2008-11-29 (Saturday) by Gregory Tucker.

Traditionally, when the banks wish to borrow from the Federal Reserve, they must deposit high quality securities, traditionally US government securities. In the midst of the crisis, the Feds loosened their loan criteria. As a result, hundreds of billions of dollars in potential junk has made it into the hands of the Federal Reserve.

Amid the news of the attacks in Mumbai and Black Friday shopping-related deaths, news of the Citibank bailout seems ancient history. The recent Citibank bailout has increased the likelihood that the Feds will “consume” hundreds of billions in losses. There’s more: The Fed is buying $100B of Fannie/Freddie debt via the FARP program.

The Fed doesn’t raise revenues through bonds or taxes–their primary recourse is to deflate the currency. In practice we all pay the bailout a little at a time through reduction in the value of the currency. None of this implies the Citibank bailout was the wrong policy. Citibank isn’t completely off the hook, and the taxpayers could receive some compensating benefit. The regulators and policy makers are in triage right now, and Citibank is one of the firms that must be saved in order to save the economy.

The train wreck, if it happens, may wait for Obama to take office, but the train was a runaway long before he even received the Democratic party nomination.

Posted in Economics | Print | 1 Comment »

2008-11-26 (Wednesday) by Gregory Tucker.

The most recent numbers for Portland were poor again. Prices for September 2008 (the latest available) are down 1.31% from August, and down 8.62% from September 2007. All told Portland has declined 9.03% from its peak in July 2008, and all trends point to continued declines.

The graph above shows how the market has behaved since January 1987, the first data available from Case-Shiller. The data from January 1987 to June 2004 shows an extremely reliable trend (confidence 99.33%), and a bubble that began with the introduction of “funny money” financial products like Subprime and Alt-A loans. If current post-peak declines remain constant, Portland pricing will intersect the historical trend around December 2009, with further price reductions around 11%, or 19% from the bubble peak.

I cannot predict what will happen after 2009, but I am predicting further declines throughout 2009.

Posted in Economics, Portland | Print | 1 Comment »

2008-11-24 (Monday) by Gregory Tucker.

Here are some nice observations on risk. 

Risk in the case of the meltdown of the balance sheets of the world’s most important financial institutions is quite different than the type of risk that financial institutions and insurance agencies were used to dealing with. What characterizes what we might term “normal risk” are three things: it is exogenous, stationary and uncorrelated. 

Although non-standard risks are difficult to plan for and manage, we must do so nonetheless. Risk models that breakdown when risks are endogenous, moving, or correlated is like building a car whose seat belts when the driver falls asleep, or whose car bag fails over 10Mph.

Transparency is a core issue. Risks cannot be managed if they cannot be measured. If government is to become the insurer of last resort, then it has the right (and obligation) to ensure transparency of the markets. The CDO and DSO markets are very opaque, to the benefit of nobody except a small handful of inside players.

Posted in Economics | Print | 1 Comment »

2008-11-18 (Tuesday) by Gregory Tucker.

There is a good article here about unemployment levels in economic cycles. Unemployment peaks about five to six quarters after the economy troughs. IF (all caps big IF) the economy would start to recover around the middle of 2009, the job market won’t start to recover until late 2010 at the earliest. 

Posted in Economics | Print | 1 Comment »

2008-11-14 (Friday) by Gregory Tucker.

LA Times reports Rush Limbaugh is already spinning the recession, and possible depression, as all the fault of President-elect Obama.

“The Obama recession is in full swing, ladies and gentlemen,” Limbaugh told his radio audience of 15 million to 20 million on Thursday. “Stocks are dying, which is a precursor of things to come. This is an Obama recession. Might turn into a depression.”

The logic is that the markets have been anticipating Obama’s tax cuts and lost confidence, even before Obama has taken office. The problem of course is using this pathetic logic, you can blame anybody for anything. Bush’s tax cuts improved economic growth causing more Mexicans to come to the United States–illegal immigration is Bush’s fault. To Rush, this statement is perfectly legitimate.

When facts don’t suit Limbaugh, he makes them up. From the same article:

“They’re going to take your 401(k), put it in the Social Security trust fund, whatever the hell that is,” Limbaugh woofed. “Trust fund, my rear end.”

A slight problem with Limbaugh’s report: Obama and the Democrats have proposed no such thing.

Knocking down Limbaugh is like fishing in a barrell, so I will stop here. What is most amazing is that 15 to 20 million Americans even bother to listen to Rush Limbaugh any longer. What a pathetic waste of braincells.

Posted in USA | Print | 1 Comment »

2008-11-11 (Tuesday) by Gregory Tucker.

Portland does have most or all of the components it needs to build a world-class, leading edge cluster in a particular field.

Choosing the winners and losers from top-down is a recipe for disaster. Despite recent bubbles (dot-com bubble of the 90’s, the real estate bubble of this decade) markets are still better than governments at pricing. Portland as an industry cluster has to arrive ground-up, involving citizens, businesses, and government working together.

Working together involves a number of things:

- Providing and ensuring funding for start up companies

- Providing low-cost office and manufacturing space for start up companies

- Simplifying taxes and incentives for investments in Portland and the state

- Ensuring all human resources in the value chain are in supply in Portland, with sufficient levels of expertise. In some cases the city and state will have to “build bridges” with other communities until we have sufficient expertise locally

- Providing a strategic and coordinated marketing (and if necessary branding) effort to align local citizens and attract talent and investments from around the region, country, and world.

In my 1.5 years in Portland I have little confidence the city or state officials are up to the task of making this happen. On the other hand, a good crisis should never be wasted, because it provides both the incentives (political pressure) and the resources (people) to make novel things happen quickly. Real estate “infesting” had tied up so much of our entrepreneurial talent, that it starved the economy of innovations in other areas.

I admit I don’t know Portland well enough to speculate on what industries Portland could become a cluster. Portland already has a good brand as a green city, so this is a place to start. But Silicon Valley (the real one) is moving quickly in this area, and we cannot compete with them head-to-head, except in a few niche areas. Custom building bicycle frames will not get us there–and who put up that stupid display at the airport? Is this really how we want to market our city?

Posted in Portland | Print | 1 Comment »