The failure here is two-fold: One, the editors’ choices of who’s to blame, and two, the reader poll ranking those choices.

Let’s start with who’s on the little list — or more to the point, who’s not.  Time did an OK job of unearthing lesser-known names who definitely bear some culpability in the disaster — such as AIG’s Joe Cassano, who did much to unleash the nightmare of credit-default swaps.

But how can anyone take this list seriously when it doesn’t include Ben Bernanke?  Yes, Greenspan (who did make the list) laid the foundation, but Bernanke built on it with abandon.  Perhaps it’s because the intelligentsia regards him a genuine scholar on monetary matters — you know, historian of the Great Depression and all that.  A far more respectable background than Greenspan, who hung out with Randians and extolled the virtues of the gold standard.

Where’s Tim Geithner, the guy whose fingerprints were on every boneheaded decision of 2008, from Bear Stearns to Lehman and beyond?

And where’s Robert Rubin?  What, is there some numerical limit of Goldman Sachs guys the editors arbitrarily applied to the list?  Hank Paulson’s on there, so Rubin can’t be?  Seems like Time lays a lot Rubin’s faux-deregulatory handiwork on the shoulders of Bill Clinton, which I daresay might be a bit unfair.  Clinton revealed his naievete on such matters when he remarked early in his first term, “You mean to tell me that the success of the economic program and my re-election hinges on the Federal Reserve and a bunch of f*$(#@g bond traders?”

Oh, and then there’s Time’s inclusion of “The American Consumer.”  Oh, that was clever, alright.  I bet the editors were congratulating themselves over the brilliance of that one — “Gee, this is almost as good as choosing ‘You’ as Person of the Year a while back!”  But this too is too harsh — consumers were merely taking their cues from the politicians and central bankers driving the ship.

Even worse than Time’s 25 choices are the rankings furnished by its readers.  I guess letting the readers vote is Time’s idea of Web 2.0.  But the sheer folly of this is revealed when the number-one choice as ranked by the people who drove by the website, the premier villain of the financial calamity that’s befallen us is… drum roll, please… Phil Gramm.

Phil Gramm?!?  Yes, his name was the first on the faux-deregulation legislation that repealed Glass-Steagall in 1999, and he’s worthy of inclusion on the list.  But I suspect the reason he ranks so high is one that Time doesn’t even mention in its writeup: His Kudlowesque comment last year, while on UBS’s payroll and consulting the McCain campaign, that the recession is a mere figment of the collective imagination.  Must’ve stuck in the craw of a lot of political junkies.

And if we’re going to beat up on former members of Congress, shouldn’t we beat up on a couple of others who are still around, like Barney Frank or Chris Dodd?

But whatever.  Time’s payroll and page count shrinks as the economy and the Internet take their toll.  Let us celebrate.

Source: I Have a Little List

It’s not where they make the big decisions, and as such the gathering is little more than an excuse for sandalistas to show up and protest.

But it was hard to avoid the media coverage this year, given the hoopla over how “the world had changed” since the last gathering.  Still, there was absolutely nothing interesting or revealing about this year’s model, save perhaps for the fact that fewer bankers showed up.

Except… an enterprising reporter for Italy’s Corriere della Sera newspaper made the most of his assignment at Davos.  Federico Fubini surveyed “60 top central bankers, financial market regulators, fund managers, and industry opinion-makers.”

He first asked whether they themselves “might have contributed, even in a minor way, to the financial crisis.”  The result:

• No — 63.5%
• Yes — 31.5%
• Not sure — 5%

“How strange,” quipped Carlyle Group chief David Rubinstein to Fubini. “I thought 100 percent of them would say they had nothing to do with it.”

Fubini then asked those who said “yes” what lay behind their hare-brained decisions.  It broke down as follows.

• “Too much optimism” — 68.7%
• “I felt I had to keep dancing while the music was playing” — 31.3%
• Greed — 0%

So let’s sum up:  Less than a third of the central bankers and other assembled world-improvers (as Bill Bonner calls them) felt they were culpable, and among them, less than a third had a grip on reality.

That’s less than 10% of the total.

I guess I shouldn’t be surprised.  World improvers fall along a bell curve just like everyone else.

Fubini wraps up his dispatch with an account of a talk given by The Black Swan author Nassim Nicholas Taleb.

The participants enjoyed his talk, which was brilliant and provocative as usual, but as he spoke, one couldn’t help wondering if what they were actually enjoying was the simplistic comfort that Taleb’s message could provide.

The audience seemed to enjoy the idea that the current crisis is a “Black Swan,” a very unlikely, though possible, event. The alternative view is that of a train driven full speed into a wall. Thinking that way requires one to ask who was in the driver’s seat, and just maybe recognizing one’s own fingerprints on the wheel.

In other words, they think they got a bad break: Their mathematical constructs told them that something like the September meltdown could happen only once every 500 years, and they just had the misfortune of it happening on their watch.  The models in their minds are still valid.

But as we saw last week, Black Swan potential still abounds, even if the record-setting Treasury auction this week has so far passed uneventfully.

Source: Clueless in Davos

The Washington Post figures the country has about one million homes too many.  And close to 30,000 of them are in Las Vegas alone.  “The solution, local executives say, will come not from Washington policymakers but from the market itself,” reports the Post. “When there are too many houses, builders stop building them. That has already happened, and many Vegas home builders have gone out of business.”

But of course, that’s not going to stop politicians from intervening anyway and trying to prop up home prices — that is, keep them unaffordable.  There was Jack Kemp, that paragon of supply-side virtue, stumping in Florida this weekend for John McCain and his $300 billion mortgage bailout.  Barack Obama’s campaign has lambasted the idea, but by the same token I haven’t heard any of his vaunted Chicago-school advisers come out and say housing prices have to come down before some semblance of balance can be restored.

Meanwhile, on the auto front, the big news to my mind is not that Treasury has spurned the idea of forking over money to General Motors for the purpose of buying Chrysler (I guess that sort of arrangement is reserved for banks), but rather the introduction of what’s billed as “the lowest priced car in the country.”  It’s a new model of Nissan’s budget subcompact, the Versa.  MSRP $9990.

Now if you’re of a certain age, you probably remember the introduction of the Yugo in the United States — also billed as the lowest-priced new car available at the time — $3990 in 1986.  The price was plastered all over the advertising.  So what, I wondered, does $3990 then translate to today?  The Minneapolis Fed’s handy-dandy inflation calculator tells me it’s $7547, rather a far cry from the $9990 Versa (destination and handling not included).

I’m sure the wonks at the Bureau of Labor Statistics would tell me I’m not taking into account “quality improvements,” better safety features, standard equipment that was once optional, and all their other hedonic calculations that allow them to skew the CPI figures so grotesquely.  And I’ll concede Nissan builds a better car than the Yugoslavians of 20-odd years ago, teetering in a fragile decade between Tito’s death and the breakup of the country.  But that’s not the point.  The point is there’s no car, good or bad, available today for the present-day equivalent of $3990 in 1986.  End of story.

In any event, housing is getting its bailout, Detroit will get its bailout sooner or later, and at no time does anyone ask where the money for these bailouts will come from.

This can’t end well.  Prepare accordingly.

Source: Homes and cars

Hey, it could be worse. We could be in Iceland. No doubt you’ve seen all the stories about how the country is essentially bankrupt after an especially Dionysian binge on derivatives. I wondered how long it would be before we saw stories about Icelanders stockpiling food and toilet paper. That day has arrived. “Bonus, a nationwide chain, has stock at its warehouse for about two weeks,” reports Bloomberg. “After that, the shelves will start emptying unless it can get access to foreign currency, the 22-year-old manager said, standing in a walk-in fridge filled with meat products, among the few goods on sale produced locally.” The CEO of the Icelandic Federation of Trade and Services sees shortages even sooner than that, the end of this week, if businesses can’t get their hands on foreign currency to make purchases abroad.

Is this coming soon to a country near you? Even if it doesn’t, Outstanding Investments editor Byron King sees a different trigger for shortages in the stores…

Our buddy Matt Simmons said the other day, “We should thank our lucky stars that people in other parts of the world are still willing to ship us oil in payment for dollars.” And: “For as fast as the financial system melted down, the oil and gas network of the world could melt down even faster.” Matt was referring to a run on the refined fuel storage tanks of the world: y’know, hundreds of millions of cars with an average of five gallons each in the tank, and everyone panics and decides to top off all at once. We’d drain the system within 24 hours… be unable to refill it in any conceivable (i.e., short) time frame…. and food supplies would run out — for lack of motor transport – within a week.

Meanwhile, the Associated Press has picked up the story of the National Debt Clock running out of digits, now that the figure has rolled over past $10 trillion. Funny how this coincides with the release of the companion book to I.O.U.S.A.

No, it’s not funny at all. Forgot, economic satire is obsolete now.

Source: Monday Musings

But this price only reflects the ‘paper price’ of gold, says Dave Gonigam. Holding the actual metal is much more difficult — and much more costly.

Dave says the “yawning chasm” between the paper and physical price of gold means something will snap soon. This could mean the paper price doubles in rapid fashion.

This from The Daily Reckoning’s Desidooru Saloon blog:

Gold is back above $900 this morning after word of the “coordinated rate cut” from the Fed, European Central Bank, Bank of England, et al.

Of course, that’s the COMEX price we’re talking about. You want the real thing to hold in your hand, you’ll have to pay more. And you’ll be waiting weeks for delivery. If it’s even available at any price.

You want a half-ounce American Eagle? A quarter-ounce? Like a Chicago Cubs fan, you’ll have to wait till next year. You want the one-ounce variety? They’re still being rationed to dealers. (Or as the U.S. Mint prefers to say, dealers have been put “on allocation.”) One major dealer won’t even try to sell you a one-ounce Eagle right now. Or a one-ounce Canadian Maple Leaf. Or a one-ounce Krugerrand. A note to customers on its website apologizes “for any delays in order fulfillment which are a result of production and delivery delays imposed by certain mints and by our suppliers.”

There’s no longer a disparity between the “paper price” and the “physical price” of gold. It’s a yawning chasm. If gold is basically unavailable unless you buy a very small quantity at your neighborhood coin shop or a very large quantity in the form of bars, does a COMEX gold price just above $900 make any sense? One expert tells CNBC that something’s gotta give… and when it does, the paper price could double in very short order.

Hmmm… Sounds like something we’ve been saying around here for a while now.

Source: Something’s gotta give

CDSs are, in essence, an insurance policy you take out on a debt instrument you hold, just in case that debt goes bad.  As you might imagine, the sellers of CDSs practically printed money as long as the credit markets stayed juiced up through August of last year and debts weren’t going bad in any great numbers.

Ever since, the threat has loomed that the sellers might actually have to pay out massive “claims” on those insurance policies.

Today, an organization called the International Swaps and Derivatives Association meets to hash out whether the Fannie and Freddie takeover would trigger such “claims” on Fannie and Freddie paper.

As Chuck Butler explains…

There’s a question as to whether the Gov’t’s conservatorship constitutes a “CDS event”, which would force the settlement of the CDS contracts that are outstanding… Fannie and Freddie have roughly $1.5 Trillion in debt outstanding… But that’s chickenfeed compared to the notional amounts of CDS contracts that could be multiples of that $1.5 Trillion!

But wait… there’s more.

If the Gov’t’s conservatorship does constitute a “CDS event” there won’t be enough debt to settle the contracts, which will lead to a need for cash… And that could lead to major problems, with the least of them being the holders needing cash, might have to sell other assets to raise the cash needed… 

“Other assets?”

Say this does actually play out. Institutions laden with CDSs that are dumping commodity plays and resource stocks for no other reason than they’re actually sellable and can generate cash would suddenly move into overdrive.

But that probably still wouldn’t be anywhere near enough cash to prevent a major deflationary episode, so the Fed suddenly monetizes all these bad debts and triggers a hyperinflation.  A malarial economy – chills, then fever.

This is not a prediction, merely a hypothetical.

Source: Look out below

“So far this year, gold has lost less than 3%,” noted Bill in yesterday’s DR. “But stocks are down 14%.”

That’s cold comfort for many gold bugs — or for anyone whose investment strategy relies on what the pros call “non-correlated assets.” Isn’t one asset class supposed to rise when another falls?

In this regard, 2008 is feeling a lot like 1981: Every major asset class is taking a beating.

The late Harry Browne advocated a “permanent portfolio” strategy — taking the money you absolutely can’t afford to lose and tying it up in equal proportions among gold, stocks, bonds, and cash. The idea is that no matter the external economic condition — inflation, prosperity, deflation, or recession — one of those four asset classes performs well enough to pick up the slack for the other three and you can average a gain of about 8% a year.

But the key word there is “average.” Some years return better than 8%. And on rare occasion, everything gets hammered. That’s what happened in 1981. The four asset classes were down an average 6%. And so far, 2008 is playing out much the same way. As Bill noted, gold is down 3% and stocks 14%. As a proxy for long bonds, the iShares Lehman 20+ Year Treasury Bond Fund (TLT) is down about 1%. Roll over a bunch of T-bills for your cash position, and you might be up about 1%. That’s an average loss of over 8%. And by the reckoning of John Williams at Shadow Government Statistics, consumer price inflation is running about the same as it was in 1981. Ouch.

Of course, 1981 marked a turning point in many regards. Paul Volcker’s Fed was putting the hammer on inflation. We were on the cusp of an epic bull market in stocks. Neither of those appear to be the case now.

By the same token, gold’s bubble had already burst in 1981. And while the world’s central banks did a swell job in the summer of 2008 goosing the U.S. dollar and taking down the price of gold on commodities exchanges below $800… just try buying a one-ounce gold coin for a reasonable premium over the exchange-quoted price: You’ll be waiting weeks for delivery. (Word came yesterday the U.S. Mint is resuming one-ounce gold Eagle sales, but it’s putting dealers on allocation.) At some point, the ticker price will have to catch up to real-world demand.

Even analysts like Marc Faber who’ve given up on commodities (at least for now) still believe it’s worth your while to accumulate physical gold. And for some additional gold ideas, check this out.

Source: A cruddy year — for every asset class

It’s funny how people react to it. Their perceptions are colored by their preconceived notions. Conservatives see it as a veiled call for tax increases. Liberals see it as a veiled call for slashing Social Security. It is, of course, neither of those things. But this is good. As I knew well back in my journalism days, if you managed to anger both sides of an issue, you did a decent job.

Now… I suspect many of the people who read this blog and saw it last night were disappointed that the movie was not a wholesale indictment of central banking. That’s an understandable sentiment… but that’s never what this movie set out to be. For one thing, the late Aaron Russo already made that movie a couple of years ago. In contrast, I.O.U.S.A. is an attempt to start a very broad discussion among an ideologically diverse group — including, yes, certain establishment figures like Pete Peterson. And the discussion begins on a simple point of agreement — that, contra Alexander Hamilton, the national debt, certainly at its present size, is anything but a “national blessing.” Seems to me that repudiating a central principle of the one founding father who threw a monkey wrench into the grand American experiment from the get-go is a darn good place to start the discussion, no?

Reuters has an account of the live-via-satellite panel that followed the premiere. For all the passion former Comptroller General David Walker conveys, for all his recall of how debt had doomed earlier republics in history (let us not forget this whole movie thing got started with his reading Bill and Addison’s Empire of Debt), his starting point for a solution to this godawful mess — forming the proverbial bipartisan blue-ribbon commission — was thin gruel indeed.

Which perhaps underscores the notion that people in power aren’t going to do anything meaningful until ordinary folks like you and me get mad. So if you didn’t have the chance last night, go see the movie and get mad.

Source: I.O.U.S.A. — The discussion begins

James Howard Kunstler, speaking two weeks ago at the Agora Financial Investment Symposium: The “project of suburbia” is over as a period in our history and the home builders are going down and they will not be coming back.

Supporting evidence this week in the Washington Post:

More Americans, 52 percent, live in the suburbs than anywhere else. The suburban growth rate exceeded 90 percent in the past decade. But there’s been a radical shift in recent months. Americans drove 9.6 billion fewer highway miles in May than a year earlier. In the Washington area and elsewhere, mass transit ridership is setting records. Last year, transit trips nationwide topped 10.3 billion, a 50-year high.

Home prices in the far suburbs, such as Prince William and Loudoun counties, have collapsed; those in the District and inner suburbs have stayed the same or increased. A recent survey of real estate agents by Coldwell Banker found an increased interest in urban living because of the high cost of commuting.

Brookings says transportation costs are now second only to housing as a percentage of the household budget, with food a distant third.

That’s the sort of forward thinking you get from the Symposium. If you couldn’t join us this year, you can do the next best thing and get audio recordings of all the speeches in the main hall — plus a special report spelling out the investment recommendations that came during the small-group sessions. This year, for the first time, we’re making the audio available in both mp3 and CD format. So what are you waiting for?

Source: Suburbia forecast unfolding before our eyes