Tag: economics

Escape from New York

New York tries the California model as yet again, mainstream economists demonstrate their irrelevance by completely failing to consider the primary factors involved. I know nothing about New York’s revenue estimation models, but I can guarantee you that they don’t take into account any change in taxpayer behavior based on changes in the rates, much less changes in their income levels:

New Yorkers are fleeing the state and city in alarming numbers — and costing a fortune in lost tax dollars, a new study shows. More than 1.5 million state residents left for other parts of the United States from 2000 to 2008, according to the report from the Empire Center for New York State Policy. It was the biggest out-of-state migration in the country. The vast majority of the migrants, 1.1 million, were former residents of New York City — meaning one out of seven city taxpayers moved out…. What’s worse is that the families fleeing New York are being replaced by lower-income newcomers, who consequently pay less in taxes.

It’s simply incredible that a profession which is largely built around the concept of equilibrium pricing staunchly refuses to consider the effects of the cost of debt and taxation. This is just the most recent example; in RGD I cited an even more dramatic tax migration from the city of Baltimore. Of course, the fact that mainstream economists don’t bother to include either debt or taxation in their models makes their decision to exclude the price of housing, food, and fuel out of the “Core CPI” statistic a little more comprehensible. After all, you’re no more likely to eat, drive or own a house than you are to pay taxes or buy things on credit.

By the way, the WND publicist has embarked upon a fairly aggressive radio campaign, so I’m doing something like two radio shows a day, starting today. If you want to follow along and listen to me say pretty much the same thing over and over again, the schedule is posted at the RGD blog. The link on the right under the book cover, cleverly entitled “RGD Radio Schedule”, will take you to the page which will be updated on a daily basis.

A brief note to the ankle-biters

On this fine afternoon, I find myself contemplating just what, precisely, could possibly be the purpose for your collective existence, which to the observer appears to testify against intelligent design and natural selection alike. I don’t pretend to understand what sickness of the soul causes you to repeatedly bash your heads against the unforgiving wall of my logic, or what compulsive disorder drives you to put yourselves in a position to be humiliated over and over again by my superior knowledge and intellect, as no sooner are you shot down than you rise, with all the sublime, shambling grace of a mindless zombie, and stumble back into the fray.

Are my ankles so sweet that you cannot resist snapping at them? Do your psychological scars run so deep that you cannot control your masochistic longings for brutal correction?

For years, I have told myself that even if your tedious and petty objections can only sharpen my arguments in the manner that butter sharpens steel, at least your desire to catch me in error, no matter how small that error might be, could nevertheless serve a useful purpose. Even the most flawlessly honed body benefits from its intestinal bacteria, after all. Although, unlike your more intelligent counterparts whose criticisms are thoughtful, substantive, and most of all relevant, you are not capable of understanding anything I write well enough to critique it in a meaningful manner, I assumed you were not only inclined to identify simple errors of basic fact, but were also capable of doing so.

It appears, however, that you have collectively failed at even this humble task. And this naturally raises a question. Is it possible that you could be more completely useless?

A few nights ago, I was reading Calculated Risk and noticed a link to historical pre-FDIC bank failure data. I followed it, being curious to know how far the official information parted from 1941 source material I had used in writing RGD. As I suspected, there were a few minor discrepancies as well as the usual Legend of the 4,000*. (The actual number of failed banks in 1933 is closer to 2,666, but the government always enjoys a nice round number.)

However, to my surprise, the number of failed bank deposits 1931 was much larger than I recalled it being. I checked my trusty and oft-updated bank failure spreadsheet and confirmed that the two not only did not match, but were not even close. The site said 1,690,232 and the spreadsheet said 160,232. The disturbing similarity made me suspect that the latter was supposed to be the former, albeit with a missing digit, and a check of the 1941 document confirmed the error. I had dropped the nine in when first typing the number into the spreadsheet… which significantly altered the percentage of bank failures about which I’d repeatedly written on this blog, in my column, and worst of all, in the book that was going to be announced the next day!

I couldn’t remember which chart I had put in the book. Which chart, dammit? Was it the year-by-year one, in which case the error would look like an absolute howler since the percentage of failed bank deposits would not be 0.34% but 3.6%? Or was it the cumulative chart wherein the difference between $68 billion and $90 billion would be visually negligible in comparison to the $666.6 billion in the neighboring column? And then, of course, there was the small matter of whether this error might call some of my conclusions about the similarity of the historical and present economic contractions into question.

Fortunately, Figure 6.3. Failed Bank Deposits and Losses in 2009 Dollars turned out to be the cumulative chart rather than the year-by-year one, which did not make the book. It was incorrect, but not embarrassingly so. The listing in the appendix couldn’t be helped, since the 160,232 number was directly in the table, but who reads the third appendix anyhow? Also, in that context it’s quite obviously a typo. And fortuitously, correcting the error also took care of a synchronicity problem that had been bothering me from the start. Since my belief is that 2010 compares 1931, why didn’t the bank failure data line up properly? And why was I following Milton Friedman’s lead in tracking the deposits from 1930 when the whole thing began in 1929?

Interestingly enough, exchanging the 1929 data for the incorrect 1931 data only required changing a single digit besides the year: “The amount of failed bank deposits as a percentage of total bank deposits is averaging 2.3 percent per year over the last two years, which is more than twice as high as the 1.01.1 percent annual failure rate in 19301929 and 19311930.” And now the bank failure comparisons are properly aligned with the beginnings of the economic contractions, which is nice.

Still, the typo involved in transferring the information from the book to the spreadsheet notwithstanding, I couldn’t believe that I hadn’t noticed an order of magnitude difference in the amount of failed deposits, especially when this meant that losses were more than 200 percent of failed deposits. This is theoretically possible since not all bank assets are deposits and actual losses are always higher than FDIC-estimated deposits, but the highest estimated actual loss to deposits in 2009 is only 107 percent so that should have been sufficient to signify that something was wrong. Ergo, mia culpa. I have, of course, created an errata page for the book and would appreciate it if any further errors are brought to my attention so that I can update it.

But, to return to my original point, if those of you who have dedicated yourselves to identifying and drawing attention to even the pettiest of my errors cannot be relied upon to catch such a relatively large and potentially significant mistake, you leave me with little choice but to conclude that you are, in fact, entirely worthless.

Okay, that was timely

Two days ago, I wrote this on the RGD blog: “You can safely expect similar “surprises” to take place in the United States and Europe over the next three quarters.” This consumer confidence report would appear to be the first of many to come:

The Consumer Confidence Index, released by The Conference Board, sank unexpectedly to 47.7 in October — its second-lowest reading since May. Forecasters predicted a higher reading of 53.1. A reading above 90 means the economy is on solid footing. Above 100 signals strong growth.

The animals spirits, they descend.

WND depression poll

It’s interesting to see that an overwhelming number of WND’s readers – 88% at this point! – believe that the U.S. is headed for another Great Depression. I very much doubt they’re all readers of my column either. It would seem that neither the stock market rally nor the endless stream of happy talk from the politicians and the financial media has convinced many people of anything. Of course, what are mere words when banks like Citi are jacking up interest rates on credit cards to 29.99% and First Premier is charging 79.9% when depositors can’t get 2% on their savings accounts. Neither the Fed nor the politicians are going to be able to get the banks lending when no one in their right mind can afford to own a credit card. As Mike Shedlock points out, this isn’t a bad thing, it is in fact a necessary thing.

It’s pretty clear that those voting aren’t regular readers of my column, though, since 39% selected the option that says Obama is the most to blame. Obama isn’t even in the top 20 of those who are most to blame for the developing depression, although no doubt it will be a major part of his legacy. This event was a long time in the making and although Obama’s ill-considered actions have only made things worse, there was nothing he could have done to stop it. In fact, if he had acted properly, everyone would already be conscious that the depression is upon us and many people would be blaming him for that.

My answer is: “Yes, the Depression is, in fact, already here”. And even if the BEA avoids springing a UK-style surprise to the downside later this week, no pumped-up reports of “better-than-expected” 3.3% GDP growth later this week is going to change that.

I’ll be on the radio with our old friend Jerry Hughes discussing this and other things from 4-5 PM eastern. Listen in via the Internet broadcast.

History’s verdict

Economics and Moral Courage, by Llewellyn Rockwell, is one of the most intellectually inspiring articles I have ever read. It is a beautiful reminder of the transience of what we think is worldly success and accomplishment:

While Mises worked at the Chamber of Commerce because he was denied a paid position at the University of Vienna, [Hans] Mayer served as one of three full professors there, along with socialist Othmar Spann and Count Degenfeld-Schonburg. Of Spann, Mises wrote that “he did not teach economics. Instead he preached National Socialism.” Of the count, Mises wrote that he was “poorly versed in the problems of economics.”

It was Mayer who was the truly formidable one. Yet he was no original thinker. Mises wrote that his “lectures were miserable, and his seminar was not much better.” Mayer wrote only a handful of essays. But then, his main concern had nothing to do with theory and nothing to do with ideas. His focus was on academic power within the department and within the profession….

[Mayer] thrived before the Nazis. He thrived during the Nazi takeover. He helped the Nazis purge the Jews and the liberals from his department. Note that Mayer was no raging anti-Semite himself. His decision was a result of a series of discrete choices for position and power in the profession against truth and principle. For a time, this seemed harmless in some way. And then the moment of truth arrived and he played a role in the mass slaughter of ideas and those who held them.

Perhaps Mayer thought he had made the right choice. After all, he maintained his privileges and perks. And after the war, when the Communists came and took over the department, he thrived then too. He did all that an academic was supposed to do to get ahead, and achieved all the glory that an academic can achieve, regardless of the circumstances…. He played the game and that was all he did. He thought he won, but history has rendered a different judgment. He died in 1955. And then what happened? Justice finally arrived. He was instantly forgotten. Of all the students he had during his life, he had none after death. There were no Mayerians. Hayek reflected on the amazing development in an essay. He expected much to come out of the Wieser-Mayer school, but not much to come out of the Mises branch. He writes that the very opposite happened. Mayer’s machine seemed promising, but it broke down completely, while Mises had no machine at all and he became the leader of a global colossus of ideas.

If we look at Mark Blaug’s book Who’s Who in Economics, a 1,300-page tome, there is an entry for Menger, Hayek, Böhm-Bawerk, and, of course, Ludwig von Mises. The entry calls Mises “the leading twentieth-century figure of the Austrian School” and credits him with contributions to methodology, price theory, business-cycle theory, monetary theory, socialist theory, and interventionism. There is no mention of the price he paid in life, no mention of his courageous moral choices, no mention of the grim reality of a life moving from country to country to stay ahead of the state. He ended up being known only for his triumphs, about which not even Mises was ever made aware during his own life.

And guess what? There is no entry at all in this same book for Hans Mayer.

Mayer was the typical academic intellectual dwarf and richly deserves to be forgotten by history, but to me the ultimate villain of the piece is Friedrich von Wieser. Can you imagine having the opportunity to anoint either Ludwig von Mises or Joseph Schumpeter as your successor and then somehow deciding to choose neither of them? That has got to be the worst employment decision in the history of economics, and quite possibly academics. It may even have been the most calamitous if one thinks through how much unnecessary economic pain and devastation could have been prevented.

As brilliant and revolutionary as Mises was, I think I would have preferred to hire Schumpeter to head the department. His History shows that his perspective was unusually broad and saddling him with the bureaucratic responsibilities would have kept Mises free to focus entirely on research. Then Schumpeter could have gotten rid of Spann, hired Hayek, and you’d have had the greatest economics department in history despite its small size. And with that collection of highly functioning brainpower assembled in one place, it’s quite possible that they would have achieved sufficient prestige to prove capable of preventing the Keynesian ascension. What a tremendous opportunity for Mankind missed. And what an interestingly esoteric possibility for an alternate history novel….

Beyond EPIC FAIL

This account of a debate between Thomas Woods and Tom McInerney, ING Chairman & CEO Insurance Americas, fairly well sums up the disastrous ignorance of the global financial elite. Keep in mind, the clueless wonder is an Econ major from Colgate with an MBA from Tuck:

The extent to which [McInerney], ING Chairman & CEO Insurance Americas was outmatched, though, was revealed in this almost embarrassingly funny episode. McInerney had mentioned that Bernanke was a diligent and knowledgeable student of the Great Depression. So, when it came time for the Q&A, one audience member asked Woods to briefly explain the Austrian view of Great Depression and how it might differ from Bernanke’s view. After Woods did this, McIerney took the stage, and as if he were about to unload a devastating blow against Woods, said to him, “this might seem like a bit of an attack. Don’t take it too personally.” And then…. he began to rant about … the relatively small size of the country of Austria. I kid you not.

Some audience members began to laugh; others cringed, as McInerney dug his hole deeper while under the illusion that he was unleashing a deadly zinger. Woods kept trying to stage whisper that Austria had nothing to do with the school of Austrian economics, but McInerney, undeterred, plowed on. Thus, when Woods took the stage he said, “this might seem like an attack, but don’t take it too personally…” And then Woods commented that we may as well say we shouldn’t listen to Milton Friedman, since the GDP of Chicago is pretty low.

And this sort of thing is just one of the many, many reasons that I’m deeply unimpressed with appeals to academic, professional, or scientific authority. Perhaps McInerney should have pleaded the Courtier’s Reply as it’s almost, though not quite, as deeply stupid as his soliloquy on the Austrian economy.

And it gets worse. Thomas Woods comments: “Of course people are right to observe that relatively few people get exposed to Austrian economics. The point here is that I had just finished a 40-minute presentation on the subject.”

No wonder McInerney’s company needed a bailout. I have little doubt it will soon need another one.

The facade crumbles

The era of Fed extend-and-pretend appears to be fast approaching an end:

On Monday the Federal Reserve held a major reverse repo test, as was announced by the NY Fed and by Zero Hedge. We have subsequently received several unconfirmed reports that the conducted test has been a disaster (we have calls into the Federal Reserve to confirm or deny this, we are eagerly awaiting their reply).

In related news, Karl Denninger reports that JP Morgan/Chase is down to only $21 billion in actual cash. But don’t worry, they have lots of other assets… unfortunately, most of them are the sort that keep showing up at only 50 percent valuations whenever a bank is seized by the FDIC. All of the professional economists have been saying that the crisis is over for months now. I, on the other hand, don’t think that the next stage has even begun yet. But surely all the experts can’t be wrong… again!

Just one question

Karl Denninger notes that no one in the media seems interested in asking it:

Note that nobody in the mainstream media bothers to bring up “Prompt Corrective Action” and demand from Bair and rest the answer to one simple question: “How does a bank get into a situation where it has a 20, 30, 40, 50% loss on it’s asset base when Prompt Corrective Action and Tier Capital requirements are supposed to cause banks to be seized before ANY loss occurs?”

The present U.S. financial system isn’t merely based on sand, it’s based on the pretense of sand. Meanwhile, Mike Shedlock catalogs a surprisingly long list of stories about the incestuous Goldman-government circle before wondering why so few Americans are upset about the way a few financial interests are exercising their power to monopolize the economy for their own benefit and to the detriment of the nation, the economy, and the public. The post is well worth reading; I’m sure you’ll all be relieved to know that the responsibility for avoiding the regulatory failures of the recent past has been placed in the capable hands of the new COO of the SEC, a 29 year-old Goldman guy.

Unfortunately, since both the Republican and Democratic elite are beholden to the banks rather than to their party’s bases, there is very little chance of this coming to an end in a rational manner. A small percentage of the American people are infuriated already, but most are still fat and happily feasting on junk food regardless of their employment status. If they ever become lean and hungry, they’re not likely to sit idly by watching bankers pay themselves billions for stealing taxpayer money while they fall from the comfortable middle class into poverty.

It’s good to be a bankster now. But keep in mind, there was also a time when it was good to be a French aristocrat.

Mortgage and foreclosure fraud

Socionomics teaches that the end of a fifth wave, especially in a major bubble, is rife with fraud, forgery, and other financial shenanigans. One of the major ones that is still percolating is the massive amount of mortgage fraud that was committed by banks and other financial institutions in mass-producing home loans for securitization purposes. It increasingly appears that a statistically significant portion of the foreclosures in process are being pursued on a fraudulent basis by entities which do not actually hold the rights to the mortgage.

Helpful Guide For All States on how to research your recorded documents at county recorder and determine if there are forgeries or fraud when facing foreclosure…. More and more evidence in coming forth which indicates some of the notorious predatory lenders took shortcuts and did illegal document recordings and some with forgeries.

I’d heard rumors of some shady practices at the mortgage banks as long as seven years ago, but now it appears that documented evidence of them is coming to light. If you took out a loan any time in the last five to seven years, it’s probably worth checking out the public records to find out if your lender was one of the fraudulent ones or not. Of course, this may also explain why some banks have been so uncharacteristically slow about following through on pursuing homeowners in default; they may know they don’t actually have the right to foreclose on them.

As usual, it’s Karl Denninger who posted this first, as he is increasingly focused on the incredible amount of illegal activity taking place in the financial and federal sectors over the last year. On a tangential note, the U.S. deleveraging process appears to be continuing, as total loans and leases at commercial banks declined $146 billion in September. TOTLL is now down 6.8 percent YTD and 8.2 percent since the October 2008 peak of $7.32 trillion. This is not indicative of economic expansion, especially considering that this decline has taken place despite the Federal incentives encouraging people to take on new automotive and housing debt.

RGD: the Amazon launch

As some of you have already noticed, Amazon is listing The Return of the Great Depression, albeit with an incorrect release date of October 1st. For those intrepid readers who are interested in participating in the Amazon launch, it is scheduled for Sunday, October 25th, from 12 noon to 12 midnight Central. And, in order to provide some encouragement to those who remain undecided about picking up a copy, here’s John Derbyshire of National Review’s impression:

“Vox Day gives us a splendidly pessimistic look at the current economic mess based on a deep background in finance and global economic history. Written with style and wit – not to mention a good imitation of Dante. Read it, weep, then get on the phone to your investment advisor.”

UPDATE: Prediction time – Vox vs 43 expert economists:

The group asked 43 top economists last month if they believe the battered U.S. economy has pulled out of the worst U.S. downturn since World War II. Those surveyed include economists from leading Wall Street firms and major corporations, as well as from highly respected universities and research firms. Thirty-five respondents, or 81%, believe the recovery has begun. Only four, or 9%, believe the economy is still in a recession. The other four say they’re uncertain.

Thus spake Vox: the economy is in a depression, not a recession. It is occurring at a scale which the experts, with their myopic focus on irrelevant bottom-line quarterly GDP, have failed to recognize. The separation between the much-manipulated economic statistics and the real economy has become too great to credibly paper over, which will lead to either a complete junking of the very concept of GDP as a credible measure of economic activity, or more likely, a significant redefinition of GDP to enable it to more accurately reflect the real economy.

Positive GDP in the third and potentially fourth quarters does not mean the economy is growing, only that the government attempts to expand credit had limited success in pulling future consumption forward; such success will only last as long as the government-expanded credit programs continue to expand.

As per request, I am in the process of putting together some objective metrics that can be tracked in lieu of relying upon GDP and used to falsify my contentions, but note that positive quarterly GDP reports are not sufficient to formally indicate that a recession is over. Nor is there anything such as a “W-shaped recovery and recession”, that’s nothing more than economic posterior-covering and ignores the larger scale view.