<!doctype html public "-//w3c//dtd html 4.0 transitional//en"> <html> Tom, it would be a real breath of fresh air if someone in Washington would admit to the same dilemma. In theory, the Chairman of the Fed has the power to maange the economy by addressing the interest rates and liquidity components as tools of US monetary Policy to achieve the stated of objective of the Federal Reserve Act of 1913, as modified by Humphrey-Hawkins. The Federal Reserve Act of 1913 mandates that "the Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates." Humphery-Hawkins, as we know, accepts full employment as 4% unemployed, below which is considered as economically "inconsistent" with inflation targets. In practice, the widespread of the securitization of debt, which allows borrowers to bypass banks to directly tap capital markets for debt rather than for equity, has in effect weakened the power of the Fed. Such developments remove the levers of control from government fiat and place them in the market where the lawful goals of the FR Act have no bearing (creeping illegality and unconstitionality?).  We are witnessing a massive leakage of the speicalized gas inside of the monetary balloon into the general atmmosphere of the open market.  Some economists think this is positive and some think negative, depending on their individual vision of economic purpose in society. Some economists may even think bubbles, like vacination, are good, because they purify/strengthen the post-bubble economy.  In theory, the view is arguable, except for those who happen to be among the innocent victims. The evolution of advance human systems makes it increasingly difficult to justify the sacrifice of individual cells (persons) for the good of the total social system (the economy), especially when the system celebrates mal-distribution as a merit. At any rate, Greenspan can no longer directly interfere with liquidity without paying the increasingly high costs of unintended and unwanted systemic consequences, such as excess deflation or inflation, unemployment, capital flight, runaway risk and above all, their political impacts. The fast emerging credit crunch is not just a bank liquidity problem any longer. Lowering interest rates by the Fed, a classic monetary tool,  will not solve the liquidity problem. The 3rd cut (November 17) since September 29 was greeting with a half-hearted applause from both the stock and bond markets, because since last summer, investors have fled risky markets for the safe haven of US Treasuries, causing the bond market to lead the Fed on interest rate policy, trading at levels that predicted even further drops in key rates.  The good news, according to market analysts, was that there will NOT be any more cuts before the end of 1998.  Greenspan is pushing on the credit string instead of pulling on it. For the last decade, debt securitization has incresingly shifted borrowing from banks to capital markets. Unlike bank loans which stay at par until there is an actual default, high yield bonds and securities are subject to daily market volatility. Institutional investors' share of the high leverage borrower market has grown from 1.7% to 19%, at the expense of banks.  Private debt jumped from 3% of GDP in 1991 during the downturn, to 14 % in 1998. While consumer debt peaked at an annual growth rate of 15% in 1995 and falls to 4% in 1998, business borrowing keeps growing at 14% annual rate. The credit crunch is a sign of more serious economic problems to come. Junk bond default rate remain at around 3%, yet the spread between 30 year Treasury and high yield bond increased because of the extra risk premium the market demanded. This was the major cause of the demise of LTCM. The tumult in the debt markets makes new construction loans and acquisition financing harder to come by for private real-estate investment trusts (REITs). REITs are byproducts the previous real-estate credit crunches.  Lenders, burnt by mortgage defaults in the beginning of the decade, were reluctant to lend when rents were low and properties were cheap.  REITs filled the vacuum by selling stock instead of borrowing to finance their acquisitions, an innovative approach.  As occupancy and rents rise in recent years, the US$200 billion REIT market delivered high returns: 35% in 1996, 20% in 1997, which in turn caused REIT share prices to rise and allowed the conservative debt level of 50% of asset value to arise in dollar terms, fueling a boom (bubble).  By the third quarter of 1998, REIT share prices have fallen 25% as a result of the plunge  in the stock market, cutting off access to new equity sources, despite of good real-estate fundamentals (high rentals and low supply).  A wave of REIT bankruptcies have started in recent weeks. The entire financial sector is bracing for massive losses to be followed by a long credit drought. In six months, Greenspan will give another speech, or testimony before Congress, explaining the phenomenon, as if belated understanding can ease the damage. There is not much he can do, because he knows that he is boxed into a corner where the cure can be worse than the ailment. IN ALLAN WE TRUST, except that there are increasing signs that Allan is dead. One more factor to take into consideration is "creative" corporate accounting procedures.  With a view towards the importance the market assigns to corporate earnings, distortive excessive write-offs to trade off for phantom future earnings improvements have become widespread gimmicks. The SEC has recently launched a study headed by Messr. Milstein and Whitehead (a lawyer and an retired investment banker respectively) to address this problem, which suggests that the impacts are systemic. This abusive manipulation of the earnings picture, while legal, contributes to the making of a bubble in asset value. Another equally serious problem is the systemic socialization of risk through structured finance.  The widespread use of derivatives to unbundle risks so that hedging against dis-aggregated risks can be priced at the highest level to serve those with targeted specific needs, creates the false impression of individual safety through extensive risk management.  This tends to cushion the downside (through risk management complacency) and inflate the upside (through ballooned efficiency expectations). Yet in fact the same degree of risks remains, because individual risks are only passed on to systemic risks, but the nature of the risk has become more serious, and added economic value comes mainly from accounting creativity. The counterparty of every hedge is a speculator, and in some blazen cases, the lack of regulation and transparency has permitted the counterparties to be the same entity, as in the case of LTCM.  Further more, when efficiency is defined as achievable via a reduction of caution, a higher peak then requires a lower valley. The defining characteristic of a bubble is that everyone inside the bubble crashes at the same time.  Structured finance has made that prospect more likely and less preventable. What is RCP website address? Henry C.K. Liu uswatl@ibm.net wrote: <blockquote TYPE=CITE>Dear LBOers, Last night I did a little late night surfing over to Russia and visited the Leningrad(St. Petersburg) website of the "real thing" RCP.  They describe themselves as Marxist-Lennist-Stalinist.  Ok. We have all seen their leader Mr.Z(how ever you spell his last name) on TV.  Now catch this according to the website no Russian leader can solve the problems of Russia including their own Mr. Z(how ever you spell his name).  I thought this is a breath of fresh air. On the down-side of things they have dusted off all their old slogans from 1917.  Which roughly read somthing like, Mom, Apple Pie and Uncle Joe.  If you read them with a sense of humor.  Possibly the RCP should consider hiring a good American pr firm or maybe Al From might be available for a consultation. I can just see it Comrade Al does the Kremlin. On more serious things...consider the impact of entry onto world markets by Russian industries.  We can see it in steel and we will see it in other things sooner rather than later.  Regardless of the political leadership of any of the olde "socialist" countries; how are you going to keep them down on the collective farm once they've seen Columbus. Sincerely, Tom L. Rakesh Bhandari wrote: > >>Yet, just as the ascent of manufacturing > >>profits was key to the stock market's vertiginous rise, the fall in > >>manufacturing earnings cannot but bring the stock market boom to an end, > >> > >Thanks Charles. What a lovely thing to say > > Hi sly Paula, > I think Charles is quoting Brenner here. But following the 1929 logic of > Henryk Grossmann,  stock market booms always outlast the production boom > because dividends are still being paid on the boom period; not only is this > case,, but when the production boom has passed its peak and the decline has > begun, money not needed for the productive process is added to the volume > of money already in use on the stock exchange, and being directed to make > further profits, pushes up share prices still higher. The apex of the stock > exchange boom is therefore reached later than the point at which the > decline in actual production has begun. Greenspan must of course be worried > that his new easy credits will not find their way into production but > speculation because in a crisis of overproduction, money can only produce > gains on the stock exchange. So despite all those bad earnings reports, I > don't think Brenner should pull his money out of the stock market quite > yet. He may be able to ride it to 10,000 before the bust. > best, rakesh</blockquote> </html>