Posts Tagged ‘financial crisis

21
Dec
08

Printing…just a figure of speech

With Obama’s looming titanic fiscal disaster which path will the Fed decide to take? Central banking or central planning?  The Fed has announced that it will continue to print notes in order to trim its funds rate, if need be, all the way to zero. All bodies in Washington seem to think the wholesale printing of money is the answer to the nation’s economic woes.

Yes, today’s policy makers allow, there are risks to “creating” a trillion or so of new currency every few months, but that is tomorrow’s worry. On today’s agenda is a deflationary abyss. Frostbite victims tend not to dwell on the summertime perils of heatstroke.

Our troubles, over which we will certainly prevail, stem from a basic contradiction. The dollar is the world’s currency, yet the Fed is America’s central bank. In the boom, a superabundance of mispriced debt led countless people down innumerable blind investment alleys. E-Z credit financed bubbles in real estate, commodities, mortgage-backed securities and a myriad of other assets. It punished saving and encouraged speculation. Imagine a man at the top of a stepladder. He is up on his toes reaching for something. Call that something “yield.” Call the stepladder “leverage.” Now kick the ladder away. The man falls, pieces of debt crashing to the floor around him.

One final question for which Mr. Bernanke will have to put himself into the shoes of a foreign depositer:

“Tell us, Mr. Bernanke, if you had the choice, would you hold dollars? And may I remind you, Mr. Chairman, that you are under oath?”

Sink your chops in here, via WSJ.

27
Nov
08

Paradox of thrift

Barely a year ago cash was considered dangerous to accumulate: investors urging board members for returns in dividends or reinvestment. We have thus seen a reversal of public opinion in recent months as companies are off in a mad scramble for any available operating cash.

No longer. For many big American companies, the day of reckoning came two months ago when the deepening financial crisis brought about the abrupt closure of the overnight commercial-paper market. This briefly sent even the most solid companies into a desperate scramble to find money to meet such basic obligations as paying their staff. Since then, the guiding principle for managers everywhere has been to gather up whatever cash they can find, and then do their damnedest to keep as much of it as possible for as long as possible.

This cash squeeze is a huge problem for the world economy, because as firms cut discretionary spending wherever they can, the result is likely to be a corporate version of what John Maynard Keynes called the “paradox of thrift”. Every firm does what is prudent for itself, but by cutting its spending it slows down the economy still further and thus hurts everybody, including itself. This will only reinforce the need for expansionary monetary and fiscal policy (see article) to boost demand; and also for more direct support in credit markets, such as the Federal Reserve’s prop for the commercial-paper market (already tapped by some large American firms).

This is only the tip of the iceberg. Read the article in its entirety via Economist.

22
Nov
08

Wealth Report

It’s nice to see that even in these tough economic times even the upper-crust playboys are having to scale back their activities.

According to a new survey by Prince & Assoc., more than 80% of multimillionaires who had extra-marital lovers planned to cut back on their gifts and allowances. Still, only 12% of the multimillionaire cheaters said they plan to give up on their lovers altogether for financial reasons.

It makes me wonder if I’m doing enough in curtailing my unnecessary expenditures?

Women were far more generous to their paramours in the face of financial crises. Less than 20% planned to lower allowances, gifts and perks, while more than half planned to raise them.

The survey doesn’t mean to suggest that all, most or even a large minority of rich men and women have affairs. It simply is a snapshot of a certain sample at a certain time. Yet it suggests that in a time of financial crisis, it is better to be a kept man than a compensated woman.

Read the entire report via WSJ.




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