Global Financial Crisis

[Michael]

This thread shall serve for discussions of the ongoing crisis in the financial-credit markets around the world.

Certainly the USA is 'ground-zero' for this issue due to the 'sub-prime' mortgage problem that appears to be the 'straw' that broke the camel's back here. Also, the sheer size of the US financial market and the US place at the heart of the global financial system makes this issue seem to be an entirely American one.

However, events in Iceland, Netherlands, Britain and Germany (to name just a few) show clearly that the problem is not unique to the US - the same toxic mixture of high leverage, opaque regulations, massive amounts of derivatives and credit-default swaps and cozy relationships between banks and regulators is a disease that is not unique to the US market.

That is to say, problems in Iceland, Netherlands, Britain and Germany were NOT caused directly by the meltdown in US mortgage-backed securities (though this did play a role). In every case I've examined so far (Glitnir in Iceland, Fortis in Netherlands, IKB in Germany) the problems are very similar to the US banking problem, but entirely unrelated to the US problem (i.e. not caused by the US problem).

So we have here a 'global' financial crisis. Central bankers in the Middle East, Russia, China, Taiwan, Japan and Canada are all reacting to the increasing global scope of this problem, even though these countries show no evidence of being involved in the 'risky' activities that are at the heart of the banking crisis.

Over the next few days, I'll be posting various pieces to address this general topic. I've been doing lots of research trying to figure out just what has 'caused' the problem (and why some places are affected and not others).

Canada rated world's soundest bank system: survey

CANBERRA (Reuters) - Canada has the world's soundest banking system, closely followed by Sweden, Luxembourg and Australia, a survey by the World Economic Forum has found as financial crisis and bank failures shake world markets.

But Britain, which once ranked in the top five, has slipped to 44th place behind El Salvador and Peru, after a 50 billion pound ($86.5 billion) pledge this week by the government to bolster bank balance sheets.

The United States, where some of Wall Street's biggest financial names have collapsed in recent weeks, rated only 40, just behind Germany at 39, and smaller states such as Barbados, Estonia and even Namibia, in southern Africa.

Source (http://www.reuters.com/article/newsOne/idUSTRE4981X220081009)

[Michael]

First up in our exploration of the cause of the crisis is the chief culprit himself.

“Not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient.” — Alan Greenspan in 2004

I believe Mr. Greenspan was specifically referring to the presumed reduction in financial risk afforded by the 'art' of hedging financial risk using derivatives when he made this comment.

George Soros, the prominent financier, avoids using the financial contracts known as derivatives “because we don’t really understand how they work.” Felix G. Rohatyn, the investment banker who saved New York from financial catastrophe in the 1970s, described derivatives as potential “hydrogen bombs.”

And Warren E. Buffett presciently observed five years ago that derivatives were “financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”

Source (http://www.nytimes.com/2008/10/09/business/economy/09greenspan.html?_r=1&pagewanted=1&hp&oref=slogin)

The derivatives market is $531 trillion, up from $106 trillion in 2002 and a relative pittance just two decades ago. Theoretically intended to limit risk and ward off financial problems, the contracts instead have stoked uncertainty and actually spread risk amid doubts about how companies value them.

If Mr. Greenspan had acted differently during his tenure as Federal Reserve chairman from 1987 to 2006, many economists say, the current crisis might have been averted or muted.

Over the years, Mr. Greenspan helped enable an ambitious American experiment in letting market forces run free. Now, the nation is confronting the consequences.

Source (http://www.nytimes.com/2008/10/09/business/economy/09greenspan.html?_r=1&pagewanted=1&hp&oref=slogin)

Now I've never been much of a fan of Mr. Greenspan going back to the late 1980's and his remarks on that frothy 'bubble' market fueled by the deregulation of the Savings & Loans and the subsequent crash (and public bailout). I lost confidence in him then and my opinion of him just keeps dropping every time I read more about him.

Greenspan has been both the champion of deregulation (or non-regulation) since the mid-1980's and was the man who steered the late 80's property bubble into the 90's dot-com bubble and then shifted that into the early 2000's property & commodities bubble (that is presently deflating). All greased up by Alan's loose money policy with negative (real) interest rates.

And they call his replacement "Helicopter Ben" due to his promise to throw money out of a helicopter if he has to save the markets. Loose money policy indeed.

[wphelan]

http://mises.org/story/3155

This article examines the origins of the current financial situation. This guy is at the Mises Institute, so that should give you an idea about his angle on this, but it seems to make sense to me. Austrian economic theory doesn't seem to get much respect, but I'd like to hear what everyone else thinks about this.

The main point is that central banks distorted the capital structure of the economy with loose monetary policy, which caused a lot of bad investment (the housing market now and the dot-com bust a few years ago) and unsustainable growth.

I know a lot of the focus is on lack of regulation and corruption in the financial world, but regulation is only treating the symptoms if the foundation of the system is flawed. All the regulation in the world won't stop this from happening again if central banks continue with the same policies.

It seem like the recent bailouts might prop the system up for a little while, but where will it leave us a few years down the road? If I had to guess, I'd say right where we are now. I'm not arguing that regulations are unnecessary, but will regulations matter that much if the way central banks operate goes unchanged?

[Michael]

http://mises.org/story/3155

This article examines the origins of the current financial situation. This guy is at the Mises Institute, so that should give you an idea about his angle on this, but it seems to make sense to me. Austrian economic theory doesn't seem to get much respect, but I'd like to hear what everyone else thinks about this.
It sounds very interesting to me. I've never liked the 'Chicago School', thought I'm not a specialist in economics. I've always thought the assertion that the 'business cycle' was dead and/or could be controled by rigorously applied monetary policy to be an absurd fantasy.

I'd be interested in what some of our economics trained members think of this.

The main point is that central banks distorted the capital structure of the economy with loose monetary policy, which caused a lot of bad investment (the housing market now and the dot-com bust a few years ago) and unsustainable growth.
Yes, I agree with this entirely, though I wouldn't put all the blame on the central banks - they are notoriously 'non-independent' - meaning their political masters must share the blame.

There are several components to both the dot-com bubble and the housing bubbles, though 'cheap credit' seems to be the biggest one. One ought not overlook the US tax-deduction for mortgage interest payments. This is essentially a public tax subsidy on holding debt - and all such market subsidies tend to distort the market in the long run.

I know a lot of the focus is on lack of regulation and corruption in the financial world, but regulation is only treating the symptoms if the foundation of the system is flawed. All the regulation in the world won't stop this from happening again if central banks continue with the same policies.
One of my earlier posted arguments (Regulating Capitalism) asserts that regulation was a political failure. All the tools/laws/agencies were there, but the politicians pretty much encouraged the regulators not to use them.

That is always a key problem with governments - they love the 'bonus' revenues that accrue to the government from both 'loose money' policies and from financial chicanary.

It is a fact that the one 'balanced' budget delivered in Washington in the last 25 years came not from the brilliance of Bill Clinton (though he does deserve some credit here) but from massively large (bonus) tax revenue in the form of capital gains taxes on all those puffed up dot-com shares smart people were cashing out of. This huge boost in revenue looks good on paper, but isn't likely to repeat year after year.

(By the same token, when the stock market goes down in a bear market, capital gains tax revenue drops giving the government less revenue than they had expected, causing unexpectedly larger deficits)

It seem like the recent bailouts might prop the system up for a little while, but where will it leave us a few years down the road? If I had to guess, I'd say right where we are now. I'm not arguing that regulations are unnecessary, but will regulations matter that much if the way central banks operate goes unchanged?
Yes, this is a very good point and one to keep in mind. All the improved regulatory hawkishness in the world won't stop the Federal Reserve from pursuing a 'loose money' policy and inflating asset bubbles all over again - or politicians, investors and consumers from demanding a 'loose money' policy in the first place. Cheap credit is a very popular thing. Go figure.

Personally, I think that the attempt to thwart recessions through 'loose money' is one of the root causes of the asset bubbles that every bull market seems to produce now. Recession are supposed to hurt. That's how they do what is necessary to achive equilibrium.

And that is perhaps a key theoretical problem for economic theory - financial systems ultimately seek an equilibrium. Our modern western eco-political systems require (need) constant annual growth.

[Michael]

One interesting nugget of information that I've picked up lately is that the creation of the process of 'securitization' of mortgages, in itself, makes negotiations with the original issuer of the mortgage all but impossible.

When a person's mortgage loan was issued and held by a local bank, one could, under distressed market conditions, approach the bank and try to renegotiate more manageable terms. In many cases, this is in the bank's interest to come to a mutually satisfactory agreement. However, when that mortgage debt is sold by the bank to another financial entity to be securitized (bundled up to distribute the risk factor) and then sold on to another financial entity to be sliced back down into smaller pieces (and leveraged like hell) and sold onto other financial institutions and retail investors, it becomes completely impossible for the original borrower to re-negotiate anything at all (since it is impossible to get the 'lender' to formally give legal permission). And thus, the borrower either has to make full payments on time or default/foreclosure is the result. No other option is feasible (in a distressed market). In a good market, one could potentially find a third party to purchase the property to enable a discharge of the mortgage debt. Not so in a distressed market.

When the market turns from 'bull to bear', instead of a few local banks taking some prudent write-downs on the debt (which is a reduced asset on the bank's books), we get thousands of abandoned houses and massive financial institutions collapsing. This effectively makes a simple downturn in the market into a disastrous event that creates a 'domino effect' of the default all the way up the world-wide financial food-chain.

On the other hand, the art of securitization of mortgages has been the main vehicle that has enabled the financial credit markets to grow exponentially over the last few decades. The large-scale pooling of the traditional security of investment in property mortgages combined with hedge-trading and derivatives, the overall cost and risk of credit has substantially dropped in real terms. Low interest rates for borrowing has been a world-wide phenomena for the last two decades. This has been the primary engine of economic growth and corporate profits around the world.

The enormous growth of the financial sector is one of the wonders of our age. In the 1960s the business of banking, broking and insuring accounted for just 10 per cent of total corporate profits in most developed economies. By 2005, this proportion had swelled to nearly 35 per cent in the US and roughly the same in Britain—the two countries that host the world's largest financial centers.

George Soros recently observed in a Prospect roundtable (July 2008) that the sector had got overblown and needed to shrink. "The size of the financial sector is out of proportion to the rest of the economy. It has been growing excessively… ending in this super-bubble of the last 25 years."

Source: Article (http://www.prospect-magazine.co.uk/article_details.php?id=10443)

This is one of the very best articles I've read that puts the whole financial crisis issue into perspective of what is actually happening. The analogy of the 'croupier' at the casino is excellent.

The financial services industry doesn't actually produce anything all that productive. Sure it exists to facilitate the supply of capital to actual productive enterprises and this is a necessary function in a capitalist-style financial system, but our present system seems to produce far more capital-credit than the whole capitalist system can possibly use productively. The vast majority of modern financial transactions are about trading assets from one to another, not actually financing production (capital). Some of it certainly is supporting capital production - but that's a smaller piece of the pie. The majority of the pie is the trading game.

So the question is, how long can we keep up this financial house of cards before we stop using the taxpayer to subsidize the real cost of credit risk? The longer we play this game, the more taxpayer bailouts will be necessary to sustain it. The financial services industry itself is the ultimate bubble.

[Americano]

Great post. It is a house of cards limited only by how long other nations consider US markets for their value added goods and services to be of enough value to extend credit at the public (government) level.

[Michael]

Great post. It is a house of cards limited only by how long other nations consider US markets for their value added goods and services to be of enough value to extend credit at the public (government) level.
So long as it is the US taxpayer that ultimately is the one backstopping the system, I don't see any reason for foreign capital to not go along for the ride.

All signs are that the politicians are hard at work trying to 'restore' the system to its state prior to October 2008. That's what they call a 'recovery'.

I call that a recipe for more disasters. So long as the financial services bubble exists - fostered and subsidized by the US government, these kind of bank failures are going to be increasingly common in the future.

When an asset bubble pops, that is not the time to go slashing interest rates. Slashing interest rates just helps to re-inflate the asset bubble.

[wphelan]

So long as it is the US taxpayer that ultimately is the one backstopping the system, I don't see any reason for foreign capital to not go along for the ride.

All signs are that the politicians are hard at work trying to 'restore' the system to its state prior to October 2008. That's what they call a 'recovery'.

I call that a recipe for more disasters. So long as the financial services bubble exists - fostered and subsidized by the US government, these kind of bank failures are going to be increasingly common in the future.

When an asset bubble pops, that is not the time to go slashing interest rates. Slashing interest rates just helps to re-inflate the asset bubble.

Exactly. Politicians are trying to restore people's "faith in the system," but the 'system' is what got us where we are today. As long governments pursue an agenda of ridiculously cheap credit and unsustainable growth, we're going to continue to see asset bubbles rise up and burst all over again.

Apprently, the door is open to cut rates even further, possibly down to zero percent.

http://www.bloomberg.com/apps/news?pid=20601087&sid=adtjOhAF5mEk&refer=home

[Americano]

So long as it is the US taxpayer that ultimately is the one backstopping the system, I don't see any reason for foreign capital to not go along for the ride.

All signs are that the politicians are hard at work trying to 'restore' the system to its state prior to October 2008. That's what they call a 'recovery'.

I call that a recipe for more disasters. So long as the financial services bubble exists - fostered and subsidized by the US government, these kind of bank failures are going to be increasingly common in the future.

When an asset bubble pops, that is not the time to go slashing interest rates. Slashing interest rates just helps to re-inflate the asset bubble.

The typical argument for slashing interest rates is inflation not being a problem. It certainly isn't when food and energy are excluded, but when the currency is inflated with debt to service special interests that same taxpayer takes the hit in a nation that imports far more than it produces while their purchasing power diminishes at an astounding rate due to stagnated wages.

Not smart in a nation 70% dependent on consumer spending, but the powers that be are obviously in desperation mode to save preferred stockholders from losing their paper wealth. They're actually still making noises about the housing market recovery even as values continue to plummet. There's nobody at the wheel to put the brakes on in what is turning into a disaster of epic proportions.

[Michael]

Exactly. Politicians are trying to restore people's "faith in the system," but the 'system' is what got us where we are today. As long governments pursue an agenda of ridiculously cheap credit and unsustainable growth, we're going to continue to see asset bubbles rise up and burst all over again.
This is precisely my view on the issue.

Restoring the markets back to where they were before the trouble erupted in mid-September 2008 is a recipe for doing it all over again.

Btw, one calculates "real" interest rates by subtracting the inflation rate from the prime interest rate. That means the US is running negative 'real' interests right now (again). Exactly the game that produced the housing bubble.

[Americano]

This is precisely my view on the issue.

Restoring the markets back to where they were before the trouble erupted in mid-September 2008 is a recipe for doing it all over again.

Btw, one calculates "real" interest rates by subtracting the inflation rate from the prime interest rate. That means the US is running negative 'real' interests right now (again). Exactly the game that produced the housing bubble.

The difference being credit other than Fed to financial institutions has for all practical purposes shut down. That's the new, even more dangerous bubble and the public isn't even getting new crackerbox houses or planned obsolescence vehicles they can't afford.

[Michael]

Interestingly enough, the Conference Board of Canada (official economic forecaster for the government) has predicted 1.9% growth for 2009 and that Canada will avoid an actual recession, although all growth forecasts have been cut in half for the 4Q and 2009.

Looks like Canada's really strong fiscal fundamentals are paying a dividend here...

[Americano]

Interestingly enough, the Conference Board of Canada (official economic forecaster for the government) has predicted 1.9% growth for 2009 and that Canada will avoid an actual recession, although all growth forecasts have been cut in half for the 4Q and 2009.

Looks like Canada's really strong fiscal fundamentals are paying a dividend here...

I'd imagine most of Canada's growth slowdown is directly related to its largest customer, the US?

[Michael]

I'd imagine most of Canada's growth slowdown is directly related to its largest customer, the US?
40% of Canada's economy is export-driven and 80% of all exports go to the USA, so yes, any slowdown in the US economy is guarenteed to cause a slowdown in the Canadian economy. Essentially exports to USA makeup 32% of Canada's GDP.

The automotive industry makes up 8% of Canada's GDP and US auto sales are hurting bad right now (October 2008 is the lowest level of auto sales in USA in several decades).

And given the predictions of a long/deep recession in the US, it is surprising that Canada is predicted to avoid an actual 'recession', though our economy is clearly in a 'slowdown' mode and will remain in one for as long as the US does.

[Americano]

40% of Canada's economy is export-driven and 80% of all exports go to the USA, so yes, any slowdown in the US economy is guarenteed to cause a slowdown in the Canadian economy. Essentially exports to USA makeup 32% of Canada's GDP.

The automotive industry makes up 8% of Canada's GDP and US auto sales are hurting bad right now (October 2008 is the lowest level of auto sales in USA in several decades).

And given the predictions of a long/deep recession in the US, it is surprising that Canada is predicted to avoid an actual 'recession', though our economy is clearly in a 'slowdown' mode and will remain in one for as long as the US does.

I know Canada has been seeking to broaden its export base to reduce the US concentration. In your opinion will the US decline put some urgency in that effort or will complacency reign?

[Michael]

I know Canada has been seeking to broaden its export base to reduce the US concentration. In your opinion will the US decline put some urgency in that effort or will complacency reign?
Well, yes, there will be some urgency to that game, but that will last only as long as the US downturn does. US market is just so easy for Canada to work with that there's a strong preference for it.

While we may find alternative markets for our resource products (lumber, nickel, iron-ore, potash, industrial diamonds, etc), that's the one area that US doesn't really dominate our exports (except energy). US energy imports aren't likely to suffer at all since natural gas and electricity are both built on long term contracts, while oil is oil and no ever has trouble selling that stuff.

Most of the Canada-US exports are heavily US consumer-economy driven and thus are hard to find alternative markets (cars, building supplies, software, television programming, pre-fab stuff, autoparts, etc). We just pride ourselves on 'weathering the storm' and out competing the US local companies (with our high wages and high taxes). :D

(btw, Canada is a world-leading exporter of 'childrens' television programing - we supply half the planet in 48 different language versions)

[Michael]

Anyone see the front cover of Time this week? :eek:

They've got the three people who did the most to CREATE the financial crisis there taking credit for dealing with it? How bizarre is that?

(Greenspan, Rubin and Summers)

[Americano]

Anyone see the front cover of Time this week? :eek:

They've got the three people who did the most to CREATE the financial crisis there taking credit for dealing with it? How bizarre is that?

(Greenspan, Rubin and Summers)

Now I remember why my only hard copy subscription is Smithsonian. Didn't Time have a cover with Hitler as man of the year?

[Michael]

Now I remember why my only hard copy subscription is Smithsonian. Didn't Time have a cover with Hitler as man of the year?
Yes - 1938 no less. :eek:

And Josef Stalin for 1939. :eek:

[Michael]

Forecasters: U.S. in 14 month recession

NEW YORK (Reuters) - The U.S. economy fell into a recession last spring and will contract sharply this quarter as more than 200,000 workers per month are added to the rolls of the unemployed, a survey said on Monday.

The Philadelphia Federal Reserve's latest Survey of Professional Forecasters removed some of the glow from an earlier report showing industrial output rebounded in October after hurricane disruptions produced a stunning fall in September.

Early data from the factory sector also supported the grim view of the forecasters, showing manufacturing in New York state tumbled in November to yet another record low.

Japan on Monday joined the euro zone in recession. Although the U.S. economy contracted in third quarter, that followed two consecutive quarters of growth, albeit helped by government stimulus payments. The arbiter of U.S. business cycles has not yet declared the economy in recession.

Source (http://www.reuters.com/article/topNews/idUSTRE4AG54L20081117?feedType=RSS&feedName=topNews)

Still pointing at 1st quarter 2010 for US recovery. I first saw that prediction about a year ago. The 'credit crisis', two US stimulus packages and the $700 billion rescue fund (over $3 trillion US dollars so far) hasn't changed nothing.

In other news today...

Citigroup job cull to hit 75,000

US bank Citigroup has announced plans for about 52,000 new job cuts, on top of 23,000 cuts already made this year.

Citigroup said the 75,000 job cuts represented a reduction of about 20% of its staff, leaving it with 300,000 jobs worldwide "in the near term".

They never tell you that these are at the lowest rungs of the corporate ladder and that all the idiot executives who got Citigroup into the mess are getting a bonus this year...

Methinks Citigroup could perform financial miracles if they took the hatchet to a couple dozen senior executives (and didn't bother to replace them).

Lets just say that Citigroup's problems weren't caused by a bunch of clerks and tellers fucking things up.

[Michael]

The Six Unknowns That Are Roiling the Stock Market

After weeks of mad volatility, even long-time market observers are baffled by what's ahead for stocks.
...

1. Will the market lows hold?
2. What will President Obama do?
3. How bad will the layoffs be?
4. How happy will the holidays be?
5. When will the hedge funds stop selling?
6. What's the next turn in the credit crisis?
Source (http://www.businessweek.com/print/investor/content/nov2008/pi20081114_324602.htm)

Indeed. Those are six darn good questions that no one really knows the answer to. Until these issues are fully known, the stock and bond markets are very likely to remain highly volitile, bearish and generally weak.

I suspect it is #6 that will be the most troublesome as the 'next wave' of credit failures hits the headlines - the US big-three auto companies most particularly. But perhaps some credit-card companies too. Apparently there's a whole wave of expected retail closings coming in January.

[Americano]

Since equity market activity is 80% institutional trading and many of the big firms have reduced or suspended dividends, the volatility has been and will be determined by the thresholds established in their buy/sell models based on 'official' economic reporting. I'm hearing 6000 if the holiday shopping season is as dismal as forecasts make it out to be. Followed by the always slow Q1.

I'd had discussions on Citibank with others this past summer and the consensus was failure in October. Then the Fed facilitated overnight borrowing, then it received $25B in bail-out capital, then the Fed began lending against commercial paper and now it looks like they need another $50B to avoid BK:

http://www.reuters.com/article/newsOne/idUSTRE4AJ45G20081122

Their market cap is now under the bail-out amount of $25B and the CEO is making those same noises every company makes before it tanks.

[Michael]

Obama Vows Swift Action on Vast Economic Stimulus Plan

By JACKIE CALMES and JEFF ZELENY
Published: November 22, 2008

WASHINGTON — President-elect Barack Obama signaled on Saturday that he would pursue a far more ambitious plan of spending and tax cuts than anything he outlined on the campaign trail, setting the tone for a recovery effort that could absorb and define much of his term.

In the Democrats’ weekly radio address, Mr. Obama said he would direct his economic team to craft a two-year stimulus plan with the goal of saving or creating 2.5 million jobs. He said it would be “a plan big enough to meet the challenges we face.”
Source (http://www.nytimes.com/2008/11/23/us/politics/23obama.html?pagewanted=1&_r=1&hp)

This does look ambitious! No real details here at all though. Probably something upwards of $300 billion is being planned here - and probably something specific for the auto sector.

It is to be noted that Presidential history suggests that the first year of the first term is the only time that one sees innovative or new policy initiatives from any Presidential Administration. If Obama's first year is all about economic stimulus packages, there may not be enough oxygen left to drive the healthcare initiative.

Personally, I think the universal healthcare initiative is potentially more important than the recession bailout game. Indeed, this policy package could serve as a 'bailout' of the US auto sector in itself by transfering the Auto sector healthcare liabilities over to a new universal program. I think if Obama doesn't move big on this issue in the first year when his political capital is at its highest, the program may not go through - or that if it does, it will be watered down to uselessness. One must strike while the iron is hot - Obama campaigned on an healthcare initiative and has an electoral mandate to pursue that right now.

[Americano]

Source (http://www.nytimes.com/2008/11/23/us/politics/23obama.html?pagewanted=1&_r=1&hp)

This does look ambitious! No real details here at all though. Probably something upwards of $300 billion is being planned here - and probably something specific for the auto sector.

It is to be noted that Presidential history suggests that the first year of the first term is the only time that one sees innovative or new policy initiatives from any Presidential Administration. If Obama's first year is all about economic stimulus packages, there may not be enough oxygen left to drive the healthcare initiative.

Personally, I think the universal healthcare initiative is potentially more important than the recession bailout game. Indeed, this policy package could serve as a 'bailout' of the US auto sector in itself by transfering the Auto sector healthcare liabilities over to a new universal program. I think if Obama doesn't move big on this issue in the first year when his political capital is at its highest, the program may not go through - or that if it does, it will be watered down to uselessness. One must strike while the iron is hot - Obama campaigned on an healthcare initiative and has an electoral mandate to pursue that right now.

I can't find the reference but recall Obama stating UHC is on his second year agenda. He's going to be busier than a one-armed paperhanger the first year and considering the size of the US economy $300B doesn't mean much other than a token gesture of 'doing something'. Since the US economy is 70% consumer driven, the average consumer is maxed out on debt (with credit card companies now reducing personal credit lines) and unemployment climbing I'd say it's time for the general public to grab their family jewels and hang on tight for a wild ride.

[Michael]

What to Do

By Paul Krugman

What the world needs right now is a rescue operation. The global credit system is in a state of paralysis, and a global slump is building momentum as I write this. Reform of the weaknesses that made this crisis possible is essential, but it can wait a little while. First, we need to deal with the clear and present danger. To do this, policymakers around the world need to do two things: get credit flowing again and prop up spending.
Read More (http://www.nybooks.com/articles/22151)

This is a pretty good article by Krugman about what needs to be done to address the ongoing 'credit crisis' around the globe.

Nothing radical there - just a good article that hits all the high points.

[Dominick]

Read More (http://www.nybooks.com/articles/22151)

This is a pretty good article by Krugman about what needs to be done to address the ongoing 'credit crisis' around the globe.

Nothing radical there - just a good article that hits all the high points.
Is the Invisible Hand on vacation ? :sneaky::angel:

[partofme]

Well it is now official. The U.S. has been in a recession since December of last year.

http://money.cnn.com/2008/12/01/news/economy/recession/index.htm?postversion=2008120112

[Michael]

Is the Invisible Hand on vacation ? :sneaky::angel:
Actually, the 'invisible hand' is waving around a wrecking ball right now.

The problem with the US financial markets are human rules, human regulations, fraudulent transactions, lots of political favors and a surfeit of human greed and shortsightedness.

Indeed, the problem with the US financial markets right now is the action of the invisible hand of market discipline - that's the problem here. Too many houses of cards, fraudulent valuations and over-optimistic projections. The 'invisible hand' of the market is making short work of most of that.

Most of our financial experts (and governments) really would much prefer to go back to the old rigged and fraudulent markets where the 'invisible hand' was no where in sight and they could all make lots of fake profits without producing anything.

[Michael]

Its official now. USA, Japan and EU are all in a recession at the same time.

Apparently this hasn't yet occured during the post-war period (until now).

And to top things off, China's economy is in a 'slowdown'.

[Americano]

Its official now. USA, Japan and EU are all in a recession at the same time.

Apparently this hasn't yet occured during the post-war period (until now).

And to top things off, China's economy is in a 'slowdown'.

I can't determine any quick, easy fix for this one.

[Michael]

Well, none of this should come as a surprise...

Internal Freddie Mac documents show that senior executives at the company were warned years ago that they were offering mortgages that could pose dangers to the firm, hurt borrowers and generate more risky loans throughout the industry.

At Fannie Mae, top executives were told it was necessary to develop "underground" efforts to buy subprime mortgages because of competitive pressures, although there were growing risks and borrowers often didn't understand the terms of the loans, documents show.

At Fannie, chief credit officer Adolfo Marzol wrote to chief executive Mudd in March 2005 to warn that entering new areas of the mortgage market represented significant risks. The industry was pushing new types of loans, he wrote, including those that required little documentation and those that carried rates that would adjust in a few years.

"The combination of these risks may be difficult for subprime borrowers to understand," Marzol wrote.

Marzol also warned that securities backed by these loans might not be as safe as they seemed. Fannie reported them as carrying the top grade given by credit-rating agencies, AAA, but Marzol cast doubt on that. "Although we invest almost exclusively in AAA rated securities, there is concern that rating agencies may not be properly assessing the risk in these securities," he wrote.

Despite these concerns, Fannie continued to push into this new market. A business presentation in 2005 expressed concern that unless it didn't, Fannie could be relegated to a "niche" player in the industry. Mudd later reported in a presentation that Fannie moved into this market "to maintain relevance" with big customers who wanted to do more business with Fannie, including Countrywide, Lehman Brothers, IndyMac and Washington Mutual.

The documents suggest than Fannie and Freddie knew they were playing a role in shaping the market for some types of risky mortgages. An e-mail to Mudd in September 2007 from a top deputy reported that banks were modeling their subprime mortgages to what Fannie was buying.
Source (http://www.washingtonpost.com/wp-dyn/content/article/2008/12/08/AR2008120803570.html?hpid=topnews)

This script is getting tired and repetitive. These guys made really dumb business decisions because their annual bonuses depended upon them to make those particular and bad decisions. If they did the right thing four years ago, they wouldn't have gotten huge bonuses. That's a key point to remember here. The whole financial system has a screwed up incentive-reward system that gives huge bonuses for dumb/stupid/risky behavior and treats the prudent, cautious and the wise as lepers.

I think the financial services industry needs to eliminate the 'limited liability' provision of the law. If these guys lost their houses and life-savings for their mis-deeds, I suspect some big changes in financial services management. Funny how something that would be 'way too risky' for one's own money isn't too risky for managing someone else's money...

[Michael]

Behind the debate over remaking U.S. financial policy will be a debate over who’s to blame. It’s crucial to get the history right, writes a Nobel-laureate economist, identifying five key mistakes—under Reagan, Clinton, and Bush II—and one national delusion.

The truth is most of the individual mistakes boil down to just one: a belief that markets are self-adjusting and that the role of government should be minimal. Looking back at that belief during hearings this fall on Capitol Hill, Alan Greenspan said out loud, “I have found a flaw.” Congressman Henry Waxman pushed him, responding, “In other words, you found that your view of the world, your ideology, was not right; it was not working.” “Absolutely, precisely,” Greenspan said. The embrace by America—and much of the rest of the world—of this flawed economic philosophy made it inevitable that we would eventually arrive at the place we are today.
Source (http://www.vanityfair.com/magazine/2009/01/stiglitz200901)

This is a pretty good 'overview' article of five key elements that caused the present financial crisis. I agree with pretty much everything here. Indeed, this article pretty much reinforces the ideas I raised in the OP of this thread - that what we have here is a political failure to use existing regulations. There was a concerted effort to ignore particular regulations, or get rid of regulations that were designed to specifically prevent the present financial crisis from happening. Remove the regulatory barriers to high-risk financial games and, surprise, surprise, we get high-risk financial games playing. Gosh, no one could have predicted that! :rolleyes:

[Michael]

Fed lowers prime to zero. This is really bad news.

I do find it interesting that when Japan finally (and fatefully) dropped interest rates down to zero, US commentators were uniform in correctly calling the source of the problem - that the Japanese banking system was rotten to the core (and the Japanese were in denial about).

Now the same case is present in the USA. Will these same US commentators admit the obvious now? The US banking system is rotten to the core.

And of course, the Japanese propping up their rotten banks was part of the problem that made Japan's recession last so long - just like what the US is doing. This is not looking good at all.

[Americano]

China and Japan are now slashing production of US consumer goods at a crisis level. We'll see a little deflation and then our planned frenzy of incurring government debt and internal monetary expansion to 'solve the economic problems' will provide some very interesting inflation. Easy double-digits.

[Michael]

This is an excellent article that discusses the actual nuts and bolts of structured financial products. What is particularly of interest is the various admissions of how badly the rating agencies fucked up.

Given my eye-of-the-storm view of the matter, I thought it would be of interest to relate two stories from my long career in structured finance, one that may help explain why, if you asked me in 2004 or 2005, I would have staunchly defended structured finance technology as having real social benefit and why, by a couple of years later, it was clear to anyone looking honestly at the business that something had gone very wrong.

Fast-forward to 2006. I could easily spend 10,000 words explaining all the ways in which the credit-derivatives and structured-products markets had grown, and changed. By this time, structured finance technology had facilitated a truly insane inflation of the housing market, and the extension of credit on absurd terms to borrowers who nobody could rationally expect to be able to pay. And credit derivatives made it possible for companies like AIG to leverage their AAA credit ratings to acquire enormous nominal amounts of purportedly loss-remote credit risk and leverage this risk hundreds of times without any regulatory body being aware of their activities, much less able to intervene to control them. Much of this has been well-reported in a variety of venues. I want to tell one anecdote from the corporate structured finance market (the market I know best) as a means of debunking what I think is a rather self-justifying explanations for how things went so wrong in the mortgage market.

It has been argued that, in a nutshell, the reason things went so wrong in the structured finance market is that “nobody” thought that the national housing market could suffer a meaningful year-on-year price decline.
Source (http://theamericanscene.com/2008/12/23/ahi-quanto-a-dir-qual-era-e-cosa-dura-esta-selva-selvaggia-e-aspra-e-forte-che-nel-pensier-rinova-la-paura)

I also find this bit about the housing market to be interesting. I've seen dozens of other articles all mentioning this fundamental assumption of Wall Street that the US housing market could never suffer a national price drop.

The reason they came up with this is due to the old US banking regulations that kept every state separate. That meant that mortgages and housing finance was always as local as the real estate markets were. Thus, a downturn in one state was quite unlikely to affect the market in another state. Thus, the assertion that national real estate market problems were impossible.

But of course, all that changed in the 1980's when the inter-state banking rules were reformed (ie. eliminated). That meant that from then on, the US real estate market was dominated by national-based real estate companies, national-based mortgage companies and national-based financing. This made the US real estate market into a national one by definition. Apparently Wall Street never noticed this development and ignored it - prefering to pretend that trends based on state-based banking systems still apply when state-based banking regulations don't apply any more.

Now, any substantial fluctuation in real estate prices, anywhere in the USA, is now a national financing problem. That is reality. Wall Street never saw this coming and proceeded to rate their investments as if the old rule still applied. And these guys are supposed to be the 'best and brightest'. :rolleyes:

[Americano]

And the sad part being the US government still depending on housing coming back to solve all their woes.

[Michael]

And the sad part being the US government still depending on housing coming back to solve all their woes.
Yes, that's the weakest link in the US economy and likely to stay that way. Over-inflated bubbles tend to be slow in recovery.

What is double nasty is that with average wages being flat for the last couple of decades, all the increase in US consumer spending over the last twenty years has been entirely driven by rising housing prices (which was a bubble).

Rising US housing a year or two down the road isn't likely to supply enough price gains to finance the consumer debt-spending boom that the US economy has become reliant upon. So the end of the housing boom is also the end of the consumer boom and that's a double hit on US growth prospects.

[Americano]

Yes, that's the weakest link in the US economy and likely to stay that way. Over-inflated bubbles tend to be slow in recovery.

What is double nasty is that with average wages being flat for the last couple of decades, all the increase in US consumer spending over the last twenty years has been entirely driven by rising housing prices (which was a bubble).

Rising US housing a year or two down the road isn't likely to supply enough price gains to finance the consumer debt-spending boom that the US economy has become reliant upon. So the end of the housing boom is also the end of the consumer boom and that's a double hit on US growth prospects.

Stagnant wages (and growing unemployment) with now prudent lending practices in place are going to make the bottom of the residential market difficult to find. I'm reading that foreclosure sales are over 50% of housing sales in many markets and foreclosures are forecast to increase all the way through 2011, the last year of adjustments to variable and interest only mortgages from the bubble. Combine that with close to a year of standing new home inventory and I can eventually envision bulldozers 'adjusting' new home inventories.

The commercial real estate market is also in really big trouble. Some of the larger shopping malls are facing insolvency due to values plummeting combined with inability to roll-over their debt portion of financing. We'll see a number of retailers tanking after the holiday season, which will add to their cash flow problems.

A commercial developer I know says the banks are demanding any project submitted for mortgage funding have a 20% in-hand equity position and executed leases with lessees approved by the bank to cover operating cash flow requirements. how's that for a polite way of saying 'absolutely no way'?

[Michael]

“We hope to do to this industry what Wal-Mart did to theirs, Starbucks did to theirs, Costco did to theirs and Lowe’s-Home Depot did to their industry. And I think if we’ve done our job, five years from now you’re not going to call us a bank.”
— Kerry K. Killinger, chief executive of Washington Mutual, 2003

...

Between 2001 and 2007, Mr. Killinger received compensation of $88 million, according to the Corporate Library, a research firm. He declined to respond to a list of questions, and his spokesman said he was unavailable for an interview.

During Mr. Killinger’s tenure, WaMu pressed sales agents to pump out loans while disregarding borrowers’ incomes and assets, according to former employees. The bank set up what insiders described as a system of dubious legality that enabled real estate agents to collect fees of more than $10,000 for bringing in borrowers, sometimes making the agents more beholden to WaMu than they were to their clients.

WaMu gave mortgage brokers handsome commissions for selling the riskiest loans, which carried higher fees, bolstering profits and ultimately the compensation of the bank’s executives. WaMu pressured appraisers to provide inflated property values that made loans appear less risky, enabling Wall Street to bundle them more easily for sale to investors.
Source (http://www.nytimes.com/2008/12/28/business/28wamu.html?hp=&pagewanted=all)

As I noted back when this financial crisis first unfolded, institutional fraud was likely to be a big component of the mess. It takes a while for this stuff to come out... but anyone reading this article should have no problem wondering why/how the US financial industry got itself into such a deep mess in the first place.

Good old greed, corruption and incompetence seem to be rather significant contributors to the financial crisis. Surprise, surprise. :rolleyes:

[Americano]

I read that article. And many like it with a different exposed incompetent leader. The public needs bad people to blame for acceptance of their circumstances. He walked away with $88M.

I feel the .com bubble was a test run to determine public gullibility in being the perfect Ponzi scheme; legally take their imagined money from them. The housing bubble a refined test of the concept. The federal credit bubble being our current bubble, how long this one lasts presents a major challenge to the US general standard of living.

[Michael]

Here's another interesting article that describes the complicity of the Federal Reserve and Government policy in creating the housing bubble.

As the housing bubble inflated from 1997 to 2006, banks, fueled by the Federal Reserve, prodded by activists, and egged on by Wall Street, created ever more exotic mortgage loans that pushed up housing prices and extended mortgage debt to families vulnerable to economic downturns. Several layers of financial products were tied to these mortgages. As some of the derivative instruments and underlying mortgages collapsed, collateral damage raced through the entire system.
Source (http://www.reason.com/news/show/130330.html)

The more I read about the events leading up to the 'financial crisis' the more I'm convinced that the whole thing was entirely predictable - just that all the players involved all had vested interests in keeping the game going as long as possible (and denying the rot at the core).

Looks increasingly like just one big 'mother of all frauds'.

[Americano]

Here's another interesting article that describes the complicity of the Federal Reserve and Government policy in creating the housing bubble.


Source (http://www.reason.com/news/show/130330.html)

The more I read about the events leading up to the 'financial crisis' the more I'm convinced that the whole thing was entirely predictable - just that all the players involved all had vested interests in keeping the game going as long as possible (and denying the rot at the core).

Looks increasingly like just one big 'mother of all frauds'.

In progress.

[Michael]

WASHINGTON — Even before word came on Tuesday that Citigroup might split into pieces to shore up its finances, an unpleasant message was moving through Congress and President-elect Barack Obama’s transition team: the banks need more taxpayer money.
...
On Tuesday, Mr. Bernanke publicly made the case that one of the most unpopular and most scorned programs in Washington — the $700 billion bailout program — needs to pour hundreds of billions more into the very banks and financial institutions that already received federal money and caused much of the credit crisis in the first place.
Source (http://www.nytimes.com/2009/01/14/business/economy/14fed.html?_r=2&partner=rss&emc=rss)

And here's the 'money-quote'...
“Our economic system is critically dependent on the free flow of credit.”
Good ole 'Helicopter Ben' is committing a 'gaffe' here - unintentially revealing a truth.

Fact is, the US economy has, for the last 25 years, been critically dependent upon cheap credit. A bubble in credit, as it were. And now the Chairman of the Federal Reserve is not only admitting it, but insisting that the bubble must be re-inflated.

So real question is, and the one that NO ONE is going to ask is, are you all planning to play this game again a half-dozen years down the road?

Fact is that the US economy has gotten addicted to having 40% of all corporate profits generated by Wall Street. That's the sign of a very unbalanced economy that is in deep trouble. But that's the economy that the Federal Reserve is demanding to be restored - a return to precisely the same conditions that caused the crisis.

Fact is the present financial crisis is not just a 'pothole' in the road that the economy ran into. The present financial crisis is the logical result of US Government policy over the last 25 years. More of the same is just going to create... more of the same.

Bottom line is that the financial industry is merely a secondary service business to the 'real' economy. Wall Street produces nothing. Yet present US Government policy holds that this secondary and non-productive industry is the real engine of US prosperity. Reality is that recent 'prosperity' was delusional - built on the fantasy of endless cheap credit.

Real prosperity does not depend upon the roulette wheel of the stock markets. That's just a legalized gambling game for the rich.

[Americano]

Source (http://www.nytimes.com/2009/01/14/business/economy/14fed.html?_r=2&partner=rss&emc=rss)

And here's the 'money-quote'...

Good ole 'Helicopter Ben' is committing a 'gaffe' here - unintentially revealing a truth.

Fact is, the US economy has, for the last 25 years, been critically dependent upon cheap credit. A bubble in credit, as it were. And now the Chairman of the Federal Reserve is not only admitting it, but insisting that the bubble must be re-inflated.

So real question is, and the one that NO ONE is going to ask is, are you all planning to play this game again a half-dozen years down the road?

Fact is that the US economy has gotten addicted to having 40% of all corporate profits generated by Wall Street. That's the sign of a very unbalanced economy that is in deep trouble. But that's the economy that the Federal Reserve is demanding to be restored - a return to precisely the same conditions that caused the crisis.

Financialization is the accepted term:

http://en.wikipedia.org/wiki/Financialization

Fact is the present financial crisis is not just a 'pothole' in the road that the economy ran into. The present financial crisis is the logical result of US Government policy over the last 25 years. More of the same is just going to create... more of the same.

Bottom line is that the financial industry is merely a secondary service business to the 'real' economy. Wall Street produces nothing. Yet present US Government policy holds that this secondary and non-productive industry is the real engine of US prosperity. Reality is that recent 'prosperity' was delusional - built on the fantasy of endless cheap credit.

Real prosperity does not depend upon the roulette wheel of the stock markets. That's just a legalized gambling game for the rich.

I agree.

The old standard of don't invest in equity markets unless you can afford to lose it was formerly the definition of a balanced portfolio. I'd think the Fed balance sheet has to be at a point of alarm with all the crap they're holding. They sent in their own man as treasury secretary, which hopefully means fewer loser investments with public debt. Let the weak fail and get to the bottom of this cycle.

Citigroup is already whining for more government investment to spend on operations.

[Michael]

Here's a set of articles by 5 economists addressing the immediate future for the US market given the conditions of the 'financial crisis'.

It is to be noted that all five of these economists were actively predicting the present financial crisis prior to it happening.

I haven't read all of the articles yet (just the first two), but the quality is pretty good. I'll probably post some comments on the articles after I've read through them all. :)

Foreign Policy: The Worst is Yet to Come (http://www.foreignpolicy.com/story/cms.php?story_id=4590)

Btw, three cheers for Foreign Policy magazine going 'online' - they have only just opened up shop on the net and I'm very glad to see it. Don't let their title fool you - they are much like The Economist in addressing a rather wide range of topics that belay the title of the publication. Foreign Policy magazine has LOTS of excellent material and some really-really-good columnist/bloggers. Steven Walt has quickly become one of my favs.

[Americano]

I read them and, like most other opinions I'm seeing, the authors all discard 2009 as a recovery year. Other than Obama's obviously politically motivated promise to generate what is it now, four-million new jobs, I don't see any recovery hopes in the near future. IMO Until this horrendous amount of leverage based on declining value assets hits bottom, there is no hope of recovery.

[The Drunk Guy]

I read them and, like most other opinions I'm seeing, the authors all discard 2009 as a recovery year. Other than Obama's obviously politically motivated promise to generate what is it now, four-million new jobs, I don't see any recovery hopes in the near future. IMO Until this horrendous amount of leverage based on declining value assets hits bottom, there is no hope of recovery.
Will it bottom here in America? With other nations taking advantage of our weakness, the dollar can only keep going down. Especially with these "fantastic" bailouts that are simply large amounts of inflation.

[Americano]

Will it bottom here in America? With other nations taking advantage of our weakness, the dollar can only keep going down. Especially with these "fantastic" bailouts that are simply large amounts of inflation.

They're all in pretty much the same boat, the difference being far less dependency on imports and 'thin air' (wall street) to generate their GDP. With most corporate earnings being in the shitter combined with what will be take-your-breath away unemployment, the US is a long way from bottom. In my mind the only question is how long it'll take to ruin the USD with the current band aid mentality of 'fixing' things. We need some serious military spending reductions to offset upcoming social costs.

[Michael]

The whole Euro area posted a -1.4% GDP in the last quarter. They are in a recession as well.

China is also experiencing the biggest economic slowdown in their history.

The inflation challenge from all this US money-printing will probably hit in about 2-3 years from now.

[phungus420]

The economy is in much worse shape then the media is letting on. This isn't just some financial crisis caused by a lack of credit, there are deep seeded problems in the American Economy. Everything I'm hearing, from my friends dad who's a manager at a cab company, to a friend that owns a music shop, to a friend at school who works in the family buisness they've owned for 50 years (for the first time they aren't sure they can make payroll this quarter!), and with corroberating reports in the paper are showing over 50% reductions in revenue, across the board, in nearly all sectors of hte economy. The only sellers that are still raking in the same revenue as last year are bars, and for some reason accountants (but I suspect that'll change). In such an economy where demand has dropped over 50% (That's a god damn staggering figure!), there is no incentive at all to invest in increased production, ie to create new jobs. Freeing up credit wol't do shit in the current state of things, except arguably add more incentive to invest in useless speculation, maybe that'll hold an all out collapse off a couple of years, but it wol't solve the problem.

To put it simply no real recovery will occure unless real demand, in tangible goods and services is somehow stimulated.

What pisses me off most is that this shit is just common sense, yet the "experts" on TV I see rattle off don't address any of this and instead are just laser focused on the availability of credit.

[The Drunk Guy]

The economy is in much worse shape then the media is letting on. This isn't just some financial crisis caused by a lack of credit, there are deep seeded problems in the American Economy. Everything I'm hearing, from my friends dad who's a manager at a cab company, to a friend that owns a music shop, to a friend at school who works in the family buisness they've owned for 50 years (for the first time they aren't sure they can make payroll this quarter!), and with corroberating reports in the paper are showing over 50% reductions in revenue, across the board, in nearly all sectors of hte economy. The only sellers that are still raking in the same revenue as last year are bars, and for some reason accountants (but I suspect that'll change). In such an economy where demand has dropped over 50% (That's a god damn staggering figure!), there is no incentive at all to invest in increased production, ie to create new jobs. Freeing up credit wol't do shit in the current state of things, except arguably add more incentive to invest in useless speculation, maybe that'll hold an all out collapse off a couple of years, but it wol't solve the problem.

To put it simply no real recovery will occure unless real demand, in tangible goods and services is somehow stimulated.

What pisses me off most is that this shit is just common sense, yet the "experts" on TV I see rattle off don't address any of this and instead are just laser focused on the availability of credit.
They're focused on credit because that is how money is created. The money released from the Fed last year can increase exponentially, but only through credit. Of course, when this does give in, an inflation will hit at the same time, perhaps reigniting this whole debacle.

[phungus420]

They're focused on credit because that is how money is created. The money released from the Fed last year can increase exponentially, but only through credit. Of course, when this does give in, an inflation will hit at the same time, perhaps reigniting this whole debacle.
I'm aware of this, but it doesn't address the core issue that is collapsing the American Economy. In fact stimulus that is focused mainly on releasing more credit will probably just exhasperbate things. Sure the artificial wealth will be reinvested and reinflate the balloon as Micheal puts it, which in turn can stave off a complete collapse for a couple of years. However the vast majority of the credit investment will be directed toward frivalous speculation, since investing in actual job creating endevors that increase production is pointless at this time. So when the new artificial bubble inevitably pops again things will be even worse since the value of the dollar will likely be destroyed in the process.

[The Drunk Guy]

I'm aware of this, but it doesn't address the core issue that is collapsing the American Economy. In fact stimulus that is focused mainly on releasing more credit will probably just exhasperbate things. Sure the artificial wealth will be reinvested and reinflate the balloon as Micheal puts it, which in turn can stave off a complete collapse for a couple of years. However the vast majority of the credit investment will be directed toward frivalous speculation, since investing in actual job creating endevors that increase production is pointless at this time. So when the new artificial bubble inevitably pops again things will be even worse since the value of the dollar will likely be destroyed in the process.
I agree. The more stimuli they pass out, the worse the problem becomes. It's putting a "Hello Kitty" band-aid on a bullet hole through the gut. It's only a matter of time until we bleed out.

[Americano]

The only realistic hope is Obama saying hunker down and grab your nuts as things are going to get real desperate right now so we can get beyond it. But we know that's not going to happen.They'd have to bring all the troops home and declare martial law. Better now than later.

[wphelan]

I'm beginning to question my sanity. Nearly everything I read in the mainstream media and hear from politicians when it comes to economy is the opposite of what I think should be done. This article is calling for the Fed to actively pursue a policy of increasing inflation, increasing government spending, and cutting taxes. First of all, hasn't this all already happened? Have I gone mad? But secondly, does doing any of this make sense to anyone here? If it was just an isolated article, I would pass over it, but it's all I hear anymore.

http://www.businessweek.com/bwdaily/dnflash/content/jan2009/db20090119_561565.htm?chan=rss_topStories_ssi_5

[Michael]

This article is calling for the Fed to actively pursue a policy of increasing inflation, increasing government spending, and cutting taxes.
Bush Administration spent the last 8 years doing precisely and exactly this.

No, you are not crazy. The pseudo-experts employed by the media really are that idiotic.

[Americano]

I'm beginning to question my sanity. Nearly everything I read in the mainstream media and hear from politicians when it comes to economy is the opposite of what I think should be done. This article is calling for the Fed to actively pursue a policy of increasing inflation, increasing government spending, and cutting taxes. First of all, hasn't this all already happened? Have I gone mad? But secondly, does doing any of this make sense to anyone here? If it was just an isolated article, I would pass over it, but it's all I hear anymore.

http://www.businessweek.com/bwdaily/dnflash/content/jan2009/db20090119_561565.htm?chan=rss_topStories_ssi_5

It's a helpless feeling.

[partofme]

Increased spending and cutting taxes is better than doing nothing in the short term but the problem is with increased inflation in the long term because of it. I think the general feeling is to get us out of the mess or limit it as much as possible now and worry about the side effects later. Not to mention the huge deficit that is on top of the one we already would have due to entitlements.

[Americano]

Increased spending and cutting taxes is better than doing nothing in the short term but the problem is with increased inflation in the long term because of it. I think the general feeling is to get us out of the mess or limit it as much as possible now and worry about the side effects later. Not to mention the huge deficit that is on top of the one we already would have due to entitlements.

It's been decided on as the required political response to avoid public panic. As an investment with little planning other than special interest requirements going into it (congress and the Fed) the return will be questionable. On borrowed money, serious inflation can be expected. Time to trim the military back to a defensive entity as we're going to incur some truly staggering social costs to avoid civil unrest.

[Michael]

It seems as if there is a growing consensus in the Obama Treasury department that TARP I was a failure (which is true, the policy failed miserably).

Unfortunately, the only thing the Obama Treasury department is certain of is that there will be "no nationalization of banks", "no wiping out shareholders" and "no wiping out of management".

Which is all very odd given that the US Government has already effectively 'nationalized' 75% of the US banking industry - except these companies are still owned by their shareholders and run by the same idiots who caused the banks to become insolvent.

And the US banking industry is as insolvent today as it was in October.

I have zero confidence that the Obama Administration is going to address this policy problem in any beneficial way. As far as I can see, the only policy that is supported in Washington is to re-inflate the housing and banking sector bubbles. Absolutely pathetic.

A change in government has been noticable in several policy areas, but when it comes to the Treasury and the economy, we might as well still have the Bush regime in place. I see no difference at all - not even a tiny one.

[Americano]

First US Q4 GDP number is in at -3.8%:

http://www.iht.com/articles/2009/01/30/business/31econA.php

I say first because it seems that every official government number I've read over the past few years (especially unemployment) receives a normally negative 'adjustment' a month or two later.

[Michael]

Bank Rescue Would Entail Triage for Troubled Assets

The Obama administration's emerging rescue plan for the banking system would amount to financial triage, with the Treasury Department playing the delicate role of deciding which of the trillions of dollars in troubled assets plaguing the economy to buy, guarantee or leave in the hands of banks, sources said.

The high-stakes approach would dramatically increase the investment of taxpayer money in the financial industry, and the potential losses. The plan, which Treasury Secretary Timothy F. Geithner is set to announce Monday, is being crafted under tremendous political pressure from people who say the government is risking too much as well as from those who say it is not doing enough to end the crisis.
Source (http://www.washingtonpost.com/wp-dyn/content/article/2009/02/03/AR2009020303782.html?hpid=topnews)

This is madness. This is EXACTLY the plan that Bush administration Treasury Secretary Paulson initially floated initially back in October 2008. The plan was laughed at then, and it is utterly laughable now.

Any bank bailout that doesn't involve making bank shareholders, bondholders and bank management suffer substantial loss is a complete waste of money.

This is 'moral hazzard' writ large. This is the worst possible comprimise. Giving Wall Street a massive golden gift and massively screwing the taxpayer is not credible public policy.

As I've noted previously, the ultimate problem that has caused the financial crisis is that the financial services industry is itself, a bubble. Re-inflating the financial services bubble is only going to make the problem worse. If it costs trillions to address this year, how many trillions do you think it is going to cost 5-6 years down the road when the game repeats? It will repeat of course - when you use tax money to reward really bad management, you can pretty much guarentee that you are going to encouraging MORE bad management (since it is very profitable).

[wphelan]

As the interest rates of central banks around the globe approach zero, something is going to have to give. Slashing interest rates has been such an important part of central banking for so long now, what will happen when there's nowhere left to go?

This article gives a good analysis of the problem and how it is leading to the insolvency at the Federal Reserve.

http://mises.org/story/3281

[Michael]

As the interest rates of central banks around the globe approach zero, something is going to have to give. Slashing interest rates has been such an important part of central banking for so long now, what will happen when there's nowhere left to go?

This article gives a good analysis of the problem and how it is leading to the insolvency at the Federal Reserve.

http://mises.org/story/3281
Yes a very interesting article. Seems like all the horrific levels of leverage on Wall Street have just been transfered over to the Fed (Fed is 55 times leverage right now!). :eek:

Overall though, I'm more worried about the American economy being so structurally dependent upon really cheap credit.

No matter how the present crisis turns out, all of the 'tools' being used to fight the financial crisis and the recession are all extremely inflationary - and that means steeply rising interest rates in the medium term.

[Americano]

Yes a very interesting article. Seems like all the horrific levels of leverage on Wall Street have just been transfered over to the Fed (Fed is 55 times leverage right now!). :eek:

Overall though, I'm more worried about the American economy being so structurally dependent upon really cheap credit.

No matter how the present crisis turns out, all of the 'tools' being used to fight the financial crisis and the recession are all extremely inflationary - and that means steeply rising interest rates in the medium term.

It is rather stupid, isn't it? Attempting to resolve a crisis brought on by credit with...credit.

[Michael]

It is rather stupid, isn't it? Attempting to resolve a crisis brought on by credit with...credit.
In 2006, the US financial services industry accounted for some 40% of all corporate profits in the USA. That's totally unsustainable and freakishly weird. You can't build your economy based on the assumption that rate of profit for that sector is 'normal'.

Trading capital shouldn't produce sky-high levels of profits. Given the nature of market theory, profit margins at Wall Street financial trading companies ought to be razor thin due to hyper-competition with a commodity product. :shrug:

[Americano]

In 2006, the US financial services industry accounted for some 40% of all corporate profits in the USA. That's totally unsustainable and freakishly weird. You can't build your economy based on the assumption that rate of profit for that sector is 'normal'.

Trading capital shouldn't produce sky-high levels of profits. Given the nature of market theory, profit margins at Wall Street financial trading companies ought to be razor thin due to hyper-competition with a commodity product. :shrug:

That's the failure of financialization. Leverage ratios exceeded available equity and capital ran for the hills, to liquidity.

[Michael]

That's the failure of financialization. Leverage ratios exceeded available equity and capital ran for the hills, to liquidity.
In other words, the house of cards collapsed.

That's the best analogy of high leverage ratios - a house of cards. Impressive as all hell while it stands, but if one little thing goes wrong...

[Americano]

In other words, the house of cards collapsed.

That's the best analogy of high leverage ratios - a house of cards. Impressive as all hell while it stands, but if one little thing goes wrong...

I agree, it's nothing but a house of cards. There are still $1.2 quadrillion in engineered financial derivatives floating around, with a world wealth number of how many trillion? Dramatic leverage with a crumbling asset base. Whether the available band aids will do the job on a sucking chest wound is now the big question.

[Michael]

Speaking of houses of cards...

US Treasury Secretary (who's name is too tricky to spell and has been acting like such an idiot that I can't be bothered to look up how to spell his name) has just rolled out yet another taxpayer-busting bank bailout plan.

This one looks like it could be the worst of all the plans discussed. The steadfast commitment to maintaining existing bank management and protecting bank shareholders is just insane.

As long expected, the US Government and banking industry have now entered the dreaded "Japanese phase" where the actual cause and extent of the problem is studiously denied by everyone involved.

To be honest, I'd rather have Bush-Paulson running the Treasury right now. With them, at least you knew they were going to screw the taxpayer and give away billions to billionaires and they weren't going to make apologies for doing it. Watching Obama's Treasury follow the same policy is just annoying. Bad public policy is expected from Republican government. It is rather disappointing to find that Obama's Administration is as intellectually bankrupt as the last one.

It is becoming apparent that putting Wall Street bankers in charge of the US Treasury is as stupid as letting Wall Street bankers run the Federal Reserve.

Wall Street bankers are the essential cause of the present financial crisis.

[Americano]

Speaking of houses of cards...

US Treasury Secretary (who's name is too tricky to spell and has been acting like such an idiot that I can't be bothered to look up how to spell his name) has just rolled out yet another taxpayer-busting bank bailout plan.

Timmy?

This one looks like it could be the worst of all the plans discussed. The steadfast commitment to maintaining existing bank management and protecting bank shareholders is just insane.

The 'too big to fail' card was played by Paulson & friends, and it won public approval when used in conjunction with the 'your life is ruined if we don't do it' card. Timmy's the Fed's own man on the inside. The Fed, a privately held entity, has somewhere in the neighborhood of $2T of bad paper it loaned against, is now the only source of critical overnight bank lending, the only source of corporate bond guarantee and there's no way it'll let those totally incompetent, fraudulent, 'too big to fail' banks fail. Powerful, international people hold Fed stock.

Hopefully Chrysler and GM don't have that leverage. There's no AIG in that crowd.

As long expected, the US Government and banking industry have now entered the dreaded "Japanese phase" where the actual cause and extent of the problem is studiously denied by everyone involved.

To be honest, I'd rather have Bush-Paulson running the Treasury right now. With them, at least you knew they were going to screw the taxpayer and give away billions to billionaires and they weren't going to make apologies for doing it. Watching Obama's Treasury follow the same policy is just annoying. Bad public policy is expected from Republican government. It is rather disappointing to find that Obama's Administration is as intellectually bankrupt as the last one.

As mentioned, Obama's treasury is the Fed. Looking at it from a detached viewpoint; Obama faces doing the right thing, cleaning out the Wall Street gene pool which would get the US closer to where it needs to be with a reduced standard of living and ensuring his defeat in 2012, or attempting to prolong the inevitable while public debt makes the Fed and selected Wall Street special interests financially well. IMO he doesn't have the political capital to do anything but go along with the program.

It is becoming apparent that putting Wall Street bankers in charge of the US Treasury is as stupid as letting Wall Street bankers run the Federal Reserve.

Wall Street bankers are the essential cause of the present financial crisis.

But they are going to walk away from it, perhaps not totally whole, but in far better financial condition than the general public who chose leadership that encouraged the scenario to occur. IMO the ability to unwind enough of the the engineered, sour derivatives out there, $1.2 quadrillion in total, to avoid a severe US economic depression is beyond the capability of world wealth. On the sovereign credit rating (which determines the interest cost of national long-term debt) the US has gone from 7 to 10 in under two years. The US long bond (30-years), recently put back in service, is going to market eight times in 2009.

On the bright side, think how fortunate Americans are that prior administration wasn't allowed to direct SS taxes into Wall Street hands.

[Michael]

Timmy?
That's the fellow. Turning out to be quite the industry stooge.

As mentioned, Obama's treasury is the Fed. Looking at it from a detached viewpoint; Obama faces doing the right thing, cleaning out the Wall Street gene pool which would get the US closer to where it needs to be with a reduced standard of living and ensuring his defeat in 2012, or attempting to prolong the inevitable while public debt makes the Fed and selected Wall Street special interests financially well. IMO he doesn't have the political capital to do anything but go along with the program.
Indeed, I'm inclined to agree. Obama has shown no leadership on this issue at all and it is begging for some serious quality leadership!

But they are going to walk away from it, perhaps not totally whole, but in far better financial condition than the general public who chose leadership that encouraged the scenario to occur. IMO the ability to unwind enough of the the engineered, sour derivatives out there, $1.2 quadrillion in total, to avoid a severe US economic depression is beyond the capability of world wealth. On the sovereign credit rating (which determines the interest cost of national long-term debt) the US has gone from 7 to 10 in under two years. The US long bond (30-years), recently put back in service, is going to market eight times in 2009.

On the bright side, think how fortunate Americans are that prior administration wasn't allowed to direct SS taxes into Wall Street hands.
Yes, and I've heard the Treasuries markets are slowing down too... just when the US is gearing up to sell LOTS of them next year! :erm:

I've been ignoring the financial news for the last week or so and today I've been reading up financial stuff... it all just seems to be getting worse. To use Sir Winston Churchill's immortal phraseology here, we're not even at the 'end of the beginning' yet! :eek:

Speaking of which, here's some news from Japan...

Japan's economy shrinks 12.7% annualized
Contraction is the sharpest since mid-1970s oil crisis
...
The economy shrank 12.7% on an annualized basis in the October-to-December period, or 3.3% from the previous quarter, according to preliminary data released Monday by the Cabinet Office.
The decline was the biggest since a 13.1% annualized contraction in the January-to-March period in 1974.

"The Japanese economy is deteriorating quite rapidly, and such deterioration is penetrating into households," said Barclays Capital economist Kyohei Morita in Tokyo.
Source (http://www.marketwatch.com/news/story/Japans-economy-shrinks-127-annualized/story.aspx?guid={BAD01499-5C66-4146-B1B4-03E3A4F3C222})

That's not good at all. How much punishment can the Japanese economy take? And it is looking increasingly like the US is entering a "Japan-like" phase now - unwilling and/or unable to face the piper's music.

[Michael]

Well, it looks like I'm not the only one to notice the Japan-like approach of the US government to the present financial crisis.

Judged by standard measures of banking distress, such as the amount of non-performing loans, America’s troubles are probably worse than those in any developed-country crash bar Japan’s. According to the IMF, non-performing loans in Sweden reached 13% of GDP at the peak of the crisis. In Japan they hit 35% of GDP. A recent estimate by Goldman Sachs suggests that American banks held some $5.7 trillion-worth of loans in “troubled” categories, such as subprime mortgages and commercial property. That is equivalent to almost 40% of GDP.

Source (http://www.economist.com/finance/displaystory.cfm?story_id=13110352)

And the US government, US regulators and US financial interests are doing NOTHING to resolve it. They all seem to be engaged in the process of endless bandaid solutions (just like the Japanese) and steadfastly avoiding pointing any fingers at the culprits or changing any of the rules/systems that cause the mess (just like the Japanese).

[partofme]

Looks like things are going to get pretty ugly in Europe.

http://www.nytimes.com/aponline/2009/03/01/world/AP-EU-EU-Summit.html?hp

[Michael]

The 'consensus' forecast for the US economy returning to growth has been 1Q2010 for about a year now.

I was reading several analysts over the weekend and it seems that the 'consensus' prediction has now moved to 'mid or late 2010' and that they are also now warning against premature celebrations if the US economy shows a modest gain in the last half of 2009. They are suggesting that this almost certainly going to be a classic 'double-dip' scenario (deep dive followed by a modest gain, then another dive).

Once again, every predictor is still running negative (or worse than the worst case scenario). :eek:

Btw, this puts US right on track with Japan's (ugly) trajectory with the 'double-dip'. :erm:

To put that into US political context, that means the Democrats are likely to be tacking against the wind in the 2010 midterms and the Republicans are likely going to get a boost from a weak economy (if past trends hold true).

And to buttress my argument that stimulus spending is a waste of time, notice the forecast of extended recession is made not too long AFTER the massive stimulus bill is enacted? I don't think the recession trajectory changes one whit based on the amount of Keynesian theory induced debt spending engaged in here.

Now if it was real money coming from a strategic reserve fund, that would definitely make a big difference, but I just can't see how borrowing $800 billion and spending it on consumption actually improves the nation's financial position overall. That just strikes me as 'robbing Peter to pay Paul'.

[Michael]

Looks like things are going to get pretty ugly in Europe.

http://www.nytimes.com/aponline/2009/03/01/world/AP-EU-EU-Summit.html?hp
It is to be noted that most of the Eastern block (Baltics and Hungary especially) were originally praised for their 'light' regulations in the financial/banking industry, following the model of Iceland and Ireland (following the advice of UK and USA).

That hasn't worked out too well.

The point to keep in mind here is that this crisis was one of bank-regulatory failure.

[partofme]

It is to be noted that most of the Eastern block (Baltics and Hungary especially) were originally praised for their 'light' regulations in the financial/banking industry, following the model of Iceland and Ireland (following the advice of UK and USA).

That hasn't worked out too well.

The point to keep in mind here is that this crisis was one of bank-regulatory failure.

I agree completely. What is astonishing is talking to conservative republicans. In general the ones I talk to in addition to every guest speaker at CPAC this past week (a big conservative event in Washington D.C.) are convinced that this whole mess was caused by Fannie May and Freddie Mac and government forcing banks to give out as many loans as possible so people can get homes that normally couldn't. While this had some involvement the government did not come up with sub-prime loans and didn't create the complex derivatives used to sell off risk which encouraged the banks to lend to anybody. They also ignore the fact these bundled securities where given AAA ratings. But don't try telling them that.

[Americano]

It is to be noted that most of the Eastern block (Baltics and Hungary especially) were originally praised for their 'light' regulations in the financial/banking industry, following the model of Iceland and Ireland (following the advice of UK and USA).

That hasn't worked out too well.

The point to keep in mind here is that this crisis was one of bank-regulatory failure.

I'm now hearing demands to suspend FASB accounting rules on asset fair market value to 'get over the crisis' (mark to market). Does it get any dumber?

[Americano]

I agree completely. What is astonishing is talking to conservative republicans. In general the ones I talk to in addition to every guest speaker at CPAC this past week (a big conservative event in Washington D.C.) are convinced that this whole mess was caused by Fannie May and Freddie Mac and government forcing banks to give out as many loans as possible so people can get homes that normally couldn't. While this had some involvement the government did not come up with sub-prime loans and didn't create the complex derivatives used to sell off risk which encouraged the banks to lend to anybody. They also ignore the fact these bundled securities where given AAA ratings. But don't try telling them that.

It was a completely unregulated feeding frenzy for fee income, nothing else. Financial institutions discarded all semblance of prudent lending standards and booked transactions destined to fail. I can't imagine anyone in the financial community actually believing residential home values could even come close to maintaining such grotesque appreciation. Though the UK fall looks as if it could be worse than that of the US.

[Michael]

I'm now hearing demands to suspend FASB accounting rules on asset fair market value to 'get over the crisis' (mark to market). Does it get any dumber?
Banks in Canada and Germany are surviving just fine on the same "mark-to-market" rules. We're plugged into the same worldwide financial markets as everyone else...

The rules didn't fail.

[Michael]

It was a completely unregulated feeding frenzy for fee income, nothing else. Financial institutions discarded all semblance of prudent lending standards and booked transactions destined to fail. I can't imagine anyone in the financial community actually believing residential home values could even come close to maintaining such grotesque appreciation. Though the UK fall looks as if it could be worse than that of the US.
It was a bit of a shock to see the extent of the UK problem (and the size of their housing bubble!). :eek:

I expect that kind of thing in the USA, because I know their system can do that (it can be 'gamed' by the politicos - cf. the 'savings & loan' debacle in the 1980s). I was quite surprised to find the UK regulatory tradition has completely evaporated (as weak as it always has been, it was surprisingly strong in the financial sector for a long time, which is why English banking got a good reputation in the first place!).

[Americano]

Banks in Canada and Germany are surviving just fine on the same "mark-to-market" rules. We're plugged into the same worldwide financial markets as everyone else...

The rules didn't fail.

No they didn't. The failure was the US and assorted followers attempt at financialization. Assets always rule net worth regardless of leverage. When a country's GDP becomes dominated by financial transactions producing few goods or services it creates a house of cards based on credit that's never sustainable. Far too many potential weak links.

[Michael]

Boy, seems like Timmy, Sommers & Bernake aren't getting much love these days.

[Americano]

Boy, seems like Timmy, Sommers & Bernake aren't getting much love these days.

Has to be a barrel of laughs. Bernanke's still wandering about like a Vegas shill making statements of the economy turning around in the second half of 2009 while Timmy's assailed by staggering corporate operating losses and accelerating residential/commercial property failures with his old employer the Fed screaming sell some debt so we can clean-up our balance sheet. The dodging of tough decisions can't go on forever.

[partofme]

Has to be a barrel of laughs. Bernanke's still wandering about like a Vegas shill making statements of the economy turning around in the second half of 2009 while Timmy's assailed by staggering corporate operating losses and accelerating residential/commercial property failures with his old employer the Fed screaming sell some debt so we can clean-up our balance sheet. The dodging of tough decisions can't go on forever.

I'm just crossing my fingers for a recovery by the end of 2010.

[Americano]

I'm just crossing my fingers for a recovery by the end of 2010.

Residential interest only loans from 2005/06 adjust to full-blown mortgages with principle and interest in 2010/11, which will present some interesting challenges. The current dilemma is now including commercial mortgage rollovers which normally have 3,5 and 7-year terms. Same problem as residential, values shot up during the bubble, were financed at 80-90% of then assessed value, values plummeted to current depressed market values.

A developer friend tells me the only way financing is currently available for a commercial development is:

1. 80% loan with 20% equity being on deposit.

2 Signed occupancy leases by lender approved tenants that constitute cash flow requirements including debt service before breaking ground.

Pretty simple method of lenders saying absolutely no way with retail closing stores closing faster than I can keep track of.

[Michael]

A developer friend tells me the only way financing is currently available for a commercial development is:

1. 80% loan with 20% equity being on deposit.

2 Signed occupancy leases by lender approved tenants that constitute cash flow requirements including debt service before breaking ground.

Pretty simple method of lenders saying absolutely no way with retail closing stores closing faster than I can keep track of.
Would you lend your own money to some business on terms any less than this? These terms are quite reasonable and were considered normal right up until the late 1980's when 'zero down' became the norm and the bubble game was on.

[Americano]

Would you lend your own money to some business on terms any less than this? These terms are quite reasonable and were considered normal right up until the late 1980's when 'zero down' became the norm and the bubble game was on.

The equity/debt ratio for developers with successful track records has long been 20/80, with larger successful developers getting 10/90 from the '80s on. I'm not familiar with any 100% debt financing for commercial development.

The lessee issue is entirely new. 50% was the former business plan benchmark to break ground, less than that if a major retailer committed as anchor. Zero if the anchor was a supermarket. Expansion for those former cash cows isn't in the cards.

If I was running a bank or an equity investor and understood the current global economic circumstances, few bankers and people who invest don't, I would be taking a equity/debt position only on solid gold deals. To me that now means government funded projects.

[Michael]

Oh boy, things are going from bad to worse with Timmy, Larry & Kenny (three stooges of US finance).

The government is seeking to resuscitate the nation's crippled financial system by forging an alliance with the very outfits that most benefited from the bonanza preceding the collapse of the credit markets: hedge funds and private-equity firms.
This Story

*
CONSUMER LENDING: U.S. to Invite The Wealthy To Invest in The Bailout
*
Restoring the Flow of Credit

The initiative to revive the consumer lending business, outlined by officials this week, offers these wealthy investors a new chance to make sizable profits -- but, thanks to the government, without the risk of massive losses.

The idea is to entice them to put their huge cash piles to work to stimulate the financial system. They would be invited to buy up recently issued, highly rated securities. These securities finance consumer lending, such as credit cards and student and auto loans.

The program, which could involve the government lending nearly $1 trillion to these investors, exceeds the size of every other federal effort to address the crisis so far. The initiative's approach could be the model for future federal efforts to aid the credit markets, sources familiar with government planning said. Officials call this strategy a "public-private partnership," but in essence the government is offering good deals to private investors to draw them into its rescue efforts.
Source (http://www.washingtonpost.com/wp-dyn/content/article/2009/03/05/AR2009030503762.html?hpid%3Dtopnews&sub=AR)

This is the worse plan floated so far. Apparently EVERY plan that Timmy, Larry and Kenny come up with involves shovelling taxpayer money as a gift to the same people who created the mess (and profited from it).

Given the consistency they have for this structure, I'm thinking that the US is in very deep trouble and is definitely cruising for a few years of stagnant growth (with high inflation) coming soon.

I completely dispair of the Obama Administration's ability to address the financial problems in any meaningful way. They are dead set on reinflating the Wall Street financial bubble and that's all there is to it.

[The Drunk Guy]

Oh boy, things are going from bad to worse with Timmy, Larry & Kenny (three stooges of US finance).


Source (http://www.washingtonpost.com/wp-dyn/content/article/2009/03/05/AR2009030503762.html?hpid%3Dtopnews&sub=AR)

This is the worse plan floated so far. Apparently EVERY plan that Timmy, Larry and Kenny come up with involves shovelling taxpayer money as a gift to the same people who created the mess (and profited from it).

Given the consistency they have for this structure, I'm thinking that the US is in very deep trouble and is definitely cruising for a few years of stagnant growth (with high inflation) coming soon.

I completely dispair of the Obama Administration's ability to address the financial problems in any meaningful way. They are dead set on reinflating the Wall Street financial bubble and that's all there is to it.
That's not taxpayer money. Taxpayer money has already been blown. Who knows what kind of fucking money that is?

[Americano]

Oh boy, things are going from bad to worse with Timmy, Larry & Kenny (three stooges of US finance).


Source (http://www.washingtonpost.com/wp-dyn/content/article/2009/03/05/AR2009030503762.html?hpid%3Dtopnews&sub=AR)

This is the worse plan floated so far. Apparently EVERY plan that Timmy, Larry and Kenny come up with involves shovelling taxpayer money as a gift to the same people who created the mess (and profited from it).

Given the consistency they have for this structure, I'm thinking that the US is in very deep trouble and is definitely cruising for a few years of stagnant growth (with high inflation) coming soon.

I completely dispair of the Obama Administration's ability to address the financial problems in any meaningful way. They are dead set on reinflating the Wall Street financial bubble and that's all there is to it.

IMO a true disaster waiting to happen. Extending yet more public credit with no ability to produce goods & services is the epitome of a federal credit bubble.

[Americano]

That's not taxpayer money. Taxpayer money has already been blown. Who knows what kind of fucking money that is?

The US is already feeling foreign resistance to enormous US public debt expansion with no economic solution and warming up the printing presses to internally fund it.

[Michael]

The US is already feeling foreign resistance to enormous US public debt expansion with no economic solution and warming up the printing presses to internally fund it.
I'm thinking the US economy is going to become addicted to 0% interest rates and as such, will be very slow to rise interest rates as the economy recovers and that will bring us back to the double-digit inflation game from the 1970s - the last time the US used the printing presses to solve a domestic policy problem.

Same game. Practically the same players too.

Btw, it is becoming obvious that Timmy, Larry & Kenny are the biggest barrier to US recovery right now. These guys are devoted to rescuing/saving Wall Street egos at any price (with taxpayer money). They are deadset on this policy and will not consider any other option. This policy pretty much guarentees a decade of stagnation dominated by zombie banks (just like Japan).

[Michael]

Well for those of you who thought that the worse was over, you ain't seen nothing yet!

Regulatory reports show 5 biggest banks face huge losses

WASHINGTON — America's five largest banks, which already have received $145 billion in taxpayer bailout dollars, still face potentially catastrophic losses from exotic investments if economic conditions substantially worsen, their latest financial reports show.

Citibank, Bank of America, HSBC Bank USA, Wells Fargo Bank and J.P. Morgan Chase reported that their "current" net loss risks from derivatives — insurance-like bets tied to a loan or other underlying asset — surged to $587 billion as of Dec. 31. Buried in end-of-the-year regulatory reports that McClatchy has reviewed, the figures reflect a jump of 49 percent in just 90 days.
Source (http://www.mcclatchydc.com/227/story/63606.html)

That's an additional $587 billion that Wall Street will be looking to Washington to cover.

Here's a nice chart to show the trend lines for each of the big US banks.

[Michael]

Lots of people have been discussing this Atlantic Monthly article entitled The Quiet Coup (http://www.theatlantic.com/doc/200905/imf-advice).

It is written from the perspective of an ex-IMF staffer discussing how the IMF would approach the US financial crisis situation.

Now the IMF doesn't exactly have a stellar track record, but overall, I think they've done remarkably well within their mandate - given the impossibly difficult job they have to do.

I think it is very interesting article - it discusses the 'standard pattern' of elite response to a financial crisis in various 3rd world countries - the way the government always begins by giving bailout money to the politically well connected super-rich people who started/caused the problem (and are the problem). This is always the 'first stage' of a crisis that tends only to make the crisis worse.

Is anyone surprised that US elites are acting EXACTLY the same way as those elites found ruling 3rd world nations? Or that the US government considers the bailout of these same elites as the first priority of any financial rescue package?

As the IMF record shows, such policies don't work. Indeed, it is the bailout to the rich elites that caused the original problem that makes solutions to the problem almost impossible and this is what necessitates IMF intervention!

[Americano]

Anyone who disbelieves that politics is the original old boys club is wallowing in idealism and naivety.