Dirt Simple

I’ve been spending a lot of time studying the current financial crisis, and trying to come up with articles that put it all in terms that regular people can understand. Well, today I stumbled upon an episode of This American Life, called The Giant Pool of Money. The episode was broadcast back in May, but it’s still highly relevant, and does a great job of explaining the whole rise and fall of the subprime crisis. If you’ve felt at all confused by what’s going on with this whole financial mess, listen to this episode.

Then, on October 3rd, tune in to a follow up episode called, Another Frightening Show About the Economy.

Mad Dog Palin is the title of an article by Rolling Stone writer Matt Taibbi.

Taibbi suggests that, “The scariest thing about John McCain’s running mate isn’t how unqualified she is — it’s what her candidacy says about America.”

Warning, if you have ever found yourself shouting the letters, “U-S-A, U-S-A,” you may find this article sends you into a fit of nationalistic rage. Then again, I can’t imagine you being here in the first place. Too many words, not enough pictures of chicks.

This is big news, and arguably, really good news too. The Globe & Mail has published an article which says the Canadian government has begun talks toward “deep economic integration” with the European Union. The original article is in their subscription only section right now, and I’m not buying a subscription. But the topic is starting to get comments from other sources.

In his blog at Macleans.ca, Andrew Coyne calls this “Huger than huge. Hugeastic. Hugeriffic.” He suggests that this could make Canada the crossroads for international trade.

Understand what this means. If we pull this off, then Canada would be the only developed country (Mexico has its own deal) with guaranteed access to both the European Union and the United States — the two richest markets in the world, with 800 million consumers between them. Locating in either the US or the EU would give a firm guaranteed access to only one. Only by locating in Canada would they get both.

Coyne also quotes this text from the original Globe & Mail article:

The proposed pact would far exceed the scope of older agreements such as NAFTA by encompassing not only unrestricted trade in goods, services and investment and the removal of tariffs, but also the free movement of skilled people and an open market in government services and procurement – which would require that Canadian governments allow European companies to bid as equals on government contracts for both goods and services and end the favouring of local or national providers of public-sector services.

If this proves true, this would effectively make Canada a satellite state of the European Union. Seems like this should be getting a little more press. Seems like maybe this should be an election topic, no?

Don’t get me wrong. I’m all for it. Anything that reduces Canada’s economic dependence on the United States is a good thing in my books. My gut tells me that most Canadians will feel the same way. My gut also tells me that the Europeans will strongly favor this as well.

More press:

Roger Taylor at the Chronicle Herald says Nova Scotia should push for Canada-EU pact.

The Montreal Gazette: Free trade with Europe - a not-so-distant dream

National Post Editorial Board: Free trade with Europe is worth some concessions

The Dow Jones Industrial Average dropped 778 points (6.98%) to 10,365. Perhaps more indicative of market perceptions though was the almost 9 percent drop in the broadly based S&P 500 Index. It fell just over 106 points to rest at 1106 at the end of trading.

In Canada, the Toronto Stock Exchange followed suit with a drop of 841 points, or 6.93 percent.

Markets were reacting to the U.S. congress failing to pass the $700 billion bailout package proposed by the U.S. Treasury and the Federal Reserve.

It is becoming painfully clear though that this is not just a U.S. problem. Europe has now seen four bank bailouts in the past few days. Money markets around the world have frozen up, with banks unwilling to lend to one another because nobody trusts anybody anymore. The fallout of this may soon be that non-bank corporations who rely on short-term borrowings to finance daily operations may be the next to fall.

Update: It’s worth noting that in percentage terms, today’s drop in the market is nowhere near being the worst. During the 1987 crash, the Dow dropped 22.6% in a day.

Here’s something you might not have known about the Federal Deposit Insurance Corporation (FDIC) which insures client deposits at U.S. banks. According to Derek DeCloet of The Globe & Mail:

the deposit insurance fund, at $45-billion (U.S.), could probably handle only one or two WaMu-sized busts before it runs out of money, which would force it to turn to the U.S. taxpayer for a loan.

How can that be? The United States, home of more than 8,000 financial institutions, has had relatively few of them go broke since the savings-and-loan debacle, and that was nearly 20 years ago. Only three small FDIC-insured banks failed last year and none in 2005 and 2006. There has been plenty of time to build up the fund. But it hasn’t happened because some genius decided, back in the mid-1990s, that the deposit insurance fund need not save too much for a rainy day. So for the next decade, most U.S. banks got a holiday from sending their dimes to FDIC.

See full article: Solvency Street is paved with pain

A couple days ago, I wrote about a Merrill Lynch Canada report which warned of trouble ahead for the Canadian housing market. Now a Scotiabank report highlighted in a Globe & Mail article makes the case for why the Canadian housing market won’t melt down like it has in the U.S..

The Scotiabank report makes some valid points about the differences in the lending landscape between Canada and the U.S.. There is no question that Canadian institutions did not engage in the same type of lending tactics as we’ve seen in the U.S.. I agree that the Canadian banking system is, in general, much more stable than that of the U.S., and I agree that we shouldn’t see the domino like effect that we have seen in the U.S. which has brought down multiple institutions.

But while it’s reassuring to know that the system may be more sound in Canada than in the U.S., the report still makes no mention of the potential consequences of a prolonged downturn in the U.S. economy. I think that’s an important point, because while Canada might not see the massive defaults and institutional failures of the U.S., it could still see sharp corrections in some of its more inflated markets that could affect a lot of people.

My thoughts on the subject are simple. I don’t have any charts or data. This is purely an armchair economist’s analysis of human behavior, so take it for what it’s worth. Whenever times are good, and money is plentiful and cheap, people overextend themselves. This applies equally to individuals, corporations, and governments. When signs emerge to suggest a change in the economic climate, people convince themselves that these are false positives, and that “things are different this time.” Eventually history repeats itself, the economy takes a dump, and then people go around saying they won’t get fooled again…until they do.

Thank you Jack Cafferty for your comment on Sarah Palin’s performance on the Katie Couric interview [Youtube video], and for chiding Wolf Blitzer for making excuses for her. Being critical of Palin, and of McCain for having chosen her, is not partisan behavior when the facts have been made so painfully clear. Palin possesses neither the intellect, nor the wisdom, nor the experience to hold any position related to the direction of any nation, let alone the most powerful one on earth.

McCain’s choice of Palin shows willful negligence for the safety and well-being of his country. Palin’s refusal to acknowledge that she is not qualified displays the same willful negligence. Americans who are giving Palin a pass on cuteness, folksiness, or down-to-earthiness are also guilty of willful negligence. Those who consider her courageous for “taking on the challenge,” are seriously warping the definition of courage. Courage is doing what’s best for others, what’s best for one’s nation, regardless of the cost to oneself. If Palin wants to show courage, she must acknowledge her limitations, suffer whatever humiliation that entails, and let someone qualified take her place.

“Ask not, what your country can do for you…”

Update: I’m not the only one making this call. In a Newsweek article [Palin is ready? Please.], Fareed Zakaria, suggests that it might be time for Palin to announce that she needs “to spend more time with her family.”

From Bob Herbert at the New York Times: Palin’s words raise red flags. Herbert is being generous, and suggests that more scrutiny from the press is required, and if she still comes up short, she should be replaced. I don’t see the need for further scrutiny. It was clear that she was too inexperienced long before the Couric interview. The stakes are too high to be giving the benefit of the doubt.

If you don’t know who Peter Schiff is, he’s the president of Euro Pacific Capital, and has served as economic advisor to congressman Ron Paul’s presidential campaign. He’s been a bear on the U.S. economy for some time now, and has earned the nickname, Dr. Doom.

In December 2006 he appeared on a Fox News panel segment on the U.S. housing market, in which he tried to get across his view that the U.S. economy, and the housing market was a house of cards waiting to fall. But you almost don’t get to hear a word he says due to the laughter and ridicule he suffers from the other panelists. And we wonder how we got here. Now the same clowns are telling us that the only thing that can save the country from ruin is another $700 billion in funny money credit.