It bears mentioning – as often as possible, to as many people as possible – that the exact same greed that got us into the current economic crisis with the shady profit structures of the Subprime crisis is what drives “the Markets.” Keep in mind whenever you read or watch news reports about how “the Markets” just don’t like the Obama plans, or how they lack specificity, that banks are publicly traded companies. Of course the market goes down regardless of what the president says: no matter what he says, anything realistic is going to suck for the banks and the markets.

If you’ve ever wondered why I’ve stopped posting articles about the stock market to the news section, this is why. We have been conditioned by the media and their corporate handlers that “confidence in the marketplace” is the only thing we’re supposed to care about. It’s a crock of shit. The markets are where rich people get richer by betting on “the ponies.”

It remains an enduring frustration of mine that journalists seem to feel the need to ask politicians questions which are “on the minds of voters,” without respect to whether or not those questions are at all reasonable to the situation. Typically, I find such excuses as “what’s on the minds of voters,” to be small minded ways of injecting the journalist’s own viewpoint into the discussion. Surely, if the journalist thought it, someone else must have thought it as well, therefore it is “on the minds of voters.”

The best current example of this is the discussion of the ARM mortgage crisis which has been the underpinning of so much of our current economic crisis. When ever someone wants to discuss ways to help home owners struggling with either Subprime or other ARM mortgages which are sapping their personal economics, the first question someone asks is one of the two as follows:

1. “But what about Joe the Irresponsible Person, who is living in a $500,000 home, but is only making $50,000? Why should the American taxpayers pay for his irresponsibility?”
2. “Well, what happens when one house on the block gets financial assistance from the government? What stops everybody else on the street from taking a vacation from paying for their mortgages? What stops them from just becoming another welfare mortgage home?”

My answer to both of these question is: show me a concrete example of either of these two things happening anywhere, and then show me what percentage of the problem these examples represent. Then, we’ll talk.

The truth is that in terms of price to income ratio – the relationship between the average home price and the income of the owner – is overvalued by an average of 10%. 10% of your income is quite a bit of money, but it’s not ten times your income, which is the example cited in #1 above. That would be 1000%. Certainly, an average can include a huge range of values and we do know that such excesses as our example do exist. But just as certainly, they must necessarily be a slim minority to fit into the relatively narrow average.

Meanwhile, the second question is basically a way to say, “I’d never do anything like that, but my neighbors are total dicks.” It’s an abstraction for which there is – to my knowledge – no concrete example.

But journalists seem compelled to ask those questions anyway. This lends some credibility to what is clearly an otherwise silly concept and forces our policy to reflect concerns over phantom problems. It is not a sound basis for policy making. It is not the seed of an intelligent, effective discussion of substantive issues.

But it sure seems that way, doesn’t it?

Via Dean Baker, as reported by the Washington Post:

When Countrywide Financial felt pressured by federal agencies charged with overseeing it, executives at the giant mortgage lender simply switched regulators in the spring of 2007.

The benefits were clear: Countrywide’s new regulator, the Office of Thrift Supervision, promised more flexible oversight of issues related to the bank’s mortgage lending. For OTS, which depends on fees paid by banks it regulates and competes with other regulators to land the largest financial firms, Countrywide was a lucrative catch.

But OTS was not an effective regulator. This year, the government has seized three of the largest institutions regulated by OTS, including IndyMac Bancorp, Washington Mutual — the largest bank in U.S. history to go bust — and on Friday evening, Downey Savings and Loan Association. The total assets of the OTS thrifts to fail this year: $355.7 billion. Three others were forced to sell to avoid failure, including Countrywide.

Hmm. . I’m thinking this is a clue to the problem. Did you happen to notice that the regulatory agency is dependent on fees paid to it by the companies it regulates? In other words, companies that it regulates that don’t make money are of no value to them, because they can’t pay for the regulation. That’s a strong incentive to keep companies profitable in George Bush’s administration, I am thinking.

I’m all for companies paying their way: they have to pay to dispose of their waste, they have to pay to get ISO certification, I would probably be OK with them having to pay for their regulatory duties as well. Still, the monies paid them aught not to factor into their budget, but rather be rolled into the general funds of the government. Or given away to starving children in Africa. But tying a regulatory body to the fortunes of the regulated is as clear a conflict of interest as one could imagine.

Once again with the caveat that I am most certainly not an economist, I will endevour to explain some of what is happening in markets right now in a way I hope makes sense to people.  I do this in part because I’ve been working to try to make things I’m learning over the months more accessible for those trying to figure out what’s going on.  Basically, I’d like to make things easier on people than they’ve been on me.  Also, I attempt this because I’ve overheard friends of mine discussing the Stock Market’s rise and fall as though they were indicators of anything accurate.  It isn’t, but that’s what we’ve largely been expected to believe.

In the particular case of this particular financial crisis, the number to watch is not the NASDAQ or the Dow.  It is the TED.  The who?  The T-bills to Euro-Dollar comparison rate.

In simplest terms, you can think of the TED as a benchmark of the willingness of banks to lend to other banks globally.  It’s based on a comparison between the current rate of interest on a Treasury Bill versus what’s known as the LIBOR, or London Inter-Bank Offered Rate (of interest, in other words).

The LIBOR is the rate at which banks typically lend to one another.  The TED is the difference between that rate and the T-Bills interest rate, which is considered to be a relatively stable benchmark.  As the TED goes up, things get bad.  Typically, the number hovers around 30 (or a 0.3% difference between the two).  Currently, it’s at around 465.  That basically means no bank is willing to lend to any other bank.  Until that number drops, our financial woes continue unabated, irrespective of the Dow’s current position.

So, that’s the bottom line of the TED and why we need to keep an eye on it.  As a basic explanation for why the rate is so high, think in terms of your own bank loans, like a mortgage.  I guess we’ll pretend the whole Subprime irresponsible lending thing never happened when we discuss this. . .

If you apply for a mortgage through FHA, you will be required to provide proof of employment because the bank would obviously like some proof that you will have the capital to pay back the mortgage.  If the amount of the mortgage relative to your income is fairly high or if you’re employment history is short, then there is a good chance you may now or in the near future have a problem repaying the loan.  If they give you a mortgage at all, the bank will probably enforce a higher interest rate on you.

The LIBOR works in roughly – very roughly – the same way.  It is the amount of interest imposed on a loan between banks.  In our current situation, there is a very good chance that some of the banks who have invested in risky enterprises may collapse.  And that’s a lot of banks, worldwide.  Moreover, those same banks are holding onto assets that might have otherwise been used like cash (like easily-tradeable capital) that are now worthless.  So, these banks have very little capital on hand to repay loans and are at risk of going belly-up before they’re done paying.

The relative risk of lending to these institutions has gone up dramatically.  At the same time, banks who might do the lending don’t necessarily want to be left with IOU’s instead of cash while they themselves are in danger of collapsing.  That’s still more incentive to raise rates.  Unfortunately, it now appears that rates have been raised to the point where no one can get a loan from anyone else.  Since lending between banks is the kernel from which most world economies draw capital, that means a frozen credit market equals a frozen economy.

So, there you go.  If you’d like to read more about the TED, you can check out this Wiki and this blog post, which I found to be quite instructive.

Just headlined on Bloomberg News: Italian Prime Minister Silvio Berlusconi said that the idea of maybe closing the world’s stock markets temporarily while they work out the problem and “rewrite the rules of international finance” has been floated.  If that sounds bad to you, you’re not alone. But it may be the only way to prevent further spiraling losses in global markets.

Of course, that requires EVERYBODY to agree to it, which in turn requires mustering much more international support than certainly President Bush is capable of.  What would it be like to actually have a working president right now?