Tuesday, January 27, 2009

The Canary in the Coal Mine, the Foxes Guarding the Chicken Coup

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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The government in Iceland collapsed yesterday. Severe economic decline combined with rising prices (a combination that the U.S. press constantly says can't exist together, but which reality indicates can) did the present administration in. The government received sweeping powers, which included potentially unlimited control of every business in the country, in an attempt to fix it. This approach never worked in communist countries and certainly wasn't going to work in Iceland either. Government policies in Iceland, just as in other developed economies, made the financial crisis possible. Since it was the government that allowed the economy to get beyond repair, it is not surprising the same government couldn't fix it.

The key to solving the Credit Crisis is to stop rewarding people for failure and instead punish them for it. Leaving the foxes in charge of the chicken coop is a guarantee that nothing will be fixed. A new study came out this morning showing that at least 90% of the top executives at banks and brokers that are receiving U.S. government bail out money are still at work. The very same people who made the bad decisions that have destroyed the financial system are being rewarded for doing so. In many cases, they are still receiving bonuses, paid by the U.S. taxpayer, for their 'excellent' performance. Why should anything get better under such circumstances? The newly appointed Treasury Secretary, tax cheat Timothy Geithner, is a strong advocate of government bailouts, so don't expect much change on that front. Based on his own personal behavior, he also obviously thinks there should be one set of rules for the people in charge and another for everyone else. How effective is he going to be in showing the corrupt and incompetent Wall Street elites the door?

Under such circumstances, it is not surprising that consumer confidence hit a new all time low of 37.7 in January. The present situations index, which measures how consumers feel about the current economy, declined further to only 29.9. The gloomy mood of consumers is translating to lower retail sales in the last many months and will create increased unemployment and bankruptcies in the retail sector in the not too distant future. Consumers are not only being hit by the threat of unemployment, but the two major pillars of wealth in the economy, the stock market and home prices, have pulled the rug out from under them. Just today, the Case Shiller home price index for November declined 18.2% year over year. A separate report a few days ago indicated house prices in California had dropped 38%.

While tiny Iceland can be bailed out by the World Bank, who is going to bail out Great Britain or the U.S.? The collapse phase of the Credit Crisis showed up first in Iceland because its small economy doesn't have the same degree of buffers and interdependencies that protect larger economies (at least in the short term). Iceland looks like the canary in the coal mine that expires first when exposed to toxic gas and warns the bigger miners to get out before the same thing happens to them. In our current economic situation, the bigger miners are just not taking the appropriate action to save themselves.

NEXT: The Latest from Davos Switzerland

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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