Readers & Thinkers: The New Third World

Dear All-

Welcome to the United States first steps towards becoming a third world country (aka emerging economy).

The SEC has banned short trading on 799 financial stocks. Does this remind you of the Malaysian prime minister that everyone called crazy? And now they are going to rescue all of the banks that have bad loans by creating a special fund that could require purchasing up to $2Trillion in dirty mortgages. And just wait until we get some more sassy inflation to go with it.

MY BASIC REACTIONS

(1) Overall, halting trading until they figure out what to do is probably prudent. But they

should have done this sooner (that is without having to prohibit short trading).

(2) The US has shown that it doesn’t play fair always. The famous economist Rudiger Dornbusch used to say “What’s true for the Gods, isn’t true for the cows.” Well, why now? It’s very simple. Henry Paulson is a former Goldman Sachs partner and would NEVER let Goldman Sachs go bust or have its share price drop too much.

On Thursday, Goldman fell from 120 to 90 and that was just too much to bear. It was ok to let Bear fail, let FRE and FNM fail, let Lehman fail and let AIG fail, but it wasn’t ok to let Goldman fail.

(3) This short restriction, although helping the accounts of many investors is causing disruption for many hedge funds, ETF managers, option traders who can no longer short securities in order to manage their positions. It is also reducing liquidity in stocks.

And of course, it’s causing prices to rise too high relative to what they probably should be.

(4) In the end, the housing market will still cause ripple effects for months to come. Taxpayers may end up paying a lot for this. I find it annoying mainly because rather than have worked to stop the true cause of this – the housing bubble from 2000-2006, everyone wants to blame Wall Street and regulate Wall Street. A simple regulation on mortgages during 2000-2006 would have most likely avoided all the problems we have today. But who wanted to spoil the party? Real-estate was the main cause of economic growth in the US during that period. So who cared if there was a bubble? And where Mr. Greenspan now? Oh, yes I forgot he’ just counting the sales from his new book that rewrote history where he forgot to mention that he took us out of the internet bubble right into the housing bubble.

(5) Hedge funds are not evil, Wall Street is not evil, however they are greedy. And if you give them a free option that allows them to keep their profits when times are good while the US government pays for their costs when times are bad, they will always take more risks.

(6) Obama and McCain keep saying they would have done better. Obama barely knows what a CDS is and the same thing would have happened under him. McCain also couldn’t differentiate a swap from an MBS. The bottom line is that if housing and lending practices had been regulated, this disaster would have been entirely avoided. I doubt either of them would have been that concerned with such a small detail, especially when it was driving the growth of the US economy.

CONCLUSION

So, even though, I think there is merit in stopping the chaos that has been occurring, I find some things very unsatisfactory. It was ok to let Lehman and Bear fail, but not Goldman Sachs. It was ok for all those companies to pay their employees $25M bonuses when the housing bubble was forming, but the US taxpayer will pay all the costs when it is collapsing. It was ok to have free trading when times were good, but it’s against the law to freely trade when times are bad.

I presented informally for students last night, the presentation is at:

http://ludwigbc.com/presentations/slides/

Sincerely

Ludwig

September 18, 2008