A reminder for the fans of demographics:  Kathleen Casey-Kirschling is generally recognized as the nation’s first baby boomer. She was born in Philadelphia on January 1, 1946, at 12:00:01 a.m. Casey-Kirschling applied for Social Security benefits on 15 October 2007, officially starting the retirement of the baby boomers at an event attended by Social Security Commissioner Michael Astrue.

Bloomberg: “Drake Management LLC suspended most redemptions from its largest hedge fund after losing 23.7 percent through November, according to a letter sent to investors of the New York-based firm.”

Bloomberg: “Legg Mason Inc. pumped $1.12 billion into two non-U.S. cash funds to prevent losses, the biggest bailout by a money manager tied to asset-backed debt sold by structured investment vehicles. ”

Financial Times: “More than 10 North American banks and fund managers have collectively injected $3bn into their money market and cash funds since October to stem losses.”

Janus, the fund manager, this week became the latest to bail out its money market funds. It put in $109m to buy troubled asset-backed securities from its funds. Half a dozen firms have made similar moves.”

Seeking Alpha has done us the service of plotting the GDP estimates for 2008 provided by 63 economists surveyed by Bloomberg. The unanimity is appalling and to me indicates systematic bias.

As one can clearly see, only two are forecasting a recession and a brief, mild one at that. A new Los Angeles Times/Bloomberg poll found that 71% of Americans now believe that a recession is likely. All I can say is let’s review this chart this time next year and see whether the economists are smarter than the man in the street. I’m with the man in the street (surprise!). I don’t know who the surveyed shills economists are; I do know that Paul Kasriel and Nouriel Roubini are both expecting a recession.

Over time, the Fed has lost control of the money supply. In part because it deliberately gave it up - by reducing or eliminating reserve requirements - and in part because of the development of an alternate financial system that bypasses traditional banking and creates credit without regulatory restraint and, for the most part, without being counted as money in the monetary aggregates.

Some years ago, a friend of mine who was a senior executive with one of the major Canadian banks made himself unpopular by suggesting that the bank give up its banking license. He did this because he saw that the profits would be greater in the unregulated alternate system than in the traditional, regulated banking system. Not that Canadian banks are unprofitable - they are amazing money machines. But that truly staggering amounts of money could be made with the regulatory restrictions removed. Like Goldman Sachs, for example.

Every time someone signs a promissory note - a mortgage, an auto loan, a credit card slip - whatever - money is created. That signature creates, instantaneously, a valuable asset that had not existed before - the signer’s promise to pay money in the future. That is the moment when money is created, everything else is just book-keeping.

The signer, the borrower, in effect sells that promise to the lender in return for money. Just like a bank, as soon as the lender accepts the note, he has a liability to the borrower for the agreed value of the loan. Now it may not be counted as money, because the lender’s liabilities may not be on the list of liabilities to be counted as money in the aggregate statistics. But it is as much money as any of those. Once you get past the state money, the direct liabilities of the Federal Reserve, everything else is just some private party’s promise, whether an actual security or an account statement. That’s why we get multiple money supply numbers - MZM, M1, M2, M3 and so forth - because they each include different classes of private money in addition to the real money. When Joe and Jane Doe sign the promissory note that is secured by a mortgage on their property, that note is their promise to pay money. Now the promise may not be a good one, and so it gets packaged and passed through various intermediate stages - RMBS, CDO, etc. - that attempt to segregate the risks.

We see that various different kinds money market funds are counted in most of the money supply aggregates except M1. But money market funds are simply mutual funds that invest (principally) in short-term debt.Why count money market funds and not, for example, commercial paper? Where is the line drawn? This is why the monetary aggregates have lost their predictive value - they don’t include most of the money. We’ve seen the rise in “money supply” triggered by investors substituting money market funds for asset-backed commercial paper. That’s an unnatural artifact of excluding commercial paper from the statistics.

The consequence of these measurement problems is that we do not get good information about the amount of credit and/or private money that is being created, nor its quality. The Great Depression in the 1930s was the result of banks failing to make good on their promises. Too many things went wrong all at once. The “fix” for this problem was to double reserve requirements and institute deposit insurance.The deposit insurance is still around, but the reserve requirements are gone again (Thanks, Al!). Perhaps more importantly, the new private money - money market funds, etc. - has no insurance and no reserve requirements. An immense amount of private money has been created, no-one knows how much. How good is it?

In the real world, there are a lot of folks who make their way by lying, cheating and stealing. In the real estate business, as I’ve mentioned, these behaviours have become the norm rather than the exception. Law enforcement is “overwhelmed.” Constance Wilson, executive vice president of Interthinx, which develops fraud detection tools for the lending industry, thinks it is going to get even worse:

“The cases we’re seeing today are from 18, 24, 36 months ago, when the market was still good,” Ms. Wilson said. “Now we’re going to see an increase in mortgage fraud, because all those loan officers, brokers and appraisers who were making six-figure incomes, now their back is against the wall. If that loan doesn’t close, they can’t make their home payment.

An increase? Hard to believe that it could be worse. But the reality is that most of the fraudsters will go unpunished, ready, willing and able to do it again.