Myths From Subprime Mortgage Crisis

Here is a noteworthy article by Yuliya Demyanyk of the Federal Reserve of Cleveland debunking popular explanations of the recent subprime mortgage crisis.

Ms. Demyanyk's intro: (bold highlights mine)

``On close inspection many of the most popular explanations for the subprime crisis turn out to be myths. Empirical research shows that the causes of the subprime mortgage crisis and its magnitude were more complicated than mortgage interest rate resets, declining underwriting standards, or declining home values. Nor were its causes unlike other crises of the past. The subprime crisis was building for years before showing any signs and was fed by lending, securitization, leveraging, and housing booms."

Most of the misconceptions had been aggravating circumstances read as causal effects, logical fallacies or outright cognitive biases at work.

The ten myths:

Myth 1: Subprime mortgages went only to borrowers with impaired credit

Myth 2: Subprime mortgages promoted homeownership

Myth 3: Declines in home values caused the subprime crisis in the United States

Myth 4: Declines in mortgage underwriting standards triggered the subprime crisis

Myth 5: Subprime mortgages failed because people used homes as ATMs

Myth 6: Subprime mortgages failed because of mortgage rate resets

Myth 7: Subprime borrowers with hybrid mortgages were offered (low) “teaser rates”

Myth 8: The subprime mortgage crisis in the United States was totally unexpected

Myth 9: The subprime mortgage crisis in the United States is unique in its origins

Myth 10: The subprime mortgage market was too small to cause big problems

Read her insightful revelations here.

My favorite quote from Yuliya Demyanyk's striking comments (oddly from a quasi government agency): From myth 2.(bold highlights mine)

``The availability of subprime mortgages in the United States did not facilitate increased homeownership. Between 2000 and 2006, approximately one million borrowers took subprime mortgages to finance the purchase of their first home. These subprime loans did contribute to an increased level of homeownership in the country—at the time of mortgage origination. Unfortunately, many homebuyers with subprime loans defaulted within a couple of years of origination. The number of such defaults outweighs the number of first-time homebuyers with subprime mortgages.

``Given that there were more defaults among all (not just first-time) homebuyers with subprime loans than there were first-time homebuyers with subprime loans, it is impossible to conclude that subprime mortgages promoted homeownership."

In short, inflationary "boom bust" policies has not only failed to achieve its goals, it has led to the sharp deterioration of the society's standard of living!!!

The Squabble For National Artist Awards Reeks Of Political Ignominy

This just a glaring example of how pathetic and crass Philippine politics is.

Recently another domestic controversy erupted over the choice of National Artist awardees.

The Political Process

The awards had supposedly been meant to be ``given to a Filipino who has been given the highest recognition for having made significant contributions to the development of Philippine arts,” according to the Inquirer. (emphasis added)

Who determines the winner? ``The selection committee is composed of representatives from the CCP and the National Commission for Culture and the Arts” says the Inquirer.

And what was the object of the controversy?

According to Manila Times’ Rome Jorge ``The recent inclusion by President Gloria Arroyo of four nominees who did not go through the painstaking selection process (as well as her omission of one candidate who did) has provoked public outrage as well as condemnation by the country’s most esteemed artists, many of them National Artists themselves.” (emphasis added)

So the CCP, NCCA and the eventually President selects the awardees.

And yet, the irony is that both parties (CCP and NCCA) in the screening committee are said to be politically colored but under opposing camps. Again from Mr. Jorge, ``More than just legacies of opposing regimes, the CCP and NCCA represent two divergent viewpoints on what Philippine arts ought to be. Their latest battleground is the National Artist Award—itself a relic of political manipulation of the arts.” (emphasis added)

The Apolitical Fantasy

Haven’t two quasi political parties along with a political President imply that POLITICS AND NOT OBJECTIVITY been the ultimate parameter for the reckoning?

How does one measure the “contribution to the development of the Philippine arts”? Because the CCP says so? Because the NCCA says so? Or because the President says so? Or because of a unanimous decision?

Isn’t art subject to the eyes of the beholder?

How can these so called representatives constitute as the national voice of the Filipinos when their aesthetic artistic palates or tastes are different from the rest of the society? Do their political positions or expertise entitle them to account for vox populi vox dei?

The reality is that politics and arts are two distinct animals.

Hence it is of no question to us, that since politics has been the principal determinant of the awards, there will always be “aggrieved” parties who think that they deserve such politically bestowed privileges but had been “manipulated” out of the race.

Ironically, the belief that the awards must be kept apolitical, but is in truth sustained and decided for by political forces, is thus nothing but another unalloyed fantasy.

Manny Pacquiao’s Lessons

In the field of sports, Manny Pacquiao does NOT need to be recognized by any political party/ies in order to be hailed a “National sportsman”.

His accomplishments have NOT just been breaking boxing world records, but most importantly his feat has been recognized by the MARKETPLACE.

That’s why he has been paid millions in currencies for appearances, for endorsements and advertisements and for the matches where he engages in.

As proof of the market’s generosity, even members of his family gets a share of the limelight by reportedly having their own ads or as guests in several TV programs, etc.!!!

In short, the market has accorded Mr. Pacquiao with the prestige of an international boxing legend more than just a national celebrity- award or no award from politicos.

In addition, he doesn’t require any blessings from politicos to become part of boxing history.

To the contrary, because of his overwhelming success, politicians have been all over him to generate political advertisement by mere association!

Thus, the accolade he receives transcends politics and subjectivism because his performance buttressed by the market has elevated him to such preeminent pedestal.

One may argue that Mr. Pacquiao maybe an extreme case, but nevertheless, you can’t achieve “significant contributions to the development of the arts” without the patronage of the public.

Ultimately, it is the artists’ contributions to the public that determines the level of “significance” to the society-a sine qua non! Even an art teacher would need pupils to ascertain his/her efficacy where success would mean higher wages or other perquisites.

Abolish The Farcical Awards

This brings us back to the issue of arts; if politics and not the markets determine the legacy of the so called “national artists” then the whole process is nothing but a sham.

Instead of advancing and fostering the cause of art, the inherent political process in the determination of the beneficiaries of the National Artist awards would only nurture political partisanship, factions, envy and rancor thereby defeating the very objective of its existence, as manifested by the recent disgraceful controversy.

Hence, given the above circumstances, the best option would be to abolish it.

Local Currencies Are Back In Fashion In The US

In the US, local currencies have been making a comeback- after its last appearance during the Great Depression.

They come in many names: In North Carolina Plenty, it is the Plenty. In Detroit, the Cheer. In Arizona, it is the Mesa Bucks and in Massachusetts, the Berkshare.

Read the rest from the LA Times here

China's Strategic Resource Accumulation Continues

China's insatiable appetite for strategic resource accumulations runs unabated.

The latest buyout activities as reported by the Wall Street Journal (all bold emphasis mine)

``China National Petroleum Corp. and Cnooc Ltd. have proposed paying at least $17 billion for all of Repsol YPF SA's stake in YPF, its Argentine unit, two people close to the talks said.

``The potential deal, which could be the biggest overseas investment by China, highlights the country's growing thirst for energy resources globally and its willingness to offer big money for access. It also underlines the ambition of CNPC to build its presence in South America and elsewhere.

``A deal would be another example of how Chinese companies are now working together to buy foreign energy assets after years of working alone.

``But the potential acquisition faces significant hurdles. A deal could be politically sensitive in Argentina, where YPF is the country's leader in both upstream operations -- the exploration for and production of oil -- and downstream operations involving oil refining and marketing...

``China's resource majors have snapped up foreign oil and other assets recently, as the country seeks to lock in energy supplies.

``China Petrochemical Corp., the Chinese state-owned oil company known as Sinopec, in June acquired Switzerland-based oil explorer Addax Petroleum Corp. for $7.2 billion. In April, CNPC purchased Kazakh oil producer MangistauMunaiGas jointly with Kazakhstan's state-owned KazMunaiGas for $3.3 billion.

``China's state energy companies are also showing more teamwork in chasing foreign deals than previously. This year Sinopec and Cnooc have together struck deals for oil and natural-gas assets in Angola and the Caribbean. In July they agreed to buy jointly a 20% stake held by U.S. oil producer Marathon Oil Corp. in an oil block off Angola for $1.3 billion.

``Chinese oil companies have also signed oil-for-loans agreements with Russia and Brazil.

``But not all of China's efforts have been successful. In June, a $19.5 billion bid by Aluminum Corp. of China, or Chinalco, to raise its stake in Anglo-Australian mining-giant Rio Tinto collapsed amid shareholder and political concerns. An earlier, successful deal by Chinalco, in which it paid $14 billion for an initial 9% stake in Rio in February 2008, is China's largest foreign investment in the resources sector.

Read the rest here

My take.

China's aggressive resource accumulation has the following implications:

1. Economic-it has been amassing resources for its industrialization and rapidly progressing middle class.

2. Political-it has been using their immense foreign reserves as leverage to expand its geopolitical influence overseas, which could have some possible bearing on its desire to become a military and economic powerhouse.

This could be manifested by its thrust to elevate the yuan as an eligible international reserve currency and as possible candidate to the replacement of the embattled US dollar.

3. Security-it has been insuring itself from US government's policy to debase the US dollar.

Moreover, by expanding access to resources coupled with a build up in military and commercial logistics and expanding her sphere of global political influence, all these could also be interpreted as an insurance policy against future military conflict.

The apparent transition of the geopolitical order from unipolar to a multipolar framework cannot be guaranteed as orderly and peaceful.

Paper Money On Path To Return To Intrinsic Value - ZERO

Voltaire (1694-1778) once said, ``Paper money eventually returns to its intrinsic value ---- zero."

No matter how you look at it...

From Price levels...

source (Robert Sahr, Oregon State, HT: Jeff Tucker)

Or inversely translated into the currency's purchasing power...

(Source AIER)

Paper money based on the US dollar system is indeed headed towards ZERO

Source AIER

As Thomas Paine(1737–1809) an English pamphleteer, revolutionary, radical, and classical liberal once wrote, ``Paper money is like dram-drinking, it relieves for a moment by deceitful sensation, but gradually diminishes the natural heat, and leaves the body worse than it found it. Were not this the case, and could money be made of paper at pleasure, every sovereign in Europe would be as rich as he pleased. But the truth is, that it is a bubble and the attempt vanity. Nature has provided the proper materials for money: gold and silver, and any attempt of ours to rival her is ridiculous…."

Crack-Up Boom Spreads To Asia And The Philippines

``But the administration does not want to stop inflation. It does not want to endanger its popularity with the voters by collecting, through taxation, all it wants to spend. It prefers to mislead the people by resorting to the seemingly non-onerous method of increasing the supply of money and credit. Yet, whatever system of financing may be adopted, whether taxation, borrowing, or inflation, the full incidence of the government's expenditures must fall upon the public. With inflation as well as with taxation, it is the citizens who must foot the total bill. The distinguishing mark of inflation, when considered as a method of filling the vaults of the Treasury, is that it distributes the burden in a most unfair way, overcharging those who are least able to bear it.”-Ludwig von Mises The Truth About Inflation

I received 4 text messages and 2 telephone calls anew this week from different banking institutions offering me loans. This seems like a defining activity since the start of the year. I don’t recall of such persistency to promote access to credit even prior to the Asian Crisis in 1997.

Yet I assume that this could be a national dynamic. Nonetheless, I can’t help but associate the actions in the Phisix to such anecdotal evidence.

Obviously, the domestic banking system which functions as the primary source of funding, has only been responding to regulatory policies.

While we don’t have available national data yet as proof for our assumption, a prolonged accommodative monetary environment will imply further space for mass speculation and a greater degree of consumption growth-that is likely to be reflected on our economic statistics.

And this seems to be the case for Asia, see Figure 1.

Figure 1: Danske Weekly: Recovery Gets More Visible

As Danske’s Fleming Nielsen wrote in his Weekly Focus, ``June’s economic data confirmed that Asia is experiencing a pronounced upswing, with strong industrial production numbers across the board. Countries such as South Korea and Thailand, which were hit exceptionally hard by the global financial crisis, are seeing industrial production recover to pre-crisis levels at a surprising clip. There are also signs throughout Asia that domestic demand is picking up – especially private consumption, with rising retail and car sales in the past couple of months.” (emphasis added)

For us, aside from the government policies, such intense reaction has been a manifestation of the “anomalous” collapse in the last quarter of 2008, which had been due to the seizure in the US banking system which rippled globally- a shock we called as Posttraumatic Stress Disorder (PTSD) [see What Posttraumatic Stress Disorder (PTSD) Have To Do With Today’s Financial Crisis].

Apparently the current actions in the financial markets and economic stats have strongly been validating our views.

Moreover, we see other national and regional quirks posing as significant influences that can electrify the pricing of regional financial assets.

As discussed in Philippine Phisix at 2,500: Monetary Forces Sows Seeds Of Bubble, ``it is likely that high savings rate combined with loose monetary policies to induce speculation, fiscal stimulus applied, largely unblemished banking system, and low systemic leverage that has impelled a bidding war in the stock markets and commodity markets.”

The Growing Inflationary Bias Of Asia’s Markets

For the longest time we had been advocating that in a world of central banking and virtual free lunch money polices, bubble cycles emanating from these are likely to be imbued more by Asia and emerging markets since developed economies have debts that have been “hocked to their eyeballs”.

Doug Noland in his Credit Bubble Bulletin says the same, `` The most robust inflationary biases are today domiciled in China, Asia and the emerging markets generally. The debased dollar has provided China and the “developing” world Credit systems unprecedented capacity to inflate (expand Credit/financial claims without fear of spurring a run on their currencies). Asian and emerging markets are outperforming, exacerbating speculative flows. Things that the “developing” world needs (energy/commodities) and wants (gold, silver, sugar, etc.) should demonstrate increasingly strong inflationary pressures. Their overflow of dollars provides them, for now, the power to buy whatever they desire.”

And the transmission mechanism from US Federal Reserve policies into global assets have nowhere been more explicit see figure 2.

Figure 2: Stockcharts.com: US dollar Index’s Inverse Correlation

As we pointed out in Asia Sows The Seeds Of The Business Cycle, a breakdown in the US dollar index (USD) seem likely to propel a reacceleration of the asset bidding wars.

The USD indeed broke down last week which likewise brought many global stock market benchmarks to new post crisis highs (the Philippine Phisix nearly touched the 2,900 level). However, Friday’s announcement of the US unemployment data, which showed a modicum of progress, may have incited a USD short covering.

The fun part is identifying the apparently synchronized inverse correlation of oil (WTIC), Emerging Market stocks (EEM) and Asia ex-Japan (DJP2) where the crucial inflection point has been vividly demarcated in March (see the red horizontal line).

So those arguing on the basis of the traditional fundamentalist metrics seem to be looking at the wrong picture. Inflation appears to be increasingly the principal moving force behind the motions of the progressively interconnected global financial asset markets.

The Global Crack-Up Boom

Where financial markets once functioned as signals for economic transitions, it would now appear that financial markets have become the essence of global economies, where the real economy have been subordinated to paper shuffling activities.

What was once a feature dominated by the West, seem likely to get assimilated rapidly by the East as government policies appear to be directed at either juicing up or controlling the “animal spirits”.

Nonetheless today these dynamics have been “globalized”.

Proof?

We pointed out last week (see The Inflation Cycle Accelerates; Asia As Chief Beneficiary) how China has been dithering over the explosive rise of its stock and property markets wherein policymakers signaled intentions to rein the markets by restricting flow of credit. However, the violent response in the stock market compelled a retraction from authorities.

This week we see more of the same.

Publicly listed state owned China Construction Bank President Zhang Jianguo reportedly resolved to materially prune its credit expansion. According to Bloomberg ``the nation’s second-largest bank will cut new lending by about 70 percent in the second half to avert a surge in bad debt.”

The result had been the same, after a reaching a new high, China’s Shanghai Index crumbled over the last 3 sessions to end the week down 4.4%.

In the US, the path to serfdom continues, the Federal Trade Commission has issued new rules to ``crack down on fraud and manipulation that can drive up prices at the pump.” (Bloomberg) Oil prices which had been on a tear mostly reflecting on the US dollar’s earlier breakdown, had been tempered anew by the realized regulatory actions (more than just threats), aside from the sharp rally in the US dollar.

Still the WTIC rose by over 2% the week.

In the UK, the Bank of England (BoE) surprised the markets when it announced additional quantitative easing measures. This means that the central bank will be issuing ‘money from thin air’ to acquire domestic sovereign instruments (Gilt) as well as “high” quality corporate debt (Marketwatch). While directly such policies are aimed at propping up the financial system, implicitly it further implies support to financial asset prices. The British pound fell .21% over the week.

In anticipation of prospective inflation, Australia will be resurrecting issuance of inflation indexed bonds as a hedge. According to Bloomberg, ``Australia will sell its first inflation-indexed bonds in six years as record stimulus spending worldwide prompts speculation price increases will resume once the global recession ends…

``Asia-Pacific governments including Australia, Japan and Thailand had signaled they may sell inflation-linked bonds as improving economies threaten to boost the price of goods and services. Australia, which considered scrapping its bond market in 2003, boosted its debt outstanding by 67 percent to A$101.1 billion ($85 billion) in the year ended June 30, about 10 percent of its gross domestic product.”

The significance:

One, when government and financial claims grow more than real output or available economic resources the outcome is materially higher prices.

Two, governments are in a predicament, while they want to see sustained elevated or high financial asset prices, to give the impression of economic growth and to further unleash “animal spirits” or expand risk appetite, the demand from excessive money has also diffused into scarce economic resources which has compelled them to impose price controls [as previously discussed in The Inflation Cycle Accelerates; Asia As Chief Beneficiary].

Price controls will only cause arbitrages into markets that are more open, it would also reduce market pricing efficiency by distorting them and enhance shortages which would fuel more volatility.

Here, as expected governments are bent to deal with the symptoms than the cause. The superficial nature of policy actions enhances nurturing the bubble cycle.

Three, bubble affected economies will likely prompt for more borrowing (see figure 3) and more money issuance activities as signified by Bank of England’s QE or Secretary Tim Geithner’s request to the US Congress to expand debt limit to $12.1 trillion (HT: Craig McCarty).

As Doug Noland aptly observed of the inflationary pyramid being erected (from the same article), ``The deeply maladjusted U.S. “Bubble” economy requires $2.5 Trillion or so of net new Credit creation to stem systemic (Credit and economic Bubble) implosion. Only “government” (Treasury, agency debt, GSE MBS) debt can, today, fill the gigantic void created with the bursting of the Wall Street/mortgage finance Bubble. The private sector Credit system is severely impaired, and there is as well the reality that the market largely lost trust (loss of “moneyness”) in Wall Street obligations (private-label MBS, CDO, ABS, auction-rate securities, etc.). The $2.0 Trillion of U.S. “government” Credit creation coupled with the Trillion-plus expansion of Federal Reserve Credit over the past year has stabilized U.S. financial and economic systems.” (emphasis added)

Figure 3: Bloomberg Chart of the Day: Addiction To Debt

The above chart shows that in the US it now takes about $4 dollars of debt to generate $1 of economic output (left window), while debt to GDP ratio has soared to 372%, which is clearly unsustainable.

Yet the policy direction is assuredly headed towards engaging in more borrowing and issuance of paper or digital money. Recently the US extended $2 billion “cash for clunkers” program which incentivize people to replace old cars with new ones supported by government subsidies (Bloomberg) is another example of debt addiction.

As Ludwig von Mises warned, ``But the boom cannot continue indefinitely. There are two alternatives. Either the banks continue the credit expansion without restriction and thus cause constantly mounting price increases and an ever-growing orgy of speculation, which, as in all other cases of unlimited inflation, ends in a ‘crack-up boom’ and in a collapse of the money and credit system. Or the banks stop before this point is reached, voluntarily renounce further credit expansion and thus bring about the crisis." (emphasis added)

The end result would likely be a nasty choice between that of market compelled deflation or hyperinflation.

The institutional bank run in the US that triggered the 2008 meltdown (in financial markets and global trade) was a classic example of the near “collapse of the credit system”.

In short, what is unsustainable won’t last. Artificial measures will only aggravate the imbalances.

In sum, all these account for the phenomenon known as the “crack-up boom” applied on a globalized scale.

Hence a bubble based boom equals a prospective bubble bust and another crisis down the road. So relish the fun while it lasts.

Interim Pause, The Bubble Blowing Dynamics At Least Until The 2010 Elections

Friday’s torrid bounce in the US dollar index could signify as a worthwhile pause for the vastly overheated Asian-Emerging Market stock markets (see figure 4)

Figure 4: US Global Investor: Asia Technically Overbought

According to US Global Investors, ``For the first time since mid-1999, stocks in emerging Asia are trading at more than 35 percent premium to the 200-day simple moving average, an overbought condition which historically has resulted in sizable corrections in the following months.”

So if this should hold true, then a correction would likely be in the range of 10-20%.

Nonetheless we can expect any material decline would likely be met by anxious officials who would hastily act to restore boom conditions.

Remember, in today’s era where policies are skewed towards favoring paper shuffling activities and where the financial sector acts as the principal growth engine of the economy, rising prices are construed as the norm (for statistical purposes) regardless of the substance of the growth. So lofty prices in financial assets will likely be the undeclared policy thrust.

Nevertheless in a bull market hiatus, which is likely a function of profit taking than policy reversals, declines are less likely to move in tidal fashion, as some stocks may generate speculative attention because the marketplace would continually seek for yields in response to the loose monetary environment.

And applied to the Philippine Phisix, foreign buying, which has largely been absent for most of the first semester of the year, appears to have returned. For three successive weeks, we have seen a net buying from foreign funds in both nominal terms and in the broader market.

So the recent approach towards the 2,900 level could be interpreted as the bidding up of Philippine stocks compounded by foreign buying as we had been expecting. In Philippine Phisix at 2,500: Monetary Forces Sows Seeds Of Bubble, we said, ``So renewed interests from foreign investors on emerging markets are likely to even propel stock prices to higher levels! We should see the same dynamics reinforced locally. This time it will probably be foreigners chasing stock prices.”

Nonetheless, foreigners entering the local market appear to have been responding to the decline of the US dollar index.

If the US dollar is expected to fall further especially against Asian currencies then such dynamics are likely to be sustained. This would function as an important support to key components of the Phisix which also means a cushion from any major correction.

Figure 5: PSE: Share of Foreign Trade

Yet, despite this foreign trade improvement, the shape of today’s rally has departed from the 2003-2007 paradigm, where this time, local investors have powered the market as shown in Figure 6. Foreign trade from the start of the year have seen only occasional bouts where it gone beyond the 50% level which characterized the previous run.

At the end of the day, domestic policymakers will also want to see such trend persist going into the local national election season, as this would boost the odds of reducing the negative rating of the incumbent President PGMA thereby improve the chances for her appointee during the national election derby.

The Fallacies of Inflating Away Debt

``In an inflationary world, deficit spending and an easy-money policy have other reasons. Deficit spending is resorted to simply because of inability to balance the budget. It is purely involuntary. An easy-money policy is advocated because it seems to make possible a speedy reduction of the interest and debt burden of the government and the balancing of the budget without imposing higher taxes. Sometimes it is urged also as a command of social justice. The latter argument is of course based upon pure illusion. Small savers pay the bill directly or indirectly via savings banks and insurance companies, whereas large capitalists, who are interested chiefly in equities, harvest the profits from refunding operations.” L. Albert Hahn The Economics of Illusion

In the US, many harbor the delusion of inflating away the massively expanding debt levels as the ‘best alternative’ policy. Such advocates appears guilty of the following sins:

One, interpreting past performance as future outcome. A semblance of success during the previous incidences allowed for the deferment of the day of reckoning because debt levels had been low, or otherwise said, the economy can yet afford to pay for such policies.

Nonetheless, the untold truth is that the subsequent growth in such imbalances has ensured the reemergence of such boom-bust cycles with greater magnitude of impact.

Two, extensive “blind” faith on governments, to ably prevent collapses in spite of evidences, proved to be a myth.

The multifaceted ‘innovative’ Fed programs (TARP, TALF, Maiden Lane LLC, TSLF, MMIFF, Reciprocal currency swaps et. al.) failed to prevent or forestall the 2008 meltdown, this serves as another patent example of government failure.

Figure 6: Federal Reserve Bank of Minneapolis: Duration of Current Recession

Another fiction is the idea that inflationary policies has shortened the duration of recession period (see figure 6) or has alleviated its depth (figure 7).

Figure 7: Federal Reserve Bank of Minneapolis: Depth of Recession

Despite all expenditures thrown at the expense of the taxpayers, the 2007 recession has been the worst among the 10 post war recessions.

Lastly, they blithely ignore the unseen or unreckoned with ramifications of the shifting but continually expanding debt loads while depleting productive resources of the economy.

In other words, such advocates underestimate the degree of the impact from present policies.

Inflation Is A Political Process, From Risk To Uncertainty

Given the extent of the rapidly expanding debt levels, not only in the US but elsewhere too, relying on inflation to diminish real debt value could make the stagflationary period of 70s look like a picnic in the park.

This likewise risks provoking political unrest or war from prolonged or extended depression.

In short, those who embrace inflationary policies parochially forget that inflation is a political process and thus has political consequences.

As James Kunstler rightly explains, ``It would be sententious to explain how this destroys currencies, but wherever ‘monetizing debt’ has been tried before in history, that is the outcome. The result would be ruinous at every level and would lead straight to the second terrible force: social upheaval brought on by the conversion of economic problems into political turbulence.” (emphasis added)

In addition, while it is true that today’s monetary and fiscal deficit spending policies momentarily benefits asset market participants (that includes me), this view neglects the possible adverse repercussions from regulators to misjudge or miscalculate on the application of untried or untested tools that may trigger disorderly adjustments in the financial markets and the economy system.

Morgan Stanley’s Manoj Pradhan has this insightful observation,

``Central banks correctly describe programmes like quantitative easing as ‘unconventional'. Being far from the norm, policy-makers do not have much experience in dealing with such unconventional policies with nearly the same familiarity as the interest rate tool. When downside risks were dominating, policy-makers were only too willing to throw everything including the kitchen sink at the problem. For the most crucial passage of time in the past two years (the time since September 2008 when markets froze), central bank purchases of risky assets and government bonds (i.e., ‘active' QE) contributed to lower yields and spreads. Outright expansion of these programmes or the implicit threat that they could be enlarged in scope and/or size also kept yields and spreads from rising too much, and the real economy benefited from these developments. Selling assets purchased according to these ‘active' QE programmes could easily reverse those moves, particularly with a return to growth and the risk of inflation. With very little experience in handling such large unwinds along with the risk of derailing a hard-fought recovery by sending yields and spreads higher, central banks are unlikely to move particularly rapidly.” (emphasis added)

When policymakers ply on uncharted territories, instead of dealing with risks, we are transformed into dealing with non-Priceable Knightean “uncertainties”.

The underlying difference against risk, to quote economist Frank H. Knight is that “Risk is present when future events occur with measurable probability” while “Uncertainty is present when the likelihood of future events is indefinite or incalculable”.

In short, the law of unintended consequences has been increasing its role in the unfolding inflationary cycle.

The Bureaucratic Incentive Problem**

Besides, there has always been the question of incentives underpinning the actions of policymakers involved.

When unelected officials (e.g. Treasury or Central Banks) dabble with economic or financial policy tools or regulations or assume greater bandwith of power over their constituents, their accountability essentially remains the same.

Any adverse outcomes arising from their actions on the economic or financial sphere will only lead to, at worst, a job loss-but in most cases the same officials get enlisted with private firms they regulate. Since, to quote Ludwig von Mises, ``A bureaucrat differs from a nonbureaucrat precisely because he is working in a field in which it is impossible to appraise the result of a mans effort in terms of money”.

In short, it cost little for them to commit a policy error, since they’re not punished for it and are measured not based on money performances but on the impact during their tenure.

Hence, policymakers are likely to take actions that are designed for generating short term “visible” benefits at the cost of deferring the “unseen” cumulative long term risks, which are usually are aligned with the office tenure (let the next guy handle the mess) or if they happen to be politically influenced by the incumbent administration (generates impacts that can win votes).

So bureaucratic myopia seems in a natural state of conflict with the long term interest of the marketplace and can function as another vital factor in amplifying the risks of enabling future crises.

**Update: I forgot to include this portion

Philippine Politics: Always Waiting For Godot

``In our age there is no such thing as ‘keeping out of politics’. All issues are political issues, and politics itself is a mass of lies, evasions, folly, hatred, and schizophrenia.”-George Orwell, Politics and the English Language

Philippine elections are near, and so the politicization trends have apparently been intensifying.

In contrast to the public, whom are seemingly severely obsessed with sensationalism, we think that the Con Ass is nothing but a diversionary ploy, because it lacks the time element and the legal channels and risks running the same parallels to the Honduran experience.

This means I don’t buy the balderdash that the highly unpopular PGMA will run anew or that the passing of President Corazon Aquino will “harm” PGMA’s political interest for the said reasons.

For me, the ‘Hello Garci scandal’ signifies as the apogee of any political capital damaging events that could have undone her, yet she persisted.

Media and its gullible captive audiences, simply loves to pick on fights that can’t go beyond superficialities. Worst, they promote abstractions (fair, good or evil, greed or etc…), when the truth is that political winds always see a shift in allegiances.

In politics (here or elsewhere), the rule of thumb has been ‘there are no permanent friends only permanent interests’.

As an aside, it would be downright naïve to also believe that Philippine politics runs on simple “partyline” platforms; as if ideology ever mattered.

Yet do any of the aspiring candidates have one?

Yes, every candidate wants corruption free “good” government alright, but unfortunately their aspirations operate asymmetrically on the platform of free lunch and an ever expanding bureaucratic based redistributive system of command and control. Regrettably, a system, which runs utterly in conflict to such supposed goals and which always penalizes the productive segment of the economy.

The reality is that politicians organize and run their bureaucratic network not by appointing people of virtue or by meritocracy but by political affiliations and interests.

Hence, policies are determined politically by populism or by political lobbying groups (hence the proclivity to corruption) or by the quirks of political leaders- preferences based on personal value priorities or marginal utility, familiarity (e.g. would favor industry from which the politico has experienced with), biases, perception and interpretation of events, ego, comfort zones and or preferred social networks (e.g. schoolmates, social organizations etc…).

Robert Ringer has this piquant quote to analogize our version of democratic politics ``You have to throw welfare programs at people — like throwing meat to a pack of wolves — even if the programs don't accomplish their alleged purpose and even if they're morally wrong." liberal Bennett Cerf quoted by Nathaniel Branden in Judgment Day: My Years With Ayn Rand” (emphasis added)

Political advertisements that dangle free this or free that or give away houses over media are fundamental examples.

The popular delusion is that the deliverance of the Philippines will come from a SAINT like leader. This shows that what matters for Philippine politics has been personality imagery, which signifies as the lotto mentality of short term gratification and is hardly about the realities of correcting the deeply flawed institutionalized political patronage system that relies on license based economic rents. Hence, the clueless citizenry will remain perpetually Waiting for Godot who in Samuel Beckett’s play never appears.

Moreover, since national election is just a few months away political forces have been mobilizing. And considering that the elite constituency of the Philippines have related or shared interests or direct/indirect affiliations, it is likely that unpublished alliances will determine the 2010 outcome.

This is where I think the administration and their allies will field multiple candidates, some camouflaged as the “opposition” or Trojan Horses.

So for clues of the possible contestants for the national elections, simply watch for the actions of the kingmakers involved in the ongoing Meralco episode as discussed in Bubble Thoughts Over Meralco’s Bubble.

Bottom line: The upcoming presidential election will likely have two known characteristics well described in quotes:

one, the road to hell is paved with good intentions, and

second, the more things change the more they remain the same.

Hence, I don’t expect any fundamental change in the political economy unless it is demanded for and in the interest of the political elitist segment of our society.

Innovation Trends In Mobile Banking

The wonders of the markets is that the competition to satisfy consumers (and thereby profit from it) function as a major pillar to technological innovation.

Take for instance, in the realm of mobile banking innovative products and services are rapidly being introduced.

Check deposits, money transfers and bills payment have expanded beyond the computers and can now be accessed through the mobile phone.

This should extrapolate to added mobility, greater financial access and savings (time, effort and resources) for consumers, as well as, efficiency and added productivity for the economy.

From mysanantonio.com, (HT: Mark Perry)

``The San Antonio-based company is testing the feature for its iPhone application among its employees and plans to release it to the public soon.

``It is similar to USAA's Deposit@Home program launched in 2006 that allows its customers to deposit checks from home using a computer and a scanner.

“To my knowledge, they will be the first bank to offer it broadly,” said Bob Meara, senior analyst with Celent's banking group in Atlanta. “I'm aware of some very small pilots going on with banks that plan to offer it to their business clients.”

``In mid-May, USAA released an iPhone app that allows people to access their accounts, pay bills, transfer funds and locate an ATM.



``With the application, USAA members simply sign the back of any check and then use their iPhone camera to take a picture of the check's front side and back side.

``They enter some information into the application — including the amount and where it's to be deposited — and then the funds are credited to the designated account.

``Most checks will get immediate availability of funds,” Dennes said."

Innovation, according to Murray Rothbard (Man Economy and State, Chapter 8) is one of the processes adopted by entrepreneurs.

``Entrepreneurial activities are derived from the presence of un­certainty. The entrepreneur is an adjuster of the discrepancies of the market toward greater satisfaction of the desires of the con­sumers. When he innovates he is also an adjuster, since he is ad­justing the discrepancies of the market as they present them­selves in the potential of a new method or product...

``By launching and producing more of the new process, he is pur­suing the entrepreneurial function of adjustment to consumer de­sires, i.e., what he estimates consumer desires will be. If he suc­ceeds in his estimate and reaps a profit, then he and others will continue in this line of activity until the income discrepancy is eliminated and there is no “pure” profit or loss in this area."

In other words, innovation thrives best in free markets.

The Seasonal 'Sell In May And Go Away ' Fails In 2009

This is just an example why seasonality factors may not be relied on.

According to Bloomberg,

``Global equity investors who follow the Wall Street axiom to “sell in May and go away” are missing out on the biggest gains in at least four decades.

``The MSCI World Index climbed 19 percent from May 1 through yesterday, the steepest advance for that period in the 23- country measure’s history stretching back to 1970, according to data compiled by Bloomberg.

``The CHART OF THE DAY tracks the MSCI World’s performance in May through July during the three years it climbed most before 2009, including the previous record gain of 15 percent in 1997. During the past decade, it posted an average loss of 3.1 percent in those three months, falling eight times, Bloomberg data show...

``The “sell in May” strategy was first noted in 1986 by the Stock Trader’s Almanac, which found that $10,000 invested in the Dow Jones Industrial Average from May 1 through Oct. 31 since 1950 left investors with a loss of $1,522. A $10,000 compounding investment in the U.S. benchmark from Nov. 1 to April 30 led to a gain of about $88,000, according to the Almanac, started by Yale Hirsch and now edited by his son Jeffrey Hirsch."

It would appear that presently, the impact from government policies has stronger bearing than simply relying on seasonal patterns.