Best of the Net - Monday October 20, 2008

Kevin Depew was talking about liquidity traps and an era of the new American saver. Here's an excerpt:

A Liquidity Trap occurs in a low-interest rate environment with stagnant economic conditions and high savings. During this environment monetary policy becomes ineffective. Why? Because under these conditions people believe that they will not receive an adequate return for the risk assumed in owning other financial assets, even bonds, so they prefer to keep cash in short-term bank accounts. In other words, they hoard cash. Sound familiar?

Mike Shedlock had a piece on a similar topic titled, "The Age of Frugality. An excerpt:

Those wondering why the Fed and Treasury liquidity measures are failing, need look no further. Greenspan had the wind of consumption at his back. Bernanke is on the backside of Peak Credit with a breeze of frugality blowing briskly in his face.

On the other hand,

Calculated Risk was mentioning that "a few of the key signals in the credit markets are responding favourably" to the trillions of dollars being thrown at them by central banks and governments around the world.

Bennet Sedacca, one of the better credit analysts I've come across had this to say in his buzz today,

No Virginia, the credit market hasn't thawed. One would think that given the amount of intervention/interruption that bonds would be trading much better. But sadly, they are not. Until this changes, we stay cautious, although I must say that if I had a 10 year time horizon and never had to mark my bonds to market every day, some of these are appealing.

Ben Stein, who I've been picking on for a long time had this to say:

In any event, we now know a lot we did not know before. Credit default swaps are way too dangerous. Derivatives generally are dangerous. There is much that Ben Stein does not know. I hope this explains some of how we got to this precarious place, I apologize for not seeing it sooner. But I am still optimistic that the government will save us from the CDS, and we will go on to renewed prosperity. In other words, I am still buying.

And Warren Buffet says we should buy American stocks because he sees the inflationary impacts of all these government interventions we've been promised will fix everything.

Not a day goes by without either the President of the US, the US Secretary of the Treasury, or Chairman of the Federal Reserve coming out to speak on how bullish they are on America.

I can't get over the striking similarity in some of the words being spoken now and those following the months of the panic of October 1929. Here's a few good ones:

"I see nothing in the present situation that is either menacing or warrants pessimism... I have every confidence that there will be a revival of activity in the spring, and that during this coming year the country will make steady progress."
- Andrew W. Mellon, U.S. Secretary of the Treasury December 31, 1929

"I am convinced that through these measures we have reestablished confidence."
- Herbert Hoover, U.S President December 1929

"The end of the decline of the Stock Market will probably not be long, only a few more days at most."
- Irving Fisher, Professor of Economics at Yale University, November 14, 1929

"...despite its severity, we believe that the slump in stock prices will prove an intermediate movement and not the precursor of a business depression such as would entail prolonged further liquidation..."
- Harvard Economic Society (HES), November 2, 1929

These were the most respected names in finance at that time. They were all wrong. Does that mean all the optimists are wrong now? I don't know. But there are a number of very smart people who told us exactly how this would play out and have been doing so for years. Are you going to bet against them or against the world's richest man?

Despite the fact that we have incredibly intelligent people with wildly different expectations about the future, nobody really knows the rules anymore. Do we believe in free markets? Or are we socialists? Can a financial system that was never legitimate in the first place be patched over one last time to effectively screw every last saver that remains? What happens if it can't?

Why play a game if you don't know the rules? That's the question I fear most people will start asking themselves.