Monday, October 27, 2008

christian investing during a financial meltdown

God is best known for eternal fire insurance, a market segment He dominates. Few people understand that God also offers a full range of financial advice and services with over 700 Bible verses referring to money or money management.

God has certain advantages which make His investment management preferred. Although unregulated and not subject to any minimum capital requirements, the Lord has more than adequate reserves. After all, He owns the cattle on a thousand hills (Psalm 50:10), all the earth and everything in it belongs to Him (Psalms 24:1;50:12). He spoke creation into existence (Genesis 1).

Unlike other investment or insurance companies, the ability of the Lord to fulfill His promises is never subject to systematic risk.

Today I’ll note just two of His less known, and certainly less utilized SIV’s. (No, a SIV is not a Structured Investment Vehicle, but a Scriptural Investment Verse.) These allow investors to leverage their initial financial investments with God to obtain even larger returns. From His prospectus:

Honor the LORD with your wealth
and with the firstfruits of all your produce;
then your barns will be filled with plenty,
and your vats will be bursting with wine.
~ Proverbs 3:9-10 (ESV)

Whoever is generous to the poor lends to the LORD,
and he will repay him for his deed.
~ Proverbs 19:17 (ESV)

You may be wondering if these investments are so good, why don’t more people use them? The Lord faces a lot of competition in markets other than eternal fire insurance. With fire insurance He is the only reliable provider, and couples the insurance with long-term retirement benefits.

I guess people don’t trust God too much unless there are no alternatives.

Be blessed.

Sunday, October 26, 2008

shakespeare is here -- starting today

The American Shakespeare Center
Stark Raving Sane Tour will be performing
The Comedy of Errors
October 26th (that be TODAY) at 1:30 and October 29th at 7:30
October 27th, October 31st, and November 1st - all at 7:30
Rosencrantz and Guildenstern are Dead
October 28th at 7:30, and November 1st at midnight

All performances in SLU's Eben Holden Center
CLICK for campus map

Ticket price: $5.00 each

CLICK for campus map

random thought . . . . no random walk: shakespeare - stark raving sane tour

Saturday, October 25, 2008

best thing that happened this week

Miss Lois playing in the leaves.

Be blessed!

Friday, October 24, 2008

the other palin

Michael Palin and John Cleese in two of my favorite Monty Python sketches.

Note that a chartered accountant is a British version of a CPA.

. . . and the famous Parrot Sketch

Thursday, October 23, 2008

5 things you may not know about the palins

This video from is a little more complimentary. Enjoy.

These are from the October 18th SNL. I'm sorry, but I still have trouble telling the difference between Sarah Palin and Tina Fey.

The Opening

Weekend Update

Wednesday, October 22, 2008

palin as president

Want some interactive satire? I thought this was funny even though not very complimentary to Gov. Palin.

Click the link below. Search the interactive picture for hidden links, then click, listen and see what happens. There is a lot to explore and it is supposed to be updated daily.

Palin as President

Tuesday, October 21, 2008

life and local elections

Election Day is two weeks away. None of the candidates in St. Lawrence County's Congressional, New York State Assembly or State Senate races post information on their campaign sites about whether they are pro-life or pro-choice. So I had to do a little hunting.

Pro-Lifer Darrel Aubertine (D-WF) is running for re-election against challenger Dave Renzi (R-C-I) in New York State Senate District 48. Dave Renzi is endorsed by the NYS Right to Life Committee and according to this email from his campaign,

Dave Renzi is PRO LIFE and has stated it several times.
~ (email 10/20/08@8:37am)

In New York State Assembly District 118, Addie Jenne Russell (D-WF) and Robert "Bobby" Cantwell (R-C-I) will face off. Russell is pro-choice and has the endorsement of Planned Parenthood Advocates of NY.

I emailed the Cantwell campaign site about his position and I am still waiting for a reply. However, the NYS Right to Life Committee has not endorsed Cantwell.

For those interested in the issue of gay marriage, Russell is also endorsed by Empire State Pride Agenda, a lesbian, gay, bisexual and transgender advocacy group.

Pro-Choice Dierdre Scozzafava (R-I-WF) is running unopposed in the 122nd Assembly District. She is endorsed by Empire State Pride Agenda. Planned Parenthood Advocates endorsed her two years ago but not in this election.

The sanctity of life or abortion rights will be issues neither in the 48th SD, with two pro-lifers running, nor in the 118th and 122nd AD's, with no apparent pro-lifers running.

However there are differences between the candidates in NY's 23rd Congressional District. Representative John McHugh (R-C-I), running for reelection, has been endorsed by NYS Right to Life Committee. His opponent, Pro-Choice Michale P. Oot (D-WF) believes, "Abortions should always be legal" (source).

Be blessed.

Sunday, October 19, 2008

why do we save so little?

U.S. saving rates have always been low and now are the lowest they have ever been. We save the smallest percentage of any country.

Q: Why do Americans save so little?

A: Because we can.

Financial innovations in the past ten years allows Americans access to something their parents never dreamed of: The Home ATM.

The ease of home equity loans have allowed Americans to dip into, and deplete, what historically has been a major source of household wealth. That is the equity in their home (i.e., the value of their houses less the amount left on their mortgages). Prior to the last ten years home equity loans were not so easy to get.

The chart below helps show this. The blue bars are the amounts of money U.S. households have taken out of their homes (a negative saving) each year since 1991. You see it rise steeply until housing prices crashed in 2007. (When housing prices crash, there is a lot less equity to borrow against.)

Source: Calculated Risk: The Adjustment Process

What I find even more interesting is the red line. This is the amount withdrawn from the Home ATM as a percentage of disposable, or after-tax, income. (The vertical scale is on the right-hand side of the chart.) As you can see, a few years ago it was as high as 9% of income. This is why during those same years overall U.S. household saving rates were zero to negative. Although some people were saving, others were dissaving. That is, spending a lot of the wealth stored in the value of their homes. (Click here for U.S. saving rate chart.)

Hmmm.... A credit crunch is here. A recession is coming. Household savings are low. People are in debt up to their ears. All these things have never happened together.

2009 should be interesting.

Be blessed.
(a.k.a. Prof. Sunshine)

Saturday, October 18, 2008

a confession

Confession: I facilitate a local presentation of Dave Ramsey's Financial Peace University. Last week the lesson was on credit cards, why you shouldn't use them, how you fall in traps, stay away from them, etc.

I had a credit card bill due Friday. It had a good sized balance since I used it when I traveled in late August. Besides, I get cash rewards! I got busy last week and forgot to pay it. Substantial late penalty, completely wiping any "cash rewards."

click on picture to enlarge if you cannot read the red sign

Yeah, they know what they are doing. They have a plan.

Yeah, hypocrisy is a strength of mine.

Be blessed.

Friday, October 17, 2008

miscellany: politics, money, funny

V.P. candidate Sarah Palin to appear on SNL, October 18th at 11:30 p.m., NBC.
Chicago Sun-Times
[Here's the opening of SNL Oct 18th with Palin.]

3/4 of rich (incomes $1m-10m) support McCain while 2/3 of super rich (incomes $30m+) support Obama.
Greg Mankiw's Blog: Who wins the rich vote?

New York Times claims Democrats better for the stock market but this analysis is meaningless.
Greg Mankiw's Blog: Republicans, Democrats, and Stock Returns

Credit Crunch Cracks (Calculated Risk)

From Peter:
Q: What the difference between today's investment bankers and pigeons?
A: Pigeons can still make a deposit on a BMW.

From Sidd:
I went to an ATM today, and it asked to borrow a twenty till next week.

From monta's ankle:
I went to fill up my gas tank and I couldn't decide between leveraged and unleveraged.

From Rob Dawg:
Went to Best Buy to get a toaster and they gave me a free bank with purchase.

Videos of the candidates trying to do standup:

~ McCain the comedian

~ Obama the comedian

Be blessed!

at 5-to-1 our next president is . . . .

Real-time election trades, an example of what economists call "prediction markets," are the best presidential election predictors. Here are the results from Intrade. Overall, the odds are 5-to-1 in favor of Obama. That is, a $1 bet on Obama costs 83.4 cents while a $1 bet on McCain costs 16.5 cents. This "market" for betting on elections state-by-state is more accurate than opinion polls.

Looks like an electoral college landslide for Obama. IMHO, only five states are in play as of today. Leaning toward Obama are Missouri (11) and North Carolina (15) while McCain has the edge in North Dakota (3), West Virginia (5) and Indiana (11). (By leaning, the favorable odds are "only" 2-to-1 or less.) That is a total of only 45 electoral college votes. McCain could win them all and still come up way short.

The odds have always favored Obama but it was close until the financial meltdown in September. You can click the "30-day price chart" button below to see this.

This is the coolest map on the election I've seen. You can click on a state for its results in real time.

If you disagree, then make a trade and put your money where your mouth is.

P.S. Last December 15th, I confidently predicted here that this year's election would be won by the Democrat ticket. All they had to do was win Ohio this time around. Obama has very solid leads in all the states that Kerry won in 2004 PLUS solid leads in Colorado (9), Iowa (7), New Mexico (5), and Virgina (13). If Obama just wins any three of these four states then he doesn't have to win Ohio's 20 votes. It is an Obama slam dunk. Game Over.

Thursday, October 16, 2008

harvard business school gone wild

A friend and former student, now at the Harvard Business School, sent me the link to this video. He wrote that he had been chased twice.

aig bailout hurts who?

Last month, AIG's board of directors entered into an agreement with the Federal Reserve Bank of New York to obtain $85 billion via a two-year credit facility that requires AIG to pay a 2% one-time commitment fee, 8.5% interest on undrawn capital and, on drawn capital, the London interbank offered rate plus 8.5%.

The federal government is getting a 79.9% stake in AIG from the deal.

The interest charges currently add up to $1 billion monthly.

~ Wall Street Journal (October 15, 2008, p. C2)

This is a bailout? The Fed gave AIG an offer they couldn't refuse:

Go broke and get nothing or we'll loan you $85 billion and you keep 20% of your company.

This was not a bailout. It was a buy out. A gun to the head buy out. No one else could come up with that much cash immediately. The government will likely make money on this deal. They're collecting 8.5% interest on the money not borrowed by AIG and about 12% on what is borrowed.

If I were an AIG shareholder, I'd be upset.

I'm a taxpayer, so I'm not.

Be blessed!

Wednesday, October 15, 2008

dobson lost his focus

Dr. James Dobson comments on the current economic crisis and presents portions of his interview with the late Larry Burkett, who makes some dire financial predictions in a discussion of his book The Coming Economic Earthquake

A friend forwarded me a link from Focus on the Family. Dr. Dobson's broadcasts on Monday and Tuesday of this week were about the recent economic meltdown. He played portions of a 1992 broadcast with Larry Burkett which warned that government budget deficits would result in a future economic meltdown.

I think the world of the late Larry Burkett. He was the pioneer in applying Biblical principles to personal finances. I've used his materials; I admire his ministry; he helped millions of people.

Although in 1992 Burkett did predict an economic meltdown, he did not predict the current meltdown.

The cause of the current crisis has absolutely nothing to do with government deficits. The causes of past financial crises, the October 1987 stock market crash, the S&L crisis in the late 1980's, the Japanese banking crisis of the 1990's had zero to do with government deficits. (Sure they might have caused increased deficits, but that would be getting the casual relationship backwards.) Japan's government had budget surpluses before their banking crisis!

Larry Burkette died some time ago so he didn't make the false connection between deficits and the current crisis. Dobson did. This is not an easy or obvious topic. No one expects him to know about financial crises. Dobson was completely outside his depth; speaking about things where he is incredibly ignorant. Being on radio made it embarrassingly ignorant.

People trust Dr. Dobson because of his core competencies. When he speaks on other topics, his loyal listeners extend their trust to him. Dobson has a responsibility to his listeners. He failed in this responsibility. He mislead people who trusted him.

Maybe Dr. Dobson needs to again focus on the family.

Monday, October 13, 2008

the new dollar and the nobel in economics

This picture, the new dollar, has nothing to do with the rest of this post.

Paul Krugman won the Nobel Prize in economics today. His work in the 1980's was deserving of it. However, it had nothing to do with his New York Times column or other opinion pieces.

What are the effects of free trade and globalization? What are the driving forces behind worldwide urbanization? Paul Krugman has formulated a new theory to answer these questions," the academy said in its citation. "He has thereby integrated the previously disparate research fields of international trade and economic geography,
~ The Royal Swedish Academy of Sciences

Many are surprised that he got the Nobel because his more recent opinion pieces are so political, so shrill, that he has lost all pretense of objectivity. Fifteen years ago he was very good at making economics understandable to as to debunk a lot of bad policy proposals, but has since lost credibility. Unfortunately the Nobel Prize will likely give his political opinions more credibility even when his writing goes beyond international trade.

Since both Krugman (a bit of a political hack of late) and the Nobel committee favor Obama, this prize may be questioned. However, even if politically motivated, that doesn't mean it is an undeserved choice.

I found this on a conservative/libertarian blog today:

...Paul Krugman's win is, as the Germans say, nicht ein Unrecht - not an injustice. Yes, he's often screamed himself silly, but the best fifth of Krugman's corpus is excellent. As I guest blogged on MR [Marginal Revolution] years ago:

[A]s a cock-eyed optimist, I'm very happy to have him around. Think about it: The world's most famous left-wing economist:

1. Blames European unemployment on labor market regulations that hold wages above the market-clearing level. (The Accidental Theorist, Part 1)

2. Publicly and articulately advocates free trade without hemming or hawing. (Pop Internationalism)

3. Identifies anti-globalization activists as the enemies of the world's poor. (The Accidental Theorist, Part 3)

4. Titles an essay "In Praise of Cheap Labor: Bad Jobs at Bad Wages Are Better than No Jobs at All" (The Accidental Theorist, Part 3)

5. Points out that if you oppose Big Government, you should favor cutting Social Security, Medicare, and other popular programs. ("The Lost Fig Leaf") Sure, he's hoping to scare us away from libertarian rhetoric, but there's no use running away from the truth.

Prediction: When Obama wins, Krugman will quickly drop his partisan hackery. He's unfair to his enemies, but he does not suffer fools gladly. And it's safe to say that a year into Obama's presidency, there will be plenty of folly for Krugman to decry.

~ Bryan Caplan

Saturday, October 11, 2008

you may want to reread thursday's post

I edited (i.e., rewrote) Thursday's "Mr. Answer Man" post. I hope it is now clearer as to what I was trying to accomplish.

Be blessed.

Friday, October 10, 2008

bird & fortune on the credit crunch.

Another satirical skit from Brits John Bird and John Fortune.

Note: The City refers to the financial district in London. Punters are people who place bets; sometimes slang for customers.

Bird and Fortune video on the credit crunch

Thursday, October 9, 2008

mr. answer man and the financial faqs

No, that is not the name of a rock band.

Today I’m here to answer frequently asked questions (FAQs). Many people seek advice, knowledge and insight from me concerning financial matters. I am a professor of economics who never took a course on financial markets and I am quite often able to play Dave Ramsey DVD’s at 57 Market on Tuesday nights. Despite these credentials, I receive no fees or payments for my advice. Therefore such advice is not only completely unbiased but also unencumbered by any knowledge of how real financial markets actually work.

Let the questions begin.

Q: Before the current meltdown, what was your advice to folks with some savings looking to invest?

A: Very standard stuff: 1) diversify your portfolio between different types of stocks and bonds, 2) if one was over 50, totally investing in stocks was considered aggressive; 3) use indexed mutual funds in different categories of stocks and bonds.

Q: What does aggressive mean in terms of investing?

A: Risky. Highly aggressive means a taking a roll of the dice.

Q: How did these people do who sought the standard advice?

A: Not very well. People tended to take only parts of the standard advice. For example, a couple in their late 50’s put all their money into stocks, going for better returns, rather than mix in some bonds to diversify. They did use indexed mutual funds to diversify among stocks but otherwise felt comfortable pursuing a more aggressive strategy. Then this year the stock market tanked.

Q: What was their reaction?

A: It was my fault.

Q: Do people who are in their 20’s or early 30’s seek advice?

A: Yes, but they tend to totally ignore me. Last year a young man sought my advice. This guy knew nothing absolutely nothing about investing, markets, or anything. I doubt he had ever read anything more sophisticated than Newsweek. He listened politely, thanked me for my advice and then told me, “I feel very comfortable in my ability to judge which companies to invest in.” He sunk his money into a couple of Chinese companies. Within six months the Chinese stock market fell 70%.

Now I don’t mind if people do not take my advice. I even prefer they don’t ask for it in the first place.

Q: What can we learn from these examples?

A: Feeling comfortable is of the utmost importance.

Q: Are you being sarcastic?

A: Yes... No... Well sort of... Sarcasm is the lowest form of humor. I'm shooting somewhat higher. The rest of this post is a ham-fisted attempt at satire. Maybe tongue-in-cheek could describe it? Good satire is like sarcasm only with style and wit, like the Bird & Fortune skit. Bad satire makes the author look like a "I think I'm so much smarter than you but really I'm nowhere near as witty as I think I am" little snot.

Sarcasm, and even the best satire, is often difficult to convey in writing. The tone of voice, facial expression, and body language which help people detect sarcasm or satire is absent.

I'm not that good a writer but I hope I'm achieving more than mere sarcasm.

Q: And what level of achievement might that be?

A: I'm trying to be a smart aleck.

Q: Didn't your mother repeatably tell you that no one likes a smart aleck?

A: Yes. However, I ignored her sage wisdom and now I have no friends.

Let's get back to how to feel comfortable....

Q: So, feeling comfortable is of the utmost importance. Has this conclusion affected how you handle your personal investments?

A: Absolutely. I feel comfortable ignoring the tons of research showing indexed funds beat the returns of the vast majority of funds actively managed by professionals, professionals with teams of highly paid experts whose whole lives are devoted to picking stock winners. I feel comfortable moving around funds, not to pick winners, but to time changes in broad market trends. But then it is easy for me to feel comfortable: I have both a Ph.D., and more importantly, a subscription to the Wall Street Journal.

Q: What is your personal investment strategy?

A: The usual cliché is to “buy low and sell high.” However, I take a very old, often utilized contrarian approach thereby finding opportunities which escape those who follow the conventional wisdom. This approach also allows me to cope and feel comfortable with market volatility.

If one part of the stock market goes down and I lose a lot, I sell so I don’t lose anymore. I then reinvest in parts of the market that have been doing well, parts that have already risen. This contrarian strategy of “sell low and buy high” makes me feel comfortable in that I know I won’t lose anymore in the declining sector and instead I am going with a proven winner. I can then wait until the market goes back up to get back in, feeling comfortable that I have bought quality investments.

I also feel comfortable knowing that I am not being a passive investor. I feel in control rather than a victim of impersonal market forces.

There has been much research showing that over the past one-hundred years this contrarian, sell-low-buy-high approach consistently yields quite stable, although negative, returns. Stable returns are very important since volatility, or instability in the market, makes people feel uncomfortable.

Q: Wouldn’t putting money in a federally insured bank account be stable with better returns?

A: There are pros and cons, and therefore trade-offs that need to be made with any investment decision. On the minus side, returns (interest rates) on bank accounts are very, very low. On the plus side, the returns are positive. This is a difficult trade-off.

However, bank accounts make you a safe, namby-pamby passive investor rather than an aggressive investor. No opportunity for using the brains God gave you. No chance of losing but no chance of lucking out, scoring a big gain.

Not aggressive? No control? Conclusion: No cojones.

Bank accounts are for sissies.

Q: Any suggestions for particular investments given the current market?

A: If you want to feel comfortable, buy gold. Gold has a high price. I was listening to a talk show on AM radio, when during a commercial break Pat Boone was paid to say that now is the best time to buy gold. Gold is the perfect investment trifecta: gold fits the contrarian investment strategy, gold dealers sponsor right-wing nut case radio, and gold is endorsed by Pat Boone.

Q: Thank you RB?

A: You’re welcome. Be blessed.

Wednesday, October 8, 2008

it 's back: banned snl skit

The scoop on why the video was removed in the first place, according to Courtney Hazlett of MSNBC:

"The issue involved the onscreen text displayed along with two of the characters in the sketch, Herbert Sandler, who’s been affiliated with some of the lending practices that brought down Wachovia Bank, and his wife Marion. The text that showed on screen under their names in the original skit was “People who should be shot.” It’s been removed." (source)

It is now back on

Tuesday, October 7, 2008

banned snl skit: the bailout

The dead-on Saturday Night Live skits poking fun at Sarah Palin are wonderful even if not complimentary. Last weekend there was a great skit about the bailout. It poked fun at Nancy Pelosi and Barney Frank. If you saw any of Pelosi on the news last week you'd recognize what they were making fun of.

This skit has been yanked from The following is from YouTube but who knows for how long it will be available there.

If it disappears, you can go HERE. (If you have trouble, keep trying. Traffic to the site has been heavy.)

It is sad when Saturday Night Live is the most politically even-handed show on a major television network.

Be blessed.

P.S. The skit was apparently pulled because they used the real names of some non-celebrities in the skit and NBC was afraid of legal problems.

Monday, October 6, 2008

roundtable discussion on the financial crisis

The Student Investment Club & the Economics Department present:

A Faculty Roundtable on the Current Financial Crisis

Tuesday October 7 at 7:00pm in Hepburn Auditorium (Room 218)
Click for St. Lawrence University's campus map.

~ Interested in learning about the current financial crisis?

~ Wondering how we got into this mess and how we might get out?

Members of the Economics Department will offer explanations and analysis followed by Q&A.

Speakers: Bob Blewett, Brian Chezum, Peter FitzRandolph, Steve Horwitz

Sunday, October 5, 2008

the very first wall street bail out

The first recorded instance of a shady financial dealing on Manhattan was in 1626. The Dutch bought the island from some Indians who lived in Brooklyn rather than from the Weckquaesgeeks who actually lived on Manhattan. The Weckquaesgeeks, not recognizing the validity of this contract, resorted to a certain method of conflict resolution: Kill the Dutch.

The Dutch West India Company, the effective colonial government, decided to bail out the settlers in 1653 from the effects of the earlier questionable financial dealings. Under the direction of Peter Stuyvesant, defenses were strengthened by building a 12-foot-high wall of earth and timber across the southern end of the island.

Surveyors laid out a street along the wall or stockade in 1685. The wall was later dismantled in 1699 after the British took title of Manhattan from the Dutch. (A real estate transaction swapping Manhattan for Suriname in South America.) Of course this path became known as Wall Street.

Thus a bail out by a government led to the creation of Wall Street. It was merely the first, and certainly not the last bail out on Wall Street.

Be blessed.

Saturday, October 4, 2008

shakespeare - stark raving sane tour

Beside the fall colors and the geese flying south in formation, a sure sign of fall is the return of the American Shakespeare Center (formerly known as the Shenandoah Shakespeare Express) to the North Country.

"Shamelessly entertaining"
~ The Washington Post

"Blowing the cobwebs out of Elizabethan drama"

Tickets for the SLU performances of the Stark Raving Sane Tour - 2008-2009, October 26th through November 1st, are now on sale at the Brewer Bookstore and Student Center for $5.00 each.


Sunday, October 26 - The Comedy of Errors, matinee 1:30 pm
Monday, October 27 - Hamlet, 7:30 pm
Tuesday, October 28 - Rosencrantz and Guildenstern are Dead, 7:30 pm
Wednesday, October 29 - Comedy of Errors, 7:30 pm
Thursday, October 30 - DAY OFF
Friday, October 31 - Hamlet, 7:30 pm
Saturday, November 1 - Hamlet, 7:30 pm / Rosencrantz and Guildenstern are Dead, 12 midnight

VENUE: Eben Holden (CLICK for campus map)

Be Blessed!

P.S. A BIG Happy Birthday to her!

Friday, October 3, 2008

cause and effect: greed vs. feng shui

"I'm shocked, shocked to find that gambling is going on in here!"

~ Captain Renault, Casablanca (1942)

Last night both vice presidential candidates cited greed as the cause of the current financial crisis. Earlier this week presidential candidate Obama also used greed to explain the crisis. However, I think candidate McCain was the first to use the G-word to help us all understand what was behind the mess.

I'm shocked, shocked to find that there is greed on Wall Street!

When did this start? In the late 18th Century? That is when traders and speculators met informally to trade under a buttonwood tree on Wall Street. In 1792 these traders formalized the market with the Buttonwood Agreement, which is the origin of the New York Stock Exchange.

However, south Manhattan has been home to greed even longer. The first recorded instance of financial fraud there occurred in 1626. That is when the Dutch bought the island Manhattan from the Canarsies for beads and trinkets worth $24. Problem: the Canarsies lived in Brooklyn. The Indians who lived on Manhattan were the Weckquaesgeeks. No wonder the Dutch were able to buy it so cheap!

What is new or different about greed in financial markets? How does greed explain what is different that brought about this financial crisis?

Greed is a constant. A constant can't explain a change.

I have a far, far, better explanation: feng shui.

When the Towers came down on 9-11, this drastically rearranged the physical layout of the south end of Manhattan (i.e., Wall Street). Work on rehabilitating the area has been quite slow. The feng shui changed, the cosmic harmony changed, and soon after the chain of events that led to September 2008's crisis started to play out. What do you expect to happen when you mess with the feng shui?

I didn't say this was a great explanation or even a good one. But it is far superior to greed as an explanation.

Be blessed!

Wednesday, October 1, 2008

a 21st century run on the bank.

Remember the run on the bank scene in It’s a Wonderful Life? That was a dramatization, with a happy ending, of what happened 75 years ago. However, 75 years ago the happy ending didn't always happen in real life.

Two weeks ago another run almost happened. Before I go on, you may want to refresh your classic-film-scene memory:

The Bailey Building & Loan was not strictly speaking a bank, but it was a middleman between depositors and borrowers. That is what banks and other financial firms generally do. A modern version of this is a Money Market Fund (MMF). With MMF accounts, people deposit cash with an investment company who then buys short-term government bonds and corporate debt. (This deposit is NOT to be confused with a type of deposit with banks. Those are just bank accounts with a deceptive name to make you think it is a MMF account.)

MMFs are an important source of funding for corporations. (Like in the Home Depot example from yesterday’s post.) Two weeks ago there was the beginning of a run on these accounts, accounts that held over 3 trillion dollars.

What happened? Just like in the movie scene, depositors were afraid of losing their money: money that was backed by short-term corporate debt, also known as commercial paper. Going back to yesterday’s post, the price of this debt was falling due to fears of AIG failing and credit swaps in general possibly failing. So, MMF assets were approaching the point where they were worth less than the value of their deposits, to where they did not have the means to back all the deposits. In the case of one fund, it did “break the buck,” meaning a dollar of deposits being worth less than a dollar.

If you had a deposit in a MMF, what would you do? If you were on the ball, you’d try to get your money out while you could. You'd want to be first in line too! Just like in the movie scene above. To pay off deposits, the MMF would have to sell their commercial paper. Who would buy it? The other MMF’s are in the same situation. With everyone selling and no one buying, commercial paper prices will crash. MMF deposits would be paid back at less than a dollar, if at all.

Let’s reimagine the scene from It’s a Wonderful Life. Do you think even Jimmy Stewart would be able convince people to keep their money on deposit if they knew that Joe's house, the Kennedy house, and Mrs. Macklin's house, houses that their money was in, had been hit by a tornado and there was no insurance?

That is why after the AIG deal two weeks ago, the federal government insured MMF accounts for a year. They weren’t bailing out anyone so much as they were stopping a 21st Century run, a present day panic.

What if our government hadn't decided to "bail out" the MMFs with federal guarantees? MMFs are a major source of short-term corporate financing. If that financing dries up, we are back to the big fat hairy recession scenario mentioned yesterday.