This is a great summary that echoes many of my views. Taleb has been right on the mark for the last 4 or 5 years and continues to "get it".
Contast the analysis below to all the sheeple commentators on Bloomberg and CNBC that praise the morons like ("Subprime is Contained") Bernanke and (deer in headlights) Geithner.
The real answer to the "crisis" was to de-lever the financial system and general economy - the main step being to force creditors to convert their stakes for equity to recapitalize the failing companies. Not for the government to arbitrarily pick winners and losers while allowing some companies to fail and givings tens of billions of dollars in subsidies and bailouts to others.
Nassim Taleb's Ten Principles concerning Black Swans
1. What is fragile should break early while it is still small. Nothing should ever become too big to fail. Evolution in economic life helps those with the maximum amount of hidden risks– and hence the most fragile – become the biggest.
2. No socialisation of losses and privatisation of gains. Whatever may need to be bailed out should be nationalised; whatever does not need a bail-out should be free, small and riskbearing.
We have managed to combine the worst of capitalism and socialism. In France in the 1980s, the socialists took over the banks. In the US in the 2000s, the banks took over the government. This is surreal.
3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus. The economics establishment (universities, regulators, central bankers, government officials, various organisations staffed with economists) lost its legitimacy with the failure of the system. It is irresponsible and foolish to put our trust in the ability of such experts to get
us out of this mess. Instead, find the smart people whose hands are clean.
4. Do not let someone making an “incentive” bonus manage a nuclear plant – or your financial risks. Odds are he would cut every corner on safety to show “profits” while claiming to be “conservative”. Bonuses do not accommodate the hidden risks of blow-ups. It is the asymmetry of the bonus system that got us here. No incentives without disincentives: capitalism is about rewards and punishments, not just rewards.
5. Counter-balance complexity with simplicity. Complexity from globalisation and highly networked economic life needs to be countered by simplicity in financial products. The complex economy is already a form of leverage: the leverage of efficiency. Such systems survive thanks to slack and redundancy; adding debt produces wild and dangerous gyrations and leaves no room for error. Capitalism cannot avoid fads and bubbles: equity bubbles (as in 2000) have proved to be mild; debt bubbles are vicious.
6. Do not give children sticks of dynamite, even if they come with a warning. Complex derivatives need to be banned because nobody understands them and few are rational enough to know it. Citizens must be protected from themselves, from bankers selling them “hedging” products, and from gullible regulators who listen to economic theorists.
7. Only Ponzi schemes should depend on confidence. Governments should never need to “restore confidence”. Cascading rumours are a product of complex systems. Governments cannot stop the rumours. Simply, we need to be in a position to shrug off rumours, be robust in the face of them.
8. Do not give an addict more drugs if he has withdrawal pains. Using leverage to cure the problems of too much leverage is not homeopathy, it is denial. The debt crisis is not a temporary problem, it is a structural one. We need rehab.
9. Citizens should not depend on financial assets or fallible “expert” advice for their retirement. Economic life should be definancialised. We should learn not to use markets as storehouses of value: they do not harbour the certainties that normal citizens require. Citizens should experience anxiety about their own businesses (which they control), not their investments (which they do not control).
10. Make an omelette with the broken eggs. Finally, this crisis cannot be fixed with makeshift repairs, no more than a boat with a rotten hull can be fixed with ad-hoc patches. We need to rebuild the hull with new (stronger) materials; we will have to remake the system before it does so itself. Let us move voluntarily into Capitalism 2.0 by helping what needs to be broken break on its own, converting debt into equity, marginalising the economics and business school establishments, shutting down the “Nobel” in economics, banning leveraged buyouts, putting bankers where they belong, clawing back the bonuses of those who got us here, and teaching people to navigate a world with fewer certainties. Then we will see an economic life closer to our biological environment: smaller companies, richer ecology, no leverage. A world in which entrepreneurs, not bankers, take the risks and companies are born and die every day without making the news. In other words, a place more resistant to black swans.
Thursday, July 30, 2009
Thursday, July 23, 2009
Frugal McDougall
This is just too good not to post...from Mish's website:
Frugal McDougall, A Rhyme For Our Times (http://globaleconomicanalysis.blogspot.com/2009/07/frugal-mcdougall-rhyme-for-our-times.html)
Frugal McDougall worked very hard
Bought things with cash and not credit cards
And when it came to the things that he bought
Things that he needed were all that he sought.
Once he was sure that his bills were all paid,
The money left over was carefully saved.
You see in the future he hoped to retireAnd knew very well what that would require.
His neighbors were foolish and laden with greed.
They focused on wants instead of on needs.
They went out to dinner about every night.
When you’re middle class that’s one of your rights.
When they got their paychecks they spent every dime.
Having money left over would have been a crime.
Their credit was pushed to its uppermost limit,
When it came to debt they were very deep in it.
When Frugal McDougall would try to explain
The value of saving they all called him names,
So he wouldn’t bother most of the time.
He said it was something like ‘pearls before swine’
Meanwhile the neighbors got credit card offers,
Promising money to fill up their coffers.
Consumed by their greed they filled out every one,
With barely a thought as to what they had done.
And when the cards came they all ran about
Foolishly spending till they were maxed out.
A pool for the yard, perhaps some new skis.
They spent money like it was growing on trees.
Some even went on a cruise to the Med,
Where they all laid around looking tanned and well fed.
No thought was given to how they would pay,
For surely a bill would be coming their way.
In complete disbelief McDougall looked on.
He knew very well that they had it all wrong.
And the foolish idea that was shared by them all
Was that happiness was now on sale at the mall.
He’d been chastened so often he now bit his lip,
For fear if he didn’t he’d let something slip.
His neighbors would learn of his total disdain
For the way that their money was thrown down the drain.
Instead he would focus on his quiet life,
With his quiet children and his quiet wife.
In their simple way their needs were all met,
And their simple life was quite free of debt.
Then one day his neighbor came home joyously
In a gigantic brand new s. u. v.
Frugal McDougall just stood there and gawked,
Confused and bewildered and totally shocked.
He knew that his neighbor made twelve bucks and hour
And shouldn’t have this kind of purchasing power.
And when asked how he paid for this monstrosity
The neighbor replied, “with my home equity.”
The debt didn’t matter, the man was a dunce,
Whose only concern had been "how much a month."
The neighborhood pondered what he had just said
And one by one light bulbs came on in their heads.
Then sure enough the very next day,
New cars appeared in every driveway.
McDougall now cautioned that they should take heed,
All this debt served no legitimate need,
Instead they were putting their futures at risk.
The response they delivered was angry and brisk.
Frugal McDougall was called a big fool,
And other mean names that were equally cruel.
"We are all rich," they boldly declared
As Frugal McDougall stood there and stared.
"Our homes are all worth more than twice what we paid!
The good life is ours and should not be delayed!"
But Frugal McDougall refused to be goaded
And as he expected the debt bomb exploded.
The neighborhood values were starting to fall,
Faster and faster effecting them all.
Then as his neighbor stood looking distressed,
The new s. u. v. was being repossessed.
Soon all around, the neighborhood toys,
The ones that had recently brought so much joy,
Were all repossessed or put up for sale.
The pleasures they brought had grown a bit stale.
Purse strings were tightened as jobs were now lost.
It seems the free money came at a steep cost.
Banks were collapsing as everyone bailed
From upside down houses and lifestyles that failed.
All of the debt that could not be repaid,
Was now wreaking havoc that would not be stayed.
Government bailouts now came on the scene
As political leaders were all very keen
To keep credit flowing and money being spent,
So trillions of dollars were foolishly lent,
In a desperate attempt to keep prices high,
A fact that they won’t even try to deny.
These actions were more than a little perverse,
For adding more debt only made the mess worse.
This of course left them with one thing to do.
They needed more sources of tax revenue,
So small businesses that were already hurting
Were saddled with costly additional burdens.
Many scaled back hoping they could prevail
But quite a few more of them now simply failed.
So many neighbors were now out of work,
They turned on McDougall and called him a jerk!
The papers had all said that he was to blame,
Though none had specifically called him by name.
In a foolish attempt to curry some favor
It seems that they now blamed the problem on savers.
They said "greedy savers are hording their cash
And collectively made the economy crash."
His penchant for saving was very well known.
Poor McDougall’s cover was thoroughly blown.
"Tax him,” folks cried as they all shook their fists
“And tax him some more if he tries to resist!
He has more money than he’ll ever need,”
They cried in a horrid expression of greed.
Poor Frugal McDougall was truly confused,
Saddened, frustrated and now feeling used.
He’d tried to warn people of what lay ahead,
But they didn’t listen and blamed him instead.
The country can never be restored to health,
As long as we’re exporting all of our wealth.
Closing our factories, exporting our jobs
Turning the people into angry mobs
And all of this spending with no end in sight
Is the most direct cause of our national plight!
How did this happen, where did it begin?
This foolish game’s left us no way to win.
Now the brave politicians all deny fault
As the nations economy grinds to a halt
Is this the end of the U.S. of A?
Will McDougall’s country now fade away?
He doesn’t know and he really can’t tell,
But from where he’s standing it doesn’t look well.
The above was written by D. Jones who writes:
Hello Mish
I lost my job as a corporate aircraft mechanic last year and have been writing picture book stories for kids for the last few months. They are all rhyming stories like this one but none of the others are even remotely political.
I'm in the process of illustrating the first one in the hopes of getting it published.The [above] rhyme really isn't for kids but I've been thinking I might illustrate it in a Dr. Sues style for adults and see if there are any takers.
By the way, armed with information from your web site and patrick.net I tried to warn my family and friends of what was coming and was thoroughly rebuked by more than a few of them, so I shut up about it. I've now had apologies from several that say they wish they had listened. Thanks for all your efforts on behalf of the little guy that has nowhere else to go for the truth.
Regards
D. Jones
Mish: Thanks DJ and good luck to you. Any publishers out there interested in DJ's books? If so, drop me a line and I will put you in touch.
By the way, please see Aircraft repair jobs sold to foreign workers, resumes not important if you want to understand what is happening to aircraft mechanic jobs in general.
Frugal McDougall, A Rhyme For Our Times (http://globaleconomicanalysis.blogspot.com/2009/07/frugal-mcdougall-rhyme-for-our-times.html)
Frugal McDougall worked very hard
Bought things with cash and not credit cards
And when it came to the things that he bought
Things that he needed were all that he sought.
Once he was sure that his bills were all paid,
The money left over was carefully saved.
You see in the future he hoped to retireAnd knew very well what that would require.
His neighbors were foolish and laden with greed.
They focused on wants instead of on needs.
They went out to dinner about every night.
When you’re middle class that’s one of your rights.
When they got their paychecks they spent every dime.
Having money left over would have been a crime.
Their credit was pushed to its uppermost limit,
When it came to debt they were very deep in it.
When Frugal McDougall would try to explain
The value of saving they all called him names,
So he wouldn’t bother most of the time.
He said it was something like ‘pearls before swine’
Meanwhile the neighbors got credit card offers,
Promising money to fill up their coffers.
Consumed by their greed they filled out every one,
With barely a thought as to what they had done.
And when the cards came they all ran about
Foolishly spending till they were maxed out.
A pool for the yard, perhaps some new skis.
They spent money like it was growing on trees.
Some even went on a cruise to the Med,
Where they all laid around looking tanned and well fed.
No thought was given to how they would pay,
For surely a bill would be coming their way.
In complete disbelief McDougall looked on.
He knew very well that they had it all wrong.
And the foolish idea that was shared by them all
Was that happiness was now on sale at the mall.
He’d been chastened so often he now bit his lip,
For fear if he didn’t he’d let something slip.
His neighbors would learn of his total disdain
For the way that their money was thrown down the drain.
Instead he would focus on his quiet life,
With his quiet children and his quiet wife.
In their simple way their needs were all met,
And their simple life was quite free of debt.
Then one day his neighbor came home joyously
In a gigantic brand new s. u. v.
Frugal McDougall just stood there and gawked,
Confused and bewildered and totally shocked.
He knew that his neighbor made twelve bucks and hour
And shouldn’t have this kind of purchasing power.
And when asked how he paid for this monstrosity
The neighbor replied, “with my home equity.”
The debt didn’t matter, the man was a dunce,
Whose only concern had been "how much a month."
The neighborhood pondered what he had just said
And one by one light bulbs came on in their heads.
Then sure enough the very next day,
New cars appeared in every driveway.
McDougall now cautioned that they should take heed,
All this debt served no legitimate need,
Instead they were putting their futures at risk.
The response they delivered was angry and brisk.
Frugal McDougall was called a big fool,
And other mean names that were equally cruel.
"We are all rich," they boldly declared
As Frugal McDougall stood there and stared.
"Our homes are all worth more than twice what we paid!
The good life is ours and should not be delayed!"
But Frugal McDougall refused to be goaded
And as he expected the debt bomb exploded.
The neighborhood values were starting to fall,
Faster and faster effecting them all.
Then as his neighbor stood looking distressed,
The new s. u. v. was being repossessed.
Soon all around, the neighborhood toys,
The ones that had recently brought so much joy,
Were all repossessed or put up for sale.
The pleasures they brought had grown a bit stale.
Purse strings were tightened as jobs were now lost.
It seems the free money came at a steep cost.
Banks were collapsing as everyone bailed
From upside down houses and lifestyles that failed.
All of the debt that could not be repaid,
Was now wreaking havoc that would not be stayed.
Government bailouts now came on the scene
As political leaders were all very keen
To keep credit flowing and money being spent,
So trillions of dollars were foolishly lent,
In a desperate attempt to keep prices high,
A fact that they won’t even try to deny.
These actions were more than a little perverse,
For adding more debt only made the mess worse.
This of course left them with one thing to do.
They needed more sources of tax revenue,
So small businesses that were already hurting
Were saddled with costly additional burdens.
Many scaled back hoping they could prevail
But quite a few more of them now simply failed.
So many neighbors were now out of work,
They turned on McDougall and called him a jerk!
The papers had all said that he was to blame,
Though none had specifically called him by name.
In a foolish attempt to curry some favor
It seems that they now blamed the problem on savers.
They said "greedy savers are hording their cash
And collectively made the economy crash."
His penchant for saving was very well known.
Poor McDougall’s cover was thoroughly blown.
"Tax him,” folks cried as they all shook their fists
“And tax him some more if he tries to resist!
He has more money than he’ll ever need,”
They cried in a horrid expression of greed.
Poor Frugal McDougall was truly confused,
Saddened, frustrated and now feeling used.
He’d tried to warn people of what lay ahead,
But they didn’t listen and blamed him instead.
The country can never be restored to health,
As long as we’re exporting all of our wealth.
Closing our factories, exporting our jobs
Turning the people into angry mobs
And all of this spending with no end in sight
Is the most direct cause of our national plight!
How did this happen, where did it begin?
This foolish game’s left us no way to win.
Now the brave politicians all deny fault
As the nations economy grinds to a halt
Is this the end of the U.S. of A?
Will McDougall’s country now fade away?
He doesn’t know and he really can’t tell,
But from where he’s standing it doesn’t look well.
The above was written by D. Jones who writes:
Hello Mish
I lost my job as a corporate aircraft mechanic last year and have been writing picture book stories for kids for the last few months. They are all rhyming stories like this one but none of the others are even remotely political.
I'm in the process of illustrating the first one in the hopes of getting it published.The [above] rhyme really isn't for kids but I've been thinking I might illustrate it in a Dr. Sues style for adults and see if there are any takers.
By the way, armed with information from your web site and patrick.net I tried to warn my family and friends of what was coming and was thoroughly rebuked by more than a few of them, so I shut up about it. I've now had apologies from several that say they wish they had listened. Thanks for all your efforts on behalf of the little guy that has nowhere else to go for the truth.
Regards
D. Jones
Mish: Thanks DJ and good luck to you. Any publishers out there interested in DJ's books? If so, drop me a line and I will put you in touch.
By the way, please see Aircraft repair jobs sold to foreign workers, resumes not important if you want to understand what is happening to aircraft mechanic jobs in general.
Wednesday, July 01, 2009
The Definition of Insanity
Back to my roots on the global housing fiasco...
The definition of insanity is doing the same thing over and over again and expecting a different result. Well, the powers that be in Washington have decided to start banging their heads against the wall again but believe that this time, we will have a positive outcome.
See the article below regarding the latest housing bailout (there have been so many now that it is no longer possible to keep count)... This bill was passed by the house of reps today with a new 125% LTV cap.
Obama Mortgage Refinancing Program May Expand, Lockhart Says
Share Email Print A A A
By Dawn Kopecki and Jody Shenn
June 19 (Bloomberg) -- President Barack Obama’s program to help more homeowners refinance may be expanded to include borrowers who owe more than 105 percent of their homes’ values, Federal Housing Finance Agency Director James Lockhart said.
The Obama administration is considering allowing Fannie Mae and Freddie Mac to refinance loans with current loan-to-value ratios of 125 percent or higher, Lockhart said at a National Association of Real Estate Editors Association conference in Washington yesterday.
The Home Affordable refinancing program, announced Feb. 18, is part of the U.S. government’s efforts to stem soaring foreclosures and bolster consumer spending.
The 125 percent level on loan-to-values would preserve the ability of Fannie Mae and Freddie Mac to package and sell the debt into so-called real estate mortgage investment conduits, he said. While 125 percent loan-to-value ratio is on the table, Lockhart said “it’s not necessarily the number we’re going to end up with.”
The program has been “seeing a slowdown” as mortgage rates increase, he said. The average rate on a typical 30-year fixed loan was 5.38 percent this week ended yesterday, according to McLean Virginia-based Freddie Mac. The rate is up from a record low of 4.78 percent at the end of April.
Under the program, borrowers with loans already owned or guaranteed by Washington-based Fannie Mae or Freddie Mac who have loan-to-value ratios of 80 percent to 105 percent and aren’t delinquent can refinance without buying mortgage insurance, or paying for more insurance than they already have.
Warehouse Lending
Lockhart also said yesterday that his agency, the companies’ regulator, is looking at ways for Fannie Mae and Freddie Mac to help the so-called warehouse lending market, which provides financing to smaller, independent mortgage companies, amid a credit crunch.
While Fannie Mae and Freddie Mac are prohibited by law from lending directly to other firms, Lockhart said they may be able to provide the market some liquidity by committing to purchase multifamily and other loans. The U.S. seized Fannie Mae and Freddie Mac and put them under FHFA’s control in September.
NC: So we are going to solve the housing fiasco by allowing people to borrow 125% of their home's value???? Isn't this what got us into this mess to begin with. Here are just a few problems with this idea:
1) You are locking people into a mortgage that leaves them 25% in the hole right from the get go. In other words, on a $250,000 mortgage - if they choose to walk away from their house rather than do this asanine refinancing - they immediately save around $70,000 (which is probably close to 2 years of after tax income for someone with a $250,000 mortgage.
2) Fannie and Freddie are locking into mortgages where they have negative cushion on a loan being given to someone who is already in the process of defaulting on their current loan.
And don't forget that Fannie and Freddie are the two already insolvent companies that are sucking an aggregate of $200 billion in blood money from the taxpayers. So its not like they have a lot of cushion against the inevitable defaults they will be facing on these loans.
3) The Government now wants to bailout the so-called warehouse lending market which provides financing to small-time mortgage brokers. Where do I begin here?
Here is a start: mortgage brokers are those scumbag hucksters who preyed on the elderly and other non-financially savvy people to put them into subprime and adjustible-rate loans that they couldn't pay and brought the global financial system to the brink of total meltdown.
That is a great plan. Look - I am still generally positive on Obama. But he needs to put together a new financial cabal. A good start would be to can Bernanke and (deer-in-headlights) Geithner. These guys are dangerous.
The definition of insanity is doing the same thing over and over again and expecting a different result. Well, the powers that be in Washington have decided to start banging their heads against the wall again but believe that this time, we will have a positive outcome.
See the article below regarding the latest housing bailout (there have been so many now that it is no longer possible to keep count)... This bill was passed by the house of reps today with a new 125% LTV cap.
Obama Mortgage Refinancing Program May Expand, Lockhart Says
Share Email Print A A A
By Dawn Kopecki and Jody Shenn
June 19 (Bloomberg) -- President Barack Obama’s program to help more homeowners refinance may be expanded to include borrowers who owe more than 105 percent of their homes’ values, Federal Housing Finance Agency Director James Lockhart said.
The Obama administration is considering allowing Fannie Mae and Freddie Mac to refinance loans with current loan-to-value ratios of 125 percent or higher, Lockhart said at a National Association of Real Estate Editors Association conference in Washington yesterday.
The Home Affordable refinancing program, announced Feb. 18, is part of the U.S. government’s efforts to stem soaring foreclosures and bolster consumer spending.
The 125 percent level on loan-to-values would preserve the ability of Fannie Mae and Freddie Mac to package and sell the debt into so-called real estate mortgage investment conduits, he said. While 125 percent loan-to-value ratio is on the table, Lockhart said “it’s not necessarily the number we’re going to end up with.”
The program has been “seeing a slowdown” as mortgage rates increase, he said. The average rate on a typical 30-year fixed loan was 5.38 percent this week ended yesterday, according to McLean Virginia-based Freddie Mac. The rate is up from a record low of 4.78 percent at the end of April.
Under the program, borrowers with loans already owned or guaranteed by Washington-based Fannie Mae or Freddie Mac who have loan-to-value ratios of 80 percent to 105 percent and aren’t delinquent can refinance without buying mortgage insurance, or paying for more insurance than they already have.
Warehouse Lending
Lockhart also said yesterday that his agency, the companies’ regulator, is looking at ways for Fannie Mae and Freddie Mac to help the so-called warehouse lending market, which provides financing to smaller, independent mortgage companies, amid a credit crunch.
While Fannie Mae and Freddie Mac are prohibited by law from lending directly to other firms, Lockhart said they may be able to provide the market some liquidity by committing to purchase multifamily and other loans. The U.S. seized Fannie Mae and Freddie Mac and put them under FHFA’s control in September.
NC: So we are going to solve the housing fiasco by allowing people to borrow 125% of their home's value???? Isn't this what got us into this mess to begin with. Here are just a few problems with this idea:
1) You are locking people into a mortgage that leaves them 25% in the hole right from the get go. In other words, on a $250,000 mortgage - if they choose to walk away from their house rather than do this asanine refinancing - they immediately save around $70,000 (which is probably close to 2 years of after tax income for someone with a $250,000 mortgage.
2) Fannie and Freddie are locking into mortgages where they have negative cushion on a loan being given to someone who is already in the process of defaulting on their current loan.
And don't forget that Fannie and Freddie are the two already insolvent companies that are sucking an aggregate of $200 billion in blood money from the taxpayers. So its not like they have a lot of cushion against the inevitable defaults they will be facing on these loans.
3) The Government now wants to bailout the so-called warehouse lending market which provides financing to small-time mortgage brokers. Where do I begin here?
Here is a start: mortgage brokers are those scumbag hucksters who preyed on the elderly and other non-financially savvy people to put them into subprime and adjustible-rate loans that they couldn't pay and brought the global financial system to the brink of total meltdown.
That is a great plan. Look - I am still generally positive on Obama. But he needs to put together a new financial cabal. A good start would be to can Bernanke and (deer-in-headlights) Geithner. These guys are dangerous.
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