Tonight, the President addressed the joint session of the Congress. Unlike the typical State of the Union addresses, the President spoke directly to the American people, trying to explain why the $800B stimulus spending is necessary when the private sector spending is right now in retreat, and why the government needs to do whatever it takes to shore up the nation's financial institutions, to get the credit flowing again.
I think the President was articulate and made a strong case. In contrast, the Republican response, delivered by Louisiana governor Bobby Jindal, was so poor that it sounded like a botched Saturday Night Live skit.
The old Republican argument that "the government is not the solution, but the problem" sounds so irrelevant these days. If the Republicans don't believe government can ever work, why do they seek to be elected to public offices? To prove that government indeed does not work? Yeah, we got plenty of proof in the Bush administration. Bush's cynical view about the role of government led to massive outsourcing of critical government functions to private contractors run by those who put him in office. The end results were terrible and deadly (in both Iraq war and Hurricane Katrina).
OK, I don't want to go back talking about Bush nightmare anymore. It is past. Now the critical task is how to restore investors' confidence in the US financial institutions.
There are concerted efforts to undermine the financial institutions. Some cried for "nationalization of the banks", while others screaming "No more bailouts. Let the banks fail".
Do US financial institutions have adequate capital? The answer is an emphatic yes. Then you ask what is the problem? The problem isn't banks having insufficient capital. The problem is investors' confidence. Majority of the financial institutions need access to the debt market for financing. In normal time, there are plenty investors willing to lend money to the banks. But this is not normal time. Investors have doubt in banks' balance sheet. I think these doubts were healthy. For a long time investors risk premium was too low. But now, there are those short sellers out there trying to create panic among the investors. They claim that "the entire US financial institutions have ZERO equity", without needing any facts to substantiate the claim. And they pay the debt rating agencies to downgrade credit ratings of the banks. They went on the TV, masquerading as libertarian capitalists speaking on behalf of regular people against government help bailing out "Wall Street thieves". But their ulterior motives are to instigate a run-on-bank of the US financial institutions, create a self-fulfilling prophecy of doom-and-gloom.
In my previous post, I have argued that the bad asset issue related to subprime lending is a tiny tinny problem. The big problem is that investors losing confidence and refuse to lend. That is why investors are piling cash into treasury securities, considered risk-free. In this circumstance, the Fed, and the Treasury have to step in to be the lender of last resort. That is what they are doing. And that is why I believe they should continue doing that, and communicate their determination to the public, so that confidence may gradually be restored.
Bernanke today did some of that during his testimonies in front of the Congress. I need more forceful pronouncement from the government more often and more clear.
I am hopeful that today's >4% rally in the stock market is the beginning of an end of the current financial crisis.
Tuesday, February 24, 2009
Saturday, February 14, 2009
Is subprime mortgage problem really the cause of current financial crisis?
I have come to the realization that subprime mortgage problem was just the trigger, not the true cause of the current financial meltdown.
Consider this analogy: there was a man smoking in a theater full of people (back in those old days when smoking was still allowed inside). He inadvertently burned his pants with his cigarette. The lady next to him shouted: "fire!". Then the next a few other also shouted: "fire!". some people started to run for the door. People in the back did not know what was happening, but heard "fire". Then they all started to run for the door. That created a stampede, and people pushed each other trying to get to the door. Children were crying, and ladies screaming. The theater door collapsed, many injured, and some even killed by the stampede.
This is what is happening now in the global financial system. The "fire" here was the subprime mortgages. But it was a small fire that could have been put out easily. The people who first called out the problem was right. Indeed we had a serious problem with the bad assets in subprime mortgages that the banks and financial institutions are holding on their balance sheet. But the scope of the problem was grossly exaggerated, sometimes deliberately by some people who could profit immensely from the problem.
These days it is a heresy to say subprime mortgage problem wasn't a big deal. But look at the facts: according to the Fed, at the end of Q2 2008, the total mortgages outstanding (both residential and commercial) was $14.8 trillion, 10% of which can be considered subprime. Residential mortgage delinquency rate was 6.41%, and foreclosure rate 2.75% (commercial mortgage delinquency rate was much much lower, less than 1%). Even we assume that ALL subprime mortgages were worth NOTHING, the money needed to completely stop subprime problem would be only 10% of the $14.8 trillion, which would be $1.48 trillion. How much money the Fed, FDIC and the Treasury have spent to rescue the banks and financial institutions? MORE than $7 trillion so far!
-on-
What's the problem here? We have a classic run-on-bank situation here, triggered by subprime problem, but more importantly instigated by the hedge fund community and the short sellers. There has been a concerted effort to undermine the US financial institutions and create panic among investors.
Because of the constant bashing of the US financial institutions by characters like Peter Schiff, investors got really confused, and did not see that the real scope of the subprime mortgage problem was actually very limited. Then you had those credit analysts, who paid by their hedge fund clients, kept pushing down the credit ratings on banks and financial institutions in an attempt to instigate a run-on-bank. What you got in the end was a self-fulfilling prophesy.
Financial institutions are built on trust. When trust was gone, these institutions could no longer exist.
Fannie and Freddie were great cases in point. There weren't much problem with their mortgage assets. Fannie's mortgage delinquency rate was a little above 1% and Freddie was still below 1%, before they were rescued by the government and put into conservancy. Either institutions had much exposure to subprime mortgages at all. What happened was that Fannie and Freddie's capital market dried up, because investors simply did not want to lend money to any financial institutions at the time, not even Fannie and Freddie. The securitization market was completely frozen (thanks to Hank Paulson who let Lehman go under). In that circumstance, no matter how money good the assets were, the companies could not survive. That was a typical run-on-bank!
We have to stop all those stupid doom-and-gloom talks. We have to restore people's confidence in our financial system. If you understand what I put forth above, you would agree with me that there IS NO fundamental problem with the US financial institutions! There was a crisis of confidence problem. We need to restore that confidence.
Consider this analogy: there was a man smoking in a theater full of people (back in those old days when smoking was still allowed inside). He inadvertently burned his pants with his cigarette. The lady next to him shouted: "fire!". Then the next a few other also shouted: "fire!". some people started to run for the door. People in the back did not know what was happening, but heard "fire". Then they all started to run for the door. That created a stampede, and people pushed each other trying to get to the door. Children were crying, and ladies screaming. The theater door collapsed, many injured, and some even killed by the stampede.
This is what is happening now in the global financial system. The "fire" here was the subprime mortgages. But it was a small fire that could have been put out easily. The people who first called out the problem was right. Indeed we had a serious problem with the bad assets in subprime mortgages that the banks and financial institutions are holding on their balance sheet. But the scope of the problem was grossly exaggerated, sometimes deliberately by some people who could profit immensely from the problem.
These days it is a heresy to say subprime mortgage problem wasn't a big deal. But look at the facts: according to the Fed, at the end of Q2 2008, the total mortgages outstanding (both residential and commercial) was $14.8 trillion, 10% of which can be considered subprime. Residential mortgage delinquency rate was 6.41%, and foreclosure rate 2.75% (commercial mortgage delinquency rate was much much lower, less than 1%). Even we assume that ALL subprime mortgages were worth NOTHING, the money needed to completely stop subprime problem would be only 10% of the $14.8 trillion, which would be $1.48 trillion. How much money the Fed, FDIC and the Treasury have spent to rescue the banks and financial institutions? MORE than $7 trillion so far!
-on-
What's the problem here? We have a classic run-on-bank situation here, triggered by subprime problem, but more importantly instigated by the hedge fund community and the short sellers. There has been a concerted effort to undermine the US financial institutions and create panic among investors.
Because of the constant bashing of the US financial institutions by characters like Peter Schiff, investors got really confused, and did not see that the real scope of the subprime mortgage problem was actually very limited. Then you had those credit analysts, who paid by their hedge fund clients, kept pushing down the credit ratings on banks and financial institutions in an attempt to instigate a run-on-bank. What you got in the end was a self-fulfilling prophesy.
Financial institutions are built on trust. When trust was gone, these institutions could no longer exist.
Fannie and Freddie were great cases in point. There weren't much problem with their mortgage assets. Fannie's mortgage delinquency rate was a little above 1% and Freddie was still below 1%, before they were rescued by the government and put into conservancy. Either institutions had much exposure to subprime mortgages at all. What happened was that Fannie and Freddie's capital market dried up, because investors simply did not want to lend money to any financial institutions at the time, not even Fannie and Freddie. The securitization market was completely frozen (thanks to Hank Paulson who let Lehman go under). In that circumstance, no matter how money good the assets were, the companies could not survive. That was a typical run-on-bank!
We have to stop all those stupid doom-and-gloom talks. We have to restore people's confidence in our financial system. If you understand what I put forth above, you would agree with me that there IS NO fundamental problem with the US financial institutions! There was a crisis of confidence problem. We need to restore that confidence.
Thursday, February 12, 2009
The theory of evolution is seriously flawed
This year marks 200th year of the birth of Charles Darwin. There are many commemorations right now going on around the world. More than 150 years since the publication of his revolutionary thesis, "the origin of species", the whole world almost entirely accept his theory of "evolution through natural selection" as a matter of fact. Even the Vatican accepts Darwin's theory of evolution.
But if you carefully study the theory of evolution, and are intellectually honest, you will come to the conclusion, as I did, that the theory is seriously flawed.
Natural selection has supplanted God as explain-it-all. Whatever we cannot explain in biology, we attribute that to the result of natural selection. For example, why do dogs have extremely sensitive olfactory function (sense of smell)? Oh, it is the result of natural selection. Because this trait gives dogs survival advantage in nature. But why human did not attain such a trait? Or why not every animal attain such a trait, if this trait confers survival advantage?
Before Darwin, God was the ultimate answer to every question. After Darwin, natural selection gradually took the place of God.
I plea, for the sake of science, we have to break the shackle of the "natural selection" dogma. Let's probe deeper. Let's not be hindered by any presumed dogma. Let's be honest with our intellect and reason. The theory of evolution in its current form is completely erroneous.
Yes, I am a Christian, and I believe in God. But that is not the reason I question evolution. I used to be a complete atheist, growing up in an atheist country. In my first year in college, I took Biology 101. Towards to the final part of the course, the topic was evolution. I had a huge debate with my classmates, which lasted to the wee hours of the morning. And the next day we would have a final test for the class. I would rather fail the test than accept a flawed (stupid, as I called it at the time) theory.
I wasn't a Christian at that time. I never heard about God. But I was honest to myself, and to reason.
Natural selection simply cannot explain the diversity of species. In order for the nature to select certain traits, you have to have the traits to begin with. But aren't we trying to explain the ORIGIN of these traits? How can natural selection PRODUCE so many different traits? Later evolution theorists postulated that random mutations somehow happen to produce many features. Then the force of natural selection would only allow those desirable traits to survive.
But that is inconsistent with the fact. Let me give you a simple example: evolution theorists believe that amphibians were evolved from fish, because nature favors animals that can both live in water and on land. If that is true, then we would see only amphibians, no fish now, because nature has selected out fish in favor of amphibians. You have to have this selection pressure in order for species to evolve, right? If there weren't "negative natural selection" pressure on fish, how can fish evolve into amphibian when fish was perfectly fine being just fish?
Let's assume for a moment that random mutations actually were lucky enough to produce certain traits. But we are talking about extremely lucky. Let's consider the trait of vision for a moment. This trait is the result of coordinated work of multiple tissue functions: the eyeball (the "lens"), the muscles that adjust the "lens", the iris that regulates the input of light, and the nerve cells that transmit light signal to brain, and the brain cells that interpret the signal, and many many more. In order for such a complex trait to evolve out of nowhere, you have to have coordinated random mutations involving multiple tissue cells, and in a series of steps, to finally and luckily result in perfect vision. What a miracle! It is like you put a heap of metal fragments together, and suddenly there is a hurricane, and after the hurricane, alas, a new Boeing 747 was right there! Yes, this could happen, mathematically possible. But it may be easier to believe in God.
Archeological evidence does not support evolution, either. Species tend to spring out from no where in very short periods of time, and then you do not see emergence of any new species for a long long period of time. It seems that the emergence of new species occurred sporadically within very short periods. Darwin theory would have predicted gradual evolution of species, which means we should see emergence of new species all the time. But the fact is different from what Darwinism predicts. Later evolution theorists noticed this glaring contradiction. Some of them proposed a modified theory called "punctuated equilibrium". How punctuated was the process of evolution? Maybe six periods, like the six days in the book of Genesis?
It takes more faith to believe evolution than to believe God!
But if you carefully study the theory of evolution, and are intellectually honest, you will come to the conclusion, as I did, that the theory is seriously flawed.
Natural selection has supplanted God as explain-it-all. Whatever we cannot explain in biology, we attribute that to the result of natural selection. For example, why do dogs have extremely sensitive olfactory function (sense of smell)? Oh, it is the result of natural selection. Because this trait gives dogs survival advantage in nature. But why human did not attain such a trait? Or why not every animal attain such a trait, if this trait confers survival advantage?
Before Darwin, God was the ultimate answer to every question. After Darwin, natural selection gradually took the place of God.
I plea, for the sake of science, we have to break the shackle of the "natural selection" dogma. Let's probe deeper. Let's not be hindered by any presumed dogma. Let's be honest with our intellect and reason. The theory of evolution in its current form is completely erroneous.
Yes, I am a Christian, and I believe in God. But that is not the reason I question evolution. I used to be a complete atheist, growing up in an atheist country. In my first year in college, I took Biology 101. Towards to the final part of the course, the topic was evolution. I had a huge debate with my classmates, which lasted to the wee hours of the morning. And the next day we would have a final test for the class. I would rather fail the test than accept a flawed (stupid, as I called it at the time) theory.
I wasn't a Christian at that time. I never heard about God. But I was honest to myself, and to reason.
Natural selection simply cannot explain the diversity of species. In order for the nature to select certain traits, you have to have the traits to begin with. But aren't we trying to explain the ORIGIN of these traits? How can natural selection PRODUCE so many different traits? Later evolution theorists postulated that random mutations somehow happen to produce many features. Then the force of natural selection would only allow those desirable traits to survive.
But that is inconsistent with the fact. Let me give you a simple example: evolution theorists believe that amphibians were evolved from fish, because nature favors animals that can both live in water and on land. If that is true, then we would see only amphibians, no fish now, because nature has selected out fish in favor of amphibians. You have to have this selection pressure in order for species to evolve, right? If there weren't "negative natural selection" pressure on fish, how can fish evolve into amphibian when fish was perfectly fine being just fish?
Let's assume for a moment that random mutations actually were lucky enough to produce certain traits. But we are talking about extremely lucky. Let's consider the trait of vision for a moment. This trait is the result of coordinated work of multiple tissue functions: the eyeball (the "lens"), the muscles that adjust the "lens", the iris that regulates the input of light, and the nerve cells that transmit light signal to brain, and the brain cells that interpret the signal, and many many more. In order for such a complex trait to evolve out of nowhere, you have to have coordinated random mutations involving multiple tissue cells, and in a series of steps, to finally and luckily result in perfect vision. What a miracle! It is like you put a heap of metal fragments together, and suddenly there is a hurricane, and after the hurricane, alas, a new Boeing 747 was right there! Yes, this could happen, mathematically possible. But it may be easier to believe in God.
Archeological evidence does not support evolution, either. Species tend to spring out from no where in very short periods of time, and then you do not see emergence of any new species for a long long period of time. It seems that the emergence of new species occurred sporadically within very short periods. Darwin theory would have predicted gradual evolution of species, which means we should see emergence of new species all the time. But the fact is different from what Darwinism predicts. Later evolution theorists noticed this glaring contradiction. Some of them proposed a modified theory called "punctuated equilibrium". How punctuated was the process of evolution? Maybe six periods, like the six days in the book of Genesis?
It takes more faith to believe evolution than to believe God!
Tuesday, February 10, 2009
Who are against the stimulus plan?
There are three groups of people who are against the economic stimulus plan:
The first group are the ideologues. These people are inherently against any form of government intervention. They stick to their ideology and dogma, refuse to consider facts and practical matters. They are like the pharisees in Jesus time, who were against doing anything on sabbath day, even rescuing someone from drowning.
The second group are the short seller. They have a lot to gain financially if the economy continues to flounder and stock market languish. They bet against US economy, equities, mortgage debts, and US financial assets. These people care nothing else other than money. They have no ethics, no moral, no trace of human decency.
The third group are idiots, who knows nothing about economics or anything. They are simply against anything supported by Obama or the Democrats.
Any reasonable person would realize that it is imperative that the US government pass an economic stimulus plan.
Demand is shrinking. Initially the decline in demand was justified, because people over spent in the past few years. But now the decline in demand is spiraling down out of control, not because of the financial health of US household, but because of pure fear and lack of confidence. Because of the shrinking demand, businesses are cutting back production capacity and laying off massive number of workers. The massive job losses are further crimping demand and consumption. The vicious cycle is feeding on itself. If nothing is done to increase demand, stop factory closings, and stem the job loss, we will definitely go into a sustained period of depression.
In this case, one obviously would prefer businesses/private sector to step up, increase investment, stimulate demand and create jobs. But that is not happening. The private sector is holding backing, quite understandably. They are not willing to take risk to invest, not knowing when the economy would improve.
Given this reality, government HAS to step in, to increase demand for goods and services. With increasing demand, businesses will stop closing factories and laying off people. Then gradually consumer confidence will be restored. A normalized demand level will be established. Once demand stabilizes, business confidence will be restored. Risking taking and private investment will come back. New jobs will be created. As a result, consumer confidence will rise. Then demand will further improve, and the loop of positive feedback will result in gradual recovery of the economy.
At which point, the government stimulus can be removed. Increased tax revenue can be used to pay down the debt borrowed for the stimulus spending.
The first group are the ideologues. These people are inherently against any form of government intervention. They stick to their ideology and dogma, refuse to consider facts and practical matters. They are like the pharisees in Jesus time, who were against doing anything on sabbath day, even rescuing someone from drowning.
The second group are the short seller. They have a lot to gain financially if the economy continues to flounder and stock market languish. They bet against US economy, equities, mortgage debts, and US financial assets. These people care nothing else other than money. They have no ethics, no moral, no trace of human decency.
The third group are idiots, who knows nothing about economics or anything. They are simply against anything supported by Obama or the Democrats.
Any reasonable person would realize that it is imperative that the US government pass an economic stimulus plan.
Demand is shrinking. Initially the decline in demand was justified, because people over spent in the past few years. But now the decline in demand is spiraling down out of control, not because of the financial health of US household, but because of pure fear and lack of confidence. Because of the shrinking demand, businesses are cutting back production capacity and laying off massive number of workers. The massive job losses are further crimping demand and consumption. The vicious cycle is feeding on itself. If nothing is done to increase demand, stop factory closings, and stem the job loss, we will definitely go into a sustained period of depression.
In this case, one obviously would prefer businesses/private sector to step up, increase investment, stimulate demand and create jobs. But that is not happening. The private sector is holding backing, quite understandably. They are not willing to take risk to invest, not knowing when the economy would improve.
Given this reality, government HAS to step in, to increase demand for goods and services. With increasing demand, businesses will stop closing factories and laying off people. Then gradually consumer confidence will be restored. A normalized demand level will be established. Once demand stabilizes, business confidence will be restored. Risking taking and private investment will come back. New jobs will be created. As a result, consumer confidence will rise. Then demand will further improve, and the loop of positive feedback will result in gradual recovery of the economy.
At which point, the government stimulus can be removed. Increased tax revenue can be used to pay down the debt borrowed for the stimulus spending.
Sunday, January 18, 2009
America never ceases to amaze the world
Four years ago, the world looked at America in total shock and maybe with a little anger as Americans chose a leader that brought too much damage to both America and the world for a second term. The world was asking: America, what have you done?
Four years later, the world again is looking at America, this time with a sense of awe, and maybe a little jealousy, as America turns a new page in her history. The world is amazed: America, only in America!
America is still the beacon of hope. America is still the light in the darkness.
The world has regained faith in America and the American people.
The night on Nov 2nd, 2008, I could not help calling my old friends in the land where I came from. I said: look, I told you so.
America, I am so proud of you. American people, I am so proud of you. American people are fair, just, and full of grace and compassion. They are not afraid of admitting their own wrong, and they always look forward.
To be honest with you, there is also evil in America. In the last of eight years, you have seen it in full display. But America always overcomes. America always moves forward.
In two days, really two days, Barack Obama will be our President! Mr. President, please remember the people who have voted for you. Please do not break your promises. We want change! Yes, you may have to make some compromises, to win over your political opponents. But never make deal with the devil!
Mr. President, I pray that: may God give you wisdom, judgment, and courage to lead this great nation out of current darkness. Bring back the hope for the whole world.
Four years later, the world again is looking at America, this time with a sense of awe, and maybe a little jealousy, as America turns a new page in her history. The world is amazed: America, only in America!
America is still the beacon of hope. America is still the light in the darkness.
The world has regained faith in America and the American people.
The night on Nov 2nd, 2008, I could not help calling my old friends in the land where I came from. I said: look, I told you so.
America, I am so proud of you. American people, I am so proud of you. American people are fair, just, and full of grace and compassion. They are not afraid of admitting their own wrong, and they always look forward.
To be honest with you, there is also evil in America. In the last of eight years, you have seen it in full display. But America always overcomes. America always moves forward.
In two days, really two days, Barack Obama will be our President! Mr. President, please remember the people who have voted for you. Please do not break your promises. We want change! Yes, you may have to make some compromises, to win over your political opponents. But never make deal with the devil!
Mr. President, I pray that: may God give you wisdom, judgment, and courage to lead this great nation out of current darkness. Bring back the hope for the whole world.
Friday, January 16, 2009
State of the economy
In four days, a new President will be sworn in to the White House. The nation is nervous, yet hopeful, about how the economy will do under Obama's hands-on approach. Free market economists worry about too much government intervention, while the Keynesian people press for more stimulus spending. Who is right?
I am in the middle of the two extremes. In the extreme left, the Keynesian people put too much faith in a few elites in the government that the government can make sound economic investments when private sectors are gun-shy. On the other hand, the free market crowd put too much faith in the "invisible hand" of the market and its ability to self adjust, forgetting that free market in short term can be very inefficient and irrational, and takes a long time to self adjust. The current economic situation is a case in point. After several years of easy credit, the financial sector is almost grinding to a standstill. Private investment is almost completely frozen. Consumers all of sudden woke up, stopped their spending binge and have been tightening the belt to suffocation. The negative multiplier effect of declining investment and consumption has led to massive layoffs and production shutdowns. Under this situation, if the government does not step in to provide a backstop, the economy will certainly spiral down to depression, and remain there for a long time, until the markets gradually self adjust. We cannot afford to wait. Normally I do not like Keynesian economics and government intervention. But this is not a normal time. If the government has any use at all, now it is the time for it to step up.
There are three types of government interventions that can affect the economy: monetary, fiscal, and tax. We have tried the monetary. Federal Reserve has printed trillions of fresh dollars, only seeing those dollars being hoarded by the banks without being put to use to stimulate the economy. Reducing taxes, or even tax rebates, may not help either, because the private sector does not want to invest or spend the money they get from tax reduction or rebates. So that leaves only fiscal stimulus in the forms of government spending. I think prudent and targeted government spending at this critical juncture is necessary to create jobs for the laid-off workers, stimulate economic demand, and produce long lasting benefits to the society.
That is why I support a "shock and awe"-type of fiscal stimulus package, to increase investment in much needed infrastructure upgrades around the entire US. Still remember the bridge collapse in Minneapolis? Just a few weeks ago, the River Rd down here in Potomac Maryland became a real river road, because a massive water main break. For so many years, we have under-invested the nation's critical infrastructure because no-one likes to pay higher taxes. We should also increase the investment in projects that produce long lasting benefits to the country, such as increasing funding for scientific research, alternative energy, national broadband networks, and smart electric grids.
Yes, I am nervous, but I am more hopeful. I am carefully watching what Obama is saying. And I like what I have heard so far. I am hopeful.
I am in the middle of the two extremes. In the extreme left, the Keynesian people put too much faith in a few elites in the government that the government can make sound economic investments when private sectors are gun-shy. On the other hand, the free market crowd put too much faith in the "invisible hand" of the market and its ability to self adjust, forgetting that free market in short term can be very inefficient and irrational, and takes a long time to self adjust. The current economic situation is a case in point. After several years of easy credit, the financial sector is almost grinding to a standstill. Private investment is almost completely frozen. Consumers all of sudden woke up, stopped their spending binge and have been tightening the belt to suffocation. The negative multiplier effect of declining investment and consumption has led to massive layoffs and production shutdowns. Under this situation, if the government does not step in to provide a backstop, the economy will certainly spiral down to depression, and remain there for a long time, until the markets gradually self adjust. We cannot afford to wait. Normally I do not like Keynesian economics and government intervention. But this is not a normal time. If the government has any use at all, now it is the time for it to step up.
There are three types of government interventions that can affect the economy: monetary, fiscal, and tax. We have tried the monetary. Federal Reserve has printed trillions of fresh dollars, only seeing those dollars being hoarded by the banks without being put to use to stimulate the economy. Reducing taxes, or even tax rebates, may not help either, because the private sector does not want to invest or spend the money they get from tax reduction or rebates. So that leaves only fiscal stimulus in the forms of government spending. I think prudent and targeted government spending at this critical juncture is necessary to create jobs for the laid-off workers, stimulate economic demand, and produce long lasting benefits to the society.
That is why I support a "shock and awe"-type of fiscal stimulus package, to increase investment in much needed infrastructure upgrades around the entire US. Still remember the bridge collapse in Minneapolis? Just a few weeks ago, the River Rd down here in Potomac Maryland became a real river road, because a massive water main break. For so many years, we have under-invested the nation's critical infrastructure because no-one likes to pay higher taxes. We should also increase the investment in projects that produce long lasting benefits to the country, such as increasing funding for scientific research, alternative energy, national broadband networks, and smart electric grids.
Yes, I am nervous, but I am more hopeful. I am carefully watching what Obama is saying. And I like what I have heard so far. I am hopeful.
Thursday, January 15, 2009
Steve Jobs says: happy new year. see you in six months
Steve Jobs of Apple finally admitted that his illness is more than just a simple hormonal imbalance. He is taking a six-month medical leave of absence, leaving Tim Cook in charge of the day-to-day operation at Apple. I suspect for the past year it was someone other than Steve taking care of the day-to-day operation at Apple, while Steve battling his health problem.
The stock will undoubtedly trade down today. But is it a bad thing that Apple from now on will gradually move out of the shadow of Steve Jobs? There is no doubt Steve Jobs has contributed enormously to the success of Apple. But I don't believe Apple is entirely managed by a few strong personalities (or one strong personality). I think the company has the needed management process (from strategy to operation to marketing, etc.) in place to continue its success in the market.
In the past several months, I have seen some welcome changes taking place at 1 Infinite Loop. For example, for the first time, Apple allows variable pricing for the songs to be sold in iTunes Store. Yesterday, there were reports that Apple has allowed third-party mobile browsers to be installed on iPhone.
I am hopeful that a post-Jobs Apple will be more open and flexible in its way of dealing with developers suppliers media and investors. In that sense, Jobs-less Apple may not entirely be a bad thing.
Disclaimer: I own common shares of Apple.
The stock will undoubtedly trade down today. But is it a bad thing that Apple from now on will gradually move out of the shadow of Steve Jobs? There is no doubt Steve Jobs has contributed enormously to the success of Apple. But I don't believe Apple is entirely managed by a few strong personalities (or one strong personality). I think the company has the needed management process (from strategy to operation to marketing, etc.) in place to continue its success in the market.
In the past several months, I have seen some welcome changes taking place at 1 Infinite Loop. For example, for the first time, Apple allows variable pricing for the songs to be sold in iTunes Store. Yesterday, there were reports that Apple has allowed third-party mobile browsers to be installed on iPhone.
I am hopeful that a post-Jobs Apple will be more open and flexible in its way of dealing with developers suppliers media and investors. In that sense, Jobs-less Apple may not entirely be a bad thing.
Disclaimer: I own common shares of Apple.
Thursday, December 18, 2008
The entire Wall Street is a giant Ponzi scheme
Oil dropped below $40, standing at $36 and changes. That is lowest in last four years. Just a few months ago it was at above $150, and expected to go to $200. What happened? Supply and demand? Not entirely.
Remember a few months ago, no matter how much production increase OPEC countries implemented, the oil price just kept going up. Now it is the opposite: no matter how much production cut, the oil price keeps dropping. Yesterday OPEC leaders announced a huge production cut, 2.2M barrels/day, or 7%, after slicing 1.7M/day already in the past three months. Surprise, oil price dropped >9%. Go figure!
There are just too much speculative trading in oil by the Wall Street. It is creating tremendous volatility in oil price that is very bad for businesses. Same situation is happening to currency exchange. Dollar has gone from dog house to king's castle in a matter of past three months. A few months ago, one Euro can buy more than $1.50. A few days ago it went down to $1.27. And in last few days, it is back to $1.43. Volatility in basic materials and currency exchange is very damaging to global trade and business investments. When business cannot reasonably forecast their input costs and trading revenue (in foreign countries), how can they conduct effective business planning? They will often have to engage in expensive hedging plans to offset the uncertainties. That benefits the Wall Street but hurts economy.
We HAVE to regulate more the hedge fund industry and stop this type of crazy speculations that damage real people and real economy.
Remember a few months ago, no matter how much production increase OPEC countries implemented, the oil price just kept going up. Now it is the opposite: no matter how much production cut, the oil price keeps dropping. Yesterday OPEC leaders announced a huge production cut, 2.2M barrels/day, or 7%, after slicing 1.7M/day already in the past three months. Surprise, oil price dropped >9%. Go figure!
There are just too much speculative trading in oil by the Wall Street. It is creating tremendous volatility in oil price that is very bad for businesses. Same situation is happening to currency exchange. Dollar has gone from dog house to king's castle in a matter of past three months. A few months ago, one Euro can buy more than $1.50. A few days ago it went down to $1.27. And in last few days, it is back to $1.43. Volatility in basic materials and currency exchange is very damaging to global trade and business investments. When business cannot reasonably forecast their input costs and trading revenue (in foreign countries), how can they conduct effective business planning? They will often have to engage in expensive hedging plans to offset the uncertainties. That benefits the Wall Street but hurts economy.
We HAVE to regulate more the hedge fund industry and stop this type of crazy speculations that damage real people and real economy.
Bernard Madoff's "Giant Ponzi Scheme"
The Bernard Madoff saga continues to dominate the financial news headline. This 70-year old fellow has been running a "giant Ponzi scheme" (in his own words) for the past two decades. Loss to the investors could exceed $50B, largest financial fraud in history. Where were the auditors? Where was the SEC?
Ponzi scheme is a term named after Charles Ponzi, a financial con artist. But even Ponzi was not able to deceive people for so long. A Ponzi scheme is like robbing Peter to pay Paul. Investors are promised high return. So they gave the money to the fraudster. The fraudster pay the earlier investors with money gotten from the later investors. As long as money keeps pouring in, the scheme can continue. But if new investors do not come in, the music stops.
Madoff has aroused a lot of suspicion over the years. Today's Wall Street Journal profiled a guy by the name of Harry Markopolos who had been prodding the SEC to investigate Madoff for years. SEC basically ignored him.
Over the past several years, government regulatory agencies have become too cozy with the businesses they regulate. President Bush wants the government agencies to "serve" the industry, and be "business friendly". Republican ideology is "let business self regulate". What you end up with is "Robber Barons" style capitalism. Large business hire lobbyists to pass government policies that favor the big businesses and create barriers for competition. Small businesses and consumers are left in the dark.
I doubt there will be any significant change even under Obama. There are just too many vested interests out there. It would be enormously hard to overcome them. The American public is stupid , and can be easily misled by these big interest groups who control the media and the propaganda machines. If Obama wants to change all that, he will be slandered and demonized, and then rendered completely ineffective. I think Obama understands that. If he really wants to do something good for America, he should make small incremental changes. Gradualism is the key. Don't step on too many toes. I hope he is smart enough. He does not want to end up like JFK, right?
Ponzi scheme is a term named after Charles Ponzi, a financial con artist. But even Ponzi was not able to deceive people for so long. A Ponzi scheme is like robbing Peter to pay Paul. Investors are promised high return. So they gave the money to the fraudster. The fraudster pay the earlier investors with money gotten from the later investors. As long as money keeps pouring in, the scheme can continue. But if new investors do not come in, the music stops.
Madoff has aroused a lot of suspicion over the years. Today's Wall Street Journal profiled a guy by the name of Harry Markopolos who had been prodding the SEC to investigate Madoff for years. SEC basically ignored him.
Over the past several years, government regulatory agencies have become too cozy with the businesses they regulate. President Bush wants the government agencies to "serve" the industry, and be "business friendly". Republican ideology is "let business self regulate". What you end up with is "Robber Barons" style capitalism. Large business hire lobbyists to pass government policies that favor the big businesses and create barriers for competition. Small businesses and consumers are left in the dark.
I doubt there will be any significant change even under Obama. There are just too many vested interests out there. It would be enormously hard to overcome them. The American public is stupid , and can be easily misled by these big interest groups who control the media and the propaganda machines. If Obama wants to change all that, he will be slandered and demonized, and then rendered completely ineffective. I think Obama understands that. If he really wants to do something good for America, he should make small incremental changes. Gradualism is the key. Don't step on too many toes. I hope he is smart enough. He does not want to end up like JFK, right?
Bailing out auto companies without debt restructuring amounts to bailing out Wall Street
I agree with the Senate republicans: if the auto companies don't restructure the huge amount of debt on their balance sheet, giving them any amount of money will not help them. The money they receive will only be enough the service the interest payment on the debt. Who owns their debt? Wall Street investors. So without first restructuring the debt, the money will just end up in the hands of the debt investors. And a few months (or even weeks) down the road, these dying auto companies will have to come back to ask for more financial help.
A debt restructuring without filing for Chapter 11 is the best way out. Their debt is already trading at below 19c on a dollar. To me that means debt investors are waiting for a Chapter 11 type of debt restructuring.
A debt restructuring without filing for Chapter 11 is the best way out. Their debt is already trading at below 19c on a dollar. To me that means debt investors are waiting for a Chapter 11 type of debt restructuring.
Wednesday, December 10, 2008
Treasury yielding 0%: absolute risk averse of the investors
Yesterday, the Treasury auctioned $30B worth of 4-week bills with 0% interest to the investors. For the off-run 3-month treasury, the yield briefly was pushed to negative territory. Basically investors are lending money to the Treasury (Uncle Sam) for free, or even paying the government for storing their cash (in the case of the negative yield 3-month bills), while demanding high interest rate to lend to corporations and individuals even with good credit. In a finance lingo, the credit spreads are unusually wide. That means investors are absolutely risk averse.
We are in an uncharted territory here. Last time when the Treasury auctioned short terms yielding 0% was late 1930s and early 1940s, during the great depression. This is certainly not a good sign.
When the private sector is not willing to take any risk, which is reflected in the ultra low interest rates on public debt and exorbitantly high interest rates on other debts (commercial, local municipalities, and individual loans), should the government step in to provide credit for the economy, as Keynesian economists would propose? I think the answer is absolutely yes.
The banks are not doing the lending. They took the cash from the Treasury's TARP (Troubled Assets Relief Program, widely known as the $700 Wall Street Bailout), and stuffed it in their vault. Homes are continuing to default. Businesses cannot get loans. Individuals cannot buy a house even they can afford (the credit standard has tightened too much). The result is that real economy is suffering. The Treasury bailout did not benefit the main street. It only fattened the pockets of the financial institutions.
Now it is the time to give money to the main street, to the real economy that creates real value to the country, not the paper-flipping Wall Street firms. How do we do that? I think the Obama economic stimulation plan is a good start. But it is not enough. And it is not quick enough. Let's put cash to work, right now!
First, the Treasury should use its cheap financing option to pump cash directly to the mortgage market, by buying high quality mortgage loans. (In my previous post, I argued that this action would even make money for the Treasury). Along the same line, the Federal government should aid the State and local governments by directly giving low interest loans to them to meet their budget shortfalls because they cannot borrow in the municipal bonds market. And yes, the Treasury should rescue the auto industry. Not only that, it should also help other domestic companies who cannot borrow from the commercial paper or corporate bond market.
The Treasury needs to act quickly. TARP is not working. Credit for the real economy is still frozen (although inter-banking lending has loosened). By real economy, I mean those "goods-producing" companies, not those trading financial papers (Wall Street). According to some estimates, there will be $800B corporate debt that needs to be refinanced in 2009. And $200B faces refinancing in the next quarter! If the credit spread does not narrow, many companies will be put to the brink of bankruptcy. The ripple effect throughout the economy would be unthinkable.
We need to end this lame duck government sooner than Jan 20. Can we amend the Constitution to allow Obama to swear in right now?
We are in an uncharted territory here. Last time when the Treasury auctioned short terms yielding 0% was late 1930s and early 1940s, during the great depression. This is certainly not a good sign.
When the private sector is not willing to take any risk, which is reflected in the ultra low interest rates on public debt and exorbitantly high interest rates on other debts (commercial, local municipalities, and individual loans), should the government step in to provide credit for the economy, as Keynesian economists would propose? I think the answer is absolutely yes.
The banks are not doing the lending. They took the cash from the Treasury's TARP (Troubled Assets Relief Program, widely known as the $700 Wall Street Bailout), and stuffed it in their vault. Homes are continuing to default. Businesses cannot get loans. Individuals cannot buy a house even they can afford (the credit standard has tightened too much). The result is that real economy is suffering. The Treasury bailout did not benefit the main street. It only fattened the pockets of the financial institutions.
Now it is the time to give money to the main street, to the real economy that creates real value to the country, not the paper-flipping Wall Street firms. How do we do that? I think the Obama economic stimulation plan is a good start. But it is not enough. And it is not quick enough. Let's put cash to work, right now!
First, the Treasury should use its cheap financing option to pump cash directly to the mortgage market, by buying high quality mortgage loans. (In my previous post, I argued that this action would even make money for the Treasury). Along the same line, the Federal government should aid the State and local governments by directly giving low interest loans to them to meet their budget shortfalls because they cannot borrow in the municipal bonds market. And yes, the Treasury should rescue the auto industry. Not only that, it should also help other domestic companies who cannot borrow from the commercial paper or corporate bond market.
The Treasury needs to act quickly. TARP is not working. Credit for the real economy is still frozen (although inter-banking lending has loosened). By real economy, I mean those "goods-producing" companies, not those trading financial papers (Wall Street). According to some estimates, there will be $800B corporate debt that needs to be refinanced in 2009. And $200B faces refinancing in the next quarter! If the credit spread does not narrow, many companies will be put to the brink of bankruptcy. The ripple effect throughout the economy would be unthinkable.
We need to end this lame duck government sooner than Jan 20. Can we amend the Constitution to allow Obama to swear in right now?
Thursday, December 04, 2008
Treasury to the rescue: 4.5% mortgage interest rate?
Today Wall Street Journal revealed that the Treasury Department is mulling a plan to bring down mortgage interest rate to as low as 4.5%. According to WSJ, this can be accomplished by direct purchasing of new mortgages by the Treasury through Fannie and Freddie. You know what? This is a fantastic idea. Only the Wall Street type would come up with this great idea. The Treasury is headed precisely by a Wall Street pro, Hank Paulson. (No, I am not being sarcastic here. I mean it. Finally, some real good idea came out of there.)
How does this work? Let me explain.
Right now the Treasury Bonds are trading at an extraordinarily low interest rate. Yield on the 30-year T-Bond is below 3.1%, while yield on the 10-year bond is around 2.6%. That means the Treasury right now can borrow money at very low cost. In the meanwhile, the interest rate on Mortgage debt is relatively high. A 30-year conforming loan right now is yielding around 5.3%. In the Wall Street lingo, the "spread" between Treasury and Mortgage is very wide, at least 2.2% (5.3%-3.1%).
What if Treasury borrow money from the financial market by selling Treasury Bonds at an interest cost of 3.1%, and then use the money to buy mortgage debt that generates a much higher interest income. The higher interest income the Treasury would get from the Mortgage investment would more than enough to pay for the borrowing cost on the Treasury Bonds, still leaving a smart chump for the Treasury.
How much the Treasury could make if it indeed decides to go ahead with such a plan? The Treasury will not buy all mortgages. It will buy only high quality conforming mortgages, minimizing default risk. Total market for these mortgage loans could be more than $600B/year. Let's assume that the Treasury would buy $100B of these Mortgage loans at a target interest rate of 4.5%. On the other hand, the Treasury would have to first issue $100B Treasury Bonds, probably at a higher cost than current, say 3.5%. So the spread would be a full 1%, which translates into $1B net interest income per year for the Treasury.
Secondary effects of these transactions would be very positive. Home sales would go up because of the attractive interest rate. Existing mortgages should be repriced because of thawing up of the mortgage market. Indirectly banks would be helped because their mortgage investments will regain liquidity. I think this is a great idea. This is an idea that would first help homeowners and also help the financial institutions. So far the $700B Bank Bailout Plan (the "trickle-down/top-down plan", as I would call it) has not produced the desired result. Banks are hoarding the cash they got from the government, instead of lending out to businesses. Credit market has not seen any much loosening so far. I believe this proposed plan, (a "bottom-up plan" as I would call it) would produce the desired result: loosening up the credit market.
One caveat remains: the money Treasury would get from Mortgage payments should go back to pay down the debt it borrowed in the first place. The government cannot get its hand on this bucket of money for other budget use. Any profit from the transaction should also be used to pay down the government debt. This way, we would not end up creating another inflationary bubble.
How does this work? Let me explain.
Right now the Treasury Bonds are trading at an extraordinarily low interest rate. Yield on the 30-year T-Bond is below 3.1%, while yield on the 10-year bond is around 2.6%. That means the Treasury right now can borrow money at very low cost. In the meanwhile, the interest rate on Mortgage debt is relatively high. A 30-year conforming loan right now is yielding around 5.3%. In the Wall Street lingo, the "spread" between Treasury and Mortgage is very wide, at least 2.2% (5.3%-3.1%).
What if Treasury borrow money from the financial market by selling Treasury Bonds at an interest cost of 3.1%, and then use the money to buy mortgage debt that generates a much higher interest income. The higher interest income the Treasury would get from the Mortgage investment would more than enough to pay for the borrowing cost on the Treasury Bonds, still leaving a smart chump for the Treasury.
How much the Treasury could make if it indeed decides to go ahead with such a plan? The Treasury will not buy all mortgages. It will buy only high quality conforming mortgages, minimizing default risk. Total market for these mortgage loans could be more than $600B/year. Let's assume that the Treasury would buy $100B of these Mortgage loans at a target interest rate of 4.5%. On the other hand, the Treasury would have to first issue $100B Treasury Bonds, probably at a higher cost than current, say 3.5%. So the spread would be a full 1%, which translates into $1B net interest income per year for the Treasury.
Secondary effects of these transactions would be very positive. Home sales would go up because of the attractive interest rate. Existing mortgages should be repriced because of thawing up of the mortgage market. Indirectly banks would be helped because their mortgage investments will regain liquidity. I think this is a great idea. This is an idea that would first help homeowners and also help the financial institutions. So far the $700B Bank Bailout Plan (the "trickle-down/top-down plan", as I would call it) has not produced the desired result. Banks are hoarding the cash they got from the government, instead of lending out to businesses. Credit market has not seen any much loosening so far. I believe this proposed plan, (a "bottom-up plan" as I would call it) would produce the desired result: loosening up the credit market.
One caveat remains: the money Treasury would get from Mortgage payments should go back to pay down the debt it borrowed in the first place. The government cannot get its hand on this bucket of money for other budget use. Any profit from the transaction should also be used to pay down the government debt. This way, we would not end up creating another inflationary bubble.
Bailout for the Auto industry: good or bad?
Chiefs of the Big Three auto companies came to the Capitol Hill to beg $34B to bail out their companies. This time, they did not come on their private jets. They took Southwest Airline and took a train to the Capitol. But there are still significant doubts among the lawmakers whether the bailout will be sufficient to turn around the failing US auto industry.
First of all, I think the government SHOULD help the auto industry. As to what is the best way to help them, I am not sure. Will writing them a check for $34B help? I don't know. But we cannot let the auto industry fail. It is one of the very few REAL industries that the US still has. If the federal government can spend a tune of $5 trillion (based on some analysts' estimate) to bail out the fraudulent financial industry, how can it not spare a small change of $34B to rescue the REAL economy?
But I do have lots to complain about the US auto industry:
1) Don't blame your failure on the Union
Sure it would be nice to have low labor cost. But why not these companies also reduce their executive compensation? Alan Mulally, the CEO of Ford, made $55M in last two years, while the company lost over $15B during the same period.
2) Big Three's problem is not that their cars are not cheap enough. Their problems is people don't want to buy their cars no matter how cheap they are
So the Big Three's problem is more of a REVENUE side, than a COST side. If they can sell more cars, they would be able to make a profit. But their market shares are dwindling despite the fact that they offer so much enticement for people to buy their cars, such as 0% financing and thousands of dollars of rebate. Lowering cost would not reverse the trend of their market share loss.
How do we deal with the problems at the Big Three? Honestly I have no clue. And I do not think anybody has any clue. Until we can convince American consumers to buy US cars not Japanese cars, no matter how much money we give them it will save them.
First of all, I think the government SHOULD help the auto industry. As to what is the best way to help them, I am not sure. Will writing them a check for $34B help? I don't know. But we cannot let the auto industry fail. It is one of the very few REAL industries that the US still has. If the federal government can spend a tune of $5 trillion (based on some analysts' estimate) to bail out the fraudulent financial industry, how can it not spare a small change of $34B to rescue the REAL economy?
But I do have lots to complain about the US auto industry:
1) Don't blame your failure on the Union
Sure it would be nice to have low labor cost. But why not these companies also reduce their executive compensation? Alan Mulally, the CEO of Ford, made $55M in last two years, while the company lost over $15B during the same period.
2) Big Three's problem is not that their cars are not cheap enough. Their problems is people don't want to buy their cars no matter how cheap they are
So the Big Three's problem is more of a REVENUE side, than a COST side. If they can sell more cars, they would be able to make a profit. But their market shares are dwindling despite the fact that they offer so much enticement for people to buy their cars, such as 0% financing and thousands of dollars of rebate. Lowering cost would not reverse the trend of their market share loss.
How do we deal with the problems at the Big Three? Honestly I have no clue. And I do not think anybody has any clue. Until we can convince American consumers to buy US cars not Japanese cars, no matter how much money we give them it will save them.
Monday, November 24, 2008
Are we going back to gold standard? Not quite so fast
Recently there have been increasing number of pundits calling for bringing the dollar back to gold standard. If you have read the Wall Street Journal and Financial Times in the past few weeks, you would have seen on the opinion pages many anti-Keynesian economists arguing for the virtues of gold standard and a real free market monetary system. Many of them point out the current financial crisis is precisely caused by credit bubble created by an inflationary fiat monetary system. To cure the global financial malaise, they contend that we need a sound money, the value of which is not based on the illusive credit-worthiness of the government, but on the tangible worth of certain precious metal such as gold.
How does gold standard work? It is very simple. Under the gold standard, the value of the dollar will be determined by its exchange rate with gold. Usually government should be the only entity that issues (meaning prints) paper bills at a predetermined exchange rate with gold (which is dictated by the market). For example, gold is now trading at around $800/troy ounce. You can bring one troy ounce of gold to the government, it will print out $800 fresh paper dollar bills for you (maybe minus a small fee, which is called seignorage), and keep the gold in its vault. The government cannot print more paper money than the worth of gold it receives. Individuals can exchange paper money for real gold if they choose to. Under a true gold standard monetary system, the amount of paper money in circulation should be exactly the same as the amount of gold in government reserve (gold stored in its vault).
The advantage of gold standard is that the government has to eventually balance its budget. The government cannot simple print money to spend. It has to borrow money from the private sector at an interest rate that is determined by the free market, not by the Federal Reserve. If the government borrows too much, the market will demand a high interest cost for its borrowing, which deters the government from running up its budget deficit.
Another benefit of gold standard is the elimination of fluctuation in currency exchange rates which should greatly facilitates global trades. When currencies are all pegged to gold, the exchange rate between currencies will be fixed. Nations will not have to be concerned above currency manipulation by their trading partners. Corporations will not have to buy expensive currency hedges when doing business in foreign countries. Wall Street currency traders will lose their jobs (that is a good thing for the economy, less friction cost).
In order for the gold standard to work, the Federal Reserve has to be abolished. Under the gold standard, money supply is completely determined by the market, rendering the Federal Reserve irrelevant. In fact, any Federal Reserve intervention in money supply will undoubtedly break the link between value of the money and value of gold. That is why even before President Nixon completely decoupled US dollar from gold in 1971, gold had been already traded way above the official dollar/gold exchange value.
But gold standard is not without its potential perils. One of the gravest risks of gold standard is that it is highly susceptible to speculation. Speculators who amass huge amount of gold can manipulate the price of gold and wreck havoc on the financial market. By hoarding gold, they can potentially deplete bank reserves and create a run-on-bank. Even sovereign reserve can be depleted by speculators' manipulation (recall the 1997 Asian financial debacle that was largely caused by western financial speculators). That is why in order for gold standard to work, we have to have absolutely strong market oversight and appropriate rules and regulations in place to prevent speculators like Rothchild and George Soros from creating instability in the financial market.
Personally, I do not believe we will ever go back to gold standard. First, no politician will be able to muster the kind of support needed to pass a law to abolish the Federal Reserve. Second, governments around the world are addicted to the easy money afforded by the fiat monetary system. Third, people who support gold standard loath government regulation. I believe stringent government regulations are absolutely critical for gold standard to function properly. Without implementing proper rules and regulations, gold standard will be subjected to constant market manipulation and eventually lose popular support.
How does gold standard work? It is very simple. Under the gold standard, the value of the dollar will be determined by its exchange rate with gold. Usually government should be the only entity that issues (meaning prints) paper bills at a predetermined exchange rate with gold (which is dictated by the market). For example, gold is now trading at around $800/troy ounce. You can bring one troy ounce of gold to the government, it will print out $800 fresh paper dollar bills for you (maybe minus a small fee, which is called seignorage), and keep the gold in its vault. The government cannot print more paper money than the worth of gold it receives. Individuals can exchange paper money for real gold if they choose to. Under a true gold standard monetary system, the amount of paper money in circulation should be exactly the same as the amount of gold in government reserve (gold stored in its vault).
The advantage of gold standard is that the government has to eventually balance its budget. The government cannot simple print money to spend. It has to borrow money from the private sector at an interest rate that is determined by the free market, not by the Federal Reserve. If the government borrows too much, the market will demand a high interest cost for its borrowing, which deters the government from running up its budget deficit.
Another benefit of gold standard is the elimination of fluctuation in currency exchange rates which should greatly facilitates global trades. When currencies are all pegged to gold, the exchange rate between currencies will be fixed. Nations will not have to be concerned above currency manipulation by their trading partners. Corporations will not have to buy expensive currency hedges when doing business in foreign countries. Wall Street currency traders will lose their jobs (that is a good thing for the economy, less friction cost).
In order for the gold standard to work, the Federal Reserve has to be abolished. Under the gold standard, money supply is completely determined by the market, rendering the Federal Reserve irrelevant. In fact, any Federal Reserve intervention in money supply will undoubtedly break the link between value of the money and value of gold. That is why even before President Nixon completely decoupled US dollar from gold in 1971, gold had been already traded way above the official dollar/gold exchange value.
But gold standard is not without its potential perils. One of the gravest risks of gold standard is that it is highly susceptible to speculation. Speculators who amass huge amount of gold can manipulate the price of gold and wreck havoc on the financial market. By hoarding gold, they can potentially deplete bank reserves and create a run-on-bank. Even sovereign reserve can be depleted by speculators' manipulation (recall the 1997 Asian financial debacle that was largely caused by western financial speculators). That is why in order for gold standard to work, we have to have absolutely strong market oversight and appropriate rules and regulations in place to prevent speculators like Rothchild and George Soros from creating instability in the financial market.
Personally, I do not believe we will ever go back to gold standard. First, no politician will be able to muster the kind of support needed to pass a law to abolish the Federal Reserve. Second, governments around the world are addicted to the easy money afforded by the fiat monetary system. Third, people who support gold standard loath government regulation. I believe stringent government regulations are absolutely critical for gold standard to function properly. Without implementing proper rules and regulations, gold standard will be subjected to constant market manipulation and eventually lose popular support.
Thursday, November 20, 2008
What went wrong for the USA?
What's wrong with America? Who is to blame for the current financial and economic meltdown?
Some people blame the government for running up too much debt. Others blame the poor people for borrowing too much that they cannot afford to pay back. But the real cause is that America's financial industry outgrew the rest of the economy.
Financial industry does not create wealth. Let me repeat it again: financial industry does not create wealth. It only re-distributes wealth. Wealth is created in the real economy, the goods-producing economy. The problem is that America is producing less and less goods, because manufacturing has been increasingly outsourced to overseas. America's economy is becoming an empty shell. If this trend continues, our children will only find jobs in either Walmart, or Wall Street. No wonder we have seen in this country the wealth gap widening, and middle-class disappearing, because the good-paying manufacturing jobs have all but gone overseas. First was the textile industry, then the electronic industry, and now the automobile industry. If the US auto industry should disappear, and most likely it will, I don't know what real stuff America can produce any more.
On the other hand, the financial industry has been growing, and it has been obsessed with growth. It forced main-street companies to move production to low cost countries, so the profit can be larger and stock prices higher. Not only that, the financial industry has been using all kinds of tricks to convince peope to borrow more, because the more we borrow, the more profit for the industry. It uses all kinds of innovative financial engineering to make borrowing easier for everyone. To persuade individuals to borrow, they give us credit cards with rewards. The more you buy, the more you save. If you own a house, they want you to borrow against your house. They call that home equity loan. After you exhausted your home equity, they ask you to borrow against your next paycheck. To persuade government to borrow, they always support lower tax and higher spending. When it comes to persuading corporations to borrow, that is where they get extremely innovative. They design all kinds of financial instruments to allow corporations to borrow easily.
The end result was the enormous growth in credit, which in turn stimulated growth of the entire economy. But this type of growth can't sustain. When individuals, government, and corporations exhausted their ability to borrow further, that is when the house starts to crumble. That is exactly what is happening now.
Don't get me wrong. I have nothing against the financial industry (I for one work for the industry). The financial industry serves a vital function, which is to promote most efficient capital allocation. In a normally functioning financial market, capitals are taken away from failing businesses to support value-creating businesses.
Because of the vital role the financial market plays in real economy, there have to be stringent and adequate rules and regulations. You cannot have a great basketball game if there are no clear rules and referees, no matter how talented the players are. The problem with our current financial system is that government under enormous lobbying pressure does not want to set rules. Existing laws are antiquated because the industry always try to find ways to circumvent them. For example, banks set up SIVs, or Structured Investment Vehicles, to engage in non-regulated investment activities, putting depositors capital under risk. Insurance companies sell innovative quasi-insurance products, such as CDS, credit default swaps, without putting sufficient capital reserve as collateral. That was how AIG got into trouble. AIG's traditional insurance business was doing just fine. It was its non-regulated business (selling CDS) that incurred huge losses and needed $155B bailout from the government.
Some people blame the government for running up too much debt. Others blame the poor people for borrowing too much that they cannot afford to pay back. But the real cause is that America's financial industry outgrew the rest of the economy.
Financial industry does not create wealth. Let me repeat it again: financial industry does not create wealth. It only re-distributes wealth. Wealth is created in the real economy, the goods-producing economy. The problem is that America is producing less and less goods, because manufacturing has been increasingly outsourced to overseas. America's economy is becoming an empty shell. If this trend continues, our children will only find jobs in either Walmart, or Wall Street. No wonder we have seen in this country the wealth gap widening, and middle-class disappearing, because the good-paying manufacturing jobs have all but gone overseas. First was the textile industry, then the electronic industry, and now the automobile industry. If the US auto industry should disappear, and most likely it will, I don't know what real stuff America can produce any more.
On the other hand, the financial industry has been growing, and it has been obsessed with growth. It forced main-street companies to move production to low cost countries, so the profit can be larger and stock prices higher. Not only that, the financial industry has been using all kinds of tricks to convince peope to borrow more, because the more we borrow, the more profit for the industry. It uses all kinds of innovative financial engineering to make borrowing easier for everyone. To persuade individuals to borrow, they give us credit cards with rewards. The more you buy, the more you save. If you own a house, they want you to borrow against your house. They call that home equity loan. After you exhausted your home equity, they ask you to borrow against your next paycheck. To persuade government to borrow, they always support lower tax and higher spending. When it comes to persuading corporations to borrow, that is where they get extremely innovative. They design all kinds of financial instruments to allow corporations to borrow easily.
The end result was the enormous growth in credit, which in turn stimulated growth of the entire economy. But this type of growth can't sustain. When individuals, government, and corporations exhausted their ability to borrow further, that is when the house starts to crumble. That is exactly what is happening now.
Don't get me wrong. I have nothing against the financial industry (I for one work for the industry). The financial industry serves a vital function, which is to promote most efficient capital allocation. In a normally functioning financial market, capitals are taken away from failing businesses to support value-creating businesses.
Because of the vital role the financial market plays in real economy, there have to be stringent and adequate rules and regulations. You cannot have a great basketball game if there are no clear rules and referees, no matter how talented the players are. The problem with our current financial system is that government under enormous lobbying pressure does not want to set rules. Existing laws are antiquated because the industry always try to find ways to circumvent them. For example, banks set up SIVs, or Structured Investment Vehicles, to engage in non-regulated investment activities, putting depositors capital under risk. Insurance companies sell innovative quasi-insurance products, such as CDS, credit default swaps, without putting sufficient capital reserve as collateral. That was how AIG got into trouble. AIG's traditional insurance business was doing just fine. It was its non-regulated business (selling CDS) that incurred huge losses and needed $155B bailout from the government.
Tuesday, November 04, 2008
America, I am so proud of you! Dawn of Hope!
At this moment, 10:33PM EST, Obama has 207 electoral votes. OH, NM and IA are Obama's country. That is just an early indication of a landslide.
1) MLK can now rest in peace. Forty years after his famous "I have a dream" speech, this nation can now look beyond the color of an individual's skin, and judge the person on his or her own merits.
2) The world is now looking at America in awe! America is STILL the beacon of light for the world. It is still the symbol of hope and inspiration.
3) It is so unfortunate that Obama's grandmother could not live to witness his grandson winning this historic election. She died one day before the election. But I am sure she is now smiling in heaven.
4) Now it is time to get to work: we need to give some desperately needed help to the middle class and the poor. Then we need to invest in America's future, by supporting education, healthcare for everyone, alternative energy technologies, and rebuilding of the crumbling infrastructure.
Finally we can all go to sleep with smile. Sweet dream, America, and wake up to the dawn of a new era, an era of new hope.
1) MLK can now rest in peace. Forty years after his famous "I have a dream" speech, this nation can now look beyond the color of an individual's skin, and judge the person on his or her own merits.
2) The world is now looking at America in awe! America is STILL the beacon of light for the world. It is still the symbol of hope and inspiration.
3) It is so unfortunate that Obama's grandmother could not live to witness his grandson winning this historic election. She died one day before the election. But I am sure she is now smiling in heaven.
4) Now it is time to get to work: we need to give some desperately needed help to the middle class and the poor. Then we need to invest in America's future, by supporting education, healthcare for everyone, alternative energy technologies, and rebuilding of the crumbling infrastructure.
Finally we can all go to sleep with smile. Sweet dream, America, and wake up to the dawn of a new era, an era of new hope.
Saturday, November 01, 2008
McCain's tax plan vs. Obama's tax plan (satire)
Let's be frank about it. McCain has a better tax plan than Obama. Not only he gives some tax cut to the poor, he will also cut tax for the wealthy and big corporations, just in case they need it. McCain will cut tax for EVERYONE, not only the middle class and poor.
How will he balance the budget, if he cut taxes? He will freeze all domestic spending except the military. Sure, this will cripple domestic economy. But no worry, our corporations can always do business in other countries. And our military spending will definitely stimulate the economy of our friends in the middle east. Yes, tough economic time is ahead of us here in the US. But that is why we are asking you to put the country first.
Even freezing domestic spending would not balance the budget, because we are already running a half trillion dollar budget deficit. But, don't fret. The government can always borrow. We have been doing that in the last eight years! Why can't we continue doing that?
On the other hand, Obama only gives tax cut to those who need it. He asks the wealthy and the corporations to chip in a little bit more. That is socialism, my friends. Obama will reduce our military spending by ending the war in Iraq, and boost domestic spending to stimulate the US economy. He will give tax credit to small businesses that create jobs in the US, not ship jobs overseas. He will repair the crippling infrastructure, and encourage investment in alternative energy technologies. My friends, that does not work! That is government intervention. You democrats did that in the 90s, the early 60s, and the late 30s. The New Deal. The Great Society. Blah blah blah. Those are false hopes. They work for a while, until we republicans came in to crash them.
My friends, on November 4th, remember to vote for McCain.
How will he balance the budget, if he cut taxes? He will freeze all domestic spending except the military. Sure, this will cripple domestic economy. But no worry, our corporations can always do business in other countries. And our military spending will definitely stimulate the economy of our friends in the middle east. Yes, tough economic time is ahead of us here in the US. But that is why we are asking you to put the country first.
Even freezing domestic spending would not balance the budget, because we are already running a half trillion dollar budget deficit. But, don't fret. The government can always borrow. We have been doing that in the last eight years! Why can't we continue doing that?
On the other hand, Obama only gives tax cut to those who need it. He asks the wealthy and the corporations to chip in a little bit more. That is socialism, my friends. Obama will reduce our military spending by ending the war in Iraq, and boost domestic spending to stimulate the US economy. He will give tax credit to small businesses that create jobs in the US, not ship jobs overseas. He will repair the crippling infrastructure, and encourage investment in alternative energy technologies. My friends, that does not work! That is government intervention. You democrats did that in the 90s, the early 60s, and the late 30s. The New Deal. The Great Society. Blah blah blah. Those are false hopes. They work for a while, until we republicans came in to crash them.
My friends, on November 4th, remember to vote for McCain.
Thursday, October 30, 2008
Here we are again, 1% Fed Funds target rate
Yesterday, the Fed lowered the target rate for Fed Funds by 50bp to 1%, matching the lowest level set in 2003-2004 time frame under Alan Greespan. US Libor dropped less than 10bp on the Fed move. Clearly, the Fed simply cannot control the price of credit.
Fed action was matched by similar rate cuts in China and Europe. Stock markets in Asia seem to like the move. Overnight HenSeng went up more than 13%. US large cap was slightly down yesterday, while mid to small caps were broadly up. Today, the market followed through with a broad rally in the 2-3% range.
The congress today was deliberating on a potential fiscal stimulate package. Nuriel Roubini, the crazy economist of NYU, was testifying for such a stimulative spending package. Roubini tends to make exaggerated statements. But so far he has been right about the economy.
US government policy largely favors big businesses and financial institutions. When banks are running into problems, meaning they are over-leveraged or borrowed too much, the Federal Reserve lowers interest rate and inject capital to save them. But when it comes to ordinary consumer, if he or she borrowed too much, no one would come to the rescue. You know the financial institutions have a perverted way of doing business: they tend to lend to the rich at low interest rate. But when they lend to low-income households, they charge extraordinarily high interest rate. The poor on average are paying much higher borrowing costs than the rich. Is that fair? I guess it is :)
I have been thinking about gold-standard monetary policy. I used to be very supportive of that. But the current financial crisis made me think again. I think a gold-standard, or silver-standard for that matter, will collapse in a financial crisis when everyone is selling out risky assets to demand for cash. Under stringent gold-standard, there would not be sufficient liquidity (in this case gold money) to meet the demand. The whole system would crash. In the fiat system, the central banks can print as much cash as the market demands. The critical issue here is at what point it is appropriate for the central bank to intervene? In many cases, the central bank should not intervene, and let the financial market to work the trouble out by itself. But in situations like now, the central bank has to take drastic actions. Though it is rather difficult to determine where to draw the line.
Fed action was matched by similar rate cuts in China and Europe. Stock markets in Asia seem to like the move. Overnight HenSeng went up more than 13%. US large cap was slightly down yesterday, while mid to small caps were broadly up. Today, the market followed through with a broad rally in the 2-3% range.
The congress today was deliberating on a potential fiscal stimulate package. Nuriel Roubini, the crazy economist of NYU, was testifying for such a stimulative spending package. Roubini tends to make exaggerated statements. But so far he has been right about the economy.
US government policy largely favors big businesses and financial institutions. When banks are running into problems, meaning they are over-leveraged or borrowed too much, the Federal Reserve lowers interest rate and inject capital to save them. But when it comes to ordinary consumer, if he or she borrowed too much, no one would come to the rescue. You know the financial institutions have a perverted way of doing business: they tend to lend to the rich at low interest rate. But when they lend to low-income households, they charge extraordinarily high interest rate. The poor on average are paying much higher borrowing costs than the rich. Is that fair? I guess it is :)
I have been thinking about gold-standard monetary policy. I used to be very supportive of that. But the current financial crisis made me think again. I think a gold-standard, or silver-standard for that matter, will collapse in a financial crisis when everyone is selling out risky assets to demand for cash. Under stringent gold-standard, there would not be sufficient liquidity (in this case gold money) to meet the demand. The whole system would crash. In the fiat system, the central banks can print as much cash as the market demands. The critical issue here is at what point it is appropriate for the central bank to intervene? In many cases, the central bank should not intervene, and let the financial market to work the trouble out by itself. But in situations like now, the central bank has to take drastic actions. Though it is rather difficult to determine where to draw the line.
Friday, October 17, 2008
It feels good to agree with Warren Buffet
I have been saying here that it is insane to hold fast depreciating cash now, when the Fed is printing trillions of dollars of fresh new bills, and stocks are trading at extraordinarily low valuation. And I myself have been buying stocks hand-over-fist. Let me name a few example: Capital One (COF), trading below book value, with pristine balance sheet and more than adequate reserves for loan losses and credit charge offs. Western Digital (WDC), the best managed hard disk drive (HDD) companies out there, is trading at 4 times last year's free cash flow! As consumers generate more digital data (videos and photos), the demand for HDD will not go down, even there will be competition from flash memory storage products, which is much more expensive than HDD. Then there is Apple, trading 15x earnings, and has $23/share cash on the balance sheet.
OK, I am going to stop here. The point is that you can buy many great stocks at very cheap valuation.
Today, I am very glad to know that the investment guru Warren Buffet happens to think the same way. In his Op-Ed on today's NY Times, he urges investors to be "greedy" when others are running in "fear". He claims that he is buying US equities. Here is the reprint of his piece on NY Times:
-----------------------------------------------
THE financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.
So ... I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.
Why?
A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.
Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.
A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.
Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.
You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.
Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.
Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”
I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was.” Today my money and my mouth both say equities.
OK, I am going to stop here. The point is that you can buy many great stocks at very cheap valuation.
Today, I am very glad to know that the investment guru Warren Buffet happens to think the same way. In his Op-Ed on today's NY Times, he urges investors to be "greedy" when others are running in "fear". He claims that he is buying US equities. Here is the reprint of his piece on NY Times:
-----------------------------------------------
THE financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.
So ... I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.
Why?
A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.
Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.
A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.
Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.
You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.
Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.
Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”
I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was.” Today my money and my mouth both say equities.
Wednesday, October 15, 2008
McCain is an angry old man in today's debate
This is the last of the three presidential debate. Obama maintained his cool and showed America that he is of the Presidential material. But McCain throughout the debate was agitated, constantly making faces and showing emotion. He does not look presidential at all. He was constantly on the attack of Obama. But when it comes to articulating his own policy stances, he failed to present a coherent message. We really don't know what his policy is except the repeated slogan of "cutting taxes" and "small government". I think tonight's debate has put "the nail on the coffin" of this election. Obama is going to win in a landslide.
Subscribe to:
Posts (Atom)
Posts
