Sunday, March 9, 2008

Debt Rattle, March 9 2008: The Game Is Over

Ilargi: Late yesterday, I added the first article below to the Debt Rattle, and put in bold letters above it: The Game Is Over! It might be a good idea to explain that.

JPM states that Wall Street banks are facing a "systemic margin call", in other words a margin call that will pervade through the system (a margin call takes place when a broker tells a borrower to put more collateral for a loan in place, for instance when the existing collateral has lost value; the typical term for this sort of margin call is 72 hours)

The banks will have to cough up $325 billion, and fast, if and when called upon, or their assets will be sold off for whatever the creditor can get for them.

The only way the banks can do this is by calling in their own loans and/or selling their assets. That means urgent phone calls to smaller banks, hedge funds, and any other funds and businesses, first those that depend heavily on borrowed money to fulfill oblgations. These parties then need to do the same: call in what is owed to them.

Down the line, that means you may get a phone call to pay up for your loan or lose your home. It doesn’t matter if you are a good client, pay in time, have a great job. The banks and lenders need to call up everyting they can, just to stay alive. It's a matter of pure survival.

You would, and will, do the same: if someone holds a gun to your head, and tells you to pay up, you go to those who owe you money, and demand your cash. Same thing.

We already have seen what this whole picture entails: the selling off of large amounts of assets. Since this happens in a market where buyers are rare, prices drop. Well, imagine the demise of Peloton, Carlyle and Thornburg, but multiplied a thousand times. It’s obvious where prices are headed, for all assets, including precious metals. And especially real estate. All assets will be marked to market, in a market without buyers. Pennies on the dollar is poised to become the next household term added to our daily vocabulary. It will be brutal.

That means your home will lose value very fast, and that in turn will make that dreaded phone call come even sooner: your home will no longer suffice as collateral for your loan.

Remember that Wall Street has so far written off about $150 billion. Many banks have already had to sell parts of themselves to foreign funds in order to stay liquid. Of course, the first $150 billion was hard, but it was also the easiest part.

Now they have to come up with over twice as much on top of that, and under far more time pressure. There will be -many- banks that don’t succeed. But before giving up, they will ravage the entire financial system, all the way down to your mortgage, car loan and all other debt. If there’s a way to get their hands on it, they will do so. They must. Don't forget: it's obvious the banks' present losses are already much bigger than they've let on, with their assets never marked to market.

Hedge funds will fail en masse. Many institutional investors, like pension plans, will also be killed. Anyone with leveraged investments in non-100% liquid assets will be caught under the wheels of the oncoming steamroller. All businesses have credit lines, all levels of government do too, as do most individuals. Get the picture?

This is why the game is over.

Banks face "systemic margin call," $325 billion hit: JPM
Wall Street banks are facing a "systemic margin call" that may deplete banks of $325 billion of capital due to deteriorating subprime U.S. mortgages, JPMorgan Chase & Co, said in a report late on Friday.

JPMorgan, which sent a default notice to Thornburg Mortgage Inc. after the lender missed a $28 million margin call, said more default notices and margin calls were likely. The Carlyle Group's mortgage fund also failed to meet $37 million in margin calls this week.

"A systemic credit crunch is underway, driven primarily by bank writedowns for subprime mortgages," according to the report co-authored by analyst Christopher Flanagan. "We would characterize this situation as a systemic margin call."

Rumour of second bail out rumour coming in Ambac
Word is that CNBC have heard from a source close to the fire escape that the Monolines are worried that there will be no new rumours about possible rescues around until the recent rescues are proved to have failed. That means that there'll be no Friday evening prop for the stock markets.

A source close to the industry said that a consortium is "being put in place to work on new rumours but we can't be sure that these rumours will actually be ready for another five business days."

News of the rumoured rumour of salvation sent MBIA and AMBAC up .01% in pre-market trading. Hank Paulson was rumoured to be delighted with the patriotic rumours, a source close to him on his lifeboat off the coast of Hawaii said Thursday. Ben Bernanke has placed pencils in his ears and is wearing his favourite underpants on his head.

Ilargi: An excellent example of the consequences of disappearing credit.

I’m nervous. Are you?
The general news media has not covered the devastating financial impact that high grain prices and the unprecedented market volatility are having on the grain marketing system. To the casual newspaper reader or watcher of the evening television news it is a real “ho hum.” For the folks on the inside of grain elevators, for the grain traders, and for the farmer on Rural Route 4 it is a scary uncertainty that could crumble their financial foundation. For example, the most well attended seminar at the recent convention of the Grain and Feed Association of Illinois were two bankers who addressed the financial issues facing elevators.

It is too complex to fully explain in this venue, but consider the requirements of elevators to hedge their purchases of grain from a farmer. When they buy 5,000 bushels of corn from a producer they are required to use the Chicago Board of Trade and offset that commitment by selling 5,000 bushels which would equal one contract. If corn prices rise 10 cents the next day, the elevator is required to pay $500 in cash to the Chicago Board of Trade in what is known as “margin money” and that brings up the value of the contract to a financial equilibrium.

Apply that scenario to the thousands of sale contracts that a typical grain elevator holds. Some of them may be months old, and months away yet from maturity. That requires the elevator to obtain a line of credit from a bank, which may be lending millions of dollars to maintain legitimate grain contracts. The elevator has to manage that risk, pay thousands of dollars in interest, and still be liquid enough to operate daily.

Some of you will be able to realize that the current grain market is putting grain elevators at great financial risk. It is putting many lenders at great financial risk. It will also jeopardize the Illinois Grain Insurance Fund, should an elevator fail. If a lender decides it can no longer loan any more margin money or calls in the loans, the elevator would be forced to liquidate its hedges at the Chicago Board of Trade and could no longer legally operate.

Margin calls: it’s the time when you have to pay back the piper
Blessed is the person who does margin trading in the stock market without ever getting a margin call. Not getting trapped while fishing with a borrowed net is surely a good sign. But there’s no way of completely avoiding margin calls. At these moments, you wonder why the margin bell tolls. Our friend Johnny is blissfully unaware of margin trading. Today, Jinny will make him understand how margin trading makes it possible to eat a cake even when you have saved none.

Jinny: Simply put, margin trading is trading with borrowed funds or securities. Suppose you want to trade in the stock market, but you only have Rs100. There are two options. The first: You invest your Rs100 in the stock market and take home the profit or loss you earn. The second: You use your Rs100 as margin money and take another Rs100 on loan from your broker. So, you can invest Rs200 even when you have only Rs100. You pay interest on the money you’ve borrowed and carry home the rest of the profit. More money means more profit, but beware! It can also mean more loss, if your investment goes wrong. In that case, you should be ready to pay back the piper.

Johnny: It seems margin calls start buzzing when your investment goes wrong. But what sets the trigger?

Jinny: The Rs100 you brought to the table upfront is called “initial margin”. This determines how much money you can borrow from your broker. For the Indian stock market, the initial margin prescribed for trading in the spot market is 50%. This means you can borrow exactly the same amount you bring upfront to the table. Once you’ve invested all the money, you are required to maintain 40% “maintenance margin” with your broker.

This means you are required to keep a minimum amount of equity in your margin account all the time. This equity represents the value of securities in your account minus what you owe the broker. In the Indian stock market, the equity in your account shouldn’t fall below 40% of the total market value of your investment. If it does, the margin call gets triggered. In that case, you’ll have to chip in additional money or security to cover the gap. I hope you now understand why I am worried about margin calls.

Johnny: Things would become clearer if you could explain by an example!

Jinny: Suppose I’ve used Rs100 as an initial margin to borrow Rs100 more from my broker. I’ve invested Rs200 in securities. The market value of my investment tomorrow rises to Rs300. Suppose I keep all my securities in the margin account, what would be the value of my equity? Well, it would be Rs300 minus the Rs100 that I owe the broker, which is Rs200. What would be the maintenance margin required? It would be 40% of Rs300, which is Rs120. The value of my equity is far more than the maintenance margin required and hence, there would be no margin call. Now take an opposite case.

Suppose the market value of my investment falls to Rs120. In that case, the value of my equity would be Rs120 minus Rs100, which is equal to Rs20. The maintenance margin required is 40% of Rs120, which is Rs48. This will trigger a margin call and you’d be required to meet the shortfall. If you don’t, your broker will sell your securities for whatever price it is worth. That’s why it is important to pay back the piper on time.

The FTSE at 750,000: Buffet's lessons for the UK

As a rule of thumb, the richest man in the world is probably worth listening to when it comes to investment advice. Warren Buffett's promotion to the top of Forbes' list of billionaires came only days after publication of his latest letter to shareholders in Berkshire Hathaway, the investment company he heads. It should be clear which document best repays attention.

While the headlines concentrated on Mr Buffett's comments on sovereign wealth funds and the succession race at Berkshire, the billionaire also warned about the dangers of over-optimistic assumptions about pension returns. He estimates that big US companies with defined-benefit pension plans are assuming that their equity holdings will earn 9.2 per cent annually, after fees.

As Mr Buffett points out, that is well ahead of the 5.3 per cent annual compound growth of the Dow Jones Industrial Average last century. Just to match that rate this century, the Dow - currently below 13,000 - would have to close at 2,000,000 on December 31 2099. Anybody expecting double-digit annual growth - 2 per cent from dividends, and the rest for price appreciation - is, in effect, betting on Dow 24,000,000 by the end of the century.

There is no mystery to American chief executives' over-optimism, says Mr Buffett. Applying a high investment-return assumption in calculating pension expenses lets US corporate bosses report higher earnings under current pension accounting.
How does the UK look? According to consultant Lane Clark & Peacock's last survey of FTSE 100 companies' final-salary pension schemes, the range of assumptions about the long-term rate of return on equities runs from 6.7 per cent (at Next) to 8.5 per cent (at Persimmon).

On a long-range Buffettesque view, that is not as far out of kilter with history as American companies are. Research by Elroy Dimson, Paul Marsh and Mike Staunton of London Business School, for ABN Amro's Global Investment Returns Yearbook, suggests the annual capital gain on UK equities has averaged 4.8 per cent since 1900. With dividends reinvested, that return rises to 9.7 per cent. The expectations of UK pension schemes are well within the latter figure, but they probably need dividends to pay pensioners (which is, after all, their raison d'être).

The lenders of last resort
"This is our doing, not some nefarious plot by foreign governments,'' said Buffett in his recently published annual newsletter to shareholders. Buffett once famously described his approach as being fearful when others are greedy, and greedy when others are fearful.

It rather sums up the strained relationship between the SWFs and their critics. Accused of being greedy in their pursuit of the strategic corporate assets of the US and Europe, some American and European politicians fear their national security is now at stake. Buffett isn't the only high profile figure from across the pond to have spoken out in defence of the funds.

His comments follow those of former Fed chairman Alan Greenspan, who last month told an Abu Dhabi audience that protectionism rather than national security explained much of the opposition to the funds' Westward advance. This week it was the turn of local private equity houses to join the debate.

The chiefs of Abraaj Capital and Dubai International Capital used a gathering of private equity professionals in Dubai to point out that SWFs are really just doing the job that some central banks should be doing, but aren't. They have become the lenders of last resort. So instead of criticizing them for sometimes nebulous reasons, Western governments should instead be saying ‘Thanks!' says Abraaj CEO Arif Naqvi.

They were preaching to the converted. The controversy created around the march of SWFs is seen in turn as hysterical, amusing or irrelevant by many who live in the region. It's also worth noting that some of these organizations have been knocking about for quite some time, most notably the Kuwait Investment Authority, first established in London in 1953.

With the notable exception of the aborted 2006 takeover of P&O-operated ports by Dubai Ports World, political opposition to SWF buying activity has failed to impede their growth in assets or their movement into new markets. Despite all the huffing and puffing, it seems they won't be going away in a hurry. Should oil remain around US$100, the assets controlled by sovereign wealth funds could be worth as much as US$9 trillion in a decade according to Abraaj Capital.

Dubai International Capital, often seen as an SWF, but in fact a private equity house according to CEO Sameer Al Ansari, believes that a little self-regulation may go a long way in appeasing the funds' critics. "If we can encourage some of the regional funds to be more transparent, it would take some of the mystique away and make life easier for all of us," he said. That may be all that is required to ensure that the SWF storm stays in the teacup where it belong

Downturn Tests the Fed’s Ability to Avert a Crisis
In the last seven months, policy makers have cut interest rates, injected money into the banking system and approved a fiscal stimulus package in an effort to keep the economy from slipping into a recession. Often, the moves seemed to work at first, only to be overtaken by more bad news.

The failure of any of the usual fiscal and monetary policy tools so far raises questions about what the Federal Reserve and federal government can do in the near term to counter the forces that have battered housing prices and pushed down the stock market and are now causing a hiring slowdown. “There are times when there is only so much the Fed can do,” said Barry Ritholtz, chief executive of FusionIQ, an investment firm in New York. “It can smooth out the business cycle a little bit, but last I checked, we haven’t done away with the business cycle.”

One of the main problems now is a deepening crisis of confidence that is compounding the ill effects from the housing downturn. As lenders and businesses become more cautious about whom they lend to and hire, they are slowing an already weakened economy. If the housing boom was a manifestation of irrational exuberance, some say it has swung too far in the other direction, to irrational despondency.

Effects of Fed rate cuts slip down for the cycle
Studying 33 years data ending in 2005, researchers found that a strategy of rotating to cyclical industries when the Fed cut rates and shifting to non-cyclicals when the Fed reversed field improved returns by about 3 percentage points annually over sticking with a broad benchmark.

When the Fed cut rates, cyclical stocks rose an average 20.3 percent annually, while non-cyclicals gained 14.6 percent and the benchmark S&P 500 gained 17.4 percent, the study noted. When the Fed hiked rates, non-cyclicals rose 10.2 percent, cyclicals rose 2.2 percent and the benchmark rose 5.3 percent. Ready to plunk the nest egg into the strategy? Don't do it, say experts, including a study author, Robert Johnson, deputy chief executive for the CFA Institute in Charlottesville, Va.

In fact, it hasn't been working this time around. Since Aug. 18, the day after the Fed first cut rates, cyclical stocks declined more than 10 percent in the subsequent six months, said John Nersesian, who ran the numbers on cyclical and non-cyclical stock sectors using Ned Davis Research tools. Non-cyclicals gained 4 percent.

"We're in a unique situation today with the credit crunch," said Nersesian, managing director and a portfolio strategist for Nuveen Investments in Chicago. With such a pervasive downturn in financials, the rate cuts aren't having an impact, he said. "Eventually, you'll be right, but the question is, at what cost?" he said.

Countrywide Said to Be Subject of Federal Criminal Inquiry
The federal authorities have opened a criminal inquiry into Countrywide Financial for suspected securities fraud as part of the continuing fallout over the mortgage crisis, government officials with knowledge of the case said on Saturday. The Justice Department and the Federal Bureau of Investigation are looking at whether officials at Countrywide, the nation’s largest mortgage lender, misrepresented its financial condition and the soundness of its loans in security filings, the officials said.

The investigation — first reported on Saturday in The Wall Street Journal — is at an early stage, said the officials, who spoke on the condition of anonymity because they were not authorized to discuss ongoing criminal matters. It is unclear whether anyone will ultimately be charged with a crime. Richard Kolko, a spokesman for the F.B.I., declined on Saturday to confirm whether the agency had started an investigation of Countrywide related to its securities filings.

A Countrywide spokeswoman, Susan Martin, said, “We are not aware of any such investigation.”
The inquiry comes as the F.B.I. investigates 14 companies as part of a wide-ranging review of business practices in the troubled mortgage industry. In that broader investigation, the F.B.I. is looking into possible accounting fraud, insider trading or other violations in connection with loans made to borrowers with weak, or subprime, credit.

The inquiry into the companies began last spring. It involves companies across the financial industry, including mortgage lenders, loan brokers and Wall Street banks that packaged home loans into securities. It is unclear when charges, if any, might be filed.

As part of that investigation, the F.B.I. is cooperating with the Securities and Exchange Commission, which is conducting about three dozen civil investigations into how subprime loans were made and packaged and how securities backed by those loans were valued

What if Fannie and Freddie Can’t Prop Up Housing?
Regardless of the myriad of reasons likely driving the price drop, one fact remains crystal clear: the GSEs’ collective ability to keep the mortgage market moving has diminished, even if only for the short term and even if just the result of frenzied deleveraging by hedge funds and other investors on Wall Street. The result? Higher mortgage rates. One industry source, with more than 25 years in mortgage banking, told Housing Wire yesterday that borrowers should get accustomed to higher-rate mortgages.

“We’re headed back to 10 percent,” the source said, who asked not to be named. “And that’s going to change the complexion of this industry dramatically.” Both Fannie Mae and Freddie Mac accounted for a record 76.1 percent of new mortgage-backed securities issued in the fourth quarter, a number than industry sources say is likely to reach well above 80 percent to start 2008. Some have even suggested that the GSEs may end up owning as much as 90 percent of the lending market before this year is out.

But what if Fannie and Freddie fall victim to the same sort of crisis of confidence that has utterly paralyzed the private-party market? What if losses continue to mount, and the GSEs are forced by Congress to take on riskier and riskier loans? The idea that the GSEs might not be enough seemed almost laughable even one month ago; yet now, it’s that thought that most often sits in the back of nearly every industry participant’s mind.The WaPo reports:
“The implications are quite onerous because this was the one market that was functioning, and moreover, this is the market that the administration was counting on to maintain its liquidity so that it could help all these troubled homeowners,” said Douglas A. Dachille, chief executive of First Principles Capital Management.
“If this continues, this is going to be very bad for home prices,” Dachille said.

Not that is isn’t already very bad for home prices, of course. But the thought that things could actually get worse? Not many in the industry want to go there. “Imagine a sinking ship with only two lifeboats, and that the sinking ship would need closer to 50 lifeboats for everyone on board,” said one source, a manager at a large independent lender who asked not to be named. “Those two lifeboats may be the best on the planet, but it won’t matter much if everyone tries to pile onto them, which is exactly what’s happening right now.”
The mortgage industry as Titanic? Now that’s a scary thought, indeed.

Bernanke rapidly loses fans in the forex world
Wall Street loyalties are always fickle, but with a 13 percent decline in the dollar in the last year, foreign exchange analysts say Federal Reserve Chairman Ben Bernanke's hard-won credibility is in tatters.
Problems in the credit market, many of them stemming from defaulting mortgages in a U.S. housing market slump, have hit other asset classes like stocks, leaving investors nervous about the economy even as prices appear to be moving higher.

Indeed, Bernanke clearly indicated in recent testimony to Congress that growth was the bigger risk to the U.S. economy and inflation secondary, with the end result that confidence in U.S. assets is declining and so is demand for the dollars to buy them.

"I am disappointed," said Michael Woolfolk, currency strategist at the Bank of New York Mellon. "Bernanke had an opportunity to manage expectations on inflation and failed to take the challenge at his congressional testimony last week. He is rapidly losing the inflation-fighting credentials he won last year."

After more dismal news, the heat again is on Bernanke
For Ben Bernanke, the embattled chairman of the U.S. Federal Reserve, life has come to resemble the hellish circularity of Groundhog Day: Each morning, he wakes to the same gloomy economic indicators, and each time he intervenes in an attempt to plug the leak, a larger one springs up in its place.

Yesterday, the latest instalment of his annus horribilis, was a case in point. Just minutes after he announced a surprise plan to increase lending to the country's beleaguered banks, with the hope of blunting a credit crisis, the U.S. Labour Department announced that non-farm payroll jobs had declined by 63,000, leading many to pronounce that the economy had slid into recession. Some economists are now predicting that Mr. Bernanke will move to slash the benchmark interest rate by 75 basis points as early as Monday, more than a week before the policy makers are scheduled to meet.

In true redux fashion, that is precisely what happened in January, when the Fed dropped rates between meetings for only the fourth time since 1994 – and to little avail, judging by the current economic environment. “After all, isn't the new strategy to cut rates eight days before meetings?” David Rosenberg, chief economist of Merrill Lynch, noted with more than a hint of sarcasm in a research report yesterday.

Mr. Rosenberg, who said he wouldn't be surprised if Mr. Bernanke moved early, called the job numbers “an unmitigated disaster,” and seemed unimpressed with the Fed's move yesterday to expand the term auction facility – a mechanism for lending money to large banks and helping to ease liquidity constraints. “As if that is going to stop Citigroup from paring its mortgage lending unit by 20 per cent, trigger a renewed hiring cycle, or prevent the economy from moving into a full-blown recession,” he wrote.

Nigel Gault, an economist with Global Insight, predicted that a reduction of at least 50 basis points is “in the bag” when the Fed meets on March 18, although he believes the current interest rate of 3 per cent will eventually drop to 2 per cent. The central bank has already lowered its base federal funds rate by 2.25 percentage points since September. “And there is a real possibility, given the escalating turmoil in credit markets, that the cut will be bigger or will come sooner.”

Canada not immune from subprime crisis: Garth Turner
The U.S. real estate crash is about to sweep into Canada,  says Garth Turner in a just-published book entitled “Greater Fool.” Turner – the Liberal MP, entrepreneur and real estate investor – says the problems underlying the American subprime crisis “go far beyond mortgage products and also reach into Toronto, Calgary and Vancouver.”
In a nutshell, Turner urges his Canadian readers to sell their real estate if it makes up much more than a third of total family net worth and consider renting until the storm passes. He suggests baby boomers sell their “McMansions” while they can still get decent prices and find more reasonably priced modest homes located near hospitals, public transit and other amenities.

The book is timely enough, considering it includes such recent news reports as the line-ups for downtown Toronto condos: line-ups he says were largely fabricated for the benefit of gullible media types. “When bungalows in Vancouver cost $900,000 and resale homes with no parking in midtown Toronto are $1 million, it’s only forty-year mortgages and an embracing of debt that sustain the unsustainable,” Turner writes in the Key Porter published book, subtitled The Troubled Future of Real Estate.

He warns that overextended young Canadian couples are buying into several real estate myths, “egged on by real estate marketing machines and reassured by economists paid by our largest lenders.” They “cling to the absurd belief that paying too much for something is okay” and that “there will always be a greater fool willing to pay more.” Turner does not believe the American housing crisis was caused by subprime mortgages extended to otherwise unworthy borrowers. “That was but a symptom” of the real disease, which was the rush into real estate that followed the flood of cheap money Alan Greenspan unleashed following the shock of 9/11.

With 5% down mortgages and the new 40-year amortization schedules, Canadian homeowners are just as overextended as their American counterparts, Turner argues. He also notes that subprime [or near-prime] loans are also available in Canada through firms like Toronto’s Exceed Mortgage. “The inevitable conclusion is that the current Canadian real estate market is floating on a sea of unrepayable, and perhaps unserviceable, debt.”

We're poised to make property tax history
Mitch Daniels is governor of Indiana

We are close to a huge breakthrough in delivering permanent property tax relief for Hoosier homeowners. Legislators from both parties have worked hard and in good faith to evaluate and improve the original plan that I proposed in October. I hope that, in the next week or so, I will be able to sign legislation that cuts property taxes sharply and protects against future unfair increases by capping them forever, while addressing the concerns of local governments and schools about their ability to provide services in the coming era of property tax restraint.

Last week, Sen. Luke Kenley and others produced a compromise plan that deserves bipartisan and universal support. It meets all four of the elements I have laid out as essential to real property tax reform: immediate and significant relief for all property taxpayers; permanent protection against future tax increases; meaningful controls on local government spending; and improved accuracy and fairness in the assessment of property values.

Despite many changes, the basic framework of my original proposal has been maintained. It provides an additional $700 million in relief for 2008 tax bills, in addition to the $250 million already allocated by the General Assembly. The average homeowner would see about a one-third cut, with those hardest hit seeing even greater relief. It takes the cost of funding school operations, child welfare, and other local obligations off the backs of property taxpayers and shifts them to the state. It caps property tax bills at 1 percent of a home's assessed value, requires referendums to approve major new capital projects, and sharply reduces the number of assessors responsible for valuing property.

At the same time, this compromise plan is exactly that -- a compromise. It takes into account the concerns that have been expressed most loudly during the legislature's consideration of property tax reform. It provides special tax relief for lower-income Hoosiers, renters and senior citizens. It eases the transition for schools and local governments to a new era of lower property taxes and gives them more flexibility than they've ever had to manage their fiscal affairs. The plan is especially sensitive to the concerns of our schools, providing two years of special payments to partially offset the impact of the new taxpayer protections, allowing communities to exceed the caps for school spending with taxpayer approval, and increasing the school "rainy day fund."

A Global Need for Grain That Farms Can’t Fill
Around the world, wheat is becoming a precious commodity. In Pakistan, thousands of paramilitary troops have been deployed since January to guard trucks carrying wheat and flour. Malaysia, trying to keep its commodities at home, has made it a crime to export flour and other products without a license. Consumer groups in Italy staged a widely publicized (if also widely disregarded) one-day pasta strike last fall.

In the United States, the price of dry pasta has risen 20 percent since October, according to government data. Flour is up 19 percent since last summer. Over all, food and beverage prices are rising 4 percent a year, the fastest pace in nearly two decades. The American Bakers Association last month took the radical step of suggesting that American exports be curtailed to keep wheat at home, though the group later backed off.

If all this suggests a golden age for American growers, it could well be brief, said Bruce Babcock, an economist at Iowa State University. He predicted that farmers would do their best to ramp up production, possibly to the point of pulling land out of conservation programs so they could plant more. “Give farmers a price incentive, and they’ll produce,” he said.

The Agriculture Department forecasts that world wheat production will increase 8 percent this year. In the United States, spring and durum wheat plantings are expected to rise by two million acres, helping to drive prices down to $7 a bushel, the government said. Yet the competition among crops for acreage has become so intense that some farmers think the government and analysts like Mr. Babcock are being overly optimistic.

Read Smith, a farmer in St. John, Wash., thinks a new era is at hand for all sorts of crops. “Price spikes have usually been short-lived,” he said. “I think this one is different.” His example is plain old mustard. Two years ago, Mr. Smith would have been paid less than 15 cents a pound for mustard seeds. As more lucrative crops began supplanting mustard, dealers raised their offering price to 20 cents, then 30 cents, then 48 cents early this year. Mr. Smith gave in, agreeing to convert up to 100 acres of wheat fields to mustard.

Ilargi: Mish is saying strange things today. You be the judge.

Did Lack Of Regulation Cause This Mess?
Glass-Steagall prevented banks from writing insurance. Why? Should banks be prohibited from selling peanut butter sandwiches too? If banks want to sell either peanut butter sandwiches or insurance it is fine with me. The point is government ought not dictate what businesses do or do not do as long as there is no conflict of interest. I see no more conflict of interest in banks selling insurance or peanut butter sandwiches than I do in Wal-Mart selling bicycles, dresses, and fishing poles out of the same store.

Speaking of which, Wal-Mart recently asked to open a bank. It was not allowed. Why? Bribery is why. Congress was bribed (via campaign contributions from banks) to not allow Wal-Mart to open a bank. Banks oppose Wal-Mart because Wal-Mart would increase competition. Existing banks do not want more competition from non-banks. In essence, banks want to sell peanut butter sandwiches (insurance) while not permitting Wal-Mart to do the same.

Another fear that banks have is that Wal-Mart would come in and do something radical like offer ATMs that charged 25 cents or a dime to do a transaction. Regulation and government sponsorship is keeping costs high.

Would the repeal of FDIC cause more frequent bank failures? Perhaps. However, in the internet age of instantaneous information, banks would be less willing to take stupid risks when customers went poking around. And any bank offering well above market rates would be waving a red flag as opposed to the green flag we see today. Thus, if bank failures were more frequent, they sure we be smaller than what we are about to face.

The only FDIC I would keep would be on checking accounts, and then only under the stipulation that banks agree not to lend that money out. Banks would be free to choose: Offer FDIC and not lend checking deposits out, or not offer FDIC. Customers no doubt would choose accordingly.

Clearly, the repeal of Glass-Steagall is not at the root of the problems we face today. The root of the problem is fractional reserve lending in conjunction with a Fed that micro-manages interest rates without having a clue as to what they are doing. So, if banks want to sell insurance, peanut butter sandwiches, and Girl Scout cookies while offering checking services I say go for it, provided we get to the real solution to this banking mess.

The solution to this mess is not more regulation but less regulation and less government interference. The best things to do would be to abolish the Fed and eliminate fractional reserve lending, the latter on a phased in approach.

The Weimar US Republic
”Congressional Democrats have pushed the Bush administration to step up its response, proposing the use of government funds to purchase distressed mortgages. Bond traders this week speculated the government may guarantee mortgage-backed debt issued by Fannie Mae and Freddie Mac, though Treasury spokeswoman Jennifer Zuccarelli today rejected the idea.”

AAARRRGHHH!!!! Ever since the Vietnam War, except for one year and that was due to the Dot Com bubble coinciding with historically cheap oil prices, our government has run in the red. It varies how badly. But most of the time, it is totally out of control. Particularly in the last 7 years. We doubled our national debt in just one decade! It is not as huge as Japan's national debt per capita. But in gross amounts, it is the largest on earth. Japan and England run close seconds. The G7 nations are the G7 debtor nations!

This is bad news for the European and American empires. The idea that we should make the US government our landlords is total insanity. Notice how the concept, 'My home is my castle' is collapsing? The government is very keen on getting everyone into hock with itself, eh? Right now, most Americans were conned into the idea, having bankers own all our houses was the road to riches, not ruin. So we turn around and decide the road to riches is to have the government own all our houses?

This is madness! No! I would rather live in a tent for ten years than do that! Indeed, I did that in order to build my own house with my own hands. And I am free of all banks. Certainly, no government will get its filthy hands on my home. I pay taxes and that is more than enough a hazard. The Chinese communists, when they came to my house to learn about capitalism, frankly didn't believe me that I owned my own house. I did own it, I paid mostly cash for it and it was a huge house. We fought over this until they finally figured it out. Eyes opened wide. They saw suddenly the concept of 'sovereignty.' I had sovereignty over my house!

Are we going to be like China under Mao? Of course, if the government owns all housing except for maybe my farm, they will confiscate whatever they can. Since the people voting for this communist system will demand they pay back the government minimal amounts on the housing owned by the government, the whole nation will loot the bank to do this. Namely, if I put money in savings because I am not paying the government to live in my home, this money will be confiscated via inflation. So I stop banking as well as going into debt.

This means I park my savings outside of the Federal Home Security System. Note that if the government owns our homes, they get to regulate many more things than they already govern. They can order us to keep their properties in top shape and already I read with alarm, stories about 'solutions' whereby the government holds the properties at a lower value right now but when the value rises over time, when the tenant sells, they have to pay back the full price to the government!

HAHAHA. GADS! Lord help us all. Talk about insanity. I have taken my lumps in real estate. After losing a LOT of money, I lived in a tent for ten years in order to make up for this and now sit on real value as my home is truly my castle. I own it outright.

This concept of controlling our own fates is fading fast in the teeth of financial woes caused by excessive debt creation, isn't it? Also note how the very same wolves, hell hounds and pirates who put us into too much debt want to fix all this by giving these debts to the government to enforce while they go off and put the easy loans cranked out by the government's central bankers into gold and oil!


Greyzone said...

Mish is full of it today. Lack of regulation caused this? Then he argues that people should only use banks that don't do fractional reserve lending? Pray tell, Mish, how anyone could believe a bank that says it doesn't do fractional reserve lending, especially after trillions of dollars of liars paper was created by all these same banksters?

Mish then convolutes moral hazard created by government insurance (FDIC) with regulation of the banks. That's bullshit or a strawman. Either way, Mish comes off as making utopian libertarian arguments that fly in the face of human behavior and human evolution.

Human beings behave exactly as we are seeing right now unless someone forces them to behave otherwise. Human beings will always do what they believe is in their own self interest. If that means lying, cheating, stealing, bribing, etc., then that is exactly what they will do. The only way to stop that behavior is place regulatory safeguards that punish such behavior. Then and only then will homo sapiens behave differently.

Instead of clear headed data analysis which Mish usually does, today's column by Mish is pure utopian libertarian BS hiding under at least 2 strawman arguments.

Sorry, but that is the first time I have ever given Mish the lowest possible rating for a column of his. He should know better but apparently Mish still believes in "free" markets and the bullshit mythology that grew up around that rhetoric without understanding the huge resource bounty of the last 500 years as the real basis for wealth creation.

Anonymous said...

Ilargi, I love your work on this daily synopsis!

Ilargi said...

Thank you anon. Still, somehow compliments seem to mean more when they're not anonymous.

. said...

So is 3.10.2008 the end of the beginning, or the beginning of the end?

A 0.75% rate cut isn't going to stop this - we've been hearing for some time that this is a solvency issue, not a liquidity issue. That rate cut will give the Meat Stick Media something to distract the masses with, but it isn't going to reverse the collateral requirements, and I don't see how they can prop the DJIA with that stuff going on in the background.

The time in Japan is 4:20 AM Monday morning as I post this. I get the feeling this day might become known as "The Long Monday".

Anonymous said...

Ilargi, I loved the 'picture' of Bernanke with his pants on his head and appropriately inserted pencils - whilst hiding in the bunker awaiting the inevitable.

Reminds me of Blackadder in the final episode. If you don't know it, check out the BBC.

This side of the pond, nerves are jangling... Methinks Gordon "sold the gold" Brown is about to realise that we haven't seen the entire business cycle yet..

Keep it up guys, really appreciate it!

Anonymous said...

Currently, there's hearsay that a confirmed rumor is coming about high-level scuttlebut that we haven't a clue what money is.

. said...

Oh, look! A scapegoat!

Anonymous said...

Illargi and Stoneleigh,
I appreciate the work you are doing.

Anonymous said...

Geyzone, I agree with you.

Anonymous said...

Ilargi, love your work, followed you over from TOD. I view it as musical chairs, when the music stops the fighting starts. Right now we have some who are "hovering" above seats and moving around the circle ever-so-slowly... while the majority skip around, oblivious...

Steven Stoll had a great essay / book review in the latest Harpers in which he talked about "steady state"... I passed this quote on to my father to help wake him from his "faith in the system"... "Finance needs to be brought in to balance with the real underpinnings of finance."

Get your chair now while the getting is good!

Anonymous said...

Thanks to the both of you for creating this blog, and keeping it going. Don't think I could get through the day without reading it.

The old hermit

Anonymous said...

Ilargi, from your introductory comment today I still cannot see the whole picture: universal margin calls will produce widespread bank failures as well as hedge fund failures (including pension funds) and even the Stock Exchanges since there are a lot of traders that are leveraged but are not either banks or funds. Prices will come down since everyone must sell and there are few buyers. That means a lot of "money" is destroyed since some equity just cannot be sold.

This means: commodity prices (agriculture, oil, natgas, metals) are going down as well as real estate value because there is a correction to the monetary base.

At the same time the US dollar will become worthless since the Fed trying to avoid this debacle "injects" more and more dollars.

So what should I do to avoid this deflation process?

bryant said...

Is there a site which explains how vulnerable home mortgages may be? Do state laws effect this much?

Since Citi looks to be dead or dying, those of us with Citi loans are wondering if the "call" get down to us.

. said...

Funny that someone should mention Citi here - I was just over at checking into a "Answers" posting I did - text is below. I am apparently now banned from using this portion of the site and based on those who accessed my profile I'd guess some sniveler at Citi sniveled to LinkedIn about the question :-)

How will the government respond to the Big Crash of 2008?

Things have been obviously going wrong since the Bear Stearns funds collapsed last August. I found a post over at that summed up nicely what has happened these last seven months:

First(1), of course, there was the derivatives based on sub-prime mortgages. That seems to be about where the common consciousness stops. But before U.S. Secretary Treasury Hank Paulson and Federal Reserve Chairman Ben Bernanke (a.k.a., Captain Carnage) even lifted a finger to try and sort out the sub-prime mortgage mess, they first had to deal with the collapse of the market for (2)Structured Investment Vehicles. Since these two crises began last summer many other financial markets have also collapsed: (3)corporate junk bonds, (4)asset-backed commercial paper, (5)municipal bonds.

The margin calls have begun as of 3/7, just as they did in 1929. How bad will it get? How fast? What, if anything can the relentlessly inept Bush administration do about these problems?

Anonymous said...

So help me out with this please. I read the following paragraph, and it caused me some alarm:

Down the line, that means you may get a phone call to pay up for your loan or lose your home. It doesn’t matter if you are a good client, pay in time, have a great job. The banks and lenders need to call up everyting they can, just to stay alive.

I was under the impression that my mortgage debt was only callable by me, and not by the bank, as long as I faithfully made my mortgage payments each month. Under what terms could they cause me to cough up the entire amount or lose my home?

Anonymous said...

I think the TAE might be a bit wrong on this one. I re-read my mortgage contract last night. They can accelerate my debt if I'm in default or if I lose the underlying asset, but they can't just accelerate the debt whenever they want, especially there is no clause about lender distress. I don't think the bank CAN margin call my mortgage.

If were are at the beginning of a systematic margin call, as seems likely, then I think what will happen is that a bunch of obscure clauses in contracts will suddenly become relevant, and it will come out that many financial obligations have the equivalent of a margin call clause on them and many of them don't. And the links without margin call ability will be what holds things together, at least to the extent that there is any holding together. Maybe some mortgages do have clauses allowing the lender to accelerate at will, or when in distress. And of course, plenty of mortgages are currently in default. But I'll bet that a lot of mortgages can't be called in by the banks even when the banks are desperate to do so. Anyone know what other relations are immune to being called in when the bank is desperate?

Farmerod said...

It seems that many other cards will be played before banks call in performing mortgages although it would be tempting, I'm sure, to call in a mortgage like mine that is fairly small in relation to the current value of the house. I mean, they know they'd get all of their money, even if I had to put my house up for sale to raise the cash. I think there would be a revolt and calls to eat the rich if the banks did that too early.

As for there being a clause in the mortgage document; I'm not a lawyer but it seems like there might be overriding statutes that govern mortgages that are only invokes in desperate times. Or, who knows, maybe governments will write new rules if convinced there is some merit in doing so.

In other news, my house goes on the market Thursday...

perry said...

The classic lendor/debtor principle has ALWAYS been that the lendor can 'call' any note at any time for any reason. That is the real "devil in the details" part of being-in-debt.

If a bank wants to, they can create 'conditions' that will make it legal for them to call your note; i.e. "your pyament is late" (even though they got it, but 'lost' it, or put it away, so that it would be recorded as being late;) a ruse used by most banks most of the time. Utility and phone companies do this often. ONE default, (whether actual or 'created'), and the contract favors the lendor, not the debtor.

Unless you have a full Amortization Statement from the lendor in real-time, showing the dates and amounts of payments RECEIVED, you may have no idea how many of your payments have been RECORDED as being late and/or in default.

The reason debt-is-death is because the lendor holds ALL the cards!


Ilargi said...

The most vulnerable part in this whole situation is what the property is worth. And I am 100% sure that the borrower will "value" the property far higher than the lender.

As I said in the new Debt Rattle's intro, the JPMorgan report gives a 30% price drop across the board as a starting point. And I think that is conservative. In the end, your house is only worth what it can be sold for.

A bank will use its own valuation, not yours, and you may have to answer that one.

perry said...
This comment has been removed by the author.