Thursday, September 18, 2008

Pulling in my horns,

I continue to pull in my horns. I've dropped the more vociferous sites I was visiting, and I am concentrating on my business related blogs. I've stopped checking the site meters, and all that.

I have a new found fascination with Wall Street, in a train wreck sort of way, but I can only read or watch so much of that before my eyes glaze over.

I'd love to know how other businesses are doing, but other than my wife's store which is both infuriatingly and encouragingly doing well, I have no other reliable stats. As I've found in the past, I'll not know how it's going until much later.

So, I'm just going to concentrate on my own business for the time being. Even though I had a major increase in sales from 2000 through 2007, I was very careful not to add any overhead, so I'm in pretty good shape even if there is a dramatic fall in sales. It's like I've built a really nice, sea worthy craft, but there is a hurricane coming and it's going to be put to the test.

I'd much rather sit pretty in port, but that kind of defeats the purpose of having a boat in the first place. So I'm out in the ocean, watching the waves get bigger, and feeling pretty confident, but....nervous.

I must say there is a disconnect between what my store is doing and what I'm seeing locally around me; announcements of new stores and events. Frankly, the Wall Street news seems like a bigger deal than most people seem aware. Bless them. Keep that activity going, while I keep caulking my boat.


blackdog said...

Keep caulking, Dunc.

I went to my bank downtown today and there were a lot of people waiting to open new accounts. (Most seemed to be old folks.) I surmise many people are pulling their money out of stocks and socking it away in safer investments (although if the FDIC goes tits-up all bets are off). The bank staff also were WAY more friendly and helpful than usual ... whatever that may mean.

My wife and I have most (about 90%) of our money in CDs, T-bills and bonds so we're not TOO worried. Yet.

Meanwhile I saw on the Web yesterday that the DOW has risen 22 cents and change since Gee Dumbya was sworn in for his first term. Real wages also are down for most people, ditto net worth (it's now negative).

If anything can drive a stake through the heart of "supply-side economics" (aka trickle-down, aka dribble-down) the experience of the last eight years should. But it won't, because (a) the plutocrats will continue pushing it and (b) the plebeians have short memories.

RDC said...

I think your cause and effect is a little bit skewed.

The stock market drop is directly tied to the credit crisis, which is directly tied to the housing bubble. Which has nothing to do with supply side economics.

The term supply-side economics was coined by journalist Jude Wanniski in 1975, and popularized the ideas of economists Robert Mundell and Arthur Laffer.

The typical policy recommendation of supply-side economics is to achieve the proper level of marginal tax rates, which, by virtue of the high rate of taxes in general, equates with cutting of taxes. Maximum benefits are achieved by optimizing the marginal tax rates of those with high-incomes and capital who are deemed as most likely to increase supply and thus spur growth. Mainstream Keynesian macroeconomics, by contrast, contends that tax cuts should be used to increase demand, not supply, and thus should be targeted at cash-strapped, lower-income households, who are more likely to spend additional income.

Jeff said...

"If anything can drive a stake through the heart of "supply-side economics" (aka trickle-down, aka dribble-down) the experience of the last eight years should."

I wouldn't go so far as to say that the whole system is broken....

The basic lever to create jobs is the lowering of interest rates by the Fed. The real estate problem was created in large part by a Fed in the early 2000s who was too willing to allow a bubble to be created in order to create jobs.

The current financial crisis is a product of too much financial innovation to get around all the regulations for banks set up after the last great depression.

Nobody likes regulations, but now we're learning why financial regulations are a good thing.

RDC said...

More than just interest rates or for that matter just regulation. There were breakdowns at almost every level. Of course while everybody was making money politicians on boths sides were cheering and encouraging the behavior.

The housing bubble really started in the late 90's when the tax laws changed. The change from having to roll the profits from a house sale into a more expensive sale with a one time tax exclusion during your lifetime, to the ability to exclude up to 250k every two years for a principal residence. This made for a fundamental change in the housing market.

You also had substantial pressure applied on banks to improve minority home ownership. This had the impact of eroding bank decisions strictly on credit terms.

Then you had the collapse of the .Com bubble in 2000. Cash flowed very heavily into the real estate market which had started to show unusual gains after the tax law change.

About this time CDO's returned (they started in the 80's with Drexall Burnham but fell out of favor). A major factor in the growth of CDOs was the 2001 introduction by David X. Li of Gaussian copula models, which allowed for the rapid pricing of CDOs.

Then you also had Sept 11 and the dropping of interest rates.

So you had a housing market that was hotter than normal, cash looking for a hot investment, politicians cheerleading homeownership and actually telling banks to make it easier for poor credit risks and first time buyers to buy, the return of CDO's, and low cost borrowing with Central Banks willing to keep the cash flowing.

The perfect storm so to speak. The end results the buying and selling of housing went thorugh the roof, home prices went insane, money was being made from the velocity of transactions and with CDO's noone was looking at risk because the traditional risk gateway was getting rid of the paper as fast as they could produce it.

BENDBUST said...

First of all guys its NOT about interest rates. It's about 'solvency'.

The paper held today at almost $4 trillion in the money markets has no value as it no longer represents t-bills, it represents SIV's, which quite often represent Bend MTG's.

A few days $100 Billion was withdrawn from money markets, as of writing this 1/2 dozen money market funds have closed.

The US financial system drug its feet in requiring accounts to 'mark to market' the value of Bonds, Money Market Paper, and real estate Mtg's. The books look fine, but the fact is most investment houses are insolvent, the money is not real.

There's about $50Billion left in FDIC to cover bank failure, at the current rate of failure/redemption thats less than a year.

All of the above has been well known over a year. The problem today is that foreigners have lost all faith in the US government, and are redeeming their money. Since spring of 2008 most shops and small banks in Europe will no longer accept US cash.

Today the Government is authorizing $1 Trillion to support the foreign redemption of money markets. The US is completely dependent upon foreign investment, as US citizenry have had a negative savings rate since 1998.

There is nothing new here, everybody saw it coming.

RDC said...

Black Dog,

One question. I am a bit confused on if Obama is blaming Wall Street and the current administration for all of the problems, then why did he originally have one of the ex-CEO's of Freddie and Fannie leading his Vice Presidental selection committee, and why does he have the other as his primary advisor related to mortgages?

Considering these were the ones that got kicked out due to accounting irregularities, and they led those two organizations when the problems were created?

Also considering that he is there to "change" things why is he getting his advice from people clearly on the inside of Washington and clearly part of the problem creation.

Might it have something to do with the fact that while those two ran those organizations Obama was the number 2 recipient of lobbying funds from those organizations, second only to Chris Dodd who happened to chair their oversite committee?

Of course it also might explain why the Democrats and Obama voted against the law supported by McCain in 05 and 06 to reform those two organizations and stip out their special rules where they did not have to follow the same reporting requirements followed by the other financial institutions.

Still I am a bit confused why such a self proclaimed agent of change is using such folks in such key advisory roles.

RDC said...


I would state it a bit differently it is about perceived value vs actual value. The credit market has seized because:

1. Noone knows what the real value is of this paper
2. Companies are hoarding capital because they may need it themselves

In reality a lot of the "toxic" paper will end up having significant value. Probably close to or maybe even higher than it is currently being carried on the books(I expect that the government will end up with a substantial profit from the AIG takeover and the Bear Sterns action). Because there is no market for it, it cannot be used to borrow money and everything comes to a quick grinding halt. The Lehman collapse demonstrated the impact the waves sent out when one of the major institutions goes down because of the interwined finanacial relationships. Bear and AIg would have been much worse.

RDC said...

Oh we have just gotten clarification from the Obama campaign that Raines is not an "adviser" and that they have asked for a retraction from the three Washington Post articles that were posted between july 16 and August 28. Wonder why it took so long to ask for a retraction? Maybe they were out of touch?

So I guess that leaves only an explanation as to why he had such a close relationship to the other forme CEO, the one he originally selected to head up his Vice Presidental selection and then through under the bus when he became a political liability.

You know Obama seems to do that a lot. His spiritual mentor, you know the one that he really did not know his true beliefs, the one that he credited with the inspiration for his first book and who he threw under the bus when he became a political liability, then the former CEO that he held in such high esteem that he picked to head his VP search committee, until he also became a liability.

RDC said...

I relly need to prrof what I type before I click publish. The typos are extemely bad.