Sunday, March 16, 2008

Bear Stearns Non-Bust

What a tough pickle! The FED has to keep Bear Stearns assets from bankruptcy and thus marked to market, because any price set for any of these assets will suggest how another $2-4 trillion nominally valued securities is likely priced. So the FED forks over another 30 billion so JPMorgan can pretend to buy Bear Stearns. And who gets hurt?

About a third of Bear Stearns stock is held by employees, none of whom will see more than 10 cents on the dollar. Recall a few days ago the head of Bear Stearns assured the world all was well. A few days later, the stock lost almost 50%.

The other two-thirds is where? Pensions, savings, etc. Of course this is far from over. The FED is fast running out of bail-money. The Chinese declined to save Bear Stearns.

Here is Arthur Laffer of Laffer Curve fame, arguing all is well against Peter Schiff, two years ago. Of course, Arthur Laffer is a Hamiltonian, whose claim to fame is the clever argument government can get bigger if we cut taxes. It is a paradox, but true. (He does not explain why we should view this as good.) Peter Schiff is obviously right on, but is sneered and jeered.

When California passed proposition 9 in the late 1970's, governments found themselves unable to tax the people into oblivion. With Laffer, they could continue on, up to a point. But to get really big government you must raise taxes, but the people are against that. So what to do? foment a real estate bubble, raise the 'value" of houses, and thus the tax income, and you have a stealth tax. problem is, so many peopl are losing jobs and under water in their mortgages, that they are simply walking away from the properties. And the huge government cannot afford what it "bought" either. California is laying off 20,000 teachers.

None of what we are going through is unexpected, anyone could have listened to people like Schiff who accurately described the problems. The amazing thing is people sit tight as the damage is done.



That's sort of the philosopher's "highbrow" perspective, and I DO AGREE.

There is another "lowbrow" way to look at all of this: take a look at where the world's money is coming from, where it's going and how it is being used.

If you just look at the nuts and bolts of the world economy, the United States and Germany are literally polar opposites.

Germany saves, invests, innovates, enhances productivity, creates value and builds profitability. And doesn't start wars any more.

We all know what US does, pretty much the opposite.

Just for fun, open up The Economist and read the charts and tables comparing the US and Germany. This is how I always read The Economist, from back to front, with rising skepticism.

Forget Dr. Laffer. FOLLOW THE MONEY. That tells the story.

Financial Journalist
London, UK & Brittany, France

David said...

Careful with your facts, they effect credibility. I believe you are referring to Prop. 13 not Prop. 9, limiting increases in property taxes to 2% annually (I believe), as long as you owned the property.

California's current budget crisis, is a result of many years of poor policy, but most formatively, State Prop. requiring 40% of revenue to be spend on education, and increases in state employee pensions. The latter will only get worse. It doesn't leave the State with many options. State taxes are already in the top 10 or so in the US.

Finally, the Laffer Curve is basic micro-economics, the law of diminishing returns. Remember basically approxiamtes an inverted U. Tax recipts increase as rates decline, and at some point, they will dip below the amout at higher rates.

I would comment more precisely, but I can see the post as I write my comments.

Interesting post. Someone is going to make a bundle when this credit mess is worked out, and these securities can be accurately priced.