Polemical Pontificator

My connection has been off and on the last couple of days. Just wanted to post a chart to help explain the economic trouble we're in. This chart is the TED spread, which is the difference in the 3 month t-bill and the LIBOR rate (LIBOR is the rate at which commercial banks loan money to each other). TED measures the liquidity of the credit markets. It should, under good times, be about 15-30 basis points (.15%-.30%) well if you look at this chart you can see the evidence of severe illiquidity. The last time it was this high was during the 87' crash were it reached 300 basis points. Today it settled at 301 basis points and last Thursday it was 313 basis points. Credit is really tight.
We should not be fooled into believing that a $700 billion bailout will be some panacea. It won't.  For one thing we don't know exactly which assets are bad. How can the government buy the bad assets when they have no proven method of finding them? We are flying blind. Also what happens when credit cards begin to default or auto loans begin to default? Are we going to have to bail them out too? If you remember back in February Paulson/Bernake said the the bailout of Bear Sterns would solve the problem, it didn't. Then in July Congress passed new authorities for the Treasury allowing it to intervene in case Fannie or Freddie failed. Paulson said he would never have to use those powers, he was wrong. Not more than 6 weeks later the government took over Fannie/Freddie and claimed to have solved the problem. Fast forward a few weeks and the we find ourselves now with an equity stake in the largest insurance company in the world. Again the Fed said this would solve the problem, it didn't. So far we are roughly $300 billion into the hole and they are asking for another $700 billion? Not to mention Congress just approved a $25 Billion rescue package for the Auto makers.  STOP!!!!
This bailout is a bad idea and will only prolong the recession we are already in. I will try and post more n this later.

Interesting move:

John McCain announced that he will suspend his presidential campaign on Thursday to return to Washington to help with bailout negotiations. He urged his opponent Barack Obama to do the same.

This works to the advantage of McCain for several reasons. One, it shows he is willing to put the health of the country before his own personal aspirations. It also throws a wrench into Obama's debate preparation. Currently the Obama campaign is saying that the debate is still on. If for some reason a deal is not reached on the proposed bailout then McCain will most likely stay in DC  over the weekend to help work out the problems. There is no way Obama can protest without looking self centered. He will be diverted and not as focused on National Security as he otherwise would be. Third, if there is a compromise solution and McCain is seen as working together with the Democrats it will send a message of leadership to the American people. A deal would also alleviate some of the fears penetrating the electorate right now.

Another example of Obama's civility:

Penalty: Set Obama's credibility back 15 yards for manhandling the truth.

Where does it end? This is going to be a nightmare.

In the dark of night over the weekend when most people were snoozing, the Treasury dramatically expanded its bailout plan to include buying student loans, car loans, credit card debt and any other "troubled" assets held by banks.

Just checking out the beaches?

Peter the Great is armed with 20 nuclear cruise missiles and up to 500 surface-to-air missiles, making it one of the most formidable warships in the world

I was on my way home from class and I happened to encounter a protest from a group here on campus that is dedicated to open borders and amnesty. One of their signs had a statement that read "the Constitution says 'give me your tired your poor your huddled masses' ". I approached one of the organizers to tell him his sign was wrong. That didn't go over to well. He claimed I was wrong and didn't know what I was talking about. I laughed and walked away trying not to argue because I'm tired.
The truth is that some of these guys on campus haven't a clue as to what they are talking about.
That phrase "give me your tired your poor your huddled masses" comes from a Jewish American poet named Ezra Pound. She wrote the sonnet in order to raise money for the pedestal of the Statue of Liberty. The people she was referencing in the poem were the Jewish populations of Eastern Europe who were being slaughtered by Russian pogrom's and the like. The founders did not say this. This is not a tenet of American principle. It was tailored to a specific people at a specific time. Anyways its a great poem.

Law and Economics test tomorrow. Philippians 4:13

Here comes the NRA. Bitter you say?

A smart piece from the von Mises institute about how the financial crises came about. Loose monetary policy led to a massive expansion of the credit market which created a bubble and when the fed began to tighten policy the bubble burst.

At the root of the problem are not mortgage-backed assets as such but the Fed's boom-bust policies. It is the extremely loose monetary policy between January 2001 and June 2004 that set in motion the massive housing bubble (the federal-funds-rate target was lowered from 6% to 1%). It is the tighter stance between June 2004 and September 2007 that burst the housing bubble (the federal-funds-rate target was lifted from 1% to 5.25%).