Relentlessly Progressive Political Economy

One of my friends, whom has little time for following the financial press, asked me to give him a lucid account of what was going on without the use of technical jargon. I asked if I could give him an analogy. He said yes. It went something like this (sorry he is a bit of a party animal so I picked an analogy that he would get; this is the PG version).

Think of a late night house party involving lots of free alcohol with an old friend that lasts into the wee hours of the morning. In the afternoon, when you awake dull eyed and empty faced like a real American brother you swear that you had a great party, that all is well, and that you are only feeling sad that, alas, the party has come to an end.

As you walk around your house in a hardened haze you suddenly get the feeling that you drank past the point of linear temporality and conscious recognition.

No mind, it is time to clean up the place. So you begin to tidy up. You put the coffee on and surveil the mess. Not bad you think; at least relative to the fun. Just then you feel the need of the washroom so you dash in for your morning (in the afternoon) constitutional and at the end you realize that the last person who was in your washroom used up all the toilet paper. And for some reason they forgot to mention it—well parties are like that—besides who likes to mention that they took the very last square. Sitting there with your pants around your ankles you just laugh about what a great party it was.

Oh No!!!, that coffee you put on the stove in your fancy Italian espresso maker—you know the one with three different metals to keep the heat conductivity to the gold plated handle very low and which on its own is one of the best pieces of industrial art you own—yeah that one; it is busy melting down on the stove top. You know it is melting down because in the air along side the disgusting aroma of burnt coffee there is the more nauseous smell of sintering metal. Suddenly you stop laughing and realise what it is going to take to get out of the washroom and across the house to the stove—all you can do is hope you closed your curtains.

After those two messes are cleaned up you suddenly loose your desire to clean. But alas on you go. After some time and more than one blind eye you crash on the couch to nurse your hangover. But just then you think it would be better to sleep for another hour or two. So you crawl off to your bedroom. Then you see your bedroom and you say OMG, you give your head a shake but alas the vision becomes clearer. You close the door, it is no longer a guess anymore, you definitely hit the blackout stage. Now you start to think that maybe the same person who used your last square was the same person who crashed in your bedroom.

Back to the couch. You turn the TV on but all the emissions are like so many nails on a chalkboard. Time for more cleaning. Some soothing jazz perhaps. You turn on the stereo and some crazy music you do not even recognize begins to blare at you. As you glance across the living room to find the remote you notice more carnage: a large red wine spill across the floor with an accompanying empty glass. As you get on your knees to pick it up you see another broken red wine glass under your couch. And the carnage just keeps coming. Over the next week it starts coming back to you in flashes; real or imagined, you still can’t say.

At this point my friend asks: “what does all this have do with the financial markets.”

I say: “lets call the supplier of the free alcohol the central banks. Lets call you, the host, Institutional investors and let us call the person who stole your last square and who trashed your bedroom the Financiers. However, that person is such a good friend of yours that you will invite them back and you will beg the supplier to lavish them with more free booze. And the first person that suggests that you and your friend might have a drinking problem you will denounce as a public nuisance.”

“What stage of the party are we at,” he asks.

“You just put the coffee on the stove,” I reply.

“What if I just do what I always do and have another drink instead of sobering up?” he asks.

“You have a drinking problem,” I respond.

He calls me a public nuisance and invites me for a drink.

Hat-tip to Andrew Jackson for putting the link on the PEF blog. The end of the clip would be funny if it were not so true. Finance is too big to fail. Even I care now that I have a pension plan.  Well not that much, ask me again in 15 years.
The Long Johns-A Perfect Explanation of Subprime Lending

By Travis Fast

I encourage everyone to watch this clip of David Dodge. In his estimation commodity prices will remain high and as such fuel higher incomes which taken together with the paltry one cent reduction in the GST will be sufficient to keep domestic demand growing strong.

There are two bets here, both of which are far from a sure thing.

I am not convinced that high commodity prices are a sure thing nor am I convinced that even at present levels they will be sufficient to drive enough investment to pick up all the slack created by a high dollar and declining exports to the US.

The more likely scenario is that the recession in the US will drive down commodity prices along side declining demand for Canadian exports and there will thus be a double demand shock to the Canadian economy. That leaves the one cent decrease in the GST to do all the heavy demand lifting.

I do not know about you, but the 1 dollar savings per 100 is not a sufficient inducement for me to rack up more debt on my credit cards. Nor is the ¼ point reduction of interest rate any great inducement either. So that leaves big durable ticket items like cars and houses.

What Dodge must think is that decreased interest rates in tandem with a diminished GST will be sufficient to keep demand for housing and complimentary durables chugging along. The problem is that housing mortgages are not just determined by interest rates but also by credit worthiness. How many more credit worthy buyers are out there especially given the cost of housing in the strongest markets? I think the supply of worthy borrowers has almost run its course.

So unless a lot of hot money starts flowing in and credit conditions are relaxed—i.e., the conditions necessary to create a bubble—the real estate party might just be over in Canada too. But who knows? The Americans seem determined to open the spigots and let the easy money flow and thereby re-inflate the bubble. This can only prolong the inevitable fall.

Travis Fast

Watching the CBC cover the international stock market turbulence is reminiscent of watching the FOX news coverage of the run-up to the American invasion of Iraq. The difference in this case is that the CBC seems to be working overtime to convince its viewers that there is no weapon of mass destruction hidden in the bourses—despite the existence of a 2.5 trillion dollar mass of toxic waste oozing around the credit markets, a record volume of unsold housing stocks, and record rates of defaults in the US none of which anyone knows how to evaluate including the US FED–hence the 75 basis point cut.

It is curious to watch the national broadcaster shill for the markets, as their mandate is to represent the public interest. On both TV and Radio the CBC has trotted out no end of starry eyed pundits—mostly brokers who make their living off commissions—counselling viewers to buy deals created by the 5 day old sell-off (save for one exception; the analyst from Merill Lynch who argued that this was no short term correction and counseled that investors head to the sidelines).

Let us be clear this is not a market you can out-clever all the putative “geniuses” on Wall and Bay St. and the City and, and, and…are getting or have been burned and are busy trying to get out with their pants on—they are not simply loosing their shirts, their shirts are being corroded-off by that 2.5 trillion dollar mass of potential toxic ooze creeping around the globe. As an aside, it looks like even the Chinese banks are exposed to 100 billion of the stuff.

And this is where sadly you, the national broadcaster and that train of pundits come in. In a market like this the job is wealth preservation. For those at the top the trick is to get out of the market—i.e., sell their equities before prices bust through the floor—hence the panic. Enter the pundits: “relax, stay clam, think long term,” they say. “Maybe make some defensive adjustments but surely and for god sake don’t take a pass on RRSP season,” they say.

Great! In the meantime, while we prop up prices and keep commissions coming in for our brokers, the top gets out and leaves us, our pension funds our children’s education savings etc., holding the bag. In short, a classic pump and dumb in the context of a bear market. It all makes me cry for the relatively transparent scams run out of the now defunct Vancouver stock exchange.

It is time that all the hacks and sycophants who staff the pages and studios of the print and television business media (I would call them business journalists but they seem singularly incapable of removed sober analysis) be muzzled and laid-off until it is time for all those little miss sun-shines to be taken out of retirement and allowed to cheer lead a bull market right back into another speculative bubble.

Nothing could be more counter to the public interest than giving brokers free media time to sucker investors. It smacks of the same problem that caused the bubble: originators, insurers, sellers and risk analysts (debt rating agencies) all making money off of the same garbage with no incentive to take a hard look (in the case of the former three acting as the same agent; e.g., CIBC). No, what we have here is a massive market failure that stems from the basic instinct that governs markets—self interest.

Allowing brokers on the National broadcaster to emit more self-interest masquerading as the public interest makes FOX news look fair and balanced. It would be funny if there were not so much blood on the floor and plenty more coming down the pipe.

Don’t be fooled by a bear market rally even if our national broadcaster is.

It looks like we all just might be fiscal Keynesians again.   Bernake and Bush have come out tandem in support of a whopping 150 billion dollar fiscal stimulus package.  I sure did miss that call yesterday. Although one wonders just what might make it into that package.  They have an aversion to anything that would entail longterm fiscal commitments.  That leaves direct limited-time transfers  and any infrastructure projects that can be ramped up relatively quickly and will take a relatively short-time to complete.  It will be interesting to see what is in the plan.

A similar size plan for Canada would entail roughly 15 billion dollars.  Lets just hope Harper sticks to his central policy paradigm: follow the leader.

It is kind of fun watching neoliberals cry for the state to rescue the markets.  So much for that theory.

By Travis Fast

So now that the US is all but confirmed to be in a recession, with any further cuts by the FED likely to have the effect of pushing on a string, we will get a chance to test the silly idea that the Canadian economy is somehow delinked from the fortunes of the US economy. Why is it a silly thesis you may ask?

1) Our resource and manufactured exports are for the most part with the US.

2) High commodity prices are somewhat offset due to the decline of the US dollar.

3) Outside of Alberta and the mining sector high commodity prices are not sufficient to keep the CDN economy treading above water.

4) Because a serious recession in the US will dampen demand across the world as the US moves away from being the consumer of last resort global commodity prices, save for precious metals, will decline along with global demand.

5) As unemployment trends up, consumer spending and house prices will begin to stall-out if not begin to trend-down in Canada.

6) Outside of a couple of geographic regions largely in the west: the Greater Vancouver Area (GVA), parts of Alberta and the Prairies Canada will enter a recession.

Given these relationships it is most likely that Canada will find that it is temporally but not materially out of phase with the US economy, i.e., there will be a time lag but not a de-linking.

As I pointed out in previous post, the conservatives have already spent their fiscal guns on tax reductions and they are thus going to be faced with two choices once they realize the impotency of monetary policy: Deficit spending or program cuts.

The former is ideologically unpalatable for the Cons (although the Republicans have shown that deficits are OK as long as they are caused by tax cuts for the rich) and the latter is pro-cyclically anti-simulative.

The problem here is that neither the central bankers nor the Conservatives believe in the usefulness, nay the necessity of fiscal policy.