Why are we bailing out the banks? – Part Four – What happens now?
Another must read by Golem XIV.
In part one of this series I suggested that the simple reason we were bailing out the banks and simultaneously cutting public spending was because,
If the banks were to be wound up it is their [the wealthiest 10%'s] credit/debt backed ‘money and the assets held in it, which would burn to ash….So the simple reason our rulers insist on bailing out the banks is that by doing so the wealthy and the powerful are simply bailing out themselves and guaranteeing the continuation of a system which suits them perfectly.
In part two I argued that while the simple selfishness answer is true there are also theoretical justifications (albeit flawed ones) for the bail and cut policy.
The two aspects of their policy ‘bail and cut’, they will insist are not contradictory at all. Simply put, they will say they are loosening or increasing the money supply (QE) in order to invest in growth (classic Keynesian) while simultaneously cutting those expenditures which they feel do not generate growth and which are in fact ‘drains’ on productivity – in their view any ‘public’ expenditure (Classic Free-market). Growth, for them, equals the free-market/private sector, while drains on growth equal government, public spending….Basically – Private Debt good, Public Debt bad.
Stream of Anecdotes
A few reflections on the market by Hussman of Hussman Funds.
Is the economy at an inflection point, or are we simply in the calm before the storm? Though economic reports have been relatively muted on balance, they have also come in somewhat above expectations in recent weeks – particularly the advance estimate of third quarter GDP at 2%, and October non-farm payrolls at 171,000. The lack of clear deterioration in recent reports begs the question of whether this is enough to dispose of any concern about recession, and instead look forward to continued positive – if slow – economic progress.
The answer to that question largely depends on how one draws inferences from economic data. The consensus of Wall Street economists, as well as the broader economic consensus, has never successfully identified a U.S. recession until well after it has begun. I believe that much of the reason is that economists tend to interpret reports one-by-one as what I’ve called a “stream of anecdotes.” From that perspective, a series of positive anecdotes, such as the reports we’ve recently seen on GDP and non-farm payrolls, encourages views that the economic landscape is all clear.
The problem is that the stream of anecdotes approach places no structure on the data – there is no analysis of leading/lagging or upstream/downstream relationships, no examination of the frequency and size of revisions to the data – particularly around economic turning points – and no attempt to place the data points into a larger “gestalt” that captures relationships between dozens of other economic reports. Moreover, it’s natural for analysts to gauge “trends” by comparing recent reports to past data, with a look-back horizon somewhere in the range of 13-26 weeks. If analysts then form expectations by extrapolating recent surprises, it then becomes very easy to produce regular “cycles” of economic surprises. We’ve been able to generate that phenomenon even using randomly generated data. In practice, the cycle of economic “surprises” tends to run about 44-weeks in U.S. data (see The Data Generating Process). As it happens, much to the chagrin of conspiracy theorists, we would expect the present cycle to peak out roughly the week of the election.
How High Might the VIX Spike?
Guest post by Vix and more. Given all the drama in the euro zone, not to mention the fiscal cliff, the various difficulties in China, continued unrest in the Middle East and Northern Africa, etc. it is more than a little surprising that the CBOE Volatility Index (VIX) has failed to trade above 30.00 this year.
In fact, with a maximum VIX of just 27.73 for the year, 2012 could mark the first time in 15 years (if one excludes the great Greenspan liquidity bubble from 2004 – 2006) that the VIX has not made it out of the twenties.
How does 27.73 compare as an annual high in the VIX? Since 1990, the mean high in the VIX has been 37.90 (inflated somewhat by the 2008 high of 89.53), while the median high VIX has still been a reasonably lofty 35.93.
This is not to suggest that the markets have been mispricing SPX options (and therefore the VIX) for most of 2012, only to note that there are certainly quite a few chapters remaining in the European sovereign debt crisis and the fiscal cliff drama, several of which will unfold before the year is over.
A Paucity of Change, Greece & CPDO
Guest post by Peter Tchir.
Maybe it is just me, but the election already seems anti-climatic. After what seems like close to 3.5 years of campaigning, the election is finally upon us. Maybe it is the length of the campaign, or the after effects of hurricane Sandy, or that bankers are vilified by both sides, or that I don’t live in a “swing” state, but it seems like people don’t really care that much about the election.
The over-riding sense I get, is that most people expect the situation to remain basically the same no matter who wins. Maybe that is an overstatement, but many people seem to be coming to the conclusion that the system is not working. No matter who wins, there is little that can be done by the winner to materially change the direction of the country. Yes, each leader would have their own agenda, and the make-up of Congress will have an impact, but unless something unexpected happens, whoever wins will face a lot of roadblocks in trying to implement their dream.
One of the biggest hurdles for either party is our mounting debt and the rules we have in place to stop it. Maybe we will go full Krugman and not worry about debt. I won’t refer to it is as full Keynesian because that might be unfair to the man who isn’t able to say whether he agrees with the policies or economists that use his name in vain. If we go full Krugman and stop worrying about debt, maybe we will see some dramatic new programs. I hope we don’t go that direction, as I think debt does matter (ask the people in Greece and Spain), but I guess it could happen.
If we stick within our feeble and weak debt “ceiling” restrictions, then the president will face severe roadblocks every direction he tries to go. The debt is becoming a limiting factor in potential policy action.
El-Erian: Romney More Nervous About QE3 than Obama
Mohamed El-Erian, chief executive officer of Pacific Investment Management Company, gives his opinion on the fiscal cliff, the global economy, and an uncertain economy.
Video below.
Underperforming…
Presented without comments.
Courtesy The Big Picture.
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