Posted by Red Mercury on Thu, 13 Nov 2008 22:39 | #

If we get “D”(epression) , “H”(yperinflation), and “W”(eimar), maybe we’ll get “F(reikorps = right-wing patriotic militia) ? One can only hope.

This is beyond politics, I’m afraid.

Posted by zuwr on Fri, 14 Nov 2008 07:57 | #

I hope you don’t mind pissing on details here.  Forcing people out onto the streets does not lead to wealth centralization.  It leads to empty houses and nonperforming mortgages.  People can default on underwater properties and walk away.  Housing prices will fall to an equilibrium and the banks that wrote the mortgages go under.  Housing is also an elastic good - meaning it is possible to cram extra people into a building.  Demand for housing can fall.  It is better from the banks point of view to keep people in place paying *something* on the mortgage.  In my view, the loan modifications might have a wealth centralization effect.  The modifications prohibit discharge on mortgage debt through bankruptcy and give the banks 50% of the upside in home appreciation should the house be sold.  Under a hyperinflationary scenario, the 50% slice is captured by the banks rather than the home owners.

Posted by James Bowery on Fri, 14 Nov 2008 18:48 | #

I hope you don’t mind pissing on details here.

Better a friend pissing on details than a foe pretending details are central to “poke holes” in my case.

Your point about loan modification is good and you will agree it is enabled by the enormous gifts to the financial elites by the political elites.  Moreover, people are more likely to enter into these quasi slave contracts if they are under serious stress—stress that can result from walking down the elasticity curve in housing.

But if you will permit me to return the favor of pissing on a detail:

Keep in mind that, as long as tenants hold title to the their houses, they stand a good chance of recovering their equity when the government monetizes its debt and this is what the banks _really_ want to avoid.  The banks, on the other hand, holding onto an empty house in which they have total equity are protected from hyperinflation, and the bailout makes it feasible for them to hold out for quasi slave terms to readmit the tenants.

I think you may be confusing relative and absolute here.  Yes, it is true that everyone, the wealthy included, are worse off in an absolute sense when wealth is centralized.  But that’s a different question from whether the wealthy are made wealthier in a relative sense—which is the definition of wealth centralization.  Especially when facing a hyperinflationary potential, this is central since the parasites will be fleeing to healthier human ecologies and presenting assets that must hold their value to the destination human ecology’s leadership (quasi slave owners), despite monetization of debt in the human ecology that was the parasite’s prior victim.

My measure of wealth centralization is the distribution of in-place liquidation value.  It seems to me that those receiving these enormous “injections of liquidity” are in a wonderful position not only to foreclose, but to buy up huge amounts of hyperinflation-proof assets at deflated in-place liquidation values—and that to the extent they are able to carry their debt-service burdens to the other side of the deflation, they’ll emerge with a greater percentage of the economy’s total in-place liquidation value than when they went in.

Posted by j on Fri, 14 Nov 2008 20:37 | #

The idea that those with access to credit will buy up solid properties and pay back their debt with inflated dollars looks good on paper but does not seem to be happening. On the contrary, what they seem to be doing is selling to hoard cash.

Historical experience does not record the result you predict. Inflation creates disorder instead of order and concentration of capital. Mostly, it seems to bring about a dramatic change in political regime and war.

War is necessary for capitalism because creates demand and puts into work the country’s productive potential.

Posted by James Bowery on Fri, 14 Nov 2008 22:24 | #

j, I think Søren has your answer: 

We’re in a new evolutionary regime where the old adaptations aren’t working even as “well” as they did during Weimar.

There is a lot of thrashing going on.

Posted by zuwr on Fri, 14 Nov 2008 23:45 | #

My view is that the banks would rather be a co-owner (via loan modification) of a house than the sole owner.  There are costs that the banks want to avoid such as bankruptcy proceedings, tenants trashing out the houses when they get kicked out, local increases in property taxes, broken windows and the resulting rain damage, “empty house taxes”, and the headache of squatters.  Empty houses get their copper pipes rip out and sold for scrap.  In a hyperinflation scenario, the scrap is actual worth something.  In short, transaction costs.  Being a co-owner in a property gives the bank someone to look out for their interests.  Banks are understaffed to be large scale property owners and that isn’t their skill set.  The prior scenario under the Resolution Trust Corporation (for the S&L;crisis) had the large blocks of property auctioned off to investors on the cheap.  It could go that way, especially with Fannie and Freddie’s empty property portfolio, but I don’t see yet it for the mortgages held by banks.  Having a performing asset, a mortgage being paid off, is better than having a nonperforming asset, an empty house, on the balance sheet.  The red flag that attracts attention to a failing bank is the Texas ratio (which is nonperforming assets divided by equity and loan loss reserves).  Too many nonperforming assets on the balance sheet means the FDIC takes over the bank and permanently bars the managers from ever working in the banking industry again. 

I agree that the bailout furthers wealth centralization, but I disagree about who is benefiting.  The lack of disclosure is one reason.  It appears that AIG made massive losing bets.  Letting AIG fail means that AIG’s counterparties, we don’t know who they are, don’t collect on their bets.  The bailout for AIG benefits not necessarily AIG, but the those who bet against AIG.  If AIG goes bankrupt, then we will be able to find out who these people are via the bankruptcy process.  We’re talking about a hundred CDS traders and their backers in New York and London.  Possibly CDS traders already based in greener locales. 

As for the loans and equity stakes in banks, the titans of the banking industry benefit from economies of scale.  Merging banks means that the IT staff of one bank can be let go and the cost savings go towards executive bonuses.  This increases the compensation of a handful of banking executives relative to everybody else.  Banking is made up of processes which are well suited to automation.  There are 8,000 banks which can be merged into 11 banks (the maximum is 10% market share for any one bank).  I suggest that making funds available first to the big banks (and allowing American Express, Goldman Sachs, and Morgan Stanley to become banks) will further bank consolidation.  This comes at the expense of smaller banks.  The Treasury also changed a long standing tax rule to further accommodate bank consolidation.  Before prior losses from an acquired bank could not offset further gains for tax purposes.  This creates tax saving in the billions of dollars as an incentive for bank mergers.  Since Congress alone has the power to raise revenue, this is illegal and unconstitutional.  Good Summary here: http://thebusmansholiday.blogspot.com/2008/11/quiet-windfall-for-us-banks-washington.html 

Henry Waxman, surprisingly, gets something right.  He actually asks that the banks which have received government money disclose employee compensation.  Here:  http://oversight.house.gov/documents/20081028142314.pdf  He doesn’t want government money to go in one door and out the other.  The bailout should be thought, first, of as: who gets paid immediately?  Loan modification and bank consolidation has benefits on a longer scale, but I feel the bailout is mainly about getting cash now before Bush party train derails.

I am not sure that the banks necessarily get screwed in a hyperinflation scenario.  They get screwed if they issue fixed rate mortgages.  They do not get screwed if they issue floating rate mortgages.  Greenspan has been recommending that banks issue floating rate mortgages for years.  Doing so reduces the interest rate risk on a bank’s balance sheet. 

Maybe I am being a stick in the mud.  I can’t imagine the banks holding 15% of the housing stock -empty- in foreclosure.  I think this is a political impossibility.  The sheriffs and politicians wouldn’t push for eviction.  Housing stock only produces income if it is rented or sold.  It is not like the housing market can be cornered.  If it is so important for banks to gain the title to these properties before hyperinflation, then one would expect to see the shut down of government lending programs for home owners.  FHA still has a 3% down payment program.  The Dems want this to be 0%.  I can imagine consolidation in the banking sector, it has been happening since they started using electronic record keeping.  Gains in market share is something which can be defended.

“My measure of wealth centralization is the distribution of in-place liquidation value.” I assume that this equivalent to the Gini coefficient.

Posted by zuwr on Sat, 15 Nov 2008 04:46 | #

Giving it some more thought: try flipping the model around.  The US is the destination of assets this time, not the source.  The game’s not up in the US.  Antisemitism is low and all the politicians are bought.  The people are not organized to protect their interests.  Countries which have undergone recent government privatization programs are the sources.  Sure it will be bad here, but nothing like what countries in Eastern Europe will go through.  When the people of the US feel that same way about Israel as the Iraqis do, then its time to leave.

Posted by torgrim on Sat, 15 Nov 2008 05:06 | #

“The prior scenario under the Resolution Trust Corporation (for the S&L; crisis) had large blocks of property auctioned off to investors on the cheap.”-(Zuwr)

It worked back in the 80’s because only a portion of the economy was affected. This time they may have overreached, and the economy may have gone, “critical”. Under the Monetary Control Act of 1980, Sears along with other “retail” businesses, were granted the title of bank and placed under the FDIC, I suspect the reason for this was to allow expansion of consumer credit to offset the fiasco, of 14%, Prime Rate at the time. Now we have had, just before this blew up, a change in the Bankruptsy Laws. A coincidence? I think not. The “powers that be”, are going to put the, “hard lein on”, those with access to money, (read here) those that are bailed out, will pick up the bargains and those on the outside will be fighting over lower wages, higher fuel prices and jobs.
Just like 1980-85, only on a larger scale.

Posted by Fred Scrooby on Sat, 15 Nov 2008 06:27 | #

“The US is the destination of assets this time, not the source.  The game’s not up in the US. [...] Countries which have undergone recent government privatization programs are the sources.  Sure it will be bad here, but nothing like what countries in Eastern Europe will go through.”  (—zuwr)

Not just Eastern Europe.  Iceland’s banking/financial sector is in free-fall and the government there hopes — hopes, mind you — to make it through the winter with money enough in foreign reserves to purchase necessary food, fuel, and medicines: 

http://www.voxeu.org/index.php?q=node/2498

http://obsidianwings.blogs.com/obsidian_wings/2008/11/iceland.html

and some are asking if the U.K. could be next:

http://blogs.ft.com/maverecon/2008/11/how-likely-is-a-sterling-crisis-or-is-london-really-reykjavik-on-thames/

“Just like 1980-85, only on a larger scale.”  (—Torgrim)

So you’re against Reaganomics, Torgrim?

Posted by torgrim on Sat, 15 Nov 2008 16:08 | #

“So you’re against Reaganomics, Torgrim?”—Fred.

Reagan inherited the inflationary economy, from LBJ, Nixon and Carter, ie., the Vietnam War and the Great Society. When Arthur Burns the FED chief resigned, the new chief Vollker, took a sledge hammer approach to the Production Economy, basically, that economy never recovered. The neo-cons were pushing the Supply Side economics with Rothbard and the Libertarians. Reagan managed to get the taxes reduced, inflation stopped, but it was at the expense of the production economy. CD’s, certificates of deposit were paying out at 10% per annum for years, the middle class shrunk, and the US, started to lose the production base of it’s economy.
In my opinion, Fred, Reaganomics, addressed the inflationary spiral, at the cost of our production base,- part of the economy. Now with a smaller economy, today, less- tax base, smaller middle class, this recession may be unmanageable, there is just not the taxable wealth there was a generation ago. The government is going to get serious about collecting money, fees, taxes, fines, licences, bankruptsy laws changed, etc. ie., “the hard lien”.

Posted by James Bowery on Sun, 16 Nov 2008 00:32 | #

My view is that the banks would rather be a co-owner (via loan modification) of a house than the sole owner.

Are you referring to the state of affairs after mortgage modification?  A bank that merely backs a mortgage is not an owner since it does not enjoy the capital gains at the sale. 

You make a good case that transiting to the “empty house” state is nasty—so nasty that the banks would much rather become co-owners under a modified mortgage plan.  They also have the option to simply auction the properties, yet so many properties sit empty—not even auctioned—while people go homeless.  Clearly something needs to be explained here since the banks so frequently turn their backs on two superior alternatives—both involving occupancy—and opt for the third and inferior alternative of an empty house.

Letting AIG fail means that AIG’s counterparties, we don’t know who they are, don’t collect on their bets.  The bailout for AIG benefits not necessarily AIG, but the those who bet against AIG.  If AIG goes bankrupt, then we will be able to find out who these people are via the bankruptcy process.

Cui Bono?  That will in/validate the distribution of hypotheses here and is very important information to acquire.

the bailout is mainly about getting cash now before Bush party train derails.

Well, yes… That’s why I tend to think of it as a “take the money and run” scenario.

I am not sure that the banks necessarily get screwed in a hyperinflation scenario.  They get screwed if they issue fixed rate mortgages.

The problem is political.  If the US government is monetizing its debt, there will be enormous pressures to let mortgage holders do so.  That can result in a cap being placed on ARM’s.

If it is so important for banks to gain the title to these properties before hyperinflation, then one would expect to see the shut down of government lending programs for home owners.

I expect there is a divergence of interest between the financial elites and political elites going on here.  Highly centralized wealth and central planning are two sides of the same coin but they _are_ two sides.

“My measure of wealth centralization is the distribution of in-place liquidation value.” I assume that this equivalent to the Gini coefficient.

Yes with a couple of provisos:  1) the Gini coefficient doesn’t adequately take into account the political economy’s nonlinear effects as people drop below subsistence.  2) The Gini coefficient is almost always used to measure income rather than wealth.  This is so pervasive that it has acquired the corresponding connotation—a connotation that results in further conflation of the central distinction in political economy between economic state and economic action.

Giving it some more thought: try flipping the model around.  The US is the destination of assets this time, not the source.  The game’s not up in the US.  Antisemitism is low and all the politicians are bought.  The people are not organized to protect their interests.  Countries which have undergone recent government privatization programs are the sources.

The communist countries are just ahead in the cycle.  That’s why “Russian” is the top demographic correlate with all other US ecological variables:

http://laboratoryofthestates.com/

and these very strong ecological correlations are highly virulent:

http://tinyurl.com/6zjdd6

Posted by Eman on Sun, 16 Nov 2008 06:07 | #

“I thought that the Jewish group organism would use the crisis brought on by the centralization of wealth to just grab the money and run…”

Normally Jews would take the money and run, but there is nowhere left for them to run to.

Each country has a Jewish carrying capacity, and that limit has been reached in nearly every place they could possibly scurry away to.

Posted by zuwr on Mon, 16 Mar 2009 19:53 | #

“Letting AIG fail means that AIG’s counterparties, we don’t know who they are, don’t collect on their bets.  The bailout for AIG benefits not necessarily AIG, but the those who bet against AIG.  If AIG goes bankrupt, then we will be able to find out who these people are via the bankruptcy process.”

And now we know who AIG’s counterparties were.  Goldman Sachs tops the list. 
Here:
http://www.businessinsider.com/henry-blodget-goldman-sachs-wins-big-in-secret-bailout-via-aig-2009-3