Tag Archives: The Fed

What’s Happening and What’s Gonna Happen


Dow 50

Happy Days, Stock Trader my stocks are going up. Is it because of my astute valuation discipline? Perhaps this (Money Supply Growth)  might be influencing conditions:fredgraph (19)

Last week, Chairman Bernanke clearly stated his position: “In light of the moderate pace of the recovery and the continued high level of economic slack, dialing back accommodation with the goal of deterring excessive risk taking in some areas poses its own risks to growth, price stability, and ultimately, financial stability.”

So Bernanke is saying, let it rain: Helicopter-ben-bernanke-11

How will this end? Last week in front of Congress Fed Chairman Bernanke spoke of the exit strategy once again, “We haven’t done a new review of the exit strategy yet.”

Well, we know how his EXIT STRATEGY will end:helicopter-crash

See more: http://www.economicpolicyjournal.com/2013/03/bernanke-money-printing-disease-about.html

By the way, WHO benefits? http://mises.org/daily/6376/Who-Benefits-From-the-Fed  No surprises here–the banks and the government. Guess who pays?

How do we know that?

Inflation Expectations

While important, however, the expectations component of the demand for money is speculative and reactive rather than an independent force. Generally, the public does not change its expectations suddenly or arbitrarily; they are usually based on the record of the immediate past. Generally, too, expectations are sluggish in revising themselves to adapt to new conditions; expectations, in short, tend to be conservative and dependent on the record of the recent past.

In Phase I of inflation, the government pumps a great deal of new money into the system, (Read pages 66 to 74 of this book, mystery of banking) so that Money supply increases sharply.  Ordinarily, prices would have risen greatly but deflationary expectations by the public have intervened and have increased the demand for money, so that prices will rise much less substantially.

Unfortunately, the relatively small price rise often acts as heady wine to government. Suddenly, the government officials see a new Santa Claus, a cornucopia, a magic elixir. They can  increase the money supply to a fare-thee-well, finance their deficits and subsidize favored political groups with cheap credit, and prices will rise only by a little bit! (Conditions as of today, March 5, 2013).

It is human nature that when you see something work well, you do more of it. If, in its ceaseless quest for revenue, government sees a seemingly harmless method of raising funds without causing much inflation, it will grab on to it. It will continue to pump new money into the system, and, given a high or increasing demand for money, prices, at first, might rise by only a little. But let the process continue for a length of time, and the public’s response will gradually, but inevitably, change.

Slowly, but surely, the public began to realize: “We have been waiting for a return to the good old days and a fall of prices, but prices have been steadily increasing. So it looks as if there will be no return to the good old days. Prices will not fall; in fact, they will probably keep going up.” As this psychology takes hold, the public’s thinking in Phase I changes into that of Phase II: “Prices inflation expectations will reverse from deflationary to inflationary.

The answer will differ from one country to another, and from one epoch to another, and will depend on many subtle cultural factors, such as trust in government, speed of communication, and many others. In Germany, this transition took four wartime years and one or two postwar years. In the United States, after World War II, it took about two decades for the message to slowly seep in that inflation was going to be a permanent fact of the American way of life.

When expectations tip decisively over from deflationary, or steady, to inflationary, the economy enters a danger zone. The crucial question is how the government and its monetary authorities are going to react to the new situation. When prices are going up faster than the money supply, the people begin to experience a severe shortage of money, for they now face a shortage of cash balances relative to the much higher price levels.

See Case for Gold Part 2

Phase 3 of inflationary expectations leads to a flight from fiat currency (Let’s hope this does not happen) Billionaires

which often leads here: HitlerWithWhip2

Reader Question

Twitter Cartoon
Reader’s Question
I’ve been reading your blog with great interest.
Curious to know where you think this flagging market is heading from here. I’m content to sit on the sidelines and watch a little longer.
My reply: The only idea more frightening than someone believing I know where the market is headed, would be if I believed I could predict the market. Predicting the market which is a complex adaptive system falls into the area of important but unknowable.
Complex adaptiveA complex adaptive system is  an open, dynamic and flexible network that is considered complex due to  its composition of numerous interconnected, semi-autonomous competing and collaborating members. This system is capable of learning from its prior experiences and is flexible to change in the connecting pattern of its members in order to fit better with its environment.  No wonder that neither mathematical formulas nor science can capture or predict human action. I think Ben Graham said roughly in these words, “Don’t confuse fancy math for thinking.”
As a reader recommends: Last liberal art
No need to predict the market
But an investor doesn’t have to predict, he or she has to find lopsided bets or “value.” I try to buy franchise companies–those with competitive advantages evidenced by steady market share and high returns on ivested capital over time–usually a ten year time period. These companies are rare but obvious like Coke, Novartis, General Mills, Stryker, Exxon, etc. The issue is what price to pay. Two years ago, several franchise companies were trading at or below the average company; they were bargains. Why?  Perhaps because prices adjusted from the over-valuations of ten years ago (Coke being an example). Most of the time you track these 80 to 140 companies and wait for a sale to occur during a market downturn, “missed” earnings report, product recall or some temporary problem.
MasterCard Franchise: Buffett and Beyond MAstercard
Search strategy
You also need to be aware of companies that can become franchises or can dominate a niche–Autozone, WDFC, and Cell Tower Companies, etc.
Then you have special situati0ns where there is some event to unlock value–SHLD spinning out SHOS, for example. the stock is up 50% in three months, so opportunity is everywhere.
Look for where the fear is greatest or where there is MAXIMUM PESSIMISM
Even with the “market” flirting with new highs, you have segments like junior mining c0mpanies (GDXJ) making new multi-year lows as people throw in the towel after years of disappointing returns. Usually, the problems are well-advertised–Mining companies are losing speculative buyers to ETFs, costs are rising faster than revenues, capital is scarcer, companies have misallocated capital in the quest for size, stocks are back to where they were five years ago but the gold price has doubled–and known. A mining company is a hole in the ground with a liar on top, so you better be careful if you wish to pick through the debris or just ignore and look elsewhere.
Focus on the particular
So who cares where the market is going? Focus on particular companies and where the fear, disgust and neglect are greatest. Unfortunately, for me that appears to be the precious-metals mining sector.  If I can find several free call options on gold and silver, I will buy as long as I don’t over concentrate. Pray for me.
Another trick is to ask yourself why the pundit on CNBC is sharing their prediction of where the market is going. Why tell?
As the two-penny philosopher once opined, “There are many who don’t know that they don’t know while those that know, don’t say.”
Understand the manipulation of hampered markets
That said, this writer suggests any investor go to www.mises.org and download the free books there and understand the Austrian Business (Trade) Cycle.  There are huge misallocations of capital going on now, so be prepared.
Jim Grant on our current situation
Listen to what Grant’s has to say about the Fed and the money madness.
Good luck.
I hope that helps


To Get Big Think Small; Lies of the Bailout


To Get Big Think Small

I am having difficulty finding value, so now I gotta go small. More on micro-cap investing…..Liquidity as an Investing Style and Microcap_Investing and then More_on_Microcap_Investing.  If you can accurately value a business while the company’s stock price is volatile, then you have a gold mine. Smaller companies tend to be more OVER and UNDER-VALUED than larger, well-known names.

Fat CatsSecrets and Lies of the Bailout

The federal rescue of Wall Street didn’t fix the economy – it created a permanent bailout state based on a Ponzi-like confidence scheme. And the worst may be yet to come

So what exactly did the bailout accomplish? It built a banking system that discriminates against community banks, makes Too Big to Fail banks even Too Bigger to Failier, increases risk, discourages sound business lending and punishes savings by making it even easier and more profitable to chase high-yield investments than to compete for small depositors. The bailout has also made lying on behalf of our biggest and most corrupt banks the official policy of the United States government. And if any one of those banks fails, it will cause another financial crisis, meaning we’re essentially wedded to that policy for the rest of eternity – or at least until the markets call our bluff, which could happen any minute now.

An excellent article that shows what has happened to our centrally-controlled, socialist, Ponzi financial system. Of course, the author does not point out the causes or remedies, but he does show the results of the bailout.

My favorite line:

We thought we were just letting a friend crash at the house for a few days; we ended up with a family of hillbillies who moved in forever, sleeping nine to a bed and building a meth lab on the front lawn.

http://www.rollingstone.com/politics/news/secret-and-lies-of-the-bailout-20130104?print=trueor Crony_Finance_Rolling_Stone.

View these films: http://thebubblefilm.com/cast/jim-rogers/

Conventional Wisdom on Booms and Busts from a Value Guru

Ask yourself what have you learned from reading this article. What can you apply from his thoughts? Read here:  Ditto.

PS:I didn’t learn much. 50 seconds to the trash bin.



Sideways Markets? Readings

Stock Volatility(Source: www.hussmanfunds.com)

Sideways Markets (Thanks VK) Sideways Markets


http://www.hussmanfunds.com/wmc/wmc121210.htm   (financial Insanity)





M2 level

Required Reserves

Reserves weekly

Like a horror movie, you may not know when and exactly how it ends–just that it won’t end well.


Analyst Position; More on the Fed’s QE3

Special Situation

Creating Value Through Corporate Restructuring Course-1 You should add this to the prior post. This syllabus should be read with the book by Gilson: Creating Value Through Corporate Restructuring. Really diligent students will buy and read the corresponding HBS case studies. Perhaps I will post those case studies in a few months.

Analyst Job Posting

I am posting this job opening for several reasons. First, you can apply. Secondly, this ad shows what a typical money management firm would be seeking. You can see that they do not want to train someone from the ground up. Thirdly, note the standard requirements: CFA, Finance Degree, prior work at a finance firm–but I will pay any reader to show a correlation and/or proof that those requirements lead to investment success. A better method to build a great team would be to look at the requirements of the job compared to the skills and characteristics of the candidates. The analyst must search (find), value and monitor investments or potential investments. The candidates would need to be independent thinkers, relentlessly curious, and able to analyze an industry/company.  The only way to improve on a market index is to be different from the index. “If you want to have a better performance than the crowd, you must do things differently from the crowd.”—SIR JOHN TEMPLETON

Again, I am amazed with the group-think on Wall Street. Everybody seems to want the same experience, background and training, but then how can one be different from the typical market participant?  Wouldn’t an investigative journalist be a potential candidate for digging into company reports rather than a CFA?  How about an entrepreneur who has started and run a company–wouldnt that person have different insights? The skepticism, curiosity, relentless digging and tying together disparate facts that an investigator thrives on would be my choice over a typical CFA candidate.  Wall Street is MBAed to death.

Therefore, do not be discouraged if you don’t fit INTO THE BOX. Send an example of your work on an industry and/or company. And if you don’t have a body of work, then start building one.  GOOD LUCK.

Analyst @ Conatus Capital Management LP (Greenwich, CT)

Full-time, work with senior investment team in sourcing , analyzing and monitoring equity investment opportunities. Perform detailed business and financial due diligence, including analyzing company opportunities, management and secular industry trends. Create detailed financial and operational models for current and potential portfolio companies to conduct intricate financial and valuation analyses.

Analyze M&A, equity and capital market transactions, restructuring and leverage recaps in companies with opportunities in North America, Europe & Asia using fundamental bottom-up operational modeling, accretion & dilution analysis and capital structuring modeling.


Bachelor of Business Administration in Finance or related & three years experience as Junior or related role at investment management firm.  Also, requires following experience: three years with valuation analysis of companies operating in NA, Europe and Asia; Three years with bottom up operational modeling of companies; analyzing M&A valuation; analyzing debt and equity capital market transaction; analyzing and valuing companies in Global Tech and Alternative Energy (wind & Solar) sections; analyzing and valuing companies in Global Finance section

CFA Level 1 & 2. Contact: Elizabeth Urdan, Conatus Capital, 2 Greenwich Plaza 06830

Conatus Capital Management LP at Two Greenwich Plaza 4th Floor , Greenwich , CT , 06830 , United States    conatuscapital.com                          Phone: 1-203-485-5200

Description: Conatus Capital Management LP is an employee owned hedge fund sponsor. The firm primarily provides its services to pooled investments vehicles. It invests in public equity markets across the globe. The firm employs a combination of quantitative and qualitative analysis to make its investments. It uses internal research to make its investments. Conatus Capital Management LP was founded in 2007 and is based in Greenwich, Connecticut.

James Loy, Chief Technology Officer

Geoffrey Hamilton, Victor Ho, David Stemerman, Founder

More on the Fed

Robert Murphy on QE3:  http://youtu.be/PW9whTQenYM Buying a specific asset class (Mortgage backed securities) is an opening for massive corruption.

Money, Banking and the Fed http://youtu.be/iYZM58dulPE

Fractional Reserve Banking and the Fed (Lesson in Booms and Busts)

Fractional Reserve Banking and the Fed

Prof. Joe Salerno’s Testimony to Congress on the problems caused by Fractional Reserve Banking and the Federal Reserve.  Fractional reserve banking causes term structure risk–customers can withdraw their money immediately but the bank creates loans at multiples of its customers’ deposits for periods longer than a day. Banks can create money out of thin air by creating these loans. Therefore, our system in buffeted by inflationary bubbles and debt collapses. Readers will learn why our financial system is infected with booms and busts. Prof. Salerno presents a solution to our Ponzi financial system. Transcript here:

Fractional Reserve Banking and The Fed_Salerno

Video of Austrian Economists’ testimony on Fractional Reserve Banking, including Prof. Salerno’s testimony (excellent): http://www.youtube.com/watch?v=jVm3Yzjq8zE

Sprott Asset Management on Economic Policy

The Solution is the Problem by Sprott Asset Management


….In today’s overleveraged world, greater deficits and government spending, financed by an expansion of public debt and the monetary base (“the printing press”), are not the answer to our economic woes. In fact, these policies have been proven to have a negative impact on growth.

No wonder bankers are reviled: http://nymag.com/news/intelligencer/encounter/jamie-dimon-2012-8/


The Freeman | Ideas On Liberty, http://www.thefreemanonline.org

Boom and Bust: Crisis and Response

by Gerald P. O’Driscoll, Jr.• March 2010 • Vol. 60/Issue 2

America has experienced a classic economic boom and bust, which I first chronicled in the November 2007 Freeman [1].

Ill-conceived policies to encourage homeownership channeled cheap credit into housing markets. Land-use and zoning policies restricted the supply of housing in key desirable markets. In The Housing Boom and Bust, Thomas Sowell of the Hoover Institution has shown how these policies brought about a crisis in housing and finance.

Others have told the story from a number of perspectives and with varying emphasis on different factors. My purpose here is to focus on the policy responses to the crisis and ask whether they have been helpful or harmful.


On October 3, 2008, Congress enacted the law creating TARP (the Troubled Asset Relief Program), which was authorized to spend up to $700 billion to purchase troubled assets from financial institutions. A little more than a month later, then-Treasury Secretary Henry Paulson announced that rather than buying troubled assets, the Treasury would use the money for capital injections into banks in return for preferred shares.

Regardless of one’s attitude toward bailouts generally, Paulson’s original plan was a recipe for disaster. To help the banks he would have needed to overpay for the assets to the detriment of the taxpayers. If he had paid then-current prices, accounting rules would have forced all firms holding such assets to write them down (not just those selling the assets). Financial institutions holding dubious mortgage-backed assets were desperately trying not to write them down because that might have threatened their depleted capital base. It is fair to say that Paulson failed to grasp the underlying problems at these institutions when he first proposed the program.

TARP became a capital-relief plan. It harkened back to the Reconstruction Finance Corporation (RFC) of the Great Depression. Under Jesse Jones and in conjunction with Franklin Roosevelt’s Bank Holiday, all the nation’s banks were examined and divided into the good, the bad, and the ugly. Call it his version of a “stress test.” Those deemed beyond hope were never reopened. Those troubled but salvageable were eligible for RFC capital injections. Jones also extracted resignation letters from senior management of institutions being bailed out. If he deemed existing management best suited to run the bank, it could stay. If not, it was replaced.

In comparison, Paulson’s strategy was “ready, shoot, aim.” Banks received government injections of money to replace depleted capital, with nothing explicit extracted in return. There were vague promises that banks would resume lending but there was nothing enforceable. The banks were stress-tested only after having received government funds. There were second and even third rounds of bailouts for some banks, indicating they had been weaker than thought. We know that at least one—CIT, a financial institution that received $2.3 billion in TARP money—should have been allowed to close. Instead it eventually filed for bankruptcy, and the taxpayer funds were lost.

Moreover, in what has become a national disgrace, existing management at bailed-out banks remained in place. The Bush administration failed to impose even the level of control exercised under FDR.

On the one-year anniversary of the announcement of Paulson’s reversal on TARP, I was asked by Newsweek for my assessment [2]. “It hasn’t done what [Paulson] said it would,” I said. “Yes, it saved some banks from going under, but did it restore the health of the banking system? Absolutely not.” I stand by that assessment today.

What Does Government Stimulate?

The fiscal response to the crisis of the Bush/Obama administrations has been to spend their way out of the recession. In the process the nation’s debt has skyrocketed. There are deficits and debt as far as the eye can see, and our children’s future has been mortgaged. The 2009 fiscal deficit was double that of 2008. It is running at 10 percent of GDP, and former Fed governor and Bush adviser Larry Lindsey estimates deficits will run at 7 percent of GDP for a decade.

Because of the work of Milton Friedman and his monetarist followers, countercyclical fiscal policy fell under a cloud. First, they argued that recessions are difficult to forecast and we only typically know we have entered one after the fact. The monetarists also argued that fiscal policy was subject to the cumbersome legislative process and thus could not be quickly implemented. Once spending began, its effects were only felt slowly. All this wisdom was forgotten in the panic of the Bush administration and then more so in the Obama administration.

The Economic Stimulus Act of 2008, passed in February of that year, mainly sent $100 billion in checks to households in early summer to stimulate consumption and jump-start the economy. As Stanford economist John Taylor, author of Getting Off Track, has shown, the money did nothing and the economy slid into recession later that year. Any economist worth his salt knows that temporary government cash infusions will likely be saved and at best have transitory effects on spending.

Undaunted by that failure, the Obama administration decided to up the ante on the theory that there had just not been enough fiscal stimulus. It replaced billions in spending with trillions in spending: the stimulus package added on to TARP. In the next section I also discuss Fed spending masquerading as monetary policy.

What is the record? It appears that the recession may have ended in the third quarter of 2009. That would make it less than one year in duration–not atypical in that sense. Most of the Obama stimulus money has yet to be spent. (Recall Friedman’s arguments on fiscal policy.) It may be good electoral politics to claim credit for a still-nascent recovery. But it is poor economics. More likely, the self-adjusting forces of the market have been at work.

Clearly, nothing the government has done has been able to lower the unemployment rate. GDP is an abstraction; being out of work is a reality. In October the unemployment rate exceeded 10 percent. (It fell back to 10 later.) A broader measure of unemployment exceeded 17 percent. These numbers put the flesh on the skeleton of policy debates. More ominously, we now are seeing indications that wage rates are falling. As the Wall Street Journal reported [3], Professor Kenneth Couch of the University of Connecticut estimates that displaced workers returning to work will on average take a 40 percent pay cut.

Double-digit unemployment rates and double-digit wage cuts are depression statistics. In what way is government spending “stimulating”? In an editorial the Wall Street Journal concluded that “no matter how hard or imaginatively the Administration spins, the reality is that the stimulus has been the economic bust that critics predicted it would be.”

Indeed, the labor story helps us to see the dark side of stimulus spending. A good chunk of it has gone to state governments to support bloated budgets in the face of collapsing revenues. Those fiscal transfers are being done, at least in part, to placate public-sector unions, which want to protect the incomes and pensions of their members.

Fiscal stimulus has failed. What about the monetary variant?

Monetary Stimulus

The Fed’s response to the crisis has drawn mixed reviews among free-market economists. Some approve of the Fed’s easing in 2008–09 as a response to an increased demand for money (falling velocity). Nearly all market-oriented economists are disquieted by the explosion of the Fed’s balance sheet as it takes on more and more assets of dubious quality. It will be extremely difficult for the central bank to dispose of such assets when it inevitably comes time for it to tighten. The Fed will likely suffer losses, and such losses impact the taxpayer. (The Fed’s surplus is paid to the Treasury.)

Many economists have been critical of the Fed for its targeted-credit policies, which amount to credit allocation. They favor one sector at the expense of others, and constitute fiscal policy rather than monetary policy. The Fed’s leadership is dismayed at its loss of approval by the general public and fears calls for greater political oversight. But the backlash is of the Fed’s own making.

In the end its fortunes are tied to the economy’s. Most Americans do not know the technicalities of monetary policy. But Fed Chairman Ben Bernanke has taken an active and public role in defending the policy response to the crisis (under both Bush and Obama). Under Bernanke the Fed has promised much and delivered little.

Just as Americans fear the spending and budget deficits, many understand that easy money helped get us into the crisis. Now Dr. Bernanke has prescribed the strongest dose of cheap money ever administered. How can the elixir that caused the boom cure the bust?

The Bernanke Fed is engaged in a policy of reflating (re-inflating) the economy: stimulating money demand to restart economic growth. It justifies the policy on the basis of Professor Bernanke’s own research that shows the evils of deflation. But what prices is he trying to prop up? All prices? Even in hyperinflations, some prices fall. Is he trying to prevent downward adjustment in wages? As suggested above, wage rates in hard-hit sectors may be falling at double-digit rates. Is he preparing for double-digit price inflation? If so, gold is underpriced at $1,000 an ounce.

Astute observers increasingly fear that what is being reflated is another asset bubble. At present, the asset bubble is concentrated in commodities (such as gold, copper, and oil) and Asian real estate. In what is known as a carry trade, global investors are borrowing dollars at low interest rates to invest in property in cities like Hong Kong and Singapore. Instead of bringing prosperity to Americans, the Fed’s policy is fueling speculation. Instead of production in the United States, the Fed’s easy money is creating paper wealth for Asian property owners.

The rise in commodity prices is perhaps most ominous. The U.S. economy remains weak and unemployment elevated. Yet Americans are already paying higher prices for gasoline. They are facing the prospect of renewed inflation and economic weakness: stagflation. That would be an updated version of the economy of the 1970s. The Fed is thereby impoverishing Americans. Is it any wonder many are calling for a reconsideration of its role?

A version of this article previously appeared on TheFreemanOnline.org on Nov. 23, 2009.

Article printed from The Freeman | Ideas On Liberty: http://www.thefreemanonline.org

URL to article: http://www.thefreemanonline.org/features/boom-and-bust-crisis-and-response-3/

URLs in this post:

[1] I first chronicled in the November 2007 Freeman: http://www.tinyurl.com/npnog4

[2] I was asked by Newsweek for my assessment: http://www.newsweek.com/id/222321

[3] As the Wall Street Journal reported: http://online.wsj.com/article/SB125798515916944341.html

The Freeman | Ideas On Liberty

Subprime Monetary Policy

by Gerald P. O’Driscoll, Jr.• November 2007 • Vol. 57/Issue 9

In recent years monetary policy has been conducted so as to create an expectation that the Federal Reserve will bail out investors when asset bubbles deflate. Investors have come to bank on the Fed’s backing of risky ventures. The recent crisis in the subprime mortgage market is at least partly the outcome of this new approach to monetary policy. That crisis has already had widespread ramifications for homeowners and investors.

Government programs and policies often serve to insulate individuals from the full consequences of their actions. For instance, subsidized federal flood insurance leads individuals to build more homes in flood plains than would otherwise be the case. The public naturally feels sympathy for homeowners who are the victims of flooding, and supports more assistance for those caught up in these dreadful situations. The “help” often exacerbates the problem, however, by removing incentives for homeowners to rebuild on higher and drier land. The general public wonders why the catastrophes appear more frequently. Pundits ascribe them to global warming, and nature is blamed for the effects of manmade policy.

Since the 1930s the federal government has insured bank deposits. That scheme inherently reduced the vigilance of bank depositors toward their banks, removing constraints on risk-taking by the insured depository institutions. The situation became acute in the 1980s and 1990s, when unconstrained risk-taking by banks and thrift institutions led to a series of banking and financial crises. Eventually the deposit-insurance system was reformed and banking put on a sounder basis. Now we are in need of a reform of monetary policy.

Crisis in the Mortgage Market

Last February the popular press discovered subprime mortgage loans (see box) when two major originators of such loans, HSBC Holdings PLC and New Century Financial, disclosed increased loan loss provisions. HSBC is a globally diversified financial company. While it was a large lender in the market, the aggregate amount of its subprime loans was not a significant portion of its total portfolio.

New Century Financial fared much less well because of the concentration of its lending in this risky category. Its stock price collapsed after problems surfaced the previous February, and the company eventually declared bankruptcy.

Other lenders in the subprime market experienced difficulties. Fears of a housing collapse and even an economic recession grew as investors gauged the size and extent of the problem in the mortgage market.

The crisis was foreseen by many. For more than a year before the bust, bankers, analysts, and even regulators knew they had a mess in the making. As John Makin of the American Enterprise Institute observed, the lending practices in the subprime market were “shoddy and absurd.”

Lewis Ranieri, former chairman of Salomon Brothers, echoed those comments: “We’re not really sure what the guy’s income is and . . . we’re not sure what the house is worth. So you can understand why some of us become a little nervous.” Ranieri helped pioneer the bundling of mortgages into marketable securities (“securitization”), so he should know!

The collapse of the subprime mortgage market is the latest in a series of financial bubbles whose existence reflects, at least in part, moral hazard in financial markets. Moral hazard is the outcome of explicit or implicit guarantees to investors. At one time, deposit insurance was a major culprit. Today, monetary policy is fostering moral hazard.

Moral hazard occurs when some action or policy alters the behavior of individuals in a counterproductive way. Specifically, a policy intending to mitigate risk causes individuals instead to assume more risk. For example, a poorly designed policy insuring against fire could lead individuals to diminish resources devoted to fire prevention. In that case, the insurance would increase the probability of the insured risk occurring. (Of course, well-designed insurance policies should reduce risk. And in competitive markets, that is what normally happens.)

Earlier financial crises were the effects of deposit insurance and bank-closure policies that effectively insulated depositors and even other bank creditors from risk in the event of the failure of depository institutions. In an October 2002 speech to economists in New York, then-Fed Governor Ben Bernanke described the savings-and-loan crisis of the 1980s as “a situation . . . in which institutions can directly or indirectly take speculative positions using funds protected by the deposit insurance safety net—the classic ‘heads I win, tails you lose’ situation.” After an intellectual and political battle of more than a decade, the deposit-insurance loophole was sealed.

To better understand moral hazard, consider the case of a gambler going to a casino. If he bears the losses, his bets will be constrained by that risk. If someone were to guarantee him against loss, but allow him to keep the profits, the gambler would have an incentive to make the riskiest possible bets. He gains all the profits but bears none of the losses. One might designate such a system as “casino capitalism.” Current Fed policy has encouraged casino capitalism in the housing market.

Monetary policy can generate moral hazard if it is conducted so as to bail investors out of risky and otherwise ill-advised financial commitments. If investors come to expect that the policy will persist, they will deliberately take on additional risk without demanding commensurately higher returns. In effect, they will lend at the risk-free interest rate on risky projects, or at least at a lower rate than would otherwise be the case. Too much risky lending and investment will take place, and capital will be misallocated.

Money and Prices

To simplify a complex theoretical issue, an ideal monetary policy is one that facilitates and does not distort economic decision-making by individuals. Market prices play a critical role in that process by signaling to everyone the relative scarcity of goods and urgency of ends.

Austrian economist and Nobel laureate in economics F. A. Hayek characterized the price system as a communications mechanism for transmitting information about economic values. By communicating that valuable information, the price system helps coordinate economic activities. In its simplest formulation, prices tend to bring about equality between supply and demand in each market.

As with any communication system, it is desirable to filter out “noise,” extraneous signals that interfere with communication. Money is indispensable to price formation, but money can generate noise along with information. The ideal monetary policy is one in which there is no noise, only valid price signals. The best possible monetary policy would maximize the signal-to-noise ratio.

Monetary noise comes about when policy changes the value of money. In economies on gold or silver standards, the discovery of new sources of the precious metal can set in motion forces leading to an expansion of the money supply and the depreciation in the value of money. In modern times, money is created by printing it, or through expansion of bank liabilities. In nearly all developed countries, the rate of that expansion is (or can be) controlled by central banks.

Changes in the value of money create monetary noise because investors and ordinary individuals mistake changes in money prices for changes in relative prices. For instance, during inflation prices will rise just to reflect the increase in money and not necessarily because there has been a shift in preferences.

Current monetary policy is much improved from the record of the late 1960s, 1970s, and early 1980s. That was the era of double-digit inflation and sky-high interest rates. In a December 2002 speech to the Economic Club of New York, then-Fed Chairman Alan Greenspan put monetary policy in historical context:

Although the gold standard could hardly be portrayed as having produced a period of price tranquility, it was the case that the price level in 1929 was not much different, on net, from what it had been in 1800. But, in the two decades following the abandonment of the gold standard in 1933, the consumer price index in the United States nearly doubled. And, in the four decades after that, prices quintupled. Monetary policy, unleashed from the constraint of domestic gold convertibility, had allowed a persistent overissuance of money. As recently as a decade ago, central bankers, having witnessed more than a half-century of chronic inflation, appeared to confirm that a fiat currency was inherently subject to excess.

Some scholars have suggested that money influences not only the prices of consumer goods and wages, but also asset prices. They argue that money can work its mischief without showing up in consumer goods inflation. Widely used price indices, such as the consumer price index (CPI), do not include asset prices. A stable price index of consumer goods would thus not be a good measure of the value of money. Professor Charles Goodhart pointed to the two-decade experience of Japan, in which consumer prices were stable while asset prices fluctuated wildly. He asked rhetorically what the meaning of “inflation” is in such a context.

Goodhart argued that at least one category of assets figures so large in consumer purchases that it cannot be ignored: housing. Rental prices and housing prices do not always move in tandem. Home prices are affected by monetary policy in a number of ways, most notably through interest rates.

If asset prices are not incorporated into measures of inflation, their movements will not be action-forcing events for policymakers. Fed chairmen will wring their hands about “irrational exuberance,” but will be powerless to do anything until the effects of asset-price changes are manifested in undesirable changes in current prices and output.

The Greenspan Doctrine

The new moral hazard in financial markets has its source in what can be best described as the Greenspan Doctrine. It was clearly enunciated by Greenspan in his December 19, 2002, speech, in which he made an asymmetric argument leading to an asymmetric monetary policy. He argued that asset bubbles cannot be detected and monetary policy ought not in any case to be used to offset them. The collapse of bubbles can be detected, however, and monetary policy ought to be used to offset the fallout.

Two months earlier Ben Bernanke had made a similar argument. He endorsed the Greenspan Doctrine, arguing against the use of monetary policy to prevent asset bubbles: “First, the Fed cannot reliably identify bubbles in asset prices. Second, even if it could identify bubbles, monetary policy is far too blunt a tool for effective use against them.” Since Bernanke is now Fed chairman, it is reasonable for market participants to assume that the Greenspan Doctrine still governs current Fed policy.

Wrong Question

The two men were surely asking and answering the wrong question. They were implicitly treating bubbles as solely the consequences of real shocks or disturbances. (An example of a real shock is a technological innovation leading to productivity gains and higher future expected profits in a sector.) They asked whether monetary policy should be used to offset the effects of real shocks and concluded that it should not. The latter is the correct answer to the question they each posed.

A different question would be whether monetary policy should be conducted so as to create or exacerbate asset bubbles, which would not have occurred or would have been milder absent the assumed monetary policy. The answer to that question is surely no. Consider Bernanke’s apt characterization of moral hazard in the context of the deposit-insurance crisis: “When this moral hazard is present, credit flows rapidly into inelastically supplied assets, such as real estate. Rapid appreciation is the result, until the inevitable albeit belated regulatory crackdown stops the flow of credit and leads to an asset-price crash.”

Bernanke could have been talking about the subprime-mortgage market. That bubble and collapse cannot, however, be blamed on deposit insurance. First, deposit insurance is no longer systematically mispriced and banking supervision has improved. Second, the majority of mortgages are no longer made by insured depository institutions. Yet something generated the moral hazard that enabled shoddy underwriting of subprime mortgages to persist for years.

The Greenspan Doctrine helped create moral hazard in housing finance. The Fed announced that it will take no action against bubbles, but will act aggressively to offset the consequences of their collapse. In effect the central bank is promising at least a partial bailout of bad investments. The logic of the old deposit-insurance system is at work: policymakers should protect investors against losses, no matter their folly. Or, in Greenspan’s own words: monetary policy should “mitigate the fallout [of an asset bubble] when it occurs and, hopefully, ease the transition to the next expansion.”

In the present context, the “next expansion” could also be rendered as “the next asset bubble.” If the Fed promises to “mitigate the fallout” from “irrational exuberance,” then it is rational for investors to be exuberant. Investors may be at risk for some loss, as with a deductible on a conventional insurance policy, but losses are still being mitigated.

Rate Cut in 2000

The Fed cut the Fed Funds rate sharply after the bursting of the stock market bubble in March 2000. In the eyes of many, the Fed cut rates too far and held them down too long, fueling not only a vigorous economic expansion but also the housing bubble. In his December 2002 speech, Greenspan was at pains to deflect any argument that the Fed was inflating a housing bubble. “To be sure,” he acknowledged, mortgage debt was high relative to household income [remember the date] by historical norms. But “low interest rates” were keeping the servicing requirements of the mortgage debt manageable (emphasis added). “Moreover, owing to continued large gains in residential real estate values, equity in homes has continued to rise despite very large debt-financed extractions.”

How wrong the Fed chairman was! If Greenspan was not worried about interest rates resetting, why should mortgage bankers and homeowners worry? It would have been reasonable to read into the chairman’s musings an implicit guarantee of continued low rates. A homeowner is certainly entitled to bet his home on the come if he wants. Should the central bank encourage such behavior?

Monetary Policy for a Free Economy

In his 2002 speech to the Economic Club of New York, Greenspan spoke disapprovingly of a policy that permits prices to nearly double in two decades. At current CPI inflation rates, however, prices will double in less than three decades. If inflation were to rise to 3 percent and remain there, prices would double in 24 years. That is not much progress against inflation, and surely we can expect better.

In a vibrant market economy with technological innovation and ever-new profit opportunities, the monetary policy that maintains true price stability in consumer goods requires substantial monetary stimulus. That stimulus will have a number of real consequences, including asset bubbles. These asset bubbles have real costs and involve misallocations of capital. For example, by the peak of the tech and telecom boom in March 2000, too much capital had been invested in high-tech companies and too little in “old-economy firms.” Too much fiber-optic cable was laid and too few miles of railroad track were laid.

By 2002 the Fed was worried about the possibility of price deflation and introduced a strong anti-deflationary bias. A tilt to stimulus was understandable at the time. A continued bias against deflation at any cost, however, will produce a continued bias upward in price inflation. The inflation rate begins at the positive number. With the bursting of each asset bubble and the fear of deflationary pressure, Fed policy must ease. The Greenspan Doctrine prescribes a stimulative overkill that begins the cycle anew. The Greenspan-era gains against inflation will then prove to be only temporary. His doctrine will be the death of his legacy, a legacy that already includes a housing bubble and its aftermath.

Article printed from The Freeman | Ideas On Liberty: http://www.thefreemanonline.org

Why California is bust


Welcome to the Bronco Ride!

Money supply growth is falling.  Go here: http://www.federalreserve.gov/econresdata/statisticsdata.htm The latest numbers show 13-week seasonally adjusted M2 annualized money supply growth is down to 5.7%. Non-seasonally adjusted is down to 5.8%. 4-week data averaged over 13 weeks is at 3.8% annualized. This four-week number shows the intensity of the decline in current weeks versus that of the longer term 13 week number.

Jim Grant in his Interest Rate Observer (www.grantspub.com) writes in his June 1, 2012 issue, “To judge by deeds, not words, the Bank of Bernanke is as tight as a tick. Over the past three months, Federal Reserve Bank credit has shrunk at an annual rate of 9.3%. At the peak of QE2 one year ago, Fed credit was billowing at short-term annualized rates of as much as 47%. Waiting for QE3.”

Also of note is Grant’s expectation of a QE3 to reverse the trend. Indeed, that’s the kicker here. The trend in money growth and credit is slowing (credit declining) and that’s negative for the stock market and economy, but a major reversal is likely in the not to distant future.

Welcome to the bronco ride.

Use this opportunity to pick up good companies when they go on sale.

Fear and uncertainty are the friends of value investors. However, the pain may be intense at times.

To understand wwhat a bear market FEELS like go here:http://www.youtube.com/watch?v=0OmkmeOMC6Q&feature=related

We are far from the 2008/2009 situation. Hang in there and Enjoy your weekend.

James Grant Opines on the Unintended Consequences of the FED and ECB’s Interventions

Investors refuse to believe that shock lies in wait…Investors do better where risk management is a conscious part of the process…survival is the only road to riches. Let me say that again: survival is the only road to riches. You should try to maximize return only if losses would not threaten your survival…You don’t want to blow it, because you don’t get a second chance. When you invest, it’s not your wealth today, but it’s your future that you’re really managing. – Peter Bernstein

Hospitalized for a serious condition: http://www.youtube.com/watch?v=pbS2WJdav6c&feature=fvsr  Pray that I can be cured……… 

James Grant Discusses the Folly of Fed Policy

James Grant Interview on CNBC March 07, 2012



CNBC Money Honey:The Federal Reserve is reportedly considering a new bond buying program to bolster the economy. The Wall Street Journal said the plan would buy more mortgage or treasury bonds, but borrow it back for short periods at lower rates. My next guest says such a plan would do more harm than good. James Grant from Grant’s Interest Rate Observer (www.grantspub.com) and Kelly Evans from headquarters are with me today. Good to see you, Jim. thank you so much for joining us.James Grant: Good to see you.

CNBC: You say such a plan by the Feds would be a wrong approach.

James Grant: We’ve had the easy money now for several years. What do you think the implications of it is? we should call this what it is, it is market manipulation, that’s what we call it in the private sector. What the Fed is doing is manhandling the structure of interest rates to the end of achieving of what it takes to be desirable macro outcomes. If the government would go down to the farmer’s market at 14th street and fiddle with the scales, there would be an understandable outcry from the customers. But the Fed and Central Banks the world over are in unprecedented ways of manipulating the value of what they’re printing, by a ton. In the latest gambit, the Fed wants to manipulate long-term interest rates lower. But in so doing, it is manipulating perceptions of risk, and it is creating a real inflation in the sense that people who want to retire in their savings, need much more cash to do it.

CNBC: And I like your latest cartoon, stick ’em up, this is a debt swap. Yeah. in the latest grant interest rate observer, in terms of the inflationary story, we’ve been talking about the threat of inflation after a long time with this easy money.

James Grant: I want to get into the ECB (European Central Bank) as well, because it’s not just the Fed. have we seen inflation yet? there’s inflation certainly in spots–obviously commodity inflation. But there’s also inflation, I think, in market assets that are stimulated, to use that favorite word of the authorities, stimulated by ultra-low interest rates. For example, in the distressed debt markets, you’ll find companies that have not made a profit in five years, issuing debt, as if this company were somehow   soundly and demonstrably solvent. by pressing down interest rates, by repressing interest rates, the Fed is in effect dulling the risk sensors of   the entire marketplace. Is this good? it’s the question to ask, Kelly. And the reason so many people are focused on the drawback of these record low interest rates and the fact that it’s also punishing savers.

CNBC: I’m curious, it may not amount to anything, but Jim, if the Fed goes this route of sterilizing its quantitative easing, and if they do another round, what does that mean to you?

James Grant: Why would they pursue that kind of action–lend long, in other words, which is in the private sector, a great way to go broke, as a bank. The Fed is going to do this. It thinks — the Wall Street Journal is floating this balloon. The Fed doesn’t want to have us believe that it is recklessly printing money to do that, ergo the gambit of locking up the funds with which this buys the bonds.

CNBC: Kelly, it looks like nothing more than what we’ve seen.  It’s the Fed interposing itself between the marketplace and — Jim, it’s an overture to people like you who think the Feds are creating inflation. Do you read a message like that and feel comforted somehow that —

James Grant, “No, I am distinctly uncomforted, Kelly. The Fed is creating, if not inflation, it is creating distortions. What has the Fed got against the price mechanism? it’s got in this country a long way over 200 years, suddenly, wherever the market sells off, we somehow have to have a fed interjection of money. What about the ECB? We’ve got the European Central Bank allowing a three-year period where the banks can pay back the lending. What are they doing with that money? They’re actually buying sovereign debt longer term. What about the ECB action? The ECB is going through a kind of adolescent growth spurt. Its balance sheet is positively exploding. its balance sheet is the equivalent of $4 trillion. It’s one-third larger than the Fed’s. Although the Euro zone has an economy about 13% or 15% smaller than ours. The Fed is a piker compared to what the  ECB has recently been doing. I think the point is, the world over we’re seeing unprecedented things (the beginning of the end of fiat currencies). We’re seeing interest rates that are lower than ever, and central banks that have never been more recklessly pro creative, to use Warren Buffett’s words, about assets. They’re printing money like mad. And people can’t seem to get enough long-term bonds, because the central banks are manipulating expectations about the future of interest rates. I think it’s all very dangerous. We can draw lessons from the depression of the 1920s, but what are the actual consequences of this continued government intervention?

Can we talk about what happened in early 1920s? Ben Bernanke can’t stop talking about the ’30s. But in 1920, ’21, the economy fell off the cliff. Nominal GDP was down 29%, wholesale prices collapsed by 40%. you know how the Fed and the Treasury reacted to this, the Treasury balanced the budget and the Fed actually raised interest rates. Guess what, the depression ended.

See video on the 1920/21 Depression by Tom Woods: http://www.youtube.com/watch?v=czcUmnsprQI

Amity Shales on the Great Depression:http://www.youtube.com/watch?v=lLeAqbOUt4c. A video destroying the common beliefs of what caused the Great Depression. The Forgotten Man.

James Grant: We keep on hearing this propaganda stick drum beat assertion that in order to get us out of our sorrows, the authorities, the high and mighty ones, say we must run immense deficits.

Article 1, Section 8 of the U.S. Constitution gives the Congress the power to COIN money and FIX the standard of WEIGHTS and MEASURES. The Constitution was not intended to give government (the Fed) the power to constantly change the yardstick of money (changing the quantity of money).  Also, the Fed interferes with the traffic signals of the economy–interest rates–by keeping the traffic light at green constantly. This will only lead to more mal-investment.


Buffett on Gold and Economic Lessons from Margaret Thatcher 1990 on the ECB

For Buffett, Coca-Cola is a prime example of the procreative investment, gold the archetypical other. For us, we submit that the chairman has failed to take proper account of today’s unique monetary backdrop. Interest rates are uncommonly low, worldwide monetary policy unprecedentedly easy. No institution under the sun is so procreative as the quantitatively easing central bank. Faster than even the best business can spin cash flow, the Federal Reserve can materialize scrip. What to do about this novel fact is one of the foremost investment questions of our time. (www.grantspub.com March 9, 2012 Vol 30, No. 5)

Buffett discusses gold as an investment asset

From http://www.berkshirehathaway.com/letters/2011ltr.pdf…The major asset in this category is gold, currently a huge favorite of investors who fear almost all other assets, especially paper money (of whose value, as noted, they are right to be fearful). Gold, however, has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.

What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As “bandwagon” investors join any party, they create their own truth –for a while.

Over the past 15 years, both Internet stocks and houses have demonstrated the extraordinary excesses that can be created by combining an initially sensible thesis with well-publicized rising prices. In these bubbles, an army of originally skeptical investors succumbed to the “proof” delivered by the market, and the pool of buyers – for a time – expanded sufficiently to keep the bandwagon rolling. But bubbles blown large enough inevitably pop. And then the old proverb is confirmed once again: “What the wise man does in the beginning, the fool does in the end.”

OK, I don’t disagree with Buffett on investing in a franchise company that can pass along prices because of its competitive advantage as long as the price you pay is not above value.  Go here: http://www.scribd.com/doc/78158885/Ko-35-Year-Chart to view the 50-year chart of Coca-Cola.  Sales, cash flows, earnings, and dividends rose steadily from 1997, year the price declined for 12 years to 2009. Why?

Back to Buffett, he says when you own one ounce of gold you will only have an ounce of gold instead of cash flow (until sold or exchanged) or earnings. True, but gold is not (in my opinion) an investment but more of a medium of exchange (See The Origins of Money and Its Value http://mises.org/daily/1333). An ounce of gold bought a quality man’s suit 100 years ago and the same is approximately true today. Gold is the reciprocal of fiat currency debasement. Unless the world’s central banks are at a top in currency debasement then picking a top in gold will be foolhardy.

Read, This Time is Different: Eight Centuries of Financial Folly by Carmen M. Reinhart and Kenneth S. Rogoff, to gain perspective on what central banks do when confronted with heavily indebted governments. Print!

Buffett’s other arguments are true regarding bubbles; people go too far. What ends will end. So let’s invert and ask, have we seen the end of rapid currency debasement? Are people’s belief in fiat currency strengthening or weakening. What has changed?

Peter Schiff attacks Buffett in Buffett’s Bursting Bubble: http://lewrockwell.com/schiff/schiff154.html

Thatcher in 1990 Predicting the Crisis in Europe

Margaret Thatcher in 1990 predicts the outcome of the ECB’s policies (No! No! No!): http://www.youtube.com/watch?v=Tetk_ayO1x4&feature=related

Longer clip: http://www.youtube.com/watch?v=U2f8nYMCO2I

Note how prescient she was. She didn’t really predict, but she did combine human nature, economic law and causality to see what was to come.  Who knew that giving a non-elective body with central control of one currency would lead to Europe’s disaster? A Classic.

The Fed Today

Wayne Angel discusses the Federal Reserve and the European  Central Bank.  Mr. Angel says, “The Board of Governors of the Federal Reserve Board  has the responsibility to be restrained from creating (printing) too much  currency in order to provide price stability and full employment. I ask the reader, “Has a government EVER shown restraint in printing fiat currency? If prices send signals to producers and consumers in how to allocate resources, wouldn’t interfering in the price discovery process to “stabilize” prices only distort capital allocation decisions?

Mr. Angel goes onto to explain the government intervention and folly in the U.S. housing market,”Congress thought that every American had the right to own a house.”  Given that disaster, what has really changed to prevent another calamity? Tick-tock.


Housing Starts

The above chart shows how prices do their work in allocating resources. The decline in housing starts will help being about an improving market for homes for either buying or renting.  Markets do work–even hampered markets.

I try my best not to be reflexively contrary unlike the man in this clip who can only contradict people: http://www.youtube.com/watch?v=bf47iNBt_qg&feature=related

Economics: Synopsis of Euro Crisis; Growth in US Money and Banking Reserves…Interesting Reading

The most expressive market is the one the one that the Fed isn’t overtly manipulating. Though Treasury yields might as well be frozen, the gold price is soaring. Why has it taken flight–not on account of an inflation problem. Gold is appreciating in terms of all paper currencies–or, alternatively paper currencies are depreciating in terms of gold–because the world is losing faith in the tenets of modern central banking. …..Gold is hard to find and costly to produce. You can materialize dollars with the tap of a computer key.–James Grant (Wall Street Journal, Dec. 5, 2009)

Monetary Policy seems extremely accommodating

Check here for the latest Federal Reserve monetary statistics: http://www.federalreserve.gov/releases/h3/current/

Fed reserves are rising across the board, excess reserves, required reserves, non-borrowed reserves, total reserves and the monetary base are increasing. Last month required reserves are up 5%–an annualized rate of 60%.

Watch what Mr. Bernanke does. This data indicates that the rising prices in the commodities market and in the U.S. stock market are going to continue. The manipulated (nominal prices) economy will be strong as well.

The developing price-inflation is going to surprise everyone traditional economists and Wall Street pundits but not YOU. www.economicpolicyjournal.com


A good synopsis of the cause and effects of the Euro Crisis.


The problems of the eurozone are ultimately malinvestments. In Greece these days the struggle continues about who will ultimately foot the bill for these investments. During the early 2000s an expansionary monetary policy lowered interest rates artificially. Entrepreneurs financed investment projects that only looked profitable due to the low interest rates but were not sustained by real savings. Housing bubbles and consumption booms developed in the periphery.

In 2007 the bubbles began to burst. Housing prices started to stagnate and even to fall. Homeowners and builders started to default on their loans. As banks had financed and invested into these malinvestments, they suffered losses. After the collapse of the investment bank Lehman Brothers interbank lending collapsed and governments intervened. They bailed out banks and, thereby, assumed the losses of the banking system resulting from the malinvestments.

As malinvestments were socialized, public debts soared in the eurozone. Furthermore, tax revenues collapsed due to the crisis. At the same time, governments started to subsidize industrial sectors and unemployment.

Moreover, even before the crisis, governments had accumulated malinvestments due to their excessive welfare spending. Two causes had incentivized social spending in the periphery. The first cause is low interest rates. These low interest rates were caused by an expansionary monetary policy by the European Central Bank (ECB) and the single currency in itself. The euro came with an implicit bailout guarantee. Market participants expected stronger governments to bail out weaker ones in order to save the political project of the euro if worse came to worst. The interest rates that the Italian, Spanish, Portuguese, and Greek governments had to pay came down drastically when these countries were admitted into the euro. The low interest rates gave these countries leeway for deficit spending.

The second cause is that the euro is a tragedy of the commons, as I explain in my (Philipp Bagus) book The Tragedy of the Euro.

Of Interest

A fair bet? http://www.youtube.com/watch?v=mhXJcfczNIc

Jeremy Grantham pontificates: http://www.gmo.com/websitecontent/JGLetter_LongestLetterEver_4Q11.pdf

Postscript: I will work on answering readers’ questions this weekend. Thanks for your infinite patience.