIRE Economy flying monkeys, US Treasury Department head and ex-Goldman Sachs CEO, Henry Paulson. A few examples:

In his latest speech, US Treasury Secretary Henry Paulson has continued to push for more power for the Federal Reserve in the oversight of financial institutions. - June 20, 2008

Treasury Secretary Henry Paulson said Thursday that the Federal Reserve may need to extend liquidity facilities to a broader range of financial firms. - June 19, 2008

U.S. Treasury Secretary Henry Paulson on Monday defended the dollar's status as the world's reserve currency and said its recent decline was only a small factor behind a surge in oil prices. - June 2, 2008And so on. Is it really such a good idea to give more power to the Fed, institution most responsible for creating the credit crisis in the first place? Should yet more institutions really be given access to Fed lending facilities and how is that consistent with a strong dollar policy? Is anything Paulson says true or make any sense?

I conclude on a positive note, that the Flying Monkeys have their foes.

N.Y. Fed's private OTC actions under fire (http://www.telerate.com/article/newsOne/idUSN1543260720080615)
June 15, 2008 (Joanne Morrison - Reuters)

The New York Federal Reserve's closed-door rule making with top players in the massive $60 trillion credit default swaps market came under legal fire on Sunday, as a fair finance activist filed a complaint questioning why it was done in the dark.

"The Federal Reserve seems to think it can engage in rule making in secret only with the industry," said Matthew Lee, executive director of the New York-based non-profit group Inner City Press/Community on the Move.

Lee filed the administrative complaint on Sunday with both the New York Fed and the Federal Reserve Board in Washington. In the complaint, he demanded that the central bankers explain why the meetings earlier this month were private and requested copies of all communications and details about the New York Fed-sponsored talks.

Officials at the Federal Reserve could not immediately be reached for comment.

The meetings were held with more than a dozen companies led by investment bank Goldman Sachs Group Inc. The companies -- which account for the bulk of business in the $60 trillion market -- met to help set new rules for credit default swaps trading, including the establishment of a clearinghouse.

Credit default swaps are privately negotiated transactions used by companies to hedge against default risks. Over the past decade, the market has grown exponentially, from about $1 trillion to $60 trillion.

Lee, referring to the Fed-led rescue of investment bank Bear Stearns by JPMorgan Chase & Co, said, "It was one thing to bail out Bear Stearns without any comments from the public. Now the Fed is trying to bail out or benefit 17 of the largest financial institutions behind closed doors."

Citing the federal Administrative Procedures Act, he said it was illegal to have conducted the meetings.
Who knows. With guys like Lee leading the charge and reporters like Joanne Morrison covering their efforts, perhaps some time after the Presidential elections in November and the next Congressional elections we will be able to put this whole sad and sordid episode of ideologically based financial system policy management behind us and restore common sense to the system, and the Flying Monkeys of the FIRE Economy will go the way of the Wicked Witch of the West.

iTulip Select (http://www.itulip.com/forums/showthread.php?t=1032): The Investment Thesis for the Next Cycle™
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ax
06-20-08, 02:11 PM
"Naturally, the retail sales figures for items that, unlike gasoline, are not essential are not rising. More on that later."

"In our example of FIRE Economy economic data misreporting we’ve buried the lead. The real story not told in the retail number is not the lack of acknowledgment of seasonal cycles reported as surprise retail sales increases every year, that rising inflation is reported as rising retail sales, or that a report on retail sales is a report on cyclical consumer credit. The big story is that the rate of growth of retail sales has been declining year over year ever since the housing bubble topped out in 2006."

Are you suggesting that you're heading towards a future post of "Time at last to short the American consumer"?

Join me. I've been short Capital One and XLY (retail ETF, there are others that are more specifically special interest retail) for awhile. It's been a good ride.

phirang
06-20-08, 03:09 PM
I've gotten some oct puts on GGP...

Sapiens
06-20-08, 03:45 PM
You can’t make someone understand something when earning their paycheck depends on not understanding it.

FIRE economists know this maxim better than anyone; and may the Devil take the hindmost if you understand.

P.S. :

When a man who is honestly mistaken hears the truth, he will either quit being mistaken or cease to be honest

phirang
06-20-08, 04:20 PM
excellentt essay on the "strong dollar fed"

http://henryckliu.com/page162.html



The Fed and the Strong Dollar Policy

by
Henry C.K. Liu <?XML:NAMESPACE PREFIX = O /><O:P></O:P>

This article appeared in AToL (http://www.atimes.com/atimes/Global_Economy/JF18Dj02.html) on June 17, 2008



A misleading impression has been given by recent press reports that the June 3 speech by Federal Reserve Chairman Ben Bernanke marked a Federal Reserve departure from a long tradition of nonintervention on the exchange value of the dollar, in response to the Treasury’s renewed declaration that a strong dollar is in the national interest of the <?XML:NAMESPACE PREFIX = ST1 /><ST1:COUNTRY-REGION><ST1:PLACE>US</ST1:PLACE></ST1:COUNTRY-REGION>.

The reality is that the Fed has a long tradition in supporting the lead of the Treasury in intervening on the exchange value of the dollar, albeit not always to keep the dollar strong. The Exchange Stabilization Fund (ESF) was established at the Treasury Department by the Gold Reserve Act of 1934 as part of the New Deal. Section 7 of the Bretton Woods Agreements Act of 1945 as signed by 28 nations obliged members to make subscription payments in gold or equivalent currencies for shares in the International Bank for Reconstruction and Development (World Bank). It required an amendment to the Federal Reserve Bank Act of 1913 to maintain the exchange value of the dollar, making ESF operations permanent.

Since then, the ESF has managed a portfolio of domestic and foreign currencies for the purpose of foreign exchange intervention to allow the <ST1:COUNTRY-REGION><ST1:PLACE>US</ST1:PLACE></ST1:COUNTRY-REGION> to influence the exchange rate of the dollar without directly affecting the domestic money supply. The ESF holds three types of assets: dollars, foreign currencies, and Special Drawing Rights (SDRs) in the International Monetary Fund (IMF). As of <ST1:DATE month="4" day="30" year="2008">April 30, 2008</ST1:DATE>, the ESF was holding assets totaling $51.2 billion of which $40.8 billion was retained profit.

By law, the Secretary of the Treasury is the chief international monetary policy official of the <ST1:COUNTRY-REGION><ST1:PLACE>United States</ST1:PLACE></ST1:COUNTRY-REGION>. The Federal Reserve has separate legal authority to engage in foreign exchange operations. Federal Reserve foreign exchange operations are conducted in close and continuous consultation and cooperation with the Treasury Secretary to ensure consistency with <ST1:COUNTRY-REGION><ST1:PLACE>US</ST1:PLACE></ST1:COUNTRY-REGION> international monetary and financial policy.

bart
06-20-08, 08:01 PM
Wow EJ, maximum kudos for that article!

There are minor points that I could quibble with and even a few things I could add, but I don't want to take anything away from your efforts. A superb job.

phirang
06-20-08, 10:08 PM
EJ, you don't think oil has surged recently because of the olympics and refinery outages? There's plenty of sulfurous sludge waiting to be upgraded...

Jay
06-21-08, 02:48 AM
You've heard it all. FIRE Economy (http://www.itulip.com/forums/showthread.php?p=6738#post6738) economists play a critical role to misinform the public about the true nature and condition of the US economy. They do for the FIRE sector industries what doctors did for the tobacco industry for decades.
The overwhelming majority of doc's were not intentionally misinforming the public about cigarettes. As you correctly note, they were sucking them down in their offices just like their patients. Do you think they would have been smoking and putting themselves at risk if they knew then what they do now? Of course not. Could a few in the minority have been swayed by advertising money, intentionally or not, sure.
I interpret your view of MSM FIRE economists as in the know, colluding with whatever the current bubble scam happens to be. Do you actually feel this way about physicians and tobacco?!

phirang
06-21-08, 08:43 AM
The overwhelming majority of doc's were not intentionally misinforming the public about cigarettes. As you correctly note, they were sucking them down in their offices just like their patients. Do you think they would have been smoking and putting themselves at risk if they knew then what they do now? Of course not. Could a few in the minority have been swayed by advertising money, intentionally or not, sure.
I interpret your view of MSM FIRE economists as in the know, colluding with whatever the current bubble scam happens to be. Do you actually feel this way about physicians and tobacco?!

A lot of doctors just do it for the money and prestige.

Jay
06-21-08, 08:49 AM
A lot of doctors just do it for the money and prestige.
Do what exactly? Become a doc? What does that have to do with the issue at hand? That this segment would volitionally be part of a "fool the public about smoking" cabal? Give me a break and take of the tin foil.

art
06-21-08, 09:36 AM
Do you think they [doctors] would have been smoking and putting themselves at risk if they knew then what they do now? Of course not.

I'm going to assume you spend very little time around hospitals. For my job I do. There's generally a crowd of docs and nurses puffing away outside that you need to push through to get in. Your assertion would appear to be wrong in my experience.

Don't underestimate the power of a good addiction. Common sense, knowledge, and rationality have nothing to do with it.

WDCRob
06-21-08, 10:42 AM
I also suspect he may not be talking about "all" doctors here. It only takes a few would-be authority figures dressed in white labs coats saying that tobacco is not a carcinogen to sow the seeds of confusion and doubt.

c.f. Warming, Global

EJ
06-21-08, 11:02 AM
The overwhelming majority of doc's were not intentionally misinforming the public about cigarettes. As you correctly note, they were sucking them down in their offices just like their patients. Do you think they would have been smoking and putting themselves at risk if they knew then what they do now? Of course not. Could a few in the minority have been swayed by advertising money, intentionally or not, sure.
I interpret your view of MSM FIRE economists as in the know, colluding with whatever the current bubble scam happens to be. Do you actually feel this way about physicians and tobacco?!

Great question, Jay.

My uncle was a doctor. He once told me it was always known by most doctors that cigarette smoking was dangerous, but some doctors did it anyway and doctors who tried to get their patients to stop were up against beliefs that pervaded society that smoking was rebellious, cool, tough, and so on, that was accomplished primarily through advertising and product placement in movies and television shows. It's really quite incredible what masses of people can come to believe. That's one of the reasons smoking makes a good analogy to debt.

Social belief systems, when there is money involved, are more complex than can be described by a short article like this. Many of the economists who denied the housing bubble (e.g., Are We Idiots? (http://www.itulip.com/forums/showthread.php?p=9121#post9121)) actually believed the things they said, just as Greenspan actually believed the things he said about allowing lenders to operate without regulation. He really believes that all regulation is bad. That is a religious belief not the basis of sound policy. No one believes that highways will function better if the lanes and speed limits are removed, but we are supposed to believe that markets will. It's an idiotic idea, and will come to be understood as such in time – again.

My theory is that the combination of ideology, that is, religious belief combined with self-interest forms the foundation of financial fallacies, which as I said in my Harper's article I don't like to call bubbles.

Take housing. Most economists believe that housing is a financial investment. This is absolutely false except in the case that the property can be rented out at a profit. It has never been true and will never be true that a building is in and of itself an asset that can rise in value net of inflation. As Robert Shiller proved with his research, a home can only ever increase in price at the rate of inflation, which is created by governments. The government can by tax and monetary policy accelerate the rate of home price inflation for a time, but does that make homes asset class? No it does not, but this has gone on so long that the false belief has been reinforced with the apparent "fact" of prices rising faster than inflation, if only for a brief time.

Yet stop anyone on the street and ask them if a home is an investment and 999 out of 1,000 will insist that it is, and perhaps even a large number of readers of this posting, and likely 99 out of 100 economists. They believe it. How can this be? How can nearly everyone believe something that is not true?

For one thing the can they make it appear true, for a while, by acting on the false belief: prices go up. Most interesting to me is what happens when circumstances change to give such clear evidence to the fact that the belief is false that gradually the believers lose their faith until no one can any longer believe it: prices fall and continue to fall for years.

I attempted to do that with the seven step reversion to the mean for residential real estate in my Jan. 2005 housing bubble correction forecast (http://www.itulip.com/housingbubblecorrection.htm).

There are similar corrections of widely held false beliefs still to come, among others:


That deficits don't matter
That the US economy is invulnerable to serious decline
That access to low cost sources of foreign credit to fund consumption and operate the government will always be available
That households don't need to save except to build home equity

The process by which these false beliefs are dispelled in the face of evidence is slow and will occur in a series of crises. We are developing what we call a False Belief Index for each according to the following model.


http://www.itulip.com/images/fbimodel.gif


Starting from a point of 100% belief in an untruth, a series of crises produce evidence that contradicts belief, followed by a period of partial recovery as the emotional impact of the crisis fades but leaves behind enough evidence to prevent a full recovery to 100% belief. The process is gradual, typically taking several years. We are modeling it because it is predictable and can be traded.

This process is reflected, for example, in our tracking in the itulipselect area of the Debt Deflation Bear Market that we identified as starting at the end of Dec. 2007 (see Time, at last, to short the market (http://itulip.com/forums/showthread.php?t=2774)). Here's the update.


http://www.itulip.com/images/debtdeflationbear062008nominal.gif
Debt Deflation Bear Market DOW year one vs Nikkei year one nominal

http://www.itulip.com/images/debtdeflationbear062008real.gif

Debt Deflation Bear Market DOW year one vs Nikkei year one real (CPI)


The role of economists in this process is that first they must give up their own false beliefs before they can express these officially, and before they can give them up two things have to happen: 1) the belief has to no longer pay, that is, the interests supported by the belief are no longer hiring, and, 2) the economist has to give up on their ideology. Both occur slowly, but the second takes a lot longer than the first. The market for socialist economists died out in the 1970s, yet there are still economists who believe in socialism. Same goes for free market fundamentalists. I expect the market for their ideas will be gone within a few years but the ideology will live on for decades. So it is with all religions.

grapejelly
06-21-08, 01:13 PM
EJ, thanks for this wonderful thread.

I will take issue with a small point you have made several other times -- the free market has failed, and we need more regulation.



In an unregulated market, market participants must use all means available to compete, including the piling on of risky assets on top of risky assets if that is what the competition is doing, otherwise profits will suffer along with the stock price.

This is a heavily regulated market. The actors are using money created out of thin air via the central banks. They are taking advantage of a seemingly limitless safety net. Other than a few show trials and arrests, the game goes on with failure punished very little and success meaning millions and billions, of which only a small fraction has to escape the FIRE economy to give the owner a lavish lifestyle.

If I were to focus on one example of how regulation caused this huge catastrophe, I would say the mere existence of the central bank leads inevitably to extreme moral hazard and the bankruptcy of earners, savers and investors. It always has and always will. We need a free market but we won't get one due to purposeful lack of understanding,

EJ
06-21-08, 03:47 PM
EJ, thanks for this wonderful thread.

I will take issue with a small point you have made several other times -- the free market has failed, and we need more regulation.

grapejelly,

Thank you for the kind words and for your contributions over the years.

After 30 years of studying the matter, I have in a way come full circle on the issue of government involvement in markets, from believing that government can effectively allocate many economic resources in an economy, to believing only markets can do that and that less government is always better, to the point of finally coming to terms with the fact that there are many public goods that a society needs that can only be effectively provided by government, such as a clean environment, and many that can only be effectively provided by markets albeit with some degree of regulation.

The first fact to consider is that there has never been nor will there ever be a completely free market. The idea that there has ever been or could ever be a completely free market is a fantasy. There are entire theories of economics devoted to this fantasy, but they are no more than that. The way you know any idea is a fantasy is to ask the purveyor to show you a successful example of what they mean. If they cannot, you are being conned. Once one gets one's head around that fact, which really ought to be quite obvious, the next question is, What is the best and minimal role for government in markets? Specifically, what institutions are needed? How should they function? With what relationship to private businesses?

Those who dream of completely free markets are wishing for a society that lacks government institutions that manage the allocation of public goods. There are plenty of instances of societies where this is the case. The front page of the WSJ today has a story about one.

Lost Hope: Once Glittering, Yangon Is Now a Ramshackle City of Fear (http://online.wsj.com/article/SB121397015528891857.html?mod=home_we_banner_left)

YANGON, Myanmar -- Fifty years ago, this city was one of the bright spots of Asia, a glittering, proud capital of a newly independent nation rich with natural resources.

But what I saw during a recent visit was a city in shambles -- a melancholy outpost of crumbling colonial architecture, economic neglect and deepening paranoia. These problems predate Cyclone Nargis, which shook the city and villages to the south in early May, and no doubt will continue long after the disaster recedes from glare.
The institutions of society and government that held the nation together collapsed, that provided security and essential services. That could happen anywhere, but hardly anyone would call that outcome desirable. Surely there is a middle ground between too little and too much government. My belief is that the middle ground is in a healthy society arrived at via a continuous process of dynamic political tension. The US almost has it down, and that is one of our strengths.


This is a heavily regulated market. The actors are using money created out of thin air via the central banks. They are taking advantage of a seemingly limitless safety net. Other than a few show trials and arrests, the game goes on with failure punished very little and success meaning millions and billions, of which only a small fraction has to escape the FIRE economy to give the owner a lavish lifestyle.

Under the guise of free markets industrial policy in the US has for over 30 years been ceded to financial interests, with the result that economic rent is now extracted from nearly every activity of American life, from education to health care to dining out. Interest is paid on everything. But this is a political and educational problem not a government versus no government matter. It's about the application of government. The great paradox of our time is that under the guise of free markets, of allowing financial players to operate without regulation, we are experiencing a return to a form of feudalism via debt serfdom, what Hudson correctly calls neo-feudalism. It is the direct result of the misguided ideological belief that markets left to their own within the political economy work out for the common good of society.


If I were to focus on one example of how regulation caused this huge catastrophe, I would say the mere existence of the central bank leads inevitably to extreme moral hazard and the bankruptcy of earners, savers and investors. It always has and always will. We need a free market but we won't get one due to purposeful lack of understanding.

Indeed central banks are at the top of the rent extraction pyramid.

Spartacus
06-21-08, 06:01 PM
I've taken roughly the same road, with one (well, 2) small addition - the concept of "regulatory capture", through which industries and their putative regulators become so incestuously interbred and sharing so many incentives and dis-incentives that no effective regulation can happen, and in fact the regulators eventually help the industry fight off competition.

The FDA attempts to ban various supplements and herbs are a good example, just off the top of my head.

This seems to happen even if the regulators do not do the industry to regulator to industry to regulator revolving door shuffle, and even if the regulators don't get any laissez - faire religion. Bureaucratic rot?

I see no workable way around it, though - thus the 2nd addition alluded to above, excessive cynicism that the situation will ever get better.



grapejel
I have in a way come full circle on the issue of government involvement in markets, from believing that government can effectively allocate many economic resources in an economy, to believing only markets can do that and that less government is always better, to the point of finally coming to terms with the fact that there are many public goods that a society needs that can only be effectively provided by government, such as a clean environment, and many that can only be effectively provided by markets albeit with some degree of regulation.

Slimprofits
06-21-08, 06:18 PM
This year's Flying Monkey of the FIRE Economy prize goes to the general of the army of FIRE Economy flying monkeys, US Treasury Department head and ex-Goldman Sachs CEO, Henry Paulson.

Have you considered awarding Goldman Sachs Group, Inc. the Lifetime Achievement Flying Monkey Firm prize?

If you haven't already read this:

Understanding US Economic Statistics (http://www2.goldmansachs.com/ideas/economic-outlook/understanding-us-economic-statistics-pdf.pdf), Sixth Edition, February, 2008 [PDF, 673 KB]

Mega
06-21-08, 07:08 PM
Thank You EJ!

I quite enjoyed that, and for once i think i followed your line of thought here. Normaly i have to stop, think, use the dictionary,think, walk the dog, think and i might get an idea what your driving at.


Not like that @ Euro-pac, Schiff will cut up the info into little bite size bits, put a bib round my neck and spoon it up for me............you tend to got for a full 3 cource meal ( Black tie).

Cheers
Mike

c1ue
06-22-08, 11:35 AM
The comments on the ideal system requiring a balance between regulators and entrepreneurs are spot on.

Human nature being what it is, my suspicion is that only a sufficiently long term mindset subclass with societal stability as its goal is sufficient for long term governmental success.

If you look at Rome, one thing stands out: despite several episodes where a dictator arose and had the opportunity to amass enough power to take over(i.e. entrepreneur turned regulator), for the first several thousand years said dictator either turned away or was whacked by the patrician class.

Looking at France as a more recent example: despite all of the seemingly odd behavior by de Gaulle and successors, France seems to be well positioned for today's world: military, economic, and energy wise. Even the troubles with North African immigrants and their children could be ascribed to growing pains; France is clearly far ahead of the game should this situation be a result of deliberate attempts to keep down the average age of the population.

While in the United States, there is a consistent upper class, unfortunately by and large they seem more intent on self aggrandisement, partying hard, making more money, and/or accumulating power rather than the governance of this nation.

Even looking at the post WWI to Vietnam era - when the United States gained its present position in the world - the advancement was primarily via accumulating advantage vis a vis the rest of the world rather than necessarily any inherent internal development.

It is this trend that disturbs me and prompts me to look elsewhere for a backup.

phirang
06-22-08, 11:42 AM
The comments on the ideal system requiring a balance between regulators and entrepreneurs are spot on.

Human nature being what it is, my suspicion is that only a sufficiently long term mindset subclass with societal stability as its goal is sufficient for long term governmental success.

If you look at Rome, one thing stands out: despite several episodes where a dictator arose and had the opportunity to amass enough power to take over(i.e. entrepreneur turned regulator), for the first several thousand years said dictator either turned away or was whacked by the patrician class.

Looking at France as a more recent example: despite all of the seemingly odd behavior by de Gaulle and successors, France seems to be well positioned for today's world: military, economic, and energy wise. Even the troubles with North African immigrants and their children could be ascribed to growing pains; France is clearly far ahead of the game should this situation be a result of deliberate attempts to keep down the average age of the population.

While in the United States, there is a consistent upper class, unfortunately by and large they seem more intent on self aggrandisement, partying hard, making more money, and/or accumulating power rather than the governance of this nation.

Even looking at the post WWI to Vietnam era - when the United States gained its present position in the world - the advancement was primarily via accumulating advantage vis a vis the rest of the world rather than necessarily any inherent internal development.

It is this trend that disturbs me and prompts me to look elsewhere for a backup.

France is great, but there are way, way more opportunities in the US. The money in Europe is tied up in old, tenacious hands and government-subsidised mafias(aka Dassault, EDF, Suez, etc).

Jay
06-22-08, 02:39 PM
I'm going to assume you spend very little time around hospitals. For my job I do. There's generally a crowd of docs and nurses puffing away outside that you need to push through to get in. Your assertion would appear to be wrong in my experience.

Don't underestimate the power of a good addiction. Common sense, knowledge, and rationality have nothing to do with it.
Art, I am a physician.

grapejelly
06-22-08, 06:01 PM
EJ, let's look at an historical example.

The market was more free in the USA in the 19th century compared to any other place or time in the world. And the US had a remarkable combination of personal freedom and economic growth never seen before or since, really.

Almost as soon as the ink was dry on the paperwork, those in power began to try to set up banks and finance government spending on their favored projects, including of course war.

And government allowed banks to reneg on their promise to redeem their notes for gold.

Things started to go rapidly downhill after Lincoln established a central currency and undermined state-chartered bank note issuance. The money center (mostly New York) banks were allowed to buy government bonds and use those same as cash reserves...the founding of the Federal Reserve was inevitable at this point.

And now, the government could reward private individuals with fat contracts and wage war without taxing the people commensurately with those expenditures. Just rack up the debt, because the banks are the ready government-licensed buyer of that debt.

That is probably the worst of it, I think -- that the central banks allow government to favor the few in power and wage limitless, unending war. It is no coincidence that the US has been almost continuously at war since 1913.

It is a problem of education. True. People don't understand what is happening with their money. And that I think is purposeful. It must be. As you have I think pointed out, the economists are beholden to a monetarist, floating fiat currency central bank point of view in order to get and keep a job. And nobody receives any real economics education K-12 in the US.

But my thinking has come around to an awareness of the following cycle, repeated closely in Greece, Rome, Spain, England, and China...

1. That the government which lets people keep the most surplus of what they create, will result in a country that is most economically successful. That results in spending more than it takes in, chronically, especially under "democracy".

2. That government will debase its money and begin to finance imperial ambitions.

3. That government will conquer other countries and then suck the surplus out of other countries.

4. Eventually, the result is an empire that briefly expands like a balloon and then pops like a balloon.

Because of lack of education, people are somewhat stupid. So they stand by and let this happen. They don't learn history properly in school so they can be forgiven. They are innocent. They do not understand that it isn't how the king is elected or appointed that matters, but instead it's the limitations that are placed on the king's power that count.

That is the lesson of the Founding Fathers but it has been lost in education today. No wonder. It doesn't appeal to the strong central imperial government we have.

The lesson today, would be to abolish the Federal Reserve. Abolish banks for that matter.

The technology is so simple today. Think about brokerage accounts versus banks. And Bullionvault versus GLD. The securities you have in a brokerage account, the gold you hold at Bullionvault, are yours. They are merely holding it for you under a bailment.

There is no need for banks. You could in fact invest your brokerage account money in pools of loans run for a very small fee by a trustee.

This whole economic mess will at some point blow up so much that banks go under and the US government goes broke. Foreigners will stop accepting US fiat.

I think there is life after that -- a good life. Think Argentina in 2002. In a surprisingly short period of time, American manufacturing will gear up. Imported goods will be very expensive. A short lived depression will result and then very good times ahead.

Jay
06-23-08, 12:27 AM
Great question, Jay.

My uncle was a doctor. He once told me it was always known by most doctors that cigarette smoking was dangerous, but some doctors did it anyway and doctors who tried to get their patients to stop were up against beliefs that pervaded society that smoking was rebellious, cool, tough, and so on, that was accomplished primarily through advertising and product placement in movies and television shows. It's really quite incredible what masses of people can come to believe. That's one of the reasons smoking makes a good analogy to debt.
EJ, I still ask you, were they intentionally misinforming the public? It is quite a leap to go from most doctors knew cigarette smoking was dangerous (which I will add is anecdotal on your part and doesn't maintain the laudable and rigorous practice of using data for almost every other theory you espouse) to say they were misinforming the public as a profession. All based off of a story your uncle told you. Did no doctors stand up and say not to smoke? If that's not the case, how many did and what dates? When you say they knew it was dangerous, what does that mean? Early COPD, lung cancer, heart disease? In what populations? What other shared risk factors for those same diseases did those people have? What percentages went on to have disease? And why the hell didn't they push seat belts harder too! And laying off the booze! And condoms!


Social belief systems, when there is money involved, are more complex than can be described by a short article like this. Many of the economists who denied the housing bubble (e.g., Are We Idiots? (http://www.itulip.com/forums/showthread.php?p=9121#post9121)) actually believed the things they said, just as Greenspan actually believed the things he said about allowing lenders to operate without regulation. He really believes that all regulation is bad. That is a religious belief not the basis of sound policy. No one believes that highways will function better if the lanes and speed limits are removed, but we are supposed to believe that markets will. It's an idiotic idea, and will come to be understood as such in time – again.

Yes, social belief systems are complex beasts. Trying to lump physicians attitudes about tobacco in with the attitudes of economists on the housing bubble is clunky at best. There is also a huge difference in the financial incentives between the two groups. Any member of the FIRE economy makes their money in perpetuating the bubble. To think that a few cigarette advertisments in a medical journal is even remotely close to the same financial incentive is silly. Physician's livelihoods depend on medical billing not adds. Lastly, to only focus on the financial aspect of social behavior is typical in an economic forum, and limiting. Most physicians, and certainly the good ones, are also driven by the desire to heal. What FIRE economist has that motive?

Sapiens
06-23-08, 09:30 AM
Surely there is a middle ground between too little and too much government. My belief is that the middle ground is in a healthy society arrived at via a continuous process of dynamic political tension.




I am glad you comprehend the above, as it is profound.

In order to maintain a political healthy society the majority of the population must be willing to defend its vested interest. If the majority of the population is left ignorant and delusional, it will only result in repression.


If a nation expects to be ignorant and free, in a state of civilization, it expects what never was and never will be."

EJ
06-25-08, 10:11 PM
EJ, I still ask you, were they intentionally misinforming the public? It is quite a leap to go from most doctors knew cigarette smoking was dangerous (which I will add is anecdotal on your part and doesn't maintain the laudable and rigorous practice of using data for almost every other theory you espouse) to say they were misinforming the public as a profession.

The message is that members of any profession can be co-opted by an industry, not that all of them are. Dean Baker is among economists who did not support the idea that home prices only go up and that home prices will not fall nationally. Perhaps we should add a more positive award. What shall we call it?

Jim Nickerson
06-25-08, 10:33 PM
The message is that members of any profession can be co-opted by an industry, not that all of them are. Dean Baker is among economists who did not support the idea that home prices only go up and that home prices will not fall nationally. Perhaps we should add a more positive award. What shall we call it?

Common cents.

World Traveler
06-26-08, 12:26 AM
Bloomberg article: try to cut FIRE Economy rent extraction and get a presidential veto. Note that Medicare can also provide the same services directly, 13% cheaper. It's all gravy for the insurance companies. From article:

"Doctors who treat Medicare patients will get a 10 percent cut in their payments on July 1 unless Congress finds money to make up the difference.

Democrats want to reduce payments to UnitedHealth Group Inc. (http://www.bloomberg.com/apps/quote?ticker=UNH%3AUS), WellPoint Inc., (http://www.bloomberg.com/apps/quote?ticker=WLP%3AUS) and other insurers that provide benefits through a program called Medicare Advantage. The companies get, on average, 13 percent more than it costs Medicare to offer services itself, according to a congressional advisory commission.

The Democratic-backed measure passed today, 355-59, giving supporters more than the two-thirds margin that would be needed to override a threatened veto by President George W. Bush (http://search.bloomberg.com/search?q=George+W.+Bush&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1). The Senate has yet to act on similar legislation."

Comments:
When Medicare cuts re-imbursements to doctors and hospitals, since the costs of providing those services do not decline, rates and fees for the rest of us go up. All so that insurance companies can continue high levels of profitability (otherwise known as rent extraction).

A very powerful lobby indeed.

http://www.bloomberg.com/apps/news?pid=20601124&sid=aBI26L6PHrRo&refer=home

Serge_Tomiko
06-27-08, 08:11 AM
The lesson today, would be to abolish the Federal Reserve. Abolish banks for that matter.



If I may be so bold, I believe it is about time for democracy itself to be abolished. Worldwide evidence is quite clear, democracy is a best plutocracy (as Oswald Spengler made clear) perpetuated by covert and overt propaganda - and at worst a theatrical sham with electors pursuaded by anarchy and civil war.

A new system of government must be implemented, which inherently does not allow for those with financial or military power undo influence.

I propose a new senate, whereby senators are chosen by specific trades. That is to say, rather than election districts being chosen along geographic lines - a relic of our agrarian past - people of certain expertise would vote for a senator that represents the best of their profession. There would be a doctor senator who represents medical doctors, an engineer for electrical engineers, and so on.

The honest truth is the complexity of the modern world is such that no one man can possibly understand the various issues that plague our nation. Further, the average citizen can possible appraise the competency of a general candidate. A system such as this would allow people to focus their energies not on watching debates and listening to soundbites, but analyzing the experience and analyzing the productive output and perhaps managerial skill of the giants of their respective industries.

This system would break the grip on the law by lawyers first and foremost - as an entire branch of our legislature would essentially be out of their control. Lawyers would be restricted to just a few seats as with all other industry organizations.

It would also give a greater voice to important, yet marginal groups - such as members of the arts. The rise of international finance capital has resulted in a wholly materialistic system of governance. Considering the aesthetic implications of public policy has hitherto been nearly impossible.

Scientists would also have a much more important role in the government. I follow the climate debate with great interest, but the fact remains I am not trained in such matters. No matter how much I listen to the pundits spout off their arguments, I am simply not qualified to properly analyze their veracity. How fabulous it would be if all the climatologists in the nation had their own representative. They could argue amongst themselves who is most qualified to represent them in the Senate. That senator would then be charged with presenting the sum of the body of knowledge of climatologists throughout the nation.

The common man would likely have a greater voice as well, as groups without much financial clout would suddenly have a guaranteed place within the framework of the state.

Anyway, enough for now. What I believe is clear is that democracy, such as it is, can only be described as a failure. The time has come for an entirely new system of government that breaks from the universalism of the past.

GRG55
06-28-08, 01:11 AM
If I may be so bold, I believe it is about time for democracy itself to be abolished...


<DL><DT>"Many forms of Government have been tried, and will be tried in this world of sin and woe. No one pretends that democracy is perfect or all-wise. Indeed, it has been said that democracy is the worst form of government except all those other forms that have been tried from time to time." <DD class=author><DD class=author>Sir Winston Churchill, Hansard, November 11, 1947
British politician (1874 - 1965)
</DD></DL>
Of course he is also credited with this alternate view of democracy:

The best argument against democracy is a five-minute conversation with the average voter.

Andreuccio
06-28-08, 02:49 AM
<dl><dt>"Many forms of Government have been tried, and will be tried in this world of sin and woe. No one pretends that democracy is perfect or all-wise. Indeed, it has been said that democracy is the worst form of government except all those other forms that have been tried from time to time." </dt><dd class="author">
</dd><dd class="author">Sir Winston Churchill, Hansard, November 11, 1947
British politician (1874 - 1965)
</dd></dl>
Of course he is also credited with this alternate view of democracy:

The best argument against democracy is a five-minute conversation with the average voter.

Great quotes. Not necessarily mutually exclusive viewpoints.

moonshot
06-28-08, 06:54 AM
To be sure, the FIRE sector gets drunk on its own Kool-Aid. I remember all the hiring by investment banks in 2000, and more recently, the investment banks buying mortgage businesses in 2005 and 2006.

If the banks creating the CDOs and CDO^2s really understood how toxic some of these things were, they wouldn't have been sitting on billions of the stuff when the music stopped. The way banks are set up, senior management, and in particular, one layer below, usually comprises true believers. The guy who was warning that this stuff will eventually blowback is driven out or passed for promotion (these persons are typically too early with their call as they cannot believe things will ever get so overextended), and the guy in charge of the desk responsible for huge increases in profits is promoted. By the time he becomes a division head, you can be damn sure that (usually) he will be dancing with the girl that brought him to the party.

Then, things blow up, lots of people are replaced, typically by heads of businesses that are currently making money, and the cycle continues.

ThePythonicCow
06-22-09, 04:12 AM
Some day when the FIRE Economy no longer dominates our political system, media, and corporate life, and the system of economic rent extraction that weighs down on our economy is lifted, we will recall ads for complex mortgages on TV and heaps of direct mail credit card offers the way we do cigarette ads from the dark ages when Big Tobacco controlled Congress and covered the ad budget for ABC, NBC, and CBS.This statement is the most conclusive proof I've seen yet that EJ is an optimist. :D

thunderdownunder
06-22-09, 08:06 AM
Wow - I understood it, felt the anger, re lived the tech bubble,looked in the rear vision mirror for confirmation, exhaled and then applauded loud enough to wake the dog.
I still can't find what changed so demoniacally around 1972-3 that sent us all down these rocky rapids. Something turned the world upside down and for the worst. Yeah I'm an old fart but I think while I stink.
Cheers to you old son for a great article.
Question ??? when are you going to take on the Big Pharma who deal with doctors and pyjamas. Now that's a bent game that puts the Nazi's "final solution" to shame.
If you wait just a short while, Median house prices will Rise as the $1.5 million dollar homes that sell for $750,000 get put in the statistics - Green shoots will be in print everywhere.

There are Lies, Damned lies and then Statistics, and you can't argue with facts.

If you want my vote it goes to a certain 3 off, Limited Liability Companies (LLC) called "Murky lane"(or something similar) I, II & III in the latest US Fed report. Thats where they put ALL the crazy monkey's that don't fly no more :D

marvenger
06-24-09, 11:20 AM
EJ still has an Austrian bent to me. Hoping for the divine conditions of the mutually beneficial market, preaching the inevitable failure of any intervention, hoping to return to venture capitalism to test himself in a pure competitive environment. I reckon best to just admit there needs to be some well thought out restrictions, and well funded agencies to monitor and legislate against new scams, despite the obvious opportunity costs. Markets in capitalism in particular, despite a theoretical theory of mutually grateful participants, always end up about one group successfully bending another over a barrel through various information, law making, organisational, access to resources etc asymmetries and twists of fate. If EJ is past his Austrian phase (i think the optimism you refer to means he's not), then surely he'd have to be more in favour of some "commie" restrictions. Otherwise, by my logic, if EJ thinks capitalism and markets are the be all and end all, the goose that laid the golden egg that is not to be interfered with, then he should give up iTulip and get back to trying to be the one standing over the barrel for his own sense of integrity.<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" /><o:p></o:p>