Graphite here. Mike has asked me to join up as a guest blogger, and since I’ve always loved the spirited mix of finance, politics, and righteous anger of The Sovereign Speculator, I’m happy to come aboard.
If you needed another sign that this deflationary crash is just getting started, take a look at this blog post over at The Baseline Scenario. It’s stunning that in August 2009, with the FDIC in a state of de facto bankruptcy, anyone can write “the FDIC works” with a straight face. Just because it’s not the kind of horrible fascist “solution” that the current pack of knaves in Washington would pursue, doesn’t mean it’s some kind of brilliant idea.
The FDIC’s explicit purpose is to bail out imprudent depositors at the expense of prudent ones. If it wasn’t for the FDIC, all those people strutting into Corus’s Chicago branches to put their money in CDs yielding 0.25% more than the competition might have been just a little bit more concerned that it was going to fund condo development projects in Florida. Instead, they got a free lunch — why look at where your money’s going when Uncle Sucker (sorry, Sam) gets to eat the losses?
The idea that the FDIC “self funds” out of the banking system is nothing but a polite fiction. It has nearly always had to rely on taxpayer bailouts when resolving banking crises. Meanwhile, the banks that stayed prudent, made reasonable loans, and kept their reserve deposits in more liquid holdings are being slammed with huge assessments and fees, which are preventing them from recapitalizing themselves or offering better rates to their customers — in effect, spreading the stress and weakness of America’s worst banks to its best ones.
Yeah, this is a great solution to the problem of bank runs. Let’s see what happens when we really do get a full banking panic and the FDIC needs to go draw on its $500 billion line of credit with the Treasury. If you think that story ends with American depositors happily riding off into the sunset with their cash, I’d love to have some of whatever you’re smoking.
People talk about bank runs as though they’re some kind of unmitigated evil, just because some people lose money. As a matter of fact, they impose discipline and order on both banks and depositors, and ensure that the banking system as a whole remains diverse and resilient to major shocks. The moral hazard created by the FDIC was one of the most important drivers of the concentration of deposits at a few mega-banks, which (all carping about the “unregulated shadow banking system” notwithstanding) were the primary source of the awful lending binge which precipitated the credit crisis.
Look for a bottom after people finally start to dismiss, ignore, and ridicule the FDIC and its absurd apologists.
Jim Grant, in his masterful banking history, Money of the Mind, relates the story of Chemical Bank, the strongest depository institution in New York throughout decades and numerous banking panics. When asked what allowed the bank to always meet depositors’ demands in specie (gold and silver coin), its longtime president George Gilbert Williams said, “the fear of God.”
What he meant was that his ass was on the line, so if the bank were to become lax in its lending standards and capital constrained, depositors would smell blood and yank their money (this was before the Federal Reserve cartel, when each bank issued its own paper notes payable in gold or silver and nobody pretended that the paper itself was worth something), putting the bank out of business. Not only did Williams bear that risk, but as a partner, he was personally liable to a great extent for the bank’s debts — none of this “collect your bonus and stiff the shareholders and taxpayer” stuff.
It should by now be abundantly obvious to observers that our entire bank regulatory structure, from the FDIC to the Fed, was created for the protection of bankers, not the saving public. The system GUARANTEES massive systemic failure, as it offers huge rewards for reckless lending. Just ask Chuck Prince.
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Here’s an essay on Mises.org, “In Defense of Bank Runs” : http://mises.org/story/1389
Excellent interview with Jim Grant here: http://www.incharacter.org/article.php?article=130
“… Under [former chairman of the Federal Reserve] Alan Greenspan, the Federal Reserve was the first responder to the scene of financial accidents. People came to depend on Federal Reserve intervention to forestall any real difficulties in the economy, and the Fed preened itself for years with the idea that it had been instrumental in delivering unto us what we call “the great moderation.” The great moderation supposedly was the period beginning about 1983 that featured a low volatility in business cycles — not too hot, not too cold, but just right — low inflation, the march of progress in technology, ever-rising stock prices, nothing so white-hot as to present a cyclical risk, but a great moderation. That was the idea. [Federal Reserve chairman] Ben Bernanke has talked about it, and the Fed has been proud of it.
In this setting, people became rather deadened to risk. The idea of risk was put on a shelf and became dusty and cobwebby. People who talked about risk were thought irrelevant and bothersome. So the financial and intellectual backdrop to our troubles was this idea of a great moderation, the idea of trusting the government — and particularly the Federal Reserve — to see into the future and improve it before it could happen to you. They were supposed to steer us away from any systemic dangers such as a recession or a depression. With those thoughts far behind, or not so far behind, the collective thoughts of Wall Street, people took a lot more risk than they might have taken and were a lot less prone to speak up. cont….”
humm. For some reason I cannot see this blog in I.E. 7.5
Works fine in FireFox.
Great to read your point of view Graphite!
Hmm. That’s IE for you. They must have done something wrong in their latest update, leaving it up to the rest of the world to adjust to their mistakes…
Actually I can see all the other posts (if I go to their link directly) in IE.
Ex -
http://sovereignspeculator.com/2009/08/20/summer-school/
http://sovereignspeculator.com/2009/08/17/line-in-the-sand/
etc… but this link does not work:
http://sovereignspeculator.com/2009/08/22/in-praise-of-bank-runs-the-only-regulator-we-need/
as I think there is a coding bug with css that IE cannot resolve but FireFox is the better browser when it comes to these kind of things …
We are on out way to the creation of another bubble now, which when it will POP, will destroy a lot … those wishing for GOLD to go to USD 2500 will not like the world that they will find themselves in … that’s what you get when enter into the pact with the devil!
If you look at the April/May 2002 time frame … that period and this period are very similar … lots of choppiness before an eventual collapse …
Regarding last post referencing Gold: I brought this up with regards to Graphite’s point of view on the FDIC. OK, So the FDIC goes bankrupt …. Paper Money is worthless … GOLD soars …. but heck, can you go to the grocery store with nuggets of Gold in your pocket? Ummm, nope. Then what do you do? There has to be some medium for transactions to occur …. what will it be?
Cool Graphite. Welcome onboard
Mike, on your bloglist, I can see that you have twice Market-Ticker, and not Reality Lenses
I can’t believe you don’t read my blog just because I am short the long bond 
Hey Pej. I don’t read very many blogs — actually, I don’t even read Market-Ticker very often. That list is mostly just prolific news blogs and guys I owe a debt to for what they taught me at one time or another.
Nice interview here with Jack Schwager, the author of the excellent books of interviews with top traders, Market Wizards.
http://www.financialsense.com/fsn/main.html
Yes Mike, no worries I was just poking you.
I’ve read most of Jack Schwager’s books, but I do not consider them as excellent as I believe they didn’t help me understand what a good trader or a good trade is. They are interesting reads, but I don’t feel like they teach you anything really.
agree with what you are saying but for now the S&P wants to move up and I do not see any resistance until 1200. Their are a large number of underinvested institutions that were looking for a retest of the low. I fully expect pullbacks along the way but ultimately see the 1200 level being hit
Guys, here is interesting info debunking EW that might be food for thought or ridicule or both:
“The only real argument I’m hearing is that we are in wave count six so it must be over. But I don’t believe wave counts are real, because no one has ever been able to explain to me what causes them and why the market trades in an exact mathematical fibonacci sequence like these people claim it does.
This is more a religion than science. The presuppositions that lay behind wave counts is the claim that all of nature is based on fibonacci numbers. If that were true then it would mean that all of human history – and the future is predetermined by some math sequence. It would mean you have no free will, because your own behavior must match these numbers. Of course that is ludicrous. I know that the next time I eat, sleep, or go to the bathroom is not predetermined by a fibonacci sequence so I put zero stock in those theories and many of the people espousing them.”
http://www.wallstreetwindow.com/content/node/11442
Axclr8 – those are all pretty pedestrian arguments against the Wave Principle, and ones that Prechter has dealt with at some length in his writings. No, Fibonacci relationships do not underlie “all” of nature, but they are found in numerous growth processes, of which human social mood (and its barometer, the stock market) is only one example. Furthermore, it is a description of mass human behavior, not that of any one particular individual. It is not a deterministic theory — individuals can (and do) resist the influence of social mood, else what would be the purpose of EW analysis or trading?
A bit OOT, but you might want to take a look at this, Mike: http://safehaven.com/article-14282.htm
If you consider in 1991 Japan had not begun its QE regimes, while the US has started it by now, it is even more telling how strong USD can be. Hmm… P3 up in USD charts coming soon?!
If you look at now XJY lives to be 100+.
Thanks Jason. I’ve also noticed the performance of the Yen in the early ’90s. In deflation, debt props up a currency despite printing, since the scale of the debt is so much greater than the scale of the printing. During panic phases the effect is strongest, since script is what you need to cover your debts.
I read the full article critical of EW principle. The author fails to grasp that EW was derived from *observation*, not from some explanatory theory. The rest of the article is full of straw men, as Graphite noted. In fact, the author unwittingly discloses that with respect to the equity markets, he is part of the herd!
Axclr8 wrote:
Regarding last post referencing Gold: I brought this up with regards to Graphite’s point of view on the FDIC. OK, So the FDIC goes bankrupt …. Paper Money is worthless … GOLD soars …. but heck, can you go to the grocery store with nuggets of Gold in your pocket? Ummm, nope. Then what do you do? There has to be some medium for transactions to occur …. what will it be?
Will one short-term alternative be some sort of bartering system — sort of like the Ithaca Hours system? See http://www.ithacahours.org/ and http://en.wikipedia.org/wiki/Ithaca_hours….What do you think?
Paper money would not be worthless if there were massive bank runs. Just the opposite: its value would soar, since so much in fake “deposits” (nothing really on deposit, just credits) would be wiped out. The money would continue to circulate as before, but each dollar would buy more. People would value pennies again.
But that is not the point of Graphite’s post. The point is that it is the moral hazard of FDIC in the first place that ENSURES massive systemic bank failure.
Without FDIC, stronger banks would attract cash from ones that made bad loans. This is what used to happen when the US was a high growth nation. The busts of the 19th century were essential to clear out malinvestments and free up capital for productive use.
If anyone out there wants a primer on Elliott Wave Theory, Daneric has an excellent series on his blog. For the record, get your E-wave analysis from him or EWI. I’m just a novice.
http://danericselliottwaves.blogspot.com/2009/03/elliott-wave-primer-part-1.html
Thanks Mike!
I had also found this one, on the EWI web site (free registration required) http://www.elliottwave.com/tutorial/Default.aspx