Bail-Outs, Bail-Ins, and Old Fashioned Failures

The recent drama in the Eurozone and, specifically, Cyprus is worth the commentary of people a lot more skilled in financial analysis than I. Future careers at organizations like the International Monetary Fund will be made by young people just now writing their doctoral these on bank failures.

Because an old-fashioned bank failure is what we're seeing happen to bankers, the investors, and the depositors. It's the fate of the depositors that is grabbing the most attention because plain-old middle class folk are being stuck with the bill. How would you enjoy losing 10 percent of your life savings?

The most important turn in this story is the seizure of deposits; what some have dubbed a "bail-in" instead of a bail-out.

So I invite you, dear reader (and bless you, whoever you are), to take a moment to ponder what happened to bank depositors before the Great Depression. In those hoary old days maybe your bank had private deposit insurance and maybe it didn't. If the bank went under you could very well lose your deposits - maybe your life savings.

Which is why the pictures of long lines of people rushing to take their money out of failing banks in the Depression are so famous. Government deposit insurance came out of that as a comfort check for people to keep their money in the banks instead of precipitating a run on a bank and only making a potential failure into a real failure.

Well, that's what's happening today. Europe has now set the precedent that your deposited money greater than 100,000 Euros is now at risk. You had better understand that risk and the solvency of your bank. Depositor beware.

Ta-Da! Give them a Nobel Prize

As I pointed out here and here, North America is now an oil and gas producing powerhouse and it will only grow over time.

What more proof? Check out the graphic and the article here at Pragmatic Capitalism.

The United States has surpassed Saudi Arabia in oil production (at least in November of 2012). Ta-da! (That's the sound a magician makes when he pulls the rabbit out of the hat.) Why, it seems like just four short years ago when America was on an inevitable road to energy decline with no road to redemption. Don't you just love irony?

Now, the fortuitous side effect is what again? Oh, yes, less war over oil. Add to this a seven million barrels a day unmet capacity in Venezuela - just recently removed from the yoke of Hugo (por que no te callas!) Chavez - and suddenly it's not looking like being an oil sheikh is such a hot gig.

The people that developed the fracking technology should get a Nobel Peace Prize.

Suddenly, I Like Him

This is an unusual and off-topic post for this blog but I just have to congratulate Andrew Mason (now the former CEO of Groupon) for his resignation letter, which you can read in full here.

I've never been a fan of Groupon or their business model but this is the most refreshing letter to employees I've ever read and here's a nice snippet.

"After four and a half intense and wonderful years as CEO of Groupon, I've decided that I'd like to spend more time with my family. Just kidding – I was fired today."

In a world where such events are wrapped in more and more twisted euphemisms and management teams move heaven and earth to say anything but the truth, I find this just wonderful. There are  many more gems in his note and I particularly like the comment about finding a good fat camp. Check it out.

Did John Maynard Keynes Understand Money?

This provocative questions come via Pragmatic Capitalism is an excellent and short post wherein the author discovers that Keynes may well have not understood monetary supply.

In my student days, I was versed in the ways of Milton Friedman - the original monetarist. A couple of his books still sit gathering dust on my bookshelf. One of the things I learned was that the government creates money through the banks.

As Cullen Roach at pragcap.com likes to describe it, the government has privatized the creation of money through the banking system. In economics terms this is often called the money multiplier, which, by the way, has been less than one for a long, long time. That is, for every dollar the government prints, less than one dollar is making its way into the economy.

 

(Click on the graphic to enlarge)

The picture is the money velocity within the monetary system of the United States. The top (red) line shows that for every dollar the Fed prints, less than one dollar is making it into the economy. There are a lot of reasons for this (mostly related to the still hampered condition of the banks) but that waaaayyy beyond the scope of this post.

I find Keynesian economics sound but its application in the real world is frightfully bad and it is nothing but a temptation to the weaker instincts of politicians. Now, having said that, did Keynes really understand the mechanics of the creation of money? And, if not, is that failing still having an impact today in our Federal Reserve's actions? Things that make you go hmmm ...

Why Does No One Believe Me?

The United States will soon be a net exporter of oil; if by soon you mean five years or so. Yet when you read the press, it seems that this is a surprise. Check out this link at CNBC.

Our huge growth in oil production should have been obvious to anyone paying even the slightest attention.  

Oh, and as long as I'm snarking ... Do you want world peace? Get the US away from middle eastern oil and it will happen all by itself. 

Capitalism is just simply amazing.

Drill Baby, Drill!

Australia is the next great oil producer? Follow this link to find out why.

Whither Steve Jobs?

Steve Jobs passed away in October of 2011 and it now appears that Apple-The-Magnificent  passed with him.

Apple's stock has been in decline for several weeks as it ran into two immutable facts. The first is the law of large numbers. That is, the larger the company, the more difficult it is to grow. The second is that Tim Cook is not Steve Jobs.

And, in case you don't watch the financial news, Apple stock is getting absolutely hammered today. I personally own some and I had to sell about half my holdings to avoid the bloodbath.

I'm working my way (slowly) through Steve Jobs biography. The book is not as easy a read as I expected because the author spends a lot of time in the minutiae of Apple's internecine spats over product design, office layout, dress codes - you name it.

What I'm learning about Jobs, though, is that he was a truly extraordinary businessman. Henry Ford changed American life with the Model T and mass production. Steve Jobs is the Henry Ford of our time and he changed the way we live our lives in ways that we don't yet appreciate.

But Steve Jobs is gone and Apple has run into the law of large numbers. Tim Cook is not Steve Jobs and Apple is now just another big company. It's a pity.