Central Bank Purchases Of US Treasuries and Agencies Debt

Foreign Central Bank purchases of US Treasuries and Agency Debt (Ginnie, Freddie, and Fannie) through the NY Fed Custodial Accounts in 2008. (Thanks to Brad Setser for the graph).

KDB and the Artifice of the Deal, Part 2

In the annals of interesting Wall Street stories this one may rank right up there.

Technically the things that Korean Development Bank CEO Min Euoo Sung is saying are true. He is talking with Lehman. He has spoken with other Korean banks about this deal. He would like to form a consortium to buy a big chunk of Lehman since it is now clear he cannot do it on his own.

The problem with the story is that Lehman is likely to be seriously insolvent and cooler heads in the Korean financial community and government seem to know it after having looked at the books. At least so they have said.

The government has already said "no" to the ambitious plans of Min to buy a place on the financial world stage.

He is viewed as 'reckless' and overly ambitious by the Korean financial community and with good reason, having taking a recent bath in the subprime, showing among the worst performances of Korea's major financial institutions.

He has a certain amount of power, and an affinity to Lehman. He does not seem to have the latitude to make the deal on his own, and the major banks have already said 'no.' We have not checked his biography carefully so we do not know yet how he is wired into the Korean government. Son? Protege? He was both Lehman's and Solly's regional manager at various times.

We'll keep an eye on this one, but our instincts are telling us that this deal is not only dead, but its starting to smell, and won't get up no matter how hard Min flogs it in the media.

A small stake might get done. We'd suggest that $6 billion is the full extent of Min's latitude at most, but more likely he was cut back to $4 billion or less. And its just not enough to get Lehman out of trouble or buy a large enough stake to give a big enough platform for Min to strut his stuff on a bigger stage.

Worst case the financial talking heads will just use this to paint the tape with the headlines as noted. The objective seems to be to offload losing positions on to the public, of whatever nationality, one way or the other.

If this deal falls through, the pundits will opine that Lehman could also do a deal with some other maverick somewhere usually identified as a 'Mideastern type' or another usual suspect for a fast deal in a troubled US company. Does Iraq have a development bank?

We have a funny feeling about this whole situation. Still nothing is so strange as real life. Let's see what happens.

US Dollar Long Term Chart

In an odd phenomenon, every time the dollar rebounds, a class of economic pundit called the deflationist seizes on this as proof that their theory of dollar strength through deflation has finally triumphed.

As we have allowed, both inflation and deflation are possible in a fiat currency regime as long as it is not tied to an external standard. That is a truism, but one which so many unfortunately overlook. Although we cannot predict the future, we can learn what to look for to assess the odds of each eventuality. As Walter Bagehot noted "Life is a school of probabilities."

Or as Charlie Chan, had he been an economist, might have noted, "Man who bases fundamental economic theory on short term market movement often ends up chasing the tails of probability."

A back-kiss up to the 80.40 level would be a normal chart bounce.

However we doubt that the dollar rally will attain that sort of altitude at least on this move. It has been a very sharp short-covering rally and the funds are nearly 'all-in.' The dollar fundamentals are getting increasingly dicey, and the overall markets instability is increasing. Most of the world knows that Hank Paulson has his finger on the trillion dollar bailout trigger, and monetization of bad debt is not exactly a classic currency building exercise. The US however, has been exceptionally fortunate by the support of its client states and central banks.

Let's see what happens next to clarify the picture.

Inequality and the Credit Crisis

It is our hypothesis that a certain relatively small subset of people are predisposed through both nurture and nature to seek to monopolize the public economy by distorting the rules, in order to gain control over the many through the possession of key assets.

It is not a matter of need or survival or even rational economic preference; it is a pathology, a compulsion, an intense neurosis. We have seen this happen in large companies and in nations where fear and greed become the dominant forces of societal impulse. The coupe de grace is generally the propagation of power to idiot sons and assorted mediocrities and sycophants, although the inherent instability of the principals is not to be discounted as a destructive force. The Roman Empire, Stalinism, and the Third Reich come to mind.

This tendency is kept in check in a balanced system by peer pressure, strong cultural mores, and public laws and regulations which tend to suppress an assortment of unproductive and outright destructive impulses.

But when through whatever means the acquisitors gain an undue influence in the system then we have an enormous accumulation of wealth and power in the hands of a few, and a growing tension between sustainability and collapse. The concentration of power tends to increase the probability of uncorrected and self-propagating policy errors.

This is why the majority passes laws, sanctions, and reforms to prevent a collapse from recurring when the memory of the disaster and its causes is fresh in their minds. Over time the safeguards are weakened and overcome as the public grows complacent, and the cycle is repeated again as it arises from enduring quirks in the variety of human nature.

Inequality and the Credit Crisis
By Steve Waldman

It's a cliché, of course, that the 2000s are the new Gilded Age, that inequality in America is at levels not seen since the original Gilded Age, which you may recall was ended by a terrible depression...

In a way, the credit crisis comes out of a tension between the broad-middle-class America of our collective imagination and the economically polarized nation we have in fact come to be...

...Credit was the means by which we reconciled the social ideals of America with an economic reality that increasingly resembles a "banana republic". We are making a choice, in how we respond to this crisis, and so far I'd say we are making the wrong choice. We are bailing out creditors and going all personal-responsibility on debtors. We are coddling large institutions of prestige and power, despite their having made allocative errors that would put a Soviet 5-year plan to shame. We applaud the fact that "wage pressures are contained", protecting the macroeconomy of the wealthy from the microeconomy of the middle class.

The credit crisis will end, and life in America will go on. What we have to decide now is, when the floodwaters clear, what kind of country will be revealed. Peering down through the murk, I don't like what I am seeing.

I'm still very stagflation-oriented in my personal portfolio (precious metals, short long bonds and stocks), so the wage-price spiral demagoguing might be interpreted as self-interested. That said, no apologies. It astonishes me that even very liberal economists take comfort in the evisceration of wage-earners' bargaining power. Yes, it means that Ben doesn't need to hike, regardless of what commodities do. But what kind of economy are we building when we take the price of past mistakes out of future wage-earners' pay packets, while protecting the accumulated wealth of those who profited by erring?