• Minor Error from Krugman
    Posted by on February 17th, 2010 at 11:20 pm

    I’m only writing this so I can say that I’m correcting a Nobel laureate. It has no other purpose.
    Last month, Paul Krugman wrote:

    Remember, the great bank runs of the early 1930s began with a run on the Bank of the United States, which was only the 28th largest bank in the country at the time.

    The bank was actually called Bank of United States. They wanted the “the” in there, but state banking regulators objected fearing that depositors would assume the bank was backed by the government.

  • Hunter S. Wannabe’s Latest
    Posted by on February 17th, 2010 at 10:17 pm

    Lots of people love Matt Taibbi. In my book, his last two articles on Wall Street make him oh-for-two. Here’s a snippet from his latest “Wall Street’s Bailout Hustle.”

    Less than a week after the AIG bailout, Goldman and another investment bank, Morgan Stanley, applied for, and received, federal permission to become bank holding companies — a move that would make them eligible for much greater federal support. The stock prices of both firms were cratering, and there was talk that either or both might go the way of Lehman Brothers, another once-mighty investment bank that just a week earlier had disappeared from the face of the earth under the weight of its toxic assets. By law, a five-day waiting period was required for such a conversion — but the two banks got them overnight, with final approval actually coming only five days after the AIG bailout.
    Why did they need those federal bank charters? This question is the key to understanding the entire bailout era — because this Dollar Store scam was the big one. Institutions that were, in reality, high-risk gambling houses were allowed to masquerade as conservative commercial banks. As a result of this new designation, they were given access to a virtually endless tap of “free money” by unsuspecting taxpayers. The $10 billion that Goldman received under the better-known TARP bailout was chump change in comparison to the smorgasbord of direct and indirect aid it qualified for as a commercial bank.
    When Goldman Sachs and Morgan Stanley got their federal bank charters, they joined Bank of America, Citigroup, J.P. Morgan Chase and the other banking titans who could go to the Fed and borrow massive amounts of money at interest rates that, thanks to the aggressive rate-cutting policies of Fed chief Ben Bernanke during the crisis, soon sank to zero percent. The ability to go to the Fed and borrow big at next to no interest was what saved Goldman, Morgan Stanley and other banks from death in the fall of 2008. “They had no other way to raise capital at that moment, meaning they were on the brink of insolvency,” says Nomi Prins, a former managing director at Goldman Sachs. “The Fed was the only shot.”

    Or there’s another way of saying it — the government did the right thing in a very, very bad situation. Here’s Tyler Cowen:

    Without the bailouts we would have had many more failed banks, very strong deflationary pressures, a stronger seize-up in credit markets than what we had, and a climate of sheer political and economic panic, leading to greater pressures for bad state interventions than what we now see. Milton Friedman understood all this quite well, which is why argued bailouts would have been a good idea in the 1929-1931 period.
    (By the way, some libertarians like to pretend that Milton Friedman blames the Fed for “contracting” the money supply by one-third in that period but in reality Friedman blames the Fed for having let the money supply fall by one-third and not having run a bank bailout.)
    If you are a libertarian, is not our current course more favorable for liberty than would have been a repeat of 1929-1931? If not, I would be curious to hear your counterfactual version of how matters would have proceeded, without the financial bailouts. Is it that you think the regional banks would have raised the financing to pick up the entire bag and keep the banking system afloat? Or is it that natural market forces would have somehow avoided a wrenching surprise deflation? Or do you think the authorities for some reason would have not nationalized the major banks? Please let us know.

  • 50 Straight Years of Dividend Increases
    Posted by on February 17th, 2010 at 4:25 pm

    The Dividend Growth Investor Blog lists ten stocks that have raised their dividend for 50 straight years; Diebold (DBD), American States Water (AWR), Dover (DOV), Northwest Natural Gas (NWN), Genuine Parts (GPC), Procter & Gamble (PG), Emerson Electric (EMR), 3M (MMM), Integrys (TEG) and Vectren (VVC).
    I should add that one of our Buy List stocks, Johnson & Johnson (JNJ), is at 47 years.
    The Dividend Growth Investor also notes that Parker-Hannifin (PH) would be on the list but it took a year off in 1991. At one point, Winn-Dixie (WINN) was at 56 straight years before the wheels came off their business. Kellogg’s (K) was at 44 years before it froze its dividend in 2001.

  • Odd Lots
    Posted by on February 17th, 2010 at 4:03 pm

    Taste Test: Wal-Mart beats Whole Food
    Least Popular Teen Hangouts
    Government jobs crowd out real jobs
    Corporate Insider Buying Picks Up

    Abby Cohen Sees S&P 500 Fair Value at 1,250 to 1,300

    Minnesota GOP want new government agency in charge of cutting government

    Housing Starts at 6-Month High

    Best and Worst Performing Stocks of the Year (and Decade)

    How the Beatles created our soaring health care costs
    You can follow me on Twitter

  • Deere’s Earnings
    Posted by on February 17th, 2010 at 3:50 pm

    I just wanted to add a very quick note on Deere’s (DE) earnings. Today’s earnings report was quite good and the stock is rallying higher.
    Still, I’m very skeptical of the stock and I find the earnings report to be rather unusual. The good news is that EPS came in at 57 cents a share which tripled the Street’s expectation. That’s also up from a year ago when Deere earned 48 cents a share.
    The bad news is that Deere’s sales declined by 6% from last year’s fourth quarter.

    Partially offsetting the 6 percent revenue decline were costs for Deere, which declined 8 percent to $4.5 billion. And its lending unit generated $85.1 million net income in the quarter, nearly double the $46.8 million net income Deere generated from financial services a year ago.

    So Deere’s banking is improving. Somehow, I’m not encouraged. That represents about one-third of their net income.
    Barron’s notes:

    The company upped its 2010 forecast, implying a full-year EPS figure of $3.04 versus a Wall Street consensus of $2.58.

    That means the stock is going for about 19 times this year’s earnings.

  • Hoenig’s Dissent
    Posted by on February 17th, 2010 at 2:38 pm

    At the FOMC meeting from three weeks ago, Thomas Hoenig was the only member to dissent from the final policy statement. The Fed released the minutes from that meeting today and this is what it had to say about Hoenig’s position:

    Mr. Hoenig dissented because he believed it was no longer advisable to indicate that economic and financial conditions were likely to “warrant exceptionally low levels of the federal funds rate for an extended period.” In recent months, economic and financial conditions improved steadily, and Mr. Hoenig was concerned that, under these improving conditions, maintaining short-term interest rates near zero for an extended period of time would lay the groundwork for future financial imbalances and risk an increase in inflation expectations. Accordingly, Mr. Hoenig believed that it would be more appropriate for the Committee to express an expectation that the federal funds rate would be low for some time–rather than exceptionally low for an extended period. Such a change in communication would provide the Committee flexibility to begin raising rates modestly. He further believed that moving to a modestly higher federal funds rate soon would lower the risks of longer-run imbalances and an increase in long-run inflation expectations, while continuing to provide needed support to the economic recovery.

    Here’s more from a talk he gave today.

    German hyperinflation is one classic and often-cited example, and with good reason. When I was named president of the Federal Reserve Bank of Kansas City in 1991, my 85-year old neighbor gave me a 500,000 Mark German note. He had been in Germany during its hyperinflation and told me that in 1921, the note would have bought a house. In 1923, it would not even buy a loaf of bread. He said, “I want you to have this note as a reminder. Your duty is to protect the value of the currency.” That note is framed and hanging in my office.
    Someone recently wrote that I evoked “hyperinflation” for effect. Many say it could never happen here in the U.S. To them I ask, “Would anyone have believed three years ago that the Federal Reserve would have $1¼ trillion in mortgage back securities on its books today?” Not likely. So I ask your indulgence in reminding all that the unthinkable becomes possible when the economy is under severe stress.

  • Mundell: Italy is Biggest Threat to Euro
    Posted by on February 17th, 2010 at 11:52 am

  • Never Answer Critics
    Posted by on February 17th, 2010 at 11:30 am

    Nassim Taleb tweets: “The idea is to NEVER answer critics, just aim to stay in print –make sure people will be reading me long after they are dead.”
    Flashback:

    Unlike the other, more technical critics, I do not think much of Cowen’s intellect, abilities, & understanding of probability & random payoffs, but that irresponsible fool was the first to advertise the contribution of “prediction markets” in high moment applications, heavy-tailed environment. “Prediction markets” fail in fat-tailed domains because of a huge estimation error. Also note a blogger who got my point about predicting in Extremistan.

    The quote above is just part of a typically overheated response to Tyler Cowen’s review of the Black Swan. Cowen’s review, by the way, is mostly positive.

  • Should Greece Ditch the Euro?
    Posted by on February 17th, 2010 at 11:03 am

    Martin Feldstein writes that Greece ought to take a holiday from the euro. This is one of those fascinating ideas that economists like to come up with, but are completely unrealistic politically. If Greece were to leave the euro, it would be a precedent that Eurozone may not like.
    Here’s the problem. To really fix its problems, Greece needs some serious financial reforms, meaning higher taxes and/or lower spending. That would hurt the economy which is already in pretty bad shape.
    But if Greece had its own currency, then they could devalue. That’s not a great move but it’s better than the alternatives. The problem is that the eurozone has an integrated monetary policy but it’s not integrated politically. Now countries like Germany and France are balking at a bailout, but the fact is that those kinds of moves are inherent in monetary integration. If you want one currency, you have to take the good and the bad.
    Feldstein favors letting Greece leave the euro “with the right and the obligation to return at a more competitive exchange rate.” Of course, what if they don’t want back in? Furthermore, as Tyler Cown points out, this could lead to a run on Greek banks: “Who wants a Euro deposit to be converted into a drachma deposit?” Not me.
    For their part, the French have snapped into action. They blame us. Or more specifically, six “Anglo-Saxon” hedge funds.
    Now, can get California to ditch the dollar?

  • U.S. Economy Grinds To Halt As Nation Realizes Money Just A Symbolic, Mutually Shared Illusion
    Posted by on February 17th, 2010 at 10:01 am

    The Onion:
    WASHINGTON—The U.S. economy ceased to function this week after unexpected existential remarks by Federal Reserve chairman Ben Bernanke shocked Americans into realizing that money is, in fact, just a meaningless and intangible social construct.

    Read more…