Me thinks he deserves it.

Two economics/finance minded fellows that I thoroughly enjoy reading are taking Ben Stein to task. Stein recently layed out the notion that the financial markets exist to provide retirees with their nest eggs - Paul Kedrosky corrects, noting the markets are about liquidity, not serving the baby boomers. Barry Ritholtz simply bids farewell to Stein after Mr. Anyone, Anyone? tried blaming traders for recent market dips.

Take it easy on him, gentlemen. All Ben Stein is trying to do is perpetuate the myth that asset prices should (and will) go up forever, as long as everyone follows playground rules. To me it vaguely resembles a Ponzi scheme pitch.

Furthermore, I’m surprised it’s taken people so long to get a clue about this guy and his thinking.

Alan Greenspan is now promoting a direct taxpayer-funded bailout of homeowners. Mr. Greenspan has been trying very hard to shift blame for the mortgage crisis, but this statement takes the cake. Begging for increased Fannie Mae, Freddie Mac, and FHA limits serves much the same purpose. It’s socializing losses.

Be forewarned - a direction is being drawn. A 600 FICO score and a pile of credit card debt is no problem - you are hereby authorized to sign any borrowing agreement you can get your hands on. You won’t need to return that widescreen TV that’s now a part of your HELOC. That leased car you’ve already missed two payments on? It’s yours - just keep it.

It’s not a liquidity issue, or one of solvency. It’s a government problem.

A solution for your debt overindulgence is close at hand - you’re neighbor will soon be bailing you out.

UPDATE: More support for subsidies, at the high end of the market. The high end hasn’t started getting whacked, yet.

UPDATE 2: Yet more on neighbors, including how some are being hurt by the questionable decisions of others.

UPDATE 3: And back to blaming the Fed.

Paul Krugman speaks:

In past financial crises — the stock market crash of 1987, the aftermath of Russia’s default in 1998 — the Fed has been able to wave its magic wand and make market turmoil disappear. But this time the magic isn’t working.Why not? Because the problem with the markets isn’t just a lack of liquidity — there’s also a fundamental problem of solvency.

I’m personally divided on Krugman - I often categorize his opinions as bellyaching, sometimes borderline inane. In this case it is the exact opposite - flawless.

I’m not grave dancing - I’m outlining alternative tactics in my own head (and begging for ideas)

• A jobs report came out today, and it was the opposite of expectation. The Dow promptly tanked. I think there are still liquidity problems that need working out, and this just exacerbated the situation. Frankly, a few lost jobs would keep inflation in check - goddamit…I was just forced to spend sixty-five bucks on flies!
• Speaking of jobs, Countrywide is now laying off up to 12,000 workers. That’s a lot of brokers and backoffice folks out looking for work, and I can’t help but think it WILL affect online advertising.
• Another hedge fund comes clean - they were on the winning side of the subprime mess. The problem as I see it - it’s tough to gain a real edge unless you have tons of capital - there aren’t enough products available for the little guy to take advantage of.

I’ll ponder what to do while searching for trophy trout this weekend…not!

UPDATE: It seems the fixed income markets are looking for someone to blame…and finding it.

Prices are headed up. What a landmark piece of news! The Los Angeles Times reported Wholesale Prices Increase 0.3%. Not exactly a scoop.

Prices increase and decrease in trends. Traders (and the Fed) know this, but the government uses these funny little reports like the colored sign at Homeland Security.

We created a huge ATM network with real estate HELOC’s (home equity lines of credit), allowed the dollar to slide to pathetic levels, subsidized the food producers until we choked on our own gratuity, and gorged on foriegn goods supposedly in the name of cheaper prices, so this recent pop should come as no surprise.

Unfortunately, it didn’t need to happen that way, and Greenspan knows it.

We need to hop back on the bike and continue our ride to economic leadership. Rising interest rates will help us on this path. No I don’t believe it is going to stifle the economy, because the economy never recovered anyway. We are just back to where we were before the year 2000 bubble. Yes, we have another bubble in real estate, but the liquidity has already been sucked out of that cause. People have tapped themselves out of Sunday afternoon movies and shopping excursions already (they can’t afford anything besides their five mortgages).

The best course of action here is to raise interest rates. This will provide some ballast for the dollar. No, the stock market won’t crash, and neither will the bond markets - that would only happen in a closed economy, and the US (and the world) is anything but closed. This may, in fact, provide a big boost to the economy, the one we should be concentrated on instead of pissing and moaning about consumer spending . Business. The reason is two-fold.

First, rate increases start at the bottom, and work their way up. Bond spreads widen, profits are made, and that profit is redeployed capital. Second, and more importantly, a rising dollar will make foreign investors happy, as their balance sheets (in local currency terms), will balloon. But they won’t extract that capital, only to buy dollar denominated investments again later at even higher prices. No, they will keep that profit deployed here, on our turf, and likely leverage it into additional investment as well. Demand for investments puts downward pressure on the cost of capital, so businesses can still fund themselves at reasonable levels.

This (potential) dynamic is good for us. We are supposed to be the great innovators, so everyone should quit speculating on the ramshackle house on the corner, and start putting their minds to work.

As Peter Drucker once wrote:

“The basic economic resource - ‘the means of production,’ to use the economist’s term - is no longer capital , nor natural resources (the economist’s ‘land’), nor ‘labor.’ It is and will be knowledge…..
Value is now created by ‘productivity’ and ‘innovation’, both applications of knowledge to work.”

Now we all know it takes some amount of capital to climb the hump, but I believe rising rates won’t stem its availablility. So, turn off The World Poker Tour (you are the sucker at the table already), pre-sell the single family home build you just invested in (repeat after me: I am not a contractor), and start thinking and doing.

A Guardian Unlimited report yesterday declared Citigroup embroiled in bond selling scandal. According to the report, a couple of traders on the other side of the pond purportedly exchanged a memo where they conspired amongst themselves to make some money. Can you believe it? Securities traders planning to make money. As far as I can see, the only stupid thing they did was talk about it too much before they actually did it.

Excuse my sarcasm.

Ok, so these two traders hatch this plan to make some arbitrage profits. For those not in the know, arbitrage is the process of simultaneously buying and selling different (but often related) assets, in order to profit from the widening or narrowing of the price differential between said assets. In this case, the folks involved saw discrepancies in prices between German government bonds and cash bonds traded on the EuroMTS, the culprit being the varying liquidity between the two markets. Now the Eurex futures market is supposed to provide some balance here, but it, according to these traders, was not doing its job very well. So they decided to flood the market with paper, wait until the remaining liquidity dried up, then buy those same bonds back on the cheap.

Hey guys, next time you get ready to do this, please let me know, so I can toss a few bucks at you.

Crap-munch! This kind of thing has been going on since markets have been in existence. If EuroMTS, can’t take the heat, maybe they should get out of the kitchen (translation: if your market is short on liquidity, it isn’t going to last). Quit and let someone else have a go.

Now the Citicorp CEO is forced to do a little dance, and act like this was bad, and that heads will roll. Hey, I didn’t hear much pissing and moaning when ExxonMobil reported its largest earnings in history (see Dallas Business Journal article). That’s because the profits are coming out the little guys’ pockets, not some multinational “for-profit” market-making system. And for those that will soon whine about Citigroup having the wherewithall (i.e. pile of cash) to pull this off, well here is an analogy for you:

In a no-limit poker game, is the player with the short stack allowed some kindness from the players with the big giant stacks? NO NO NO! The short stack gets pummeled like a rotten melon, and sent home with tail between legs. Poker table = pure free market; European futures exchanges = need some work.

If you want to learn more about these markets, how they work, and how they are sometimes “stacked” for advantage, here are a few books worth reading:

Liar’s Poker by Michael Lewis (a classic) - get it here;

The Vandal’s Crown by Gregory Millman (limited availability)- get it here;

and for the hardcore study beast with ample time on their hands…

The Complete Arbitrage Deskbook by Stephane Reverre - get it here.

NOTE: the author does not condone breaking securities laws (including but not limited to illegal market manipulation), bankrupting third world governments, or churning the accounts of anyone’s grandmother. Please feel free to provide commentary regarding what these folks actually did that was wrong - I am happy to lay down if I am in err.