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Just some interesting facts:
1. The big three at first asked for $34 Billion loan. Congress ready to dish out $15 Billion. Their total market cap? $14 Billion.
2. The big three’s manufacturing capacity is 17 million cars. In 2007, Americans bought only 14 million cars (domestic and foreign).
3. Ford pays, on average, $71 an hour to its workers. The Japanese U.S. plants pay $49/hr. Source see NYT.
4. The auto sale declined the most when gas price peaked after summer. Recently, there is a sales rebound despite poor economy. Trucks rebounds the most. Small cars may actually declined.

Thoughts:
- Undoubtedly the auto industry will shrink and restructure. However,
- The current difficulty is largely due to past sins. In terms of cost structure, the auto industry may be on the rebound. (in Ford, new employees are paid $53/hr)
- The auto industry lacks the vision and business foresight? Well, how about blaming “the American Dream” for a change? How many Americans can stand up and say, “I had nothing to do with this”?

Said a lot more yesterday. But I’d better stick to what I know

Leaving tomorrow for Japan. Just some thoughts to write down …

1. I think the financial crisis is about to be over. Once the extra liquidity is taken out of the system and excess leverage is held in check, we will go back to the basics. The production function comes down to K and L (capital and labor). When both are healthy and in balance, I think we are fine. The real depression will only come when natural resources becomes the bottle neck.

2. The British rescue package (i.e. injecting cash to banks) is a superior solution to the original American one.  Bernanke kept saying “price discovery”, which I interpret as to let market figure out asset’s true price. However, the original package ran contrary to this principle: it required the government to buy up assets (instead of letting banks to pick sellers and set prices).

3. Although commercial banks are saviors of the day, the “animal instinct” of investors will again raise the profile of ibanks. No wonder Goldman Sachs decides to apply the NY state bank charter, instead of the national one: it doesn’t care about retail banking at all.

4. Japanese Yen and Chinese RMB will likely appreciate. Since Japan cannot lower rates any more, it will have to absorb the impact of increased domestic debt by other nations (produced by the bailouts). China may lower the rates but I believe it is under greater inflationary pressure than everyone else. Therefore, it may have to raise rates or appreciate RMB.

5. For the developed nations, it is easy to release money to the market in unison. But it is going to be a lot harder to take money out of circulation once the economy improves. To be more precise, since nations recover at different speed, some may need to restore monetary discipline earlier than others. However, because the financial market is globalized, the liquidity excess may soon return (or linger?).

6. Is Moral Victory is now called “Nobel Prize”? The Swedish Academy shouldn’t be playing God. If Krugman gets an “early” pass, then Gore and DaLai got an easy one.

Just heard that the Fed has started buying commercial papers directly from non-financial corporations. Someone on WSJ said recently, “If the commercial-paper market was a place, it would be at the intersection of Wall Street and Main Street. That should make Washington’s intervention a little more palatable”. 22 years ago, the Black Monday started with a sudden drying-up of the commercial paper market. Reading that part of the history left me with a lasting impression.

As bad as things are getting (Iceland may go “national bankrupt”–wasn’t that called devaluation? Russian stock market is closed indefinitely, Bank of America can’t hardly find buyers of its $10B stocks), I still think we are fortunate to have Bernanke and Paulson running the ship.  Although Bernanke declared a rate cut today (almost), but that only came after oil price dropped to below $90 and Australian CB cut its rate by 1% (adding further pressure to current account balance I suppose). Once the dark days are over, looking back, I think it will be safe to label Bernanke a “conservative” monetary policy maker.

Paulson–for whatever mistakes he’s made–he did what he could to link up the political and financial world quickly. McCain, for that matter, wasn’t too far off when he said the “foundamentals of the economy is sound”. The speculative assets may be crashing, the capital assets are still productive (at least I have not heard otherwise). If there is a national ROA I’d like to get that number.

I think US will take a long time (between Japan’s decades and 1987’s month) to recover. But depression? I really have to see it to believe it.

The bailout talk “imploded” tonight.

WaMu was seized by FDIC and sold to JPMC for $1.9B (over $307B in assets).

FDIC has only $45B in the insurance fund.

Short term T bill goes into negative rate in real terms.

Money market, commercial paper markets are tighter by the day.

Just read another article on WSJ that talks LIBOR: Libor’s Accuracy Becomes Issue Again

Looks like there is some “institutional lying” going on: the libor rate (short term inter-bank loans, unsecured) is lower than the rate charged by the Federal Reserve through auction facilities (tech. operation, collateralized). The article reasonably speculates that, since libor is calculated based on reported inter-bank loan rates (from member banks), it is likely the banks are under-reporting the rate they are charged for in order to hide their own credit risks.

Why doesn’t the Congress tie the rescue/bailout package to the libor/Fed facility spread? This is a joke, of course. But I didn’t start it.

Not that I don’t have any thing good to do. But I have to say I am furious over the bailout plan. The more I heard about it, the less I like it. The bottom line? I don’t think Wall Street is contrite enough–they haven’t told us exactly what went wrong, why it went so wrong or how to right the wrong. How do I know $700 billion is enough?!

Anyway, here is some midnight ramble I sent to Congressional politicians from WA:

I am writing you to voice my strong OPPOSITION to the Wall Street Bailout Plan of 2008.

The plan, as it stands today, amounts to an extortion, like a polluter asking for Federal funds to clean up by saying it doesn’t have the money to do it itself. It might makes sense financially but fails to address the issue of public wellfare and fairness. After all, at $700 Billion, it is NOT about money any more. I urge you and your fellow Congressional colleagues to immediately reject the current version of the the plan.

First, the current crisis is the result of a loose monetary policy in combination with a corrupt regulatory ecosystem. The immediate consequence is the formation of a “financial-political complex” that usurped the monetary policy setting power of the Federal government.

Secondly, because the plan was drafted by Wall Street insiders, it may pay lip service to political consideration. Yet the entire process has been extremely undemocratic and un-American. I refuse to accept the notion that the financial industry is so complicated that only experts have the exclusive right on how to preserve public wealth.

Thirdly, Congress must act quickly and decisively to send a clear message to the entire industry of what lacking in the proposal, and to reassure investors of its political leadership.

I like to elaborate further on the above three points:
1. The Wall Street extortion. By playing up the complexity of financial dealings and by addictively committing large sum of public wealth into risky investment schemes, the Wall Street gang has been acting like a polluter who pours huge amount of posionous material into air and river. He reasons–correctly but shamelessly–that if the problem is bad enough and the scale is large enough, they can reap the benefit on the upside but force the tax payers to cushion the down side.

On Wall Street, a clique of large firms acted just like polluters: they sliced up the bad loans and sprayed them onto every other securities so that no one can escape the wrath of a meltdown. They lobbied to have their leverage level raised from 30-1 to 40-1 so that they could generate credits regardless of Federal Reserve’s monetary policy. The corrupt relationship between the money man and politicians is also amply reflected in the severity of this crisis. The examples are: Fannie and Freddie’s account scandals were not properly addressed; An industry lobbiest (Cox) became the head of SEC; Populist politicians openly pressured the Fed to further loose credits so they (the politicians) could garner a few more votes from some despicable parasites.

2. The plan is undemocratic. In terms of dollar amounts, $700 million is administrative, $7 billion is budgetary but $700 billion is political. It amounts to $2300 for every man, woman, child, senior of this country! Yet what do we, as regular tax payers, get in return? A promised financial order that was there in the very beginning and only got lost thanks to the very people we are told to bailout.

Where is the social justice? Where is the political accountability? Remember, $700 billion is political–at this point, it is NOT about money any more! If we are asked to pay $2300, we should be given a chance to recount whether we had ever benefited that much from the boom. Otherwise, where is the justification of that $2300–is it a tax? An appropriation based on Emminent Domain?

3. The urgency. People have been asking how to act rationally in a time of extreme urgency. In this case, the best action should be a decisive and clear worded Congressional rejection of the Bailout, telling Wall Street, “you are not contrive enough; you have not cede enough.”

I like Senator Dodd’s proposal which requires a public equity stake in every financial institution benefited from public funds. In addition, I suggest Congress collect a one-time rememdy taxes on people who have paid capital gain tax in the last five years to pay for the Bailout.

The Federal government has taken over AIG:

… the Fed will lend up to $85 billion to AIG, and the U.S. government will effectively get a 79.9% equity stake in the insurer in the form of warrants called equity participation notes. The two-year loan will carry an interest rate of Libor plus 8.5 percentage points.

If AIG proves to be the firewall that stopped the crisis from spreading, then Messrs Bernanke and Paulson would likely be mentioned in the same breath as J. P. Morgan and Benjamin Strong in 1907.

The fact that we are repeating a panic happened one hundred year ago is a sad reminder that Leninism isn’t dead after all. There is something fundamentally wicked about Capitalism, namely, how to restrain Greed so that it doesn’t devour the system.

In the short run, if there is indeed a solid market rebound, I am sure Joe Sixpacks somewhere in Ohio will forget about all the scare and vote for their “conscience” again …

Update on 9.17: ????Dow dropped 450 points. WaMu is being auctioned off. Just pulled out of money market altogether. Ready to open other bank accounts. Is it that bad?!

Lehman Bro. filed bankruptcy today. ML was sold to BoA yesterday. A.I.G. needed cash infusion (as Lehman did four month ago).

Looking back, when the whole thing started over a year ago, I never thought “the credit crunch” would explode into a full blown financial crisis. In terms of personal finance, I escaped the early “crunch”, got hot-headed, plunged back in and am now a wounded prey.

One lesson learned is the definition of “liquidity”. Gradually, I come to see it as an index of market participants’ expectation of return on investment. What I read about Lehman’s demise certainly reinforced this conviction:

… even to the bitter end, Lehman didn’t access the Federal Reserve’s emergency loan facility. If it had, everyone would have assumed it was in trouble.

I always wondered why the Fed kept pumping money in but nothing worked. One reason could be that the repos is really short term so it wouldn’t work out timing-wise. The other–just as I suspected.

1. Demographics, social stratification, mobility study
TItle: Was There a REvolution? Kinship and Ineqaulity of the Very Long Term in Laio Ning
By Cameron Campbell (UCLA), James Lee (Michigan)
Based on Liaoning dataset, studied social stratification patterns in late Qing and post Reform contemporary. On going study (from a flyer in 2008, a coloquium missed), tentative conclusion.

Highlights:
Father-son attainment correlation
Kinship/descendent group vs. village
Education as a factor
Unique dataset!
China appeared to be a less aristocratic society then contemporary Europe/America (same authors 2003)

Also mentioned studies: Deng/Treiman (1997), Zhou, Moen and Tuma (1998), Cheng and Dai (1995)

2. Hiking: Bare Mountain
a. Long, arduous drive to trail head: poor road signs, unpaved gravel road full of potholes: need a high clearance vehicle!
b. Eye opening views:
The road largely circle around the back of Mt. Si, which has a stunning silver back don’t see from the highway
Clear-cut forests along the way: the road is largely a mix of logging/utility road
See the clear-cut area after coming out of dark forests felt like stambling upon an African Elephant grave–an eery sight indeed! A unmistakeable sense of death, an immense scene of ruin, an empty feeling of powerlessness and, seeing the new trees planted, a sense of renewal.
A beatiful day with a setting sun in a setting summer.
c. Quiet and cozy trail:
Met very few people, two of them met before on the street or on a different trail! Saw David and Lisa–met just last week in between Tuck and Robin Lakes. Their dogs (Buster and Sunny) gave them away. Both parties were flabbergasted. OMGs echoed all over the valley.
Dense foliage, should be fun during autumn.
d. Conclusion: feels like an newly made friend or an unexpected culinary discovery!

3. NYT article on low ROBC capital
Main Bank of China Is in Need of Capital
A poorly organized article that is undeserving NYT credential. Took me a while to figure out what it says:
PBOC forces commercial banks to turn in their forex reserves and used them to buy treasury and mortgage backed bonds.
As the MBB tanked, the return on those bonds probably wasn’t enough to meet PBOC’s interest obligation to the commercial banks lending those reserves to begin with.
This inbalance drained PBOC’s capital reserve to very low level.
Instead of printing money, PBOC chose to ask for government transfer/handout to sustain liquidity

Things noteworthy:
Different monetary/exchange philosophies b/w PBOC and MoF. PBOC against weak RMB but MoF favors.
PBOC prefer bonds vs. MoF stocks

Standard & Poor’s estimates China’s (mortgage) holdings at $340 billion

By buying United States bonds, the Chinese government has been investing a large chunk of the country’s savings in assets earning just 3 percent annually in dollars. And those low returns turn into real declines of about 10 percent a year after factoring in inflation and the yuan’s appreciation against the dollar.

The gap between what banks are paying on deposits and the rates they are charging ordinary customers to borrow is several percentage points. This amounts to a transfer of wealth from ordinary Chinese savers to the central bank and on to Americans who are selling their debt to the Chinese.

4. Also remembered an earlier NYT article about how China used its foreign reserve to shore up domestic banks:
$200 Billion to Invest, but in China

Read ????? (1 and 2) after Steve C recommended it. He asked me whether I can still “handle” China but I was interested in the central-local relationship.

The book is similar to a pretty stylized mini TV series: bad guys are bad all around and good guys are good inside out, “????”, etc. And there isn’t as much discussion of central-local tensions till the 2nd series, which, when it comes to that, is very revealing:

 ???????????????????????????????1994?????????????????1994???????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????

Also, according to the book, the central transfers are often NOT included in local’s budgets! No wonder ????? become so prominent and prevalent.

Two years ago, I’d thought this is abnormal and is something that can be amended by policy or institutional design. Now, I don’t think so any more: the central-local tension is part of China political economy that is beyond regime or even civilization (????????????????????????????????????????????????????)

There is certainly an institutional design component: one may argue that focus on GDP, including the bias toward growth in cadre evaluation, calls for locals to game the system. Therefore, however hard the center tries, it still can’t make ?????–even when provincial heads are centrally appointed.

But defects in institutional design do not explain prevalent corruption. Not even the misaligned center-local interests can explain that. In other words, you can have very clean local officials who still undermine national economy in pursuit of local interests.

Corruption seems to be best explained by property rights (and its principal-agent implication). A national economy has a certain amount of endowed assets–land, natural resources or labor that can only be mobilized politically. The marketization of those assets is often a monopolized process (because the assets are considered public), particularly when there is a pretty strong government (i.e. an agent of public interests).

The natural conclusion is that it is an ill that cannot be solved by political reform alone (e.g. corrupt but democratic countries like India). It may solve the agency problem but certainly not the rights ill.

But how can one privatize public assets and keep them efficiently deployed without creating injustice? I think this is the real question. Is Norway a possible exception to this? I really need to study the Scandinavian countries more …