Unemployment is likely to become a greater problem in the next 12 months.  Here’s a discussion in Slate about what the real unemployment figures may be now.

Obama’s infomercial was very well done and utilized the “general to specific example” technique that works so well.  It’s main value, however, was its attempt to familiarize voters with Obama himself.  In order to close the deal, Obama needs to reassure voters that his exemplary oratorical skills aren’t just those of another snake oil salesman.  In that regard Beezer believes the infomercial was successful.

As for the “mark to market” accounting rules that have come under criticism because they attempt to treat property assets like they are stocks, insofar as valuing them short term on balance sheets, it appears the criticisms may be right.  Bloomberg reports German financial firms are doing better now that the Germans have moderated the mark to market rules.  Read here.

And finally, at least for the moment, there’s an ongoing discussion underway in economist’s view about what, if any, support should be forthcoming for underwater mortgages.  Combine that with the news report on CNBC about rumours the Treasury is considering the use of as much as $600 billion to mitigate the feared rate of foreclosures.  In previous posts, Beezer has argued that with all the government spending going on, some of it should go directly to helping homeowners (taxpayers) battle foreclosure.

That’s it for right now.

While the Fed drops rates to 1% in an attempt to jump start lending, the real world participants in the economy are providing loans at rates much higher, more accurately reflecting the real cost of money than the government.  Big surprise there.

In the mortgage market, the government (in the form of Fannie and Freddie and credit reform legislation) forced private financial businesses to throw caution to the winds, lending money to extraordinarily dodgy borrowers and speculators.   Wall Street, charged with coming up with financial instruments to cover these stupid loans, invented a boatload of toxic securities that have crushed banking capital worldwide.

Now that some semblance of sanity has returned, major companies such as food giant Nestle have had to settle for credit line terms that are much higher than government backed loan rates.  Banks now realize they have been loaning out working capital money, such as credit lines or commercial paper, at ridiculously low rates.  It’s about time they wised up.

Banks are in the business of making a little money steadily.  They should not be taking big risks with depositor money.  They collectively forgot.  And now they’ve given all their profits back (and most of shareholder equity), because they took huge risks. 

Because banks have come back to their senses, there’s a credit crunch.  What’s really happening is that corporations were lulled into laziness with the cheap money and forgot to tend to their internal cash flows.  Now they must do so.

Meanwhile the average Joe the Plumber or Maggie the Florist have discovered that they, in their own way, had grown accustomed to cheap credit too.   Their retrenchment is individually smaller, but collectively huge.  Customers are not using credit cards as much.  Small business is retrenching quickly, as well.  Over the counter, cash is becoming a more important ingredient.

And while the price of commodities, especially gasoline and diesel fuel, have plummeted from the mid-summer highs, consumers know the relief may be short lived.  They will continue to cut back.  

Americans traveled 5.2% less, year over year in August, a total of some 15 billion miles in the biggest decline since 1942.  Tire shipments to New England dropped some 25%.  In some states it’s 30%.  And tires are considered to be somewhat anti-cyclical because if consumers postpone new car purchases (which they are doing in a major way) they still need tires.  Not if they’ve parked the truck in the driveway.

Asking over-leveraged consumers to borrow more isn’t going to work.  Wishing banks would return to the easy money days won’t work either.  There’s a slimming down going on.  And it’s just in time to avoid a heart-attack, Beezer believes.

That’s the private economy.  What about government and its employees?  These folks have grown accustomed to secure paychecks, secure health and retirement benefits, and secure jobs.  Is that going to continue?  If it does while the private employees take the nut full face, there will be political Hell to pay.

Unemployment is a lagging phenomenon.  It has yet to hit in any substantive way.  If everyone who is unemployed comes from the private sector, there will be a revolt.  It’s not likely to show up during this election (although it might), but it most certainly will assert itself two years hence.  And if polls are accurate that the Democrats are going to sweep the White House and Congress, then they will have two years to start paying for the indulgences of everyone the past 8 years.   Or they will be swept out of office in two years in Congress.  And out of the White House in four.

First, a graphic look at what a credit crunch looks like.  This little gem came from a commentator to a post about the credit crunch contained at the website Marginal Revolution, one of the many, many internet sites chock full of economic and political discussions.

The chart clearly shows that banks aren’t lending.  But a lot of what this chart shows includes an anticipation by the banks that the real economy is going to slow, and therefore their lending terms have become more conservative.  If it turns out that the real economy isn’t going to a full stop, then this chart line will rebound quickly.

It’s the same with letters of credit used to fund international trade.  Reports show that lending into this market has declined substantially.  But a large part of this contraction is lenders anticipating a global slowdown of unknown magnitude.  If the magnitude is unknown, lenders become cautious even if funding supplies are ample.  For example, an Asian company that makes a product tied to the US housing market, may have a problem getting a letter of credit because the lender anticipates the Asian company will have to cutback production due to the fall off in demand.  And of course, suppliers to the Asian company will not be able to sell as much of their product as well.  The Asian company will have to reduce its production and, therefore, require less letter of credit funding to trigger a deal and the shipping dependent upon the deal.

It’s not rocket science, actually.  But while the new realities are accommodated, there is a very uncomfortable speed bump to navigate while parties come to agreement on pricing and volume.

This is a slowdown, and working through such an event involves a more conservative approach to lending.  It’s a rational, and needed, reaction.  No one is in business to throw good money into a transaction unless and until that transaction pricing can accurately reflect the new reality.

The only safe observation anyone can make is that the financial markets will over-react to the downside, just as they left themselves vulnerable when times were cooking to the upside.   Governments use their financial tools to try and backstop financial participants.  Also, governments will try and utilize tax policy and subsidies to backstop non-financial activity and its all-important employment.  Nothing like a big jump in unemployment to drop demand for final goods even further in a recession.

Outside of environmental surprises from Mother Earth, these recessions always involve too much debt being issued to fund a boom.  Fueled by debt and excess liquidity created by the boom, asset bubbles appear, then grow, then pop as the economic activity hits a debt ceiling it cannot sustain.  Production cannot generate enough cash flow to sustain debt levels.  Not everywhere, but in enough sectors to put the brakes on overall growth.

So prices have to go down.  Commodity prices have plummeted the past couple of months.  There has been, for sometime, pressure to contain labor costs.  This has shown up in the decade long stagnation of wages among the working and middle classes.  This type of disparity also occurred in the 1920s.

As governments try to mitigate the pain caused by the current financial mess and the economic slowdown,  they will inevitably seize control of parts of the economy.  There are many dangers here.  Politics is power, and power begets abuse and cronyism.  Parts of the economy with political power will gain subsidies that, in hindsight, should not have been awarded.  But that’s the way these things go.

One constant is that people do what they perceive is in their best interest.  If their first moves turn out to be a mistake, they try something else.  And they keep trying until they get it right.  The last thing government should do is inhibit the individual from doing as they wish.  Manhatten and Washington D.C. are small villages compared to the 200 million adults working in America.  If the government takes too much independence from the adults, the government will only make matters much worse.

Everyone in the productive markets is being cautious.  So too should governments be cautious.

Just a short post about the current economic crisis, as explained brilliantly by British comedians, Bird and Fortune. 

It’s Casino Royale out there in financial markets, and participants who just months ago were confident in what they do for clients are now tired and shaken.   The idea of hedgeing one’s investment has morphed into a pure casino of placing bets throughout the day on every piece of investment paper one can imagine, from oil futures, to dollar futures, to inverse ETFs—on and on and on.

“The trend is your friend,” is the gambler’s siren cry.  “We’ve called three successful tops and three bottoms the past month, for an average return of 75%” cry out the bookies.  The only thing Beezer hasn’t heard yet are the radio ads urging “investors” to call a 1-800-whatever and get “two guaranteed wins for free!!!”

What the heck is going on?  Gambling is going on.  It’s that simple.  The underlying investment world has been overlayed by a trillion upon trillion dollar gambling craze.  Fundamentals are merely after-thoughts in this huge casino, and when fundamentals do assert themselves, the reactions in the real markets are magnified dramatically.  “You in trouble?” asks the gambler, “Buy the inverse ETFs and make a fortune as the price declines.”

In the end, the vast majority of gamblers lose.  As volatility increases, gamblers can’t keep up.  It’s too fast.  It’s only about price movement, up or down.  They basically end up beating each other senseless.

Unfortunately the world is suffering immense collateral damage because all this gambling perverts price discovery in the underlying markets.  Prices no longer correspond to any rational fundamentals and the productive industry relying on at least a modicum of price stability withdraw from the markets simply because no one can figure out how to actually get business done in this gambling whirlwind.  Banks withdraw.  Commodity buyers (and credit suppliers to commodity producers, including farmers) withdraw. 

The idea was that all this stuff would provide liquidity to the markets.  The risks that these “Non-Securities” could pose was not understood.  What worked as an algorithm in the classroom turned out to be cyanide in the real world.

When the connection between the price of a real security is broken from the fundamentals, investors withdraw their money and put it where (it is fervently hoped) there is safety.  At the moment, a favorite place to park this money is in US Treasuries.  And that’s where it’s going to stay until regulations are put in place to inhibit gambling.

Something direct and easy to understand is needed.  Eliminating all these non-securities by fiat would work.  Taxing short term gains at 80% would probably have a serious calming effect. 

A similar problem occured in the 1920s.  Productive investments made previously in new industries that were manufacturing an explosion of goods like cars and washing machines, were bearing fruit and wealth was being created.  But wealth created is not necessarily wealth re-invested in more productive activity.  Especially if the previous investments need little additional capital to keep increasing profits.  So the money gravitates to the stock market instead.  In the 1920s regulation of these markets, as well as banking, was minimal.  The stock market, or any financial market for that matter, is represented as a number.  The number goes up, you win.  The number goes down you lose–unless you can place a bet that rewards you if the number goes down.  And of course, if you need to put down only a dime to bet a dollar, so much the better if you guess which way the number will go.  It matters absolutely nothing what the fundamentals are.  “The trend is your friend,” after all is said and done. 

A side observation is that, under the scenario explained above, an early warning of coming disaster is that the disparity in incomes increases as the wealthy need not invest more in labor or machinery because previous investments in labor and machinery were so successful.   No trickle down for a while, it seems.

Today it’s much the same.  Only larger because there are simply more people on the planet, and way more money.

And it’s probably right to ask again, as Fred Schwed did years ago about Wall Street tycoons “Where are the Customers’ Yachts?”  A lot of Manhatten executives have been paid hundreds of millions of dollars to pump up this gambling machine.  So where are the customers’ yachts?

Woven everywhere in our lives is our legal system.  Beezer believes this system is seriously impaired and in many ways this impairment has enabled much of what we see today in our banking system and in our failure to protect individuals from unscrupulous liars.

We have forgotten to protect the truth and to defend honesty.  The result is liars everywhere flourish, from political advertising that is, at best, gross mis-representation, to investment bankers selling toxic waste labeled as “insurance.”

Somehow, truth and honesty have to be restored to their rightful place as the two fundamental reasons for a legal system.  Today, everything is relative in the law.  We no longer enforce the truth.  We no longer punish liars.  We cannot because honesty and truth are no longer the reason our system exists.  Our judicial system exists as competition:  Winners and Losers.  It’s participants do not get up everyday and go to work to protect truth and honesty.  They go to work to win.  To make advantage for their clients.  

The construction of our legal system is rational.  Our Constitution protects our legal system from political manipulation.  It is a separate, defined, branch of government which is intended to be independent.  It exists to protect the innocent, not only from criminals and liars, but from government itself if need be.

It’s not the system’s design that’s at fault here.  It’s the participants.  There needs to be some type of professional commitment similar to the medical professions’ “First, do no harm.”  In medicine, a patient is involved and the issue is health.  But in the legal system, a client may be the worst kind of liar or worse.  That’s why honesty and truth need to be the judiciary’s ultimate patients.  The system needs to be reminded why it exists:  To discover and protect the truth and to defend honesty.

If this patient dies, we are all in very big trouble.  Beezer believes this patient is very ill and much of what we see today in crisis, has been greatly enabled by a moribund judiciary.

This hasn’t happened overnight, of course.  Congress makes the laws, and it’s approval rating is something like 10%.  In short, most citizens don’t believe a thing the government or its representatives say.  They assume these folks are lying.  They didn’t come to this conclusion based on thin air. 

Where can this reformation come from?  It could be generated by the profession itself.  After all, lawyers dominate the Congress membership.  Lawyers play critical roles in the construction of laws.  And of course, they totally control the underlying justice system.  What if the discovery of truth and the protection of honesty became the most important reason all lawyers went to work everyday?  From Congressmen and women down to the single practitioner.  Failure to do so would result in sanction or disbarment.

And it is the approach that matters most.  No one can be right all the time.  Truth is sometimes hard to find even when everyone seeks it.  It is impossible to find if some of the participants want to hide or supress the truth. 

When a criminal confesses to his lawyer that he committed a crime, is it honest to hide that truth?   Of course not.  How can you have the judiciary protect anyone when one of its fundamental tenants is to suppress the truth?  Again, this is about winning and losing.  It’s not about truth, or honesty.  In fact, in its current state, the judiciary protects willing suppression of truth, and therefore encourages at the very least, lies by omission.

Truth and honesty get a tough welcome in any market, free or otherwise.  But they have no chance of surviving if their legal protectors have, like a bad set of tonsils, not only stopped protecting the body but have gone to the other side.