Phil Flynn from Alaron has a nice comment on the legislation in front of Congress right now about limiting trading in commodity futures:

“Of course many in Washington still do not get it. The senate has opened the floor to debate on trying to reign in the very thing that may have saved this economy from a total economic collapse and that is speculation! This time the oil market next time the stock market and eventually the entire US capitalist system. Senator Byron Dorgan is particularly clueless when he says, “nothing that has happened in supply and demand remotely justifies the doubling of the price of oil in the year.” Oh, yeah, says who. Why is Senator Dorgan all of a sudden smarter than the markets? Is he a trader, or an analyst, or an oil man? Has he looked at worldwide inventories? Has he looked at the dollar! Does he realize that the confidence in the US economy and its housing market is in bad shape? If he is aware of all that, maybe the distinguished Senator would like to tell us what a fair price for oil might be? Is it $50 a barrel? Is it $70? Well he better be right because if he sets the price too low the US will use more oil and eventually we will run out. If he sets the price too high he will slow economic growth to a standstill and put thousands – probably more like millions – of people out of work. Sen. Dorgan, this false belief that if we rein in speculators from the market that oil prices would somehow be magically lower is not only false but a danger to the economy. Sen. Dorgan for every buyer there is a seller and the more liquidity the better chance that we will all get a fair price for oil. Bad regulation your part in a tight global market may lead to less market transparency and potential shortages of supply. Arbitrary position limits in a market whose demand is at or near its all time high demand levels is counterproductive. The increase in so called speculation is simply a reflection of what is happening with oil on a global scale. Take Senator Harry Reid who claims experts say that speculation accounts for 20%, 30%, and even 50% of the cost of a gallon of gasoline. Of course Senator Reid these experts who say this has no facts to speak of on this so it’s only speculation.They have a right to speculate of course unless you clamp down on that as well.”

Well said, Mr Flynn.

 http://www.alaron.com/WorkArea/blogs/blogrss.aspx?blog=80

There was an article on Bloomberg today about the cost of bailing out Fannie Mae and Freddie Mac per Secretary Paulson’s plan that is before congress. The Congressional Budget Office came up with a figure of $25 billion. If a rescue is necessary, which I am not sure that it will be, the $25 billion figure seems pretty low. But this begs the question, is $25 billion or 4 times that amount, really that much, when it comes to government spending. Lets compare this with the S&L crisis:

Cost of Savings and Loan Crisis – $125 Billion

• As a percentage of GDP in 1989 – 2.85%
• As percentage of Total Tax Receipts 1989- 7.32%

 

Cost of Fannie & Freddie – $25 Billion x 4 = $100 Billion*

• As a percentage of GDP for 2007 – 0.86%
• As a percentage of Total Tax Receipts 2007 – 2.39%

 
So even just comparing the cost of this with the S&L crisis, this bailout is relatively small. You would have to triple our numbers to get close to the percentages of the S&L costs.

Now I think that Fannie and Freddie need some serious reform. The structure of these GSE’s has not necessarily been as great for homeowners as Fannie and Freddie’s management and supporters would like us to believe. And ultimately it has caused an undue systemic risk to the financial system by allowing these entities to operate with less capital requirements than other firms because they had the implied (and now explicit) backing of the federal government. But to pull the rug out now would be stupid, and as Paul Muolo, co-author of Chain of Blame, said it would be game over for the US economy if these GSE’s were allowed to fail. So I think right now this is money well spent.

*Now this is a total guess, but certainly if the federal government gets involved it would be more than $25 billion. So 4x the based number is going to be our reasonable guess.

GDP and Tax Receipt numbers are from the US Dept of Commerce – www.bea.gov

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=atix1Kea2wh8

This is an interesting article by Frank Shostak about the what is the definition of the money supply. He makes the point that the most important aspect of money is that it is a medium of exchange. Therefore money supply at its most basic is money that can be used for exchange immediately, without restrictions. This limits the money supply to being cash and demand deposits, not including savings accounts and money market accounts which Shostak contends are like credit instruments because they have time restrictions.

The guys over at GaveKal pointed me to this one. Worth the read.

The Mystery of The Money Supply Definition