.Let’s examine Greenspan’s reason for abandoning what he considers the free market. His reason is that free markets cannot be entirely trusted, since government regulators in charge of free markets cannot forecast with 100 percent accuracy. “Yes, I found a flaw,” Greenspan said in response to grilling from the House Committee on Oversight and Government Reform.
“That is precisely the reason I was shocked because I'd been going for 40 years or more with very considerable evidence that it was working exceptionally well.” He went on to say: “We cannot expect perfection in any area where forecasting is required.” He also said: “We have to do our best but not expect infallibility or omniscience.”
The media spun this as Greenspan abandoning free market principles. Maybe that is what Greenspan intended to convey, or maybe it wasn’t. But one thing is certain, regardless of his motives. Greenspan is not condemning the free market and capitalism. He is simply acknowledging the obvious:
That government regulators – even the chief government regulator, the Federal Reserve Chief – cannot be omniscient, cannot know everything, and cannot predict everything.
The irony of these comments is that Greenspan, whether he intends to or not, is providing one of the best arguments in favor of free markets and capitalism by demonstrating that man is not capable of controlling and forecasting everything. Therefore, it’s best to leave man alone, on an individual case-by-case basis, to assess what makes most economic sense.
Wednesday, March 4, 2009
Greenspan's argument in favor of Capitalism
Tuesday, March 3, 2009
Credit Default Swaps and the U.S. Debt
When you purchase a CDS, it is something akin to buying insurance for your investment. It's an attempt to decrease your risk on a credit derivative. As a buyer of a CDS, you pay a premium to the seller, who then is obligated under the agreement to pay you a specified amount if the credit derivative covered by the CDS goes into default. The idea is to financially protect yourself no matter what happens to the value of the loans or bonds upon which the derivative is based. If the loans or bonds retain their value, you gain from your original investment. If they loose value, you get a payoff from whoever sold you the CDS.
If used appropriately, you are able to minimize your risk. In an interesting twist, because you don't have to own the underlying credit derivative, CDSs can also be bought and sold separately, taking on a life of their own and looking a lot more like gambling than investing (not that I have a problem with gambling, as long as it's clear that's what you're doing.)
Similar to short selling, CDSs have an important role in capital markets by reflecting the perceived value of various credit derivatives and the status of the bonds and debts from which they are derived. High "premiums" for a CDS signal that the underlying loans and bonds are considered to be at a greater risk for default.
So that brings me to the latest interesting piece of news: The cost of purchasing a CDS on U.S. Treasuries is now higher than the cost of buying a CDS on Pepsi or IBM--or even government debt from France!!
Probably has something to do with all those spending bills Congress has passed lately, don't you think?
HT George Washington's. Blog
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Monday, March 2, 2009
On the importance of resisting injustice
"Power concedes nothing without a demand. It never did, and it never will. Find out just what people will submit to, and you have found out the exact amount of injustice and wrong which will be imposed upon them; and these will continue till they have resisted with either words or blows, or with both. The limits of tyrants are prescribed by the endurance of those whom they suppress."
-- Frederick Douglass (1818-1895), escaped slave, Abolitionist, author, editor of the North Star and later the New National Era
"Let us disappoint the men who would raise themselves upon the ruin of our country."John Adams (1735-1826) Founding Father, 2nd US President
HT Liberty Quotes.
Sunday, March 1, 2009
Bank Nationalization by any other name....
By Ari Levy Jan. 23 (Bloomberg) --
The U.S. government’s decision to pledge billions of additional dollars with strings attached to Citigroup Inc. and Bank of America Corp. may be nationalization by another name, according to former bankers and regulators.
Faced with pressure from lawmakers, banks have shaken up management, eliminated executive bonuses and staff and canceled conventions. They’ll be forced to do monthly reports on how they’ve boosted lending while slashing quarterly dividends to one cent a share for three years.
“When the Treasury tells a bank to pay a penny a share vs. its old dividend, you know who’s calling the shots,” said Jon Bruss, a 40-year industry veteran and founder of Hartland, Wisconsin-based Fortress Partners Capital Management Ltd., which invests in banks. “It may not be de jure nationalization but I think it’s de facto nationalization.”
HT fiatch:
Government interventions lead to market distortions which will lead to further government intervention until it is understood that it is the interventions causing the problems in the first place. This is the danger of a mixed economy and democracy. Our economy contains elements of the free market and of political intervention. When something does not go as desired, guess which part gets blamed by the politicians?The WSJ reported on February 25 that “Bernanke Again Pushes Back Against Nationalization:”
In response to a specific question about Citigroup Inc.’s current woes, Mr. Bernanke told the House Financial Services Committee, “We will see how their test works out and we’ll see what evolves.” Nationalization, he said, misses the point.
Asked if the Citigroup could end up nationalized, Mr. Bernanke said he doesn’t see that happening. “It may be the case that the government will have a substantial minority share in Citi or other banks, but again we have the tools… to make sure that we get the good results we want in terms of improved performance” without the negative effects of a bankruptcy process or seizure, which would be disruptive to the markets, Bernanke said.
He added that he defines nationalization as the government taking over 100% of a firm and zeroing out stock. “I don’t think we want to do that,” he said. “I don’t think we need to do that.”
So, it’s not “nationalization” according to the Fed Chairman unless one government controls the entire 100%? How convenient.
The US will match other sovereign wealth funds dollar for dollar to acquire up to a 40% stake in Citigroup for the Feds. Call it what you will, e.g. call it “Unicornization,” but Citigroup is a private organization no more. It’s been nationalized.
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