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Topic: We're Fucked - The Coming Economic Crisis (Read 162024 times) |
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Blunderov
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Re:We're Fucked - The Coming Economic Crisis
« Reply #45 on: 2008-09-24 13:36:13 » |
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<If this doesn't cause a 2nd revolution ...>
http://www.buffalonews.com/home/story/446693.html
“I believe if the credit markets are not functioning, that jobs will be lost, the unemployment rate will rise, more houses will be foreclosed upon, GDP will contract, that the economy will just not be able to recover,” Bernanke said. “My interest is solely for the strength and recovery of the U. S. economy.”
[Blunderov] It is my conviction that plain language analysis is the bedrock of any useful philosophy. What does the preceding statement actually mean?
Not a lot that the taxpayer will like.
<transcription> "My friends are hurting. I have power. When my friends are hurting, you will hurt too. You do not want my friends to hurt. Not if you know what is really good for you. Give me your money. This is your fault. Pay. Motherfuckers. Kiss my little brown and puckered ring. And say you like it. Say it like you mean it!"
[Bl.] Any muskets stashed in that there barnyard America? I believe your "Constitution" actually permits "regime change" by violence if necessary? This might be a good time! Use it .. don't use it...
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Mermaid
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Re:We're Fucked - The Coming Economic Crisis
« Reply #46 on: 2008-09-28 04:11:28 » |
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a fantastic commentary from guardian
$700 billion wont save America from slump.
http://www.guardian.co.uk/business/2008/sep/28/globalrecession.useconomicgrowth
$700bn won't save America from a slump
Whatever happens to Henry Paulson's plan to rescue the banks, he cannot forestall a crippling financial downturn, writes James Doran in New York
* James Doran
* The Observer,
* Sunday September 28 2008
There is a simple reason why US Treasury Secretary Henry Paulson's $700bn bail-out package has been so hard to sell to politicians and the American people: it won't really work. Despite the historically massive expenditure and all the little clauses to make sure Wall Street fat cats get their comeuppance, the plan is unlikely to do anything to save the world's biggest economy from a long and crippling downturn.
It will doubtless save some banks from collapse, but is that worth the government putting itself on the hook for nearly a trillion dollars - more than $3,000 for every man, woman and child in America? And that's not the half of it. Not bailing out Wall Street - with as much money as it would take to launch an American National Health Service - presents an even bleaker prospect: a financial nuclear winter that could last a generation. In short, America is doomed if it does and even more doomed if it doesn't get Paulson's billions, perhaps the ugliest economic choice it has ever faced.
You can always rely on 'Neutron Jack' Welch, the former GE boss and all-round tough talker, to tell it how it is. 'I now believe we are in for one hell of a deep downturn,' he told the World Business Forum in New York last Wednesday, adding that the first quarter of 2009 will be 'brutal'.
Until recently, Welch said, he had believed the American economy could avoid recession, but he has changed his mind, despite the bail-out. 'I am now caving,' he said. 'Get ready for real tough times. They're coming.'
Welch is not alone in his gloomy outlook. A day after the New York meeting, Peer Steinbrück, the German finance minister, predicted America will soon be knocked off its perch as the world's leading economic superpower.
If you peel away this hyperbole, however, and consider the ramifications of such large-scale government intervention into the market as Paulson's bail-out represents, even Steinbrück's seemingly gratuitous slight sounds plausible.
The first question anyone thinking about the bail-out should surely ask is whether $700bn is enough, or indeed too much, to fix things. And where did that figure come from? David Wyss, chief economist at Standard & Poor's, the New York credit rating agency, suggests that all the 'level 3' assets of all the biggest financial firms on Wall Street adds up to about $630bn. But this valuation is arbitrary at best, seeing as these sub-prime or toxic securities are only really worth what the market - or in this case the US Treasury Department - is willing to pay for them.
'I think the biggest risk to the financial system is if it turns out to be not enough,' says Barry Bosworth, a former economic adviser to President Carter and a senior economist at The Brookings Institution, a left-leaning Washington think-tank.
It is impossible to know how much money will be needed to mop up all of America's sub-prime- related securitised debt because we don't yet know how the Treasury intends to go about buying it. 'There is so little agreement on this point - on whether it should be a traditional auction or a reverse auction or some other process - that the whole structure could very well fracture,' Bosworth says. 'There is not enough detail.'
And the seemingly flawed mechanics of the bail-out are just the tip of the iceberg. Assuming the plan actually gets off the ground and the Treasury is able to organise some kind of workable asset sale, what will happen to the US economy once the banks have been 'saved'? Will house prices automatically start to stabilise? Will jobs be created as if by magic? Will Americans suddenly find they have disposable income on hand to get their consumer-weighted economy whirring away again? Of course not.
And that is the plan's biggest flaw. 'My biggest fear is that all of this money, and it really is a very large amount, is going to be spent and none of it will be used to stimulate the economy,' Bosworth says.
In fact it is entirely possible that the economy will become even more paralysed after the bail-out than it is today, because the government will put such a strain on the already-creaking public finances that it will not be in a position to provide any sort of stimulus for a long time to come. America will be unable to spend its way out of this crisis.
Most critics of Paulson's plan express concern over US taxpayers shelling out billions of dollars to bail out greedy Wall Street bankers, but this is a misconception. Taxpayers, who have been shocked by the scale of earnings of all-too-fallible 'masters of the universe' such as Lehman Brothers' Dick Fuld and Bear Stearns' Jimmy Cayne (see panel) are not directly paying for this; nor will they ever, because America does not have $700bn of taxpayers' money. The government is in debt to the tune of $9.8 trillion. The entire sum will probably be borrowed from foreign governments and other purchasers of US Treasury bonds - which creates further problems.
'Borrowing every penny of this $700bn could have very serious consequences,' Bosworth says. 'Firstly, investors from other countries are going to see this as the biggest example yet of America's lack of financial discipline. They may then very well decide they should not invest so heavily here and diversify their portfolios to invest less in US Treasuries, dollars and US equities and more in European bonds and the euro.'
This, of course, will drive the already weakened dollar down even further, which will not only suck more lifeblood out of the American economy but drive up the dollar-denominated price of oil and other commodities, adding inflationary pressure into the bargain. Talk about kicking a country while it is down.
Vincent Reinhart is a senior economist at the American Enterprise Institute, a conservative think-tank normally the antithesis of Brookings and its liberal scholars. He is in a particularly good position to criticise Paulson and Fed chairman Ben Bernanke's latest work because he worked for the Federal Reserve for more than 25 years, much of it as a director on the monetary affairs board.
On the subject of the bail-out, however, he agrees almost entirely with Bosworth. In fact he goes even further, suggesting that what has been dubbed 'Tarp' (the Troubled Asset Relief Programme) will all but cripple whoever wins the presidential election in November.
'Who would want to be President and inherit this mess?' Reinhart asks, adding that most of the big decisions in the victor's entire four-year term will be made by the Bush administration before inauguration day in January. 'The whole four years will likely be bogged down in very dull financial regulation and legislation relating to this bill.'
What is more, with such immense pressure on public finances from the size of the debt incurred to fund it, Barack Obama can forget about spending increases and John McCain won't have any room for tax cuts. So whoever wins will be unable to fulfil many of their manifesto pledges.
The next President will also face the prospect of a global depression to manage, and with it the possibility of strained relations with foreign governments.
China, so dependent on the US as top buyer of its manufactured goods, faces an abrupt slowdown as Americans tighten their belts. This of course will mean that China and other nations will be less able to purchase huge wads of US Treasuries even if they wanted to, further restricting America's access to funds. 'It certainly will change our relationship with our trading partners,' Reinhart says.
It is almost as if Paulson and Bernanke have created a plan that will see them through the next few months without concern for the long-term effects of their actions. 'I regard this as nothing more than a stopgap measure to get us through the election,' says S&P's Wyss.
After the Latin American financial crisis in the 1980s, the leading countries of Asia and the Pacific Rim said such a collapse could never happen to them. But in just a few years their economies were falling like dominoes.
And as Japan, Singapore and Taiwan were failing, Americans looked on and observed that such endemic economic troubles only happened in developing economies such as Asia and Latin America, and could never happen in their great nation. They were wrong.
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Blunderov
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Re:We're Fucked - The Coming Economic Crisis
« Reply #47 on: 2008-09-28 13:06:11 » |
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Quote from: Mermaid on 2008-09-28 04:11:28
[Blunderov] I do not think there is enough money in the whole world to throw at the problem.
I've been wondering what derivative is. Simply put it is that favourite old con: the shell game. Bottom line;There is no pea under any of the shells. Never will be. The only sensible strategy is not to play.
http://en.wikipedia.org/wiki/Shell_game
http://www.thetreeofliberty.com/vb/showthread.php?p=236805
$1 Quadrillion of Unregulated Debt At Core of Coming Derivatives Crisis
By John Tiffany
http://www.americanfreepress.net/htm...risis_150.html
Despite all the blather and swearing-on-the-Bible pronunciamentos from establishment “pundits,” our house-of-cards financial system is not fundamentally sound.
Expect such indices as the Dow to tumble even much lower when the Pandora’s box of derivatives is fully opened.
Believe it or not, the Dow is still not far from its all-time peaks, with a lot further to fall. The depression is still in its early stages. We are looking at $1 quadrillion of unregulated debt, with much of it at risk. (And we used to think $1 trillion was a lot.)
These are literally inconceivable sums. Counting one dollar per second, it would take 32 million years to count to one quadrillion.
The stock market in this era of the privately owned Federal Reserve Bank is a giant craps shoot. Much of it is quite unregulated, especially the invisible market of derivatives. The sub-prime mortgage market collapsed, which is now being followed by a giant credit crisis. Now we are looking at the possible collapse of the derivative market.
President Bush failed at every business he has been associated with. He has always had his dad to bail him out to avoid bankruptcy. But this time his dad and even Henry Paulson can’t keep Bush from facing the failure of his economic policies at the helm of the U.S. economy.
America’s oversized debt pyramid has just begun to wind down. The Federal Reserve has announced that it is giving an $85 billion loan to American International Group (AIG), the world’s largest financial conglomerate, in exchange for a nearly 80 percent stake in the firm.
The Associated Press calls it a “government takeover,” but as Ellen Brown, J.D., author of The Web of Debt, says, this is not a real nationalization like the purchase of Fannie Mae/Freddie Mac stock by the U.S. Treasury. “The Federal Reserve,” she points out, “has the power to print the national money supply, but it is not actually a part of the U.S. government.
It is a private banking corporation, owned by a consortium of private banks. The private banking industry just bought the world’s largest insurance company.” But they used taxpayer money to do it.
Proposals for reforming the banking system are not even on the radar screen of establishment politics, but the current system is collapsing at train-wreck speed. Says Brown: “We need to stop funding the culprits who brought us this debacle at our expense. We need a public banking system that makes a cost-effective credit mechanism available for homeowners, manufacturing, renewable energy, and infrastructure; and the first step to making it cost effective is to strip out the swarms of gamblers, fraudsters and profiteers now gaming the system.”
Just What Are Derivatives?
Derivatives are financial instruments whose value changes in response to the changes in underlying variables. The main types of derivatives are futures, forwards, options and swaps.
The main use of derivatives is to reduce risk for one party. The diverse range of potential underlying assets and pay-off alternatives leads to a wide range of derivatives contracts available to be traded in the market. Derivatives can be based on different types of assets such as commodities, equities (stocks), bonds, interest rates, exchange rates or indexes (such as a stock market index, consumer price index (CPI)—inflation derivatives—or even an index of weather conditions, or other derivatives). Their performance can determine both the amount and the timing of the pay-offs.
Stock index futures and options are known as derivative products because they derive their existence from actual market indices, but have no intrinsic characteristics of their own. In addition to that, one of the reasons some believe they lead to greater market volatility is that huge amounts of securities can be controlled by relatively small amounts of margin or option premiums. One reason derivatives are popular is because they can be transacted off balance sheets
http://engforum.pravda.ru/showthread.php?p=2589185
The theory behind the global credit crunch
By GREG RAY
THE mother of all bubbles is bursting.
It's a slow-motion implosion that many saw coming a long time ago.
It began inflating in the United States of America in the latter years of the 20th century, after the US Government was persuaded to deregulate the finance industry.
Unlike previous bubbles, this one has not been confined to real estate or shares although those markets certainly hyperinflated.
This bubble is pumped full of a strange class of asset called a "derivative", a kind of financial steroid that has bulked up balance sheets, markets and economies with artificial wealth.
Derivatives, of which the now widely acknowledged mortgage-backed securities are just one small subset, have grown astoundingly since they were first introduced on Wall Street not many years ago.
These products are very far removed from the investments with which most people are at least a little familiar.
They may be mortgage-backed securities an investment bond remotely linked back to real people paying off real loans to buy real houses.
They may be credit default swaps, a more exotic kind of "derivative" which amounts to a bet (dressed up as insurance) on whether any company or organisation you care to name will suffer some kind of "credit event" such as going broke or having trouble refinancing a loan.
Credit default swaps were first introduced by JP Morgan in 1995 and by mid-2007, the value of the market had ballooned to about $45 trillion, more than twice as big as the US stock market.
There are other kinds of derivatives, all based on different ideas and all subject to different risks.
Read any articles on the subject even by the best informed financial advisers and you will quickly see how much potential for danger exists in some of these opaque, confusing products.
Nobody, it seems, is sure how big the derivatives market is. It's at least US$500 trillion and is probably bigger, which explains why the suggestion that large parts of the market may be hollow has spread terror around the world.
The derivatives market in the US blossomed for a number of reasons.
One factor, in my opinion, was a seismic shift in the nature of the US economy.
As the 21st century dawned, corporations were abandoning the US in droves, shifting their operations to low-cost labour countries like India and China.
This created an employment dilemma: where would all the sacked Americans find jobs?
It also created a budget problem: exporting less and importing more, America would be running even bigger deficits than before, transferring more and more wealth to foreign trading partners, especially in China and the Middle East.
It looked like the country was going broke, going further into debt and losing ownership of the assets it could have used to generate income to get back into the black.
As manufacturing dived, the US economy became much more dependent on "unproductive" sectors like finance, insurance and real estate to provide jobs and income.
US politicians wanted economic growth but the nation was increasingly without the means to generate any.
One way to produce growth, at least for a time, was to paper over the structural problems of the economy by stimulating a housing boom.
Such booms can only ever be temporary, but while they last they put thousands of people to work in the construction industry.
To create this boom and the appearance of growth the Government encouraged a massive expansion in money supply. An extremely lenient credit environment enabled thousands of Americans in marginal financial circumstances to borrow money to buy and furnish newly built homes.
Maybe the lenders could see trouble ahead. It would be strange if they couldn't. They were lending money to bad risks. Low starting interest rates and various sweetheart deals were pulling people in, but it was obvious that once the deals ended, if house prices hadn't risen the music would have to stop and somebody would wear a loss.
That obvious fact should have popped the housing boom, but these were no ordinary times.
Years of lobbying by the banking and broking industry had induced then-president Bill Clinton in 1999 to repeal the famous Glass-Steagall Acts, which had been enacted following the 1930s bank crash to separate commercial and investment activities of banks and prevent them from indulging in certain forms of fraud and risky, self-interested behaviour.
The Glass-Steagall laws were part of the so-called "New Deal" that the Roosevelt Democrat Government implemented to curb the excesses of unbridled capitalism.
When those laws were repealed at the turn of this century the scene was set for a different kind of "New Deal", this time engineered by the financial whiz-kids in the Wall Street banks and broking houses.
The derivatives market had what looked like a magical power to let the US economy defy gravity.
Instead of regional banks keeping their risky loans on their own books, they could bundle them together into portfolios and pass them to brokers and investment banks which could turn them into bonds and sell them to people and organisations with money to spare. Then they could turn around and lend some more.
The lending and liquidity boom meant there were plenty of investment dollars looking for a profitable home, and as long as the mortgage-backed bonds were paying their coupon rates few investors asked any questions.
Even better, a lot of the risk could be exported to the countries and entities which were financing the growing US deficit.
Oil-rich and cash-rich creditor countries like China, Japan and Middle Eastern oil states were sitting on mountains of foreign exchange that was crying out to be profitably invested. Derivatives, including mortgage-backed securities, were offered to these investors, who also continued to buy more traditional US-dollar investments such as Treasury bonds.
Pension funds and local councils as far off as Australia were also hooked, lured by the apparently safe ratings of the derivative products. Most had no idea that they were really buying into bad mortgages, bad credit card debt, risky bets on company share prices and all manner of doomed credit.
Some sensed trouble, of course.
The huge surge in US dollar liquidity that was washing around the globe was certainly raising eyebrows. When the US Treasury stopped revealing the M3 money supply (a measure of total dollars in the world) a couple of years ago after recent graphs had shown near-vertical growth, more people realised the game was up.
All those dollars being pumped into the system were simply blowing bubbles.
Bubbles inflated in real estate prices not just in America but all over the world. Sharemarkets turned into bubbles too, and another bubble market developed in company acquisitions by private equity funds. Anything with real value skyrocketed in price because of all that excess money that was looking for a home.
Arching over the lot was the biggest bubble of all, in the derivatives market.
Derivatives were easy to get, offered what appeared to be comfortable returns and many appeared to be foolproof.
Although many derivative products could, in theory, have respectable uses in spreading or minimising risk, they were overwhelmingly used as speculative instruments.
Legendary US investor Warren Buffett called them correctly in 2003 when he said they were "financial weapons of mass destruction" and "time bombs" posing a "mega-catastrophic risk" to the entire economy.
Incentives in the derivatives market were loaded to encourage fraud and dodgy accounting, Buffett warned, adding that many derivative contracts appeared to have been drafted by "madmen".
He compared the derivatives market to "hell": easy to enter but almost impossible to exit.
All market bubbles depend for their inflation on the "bigger fool" principle.
Open-eyed buyers of bubble-market assets buy real estate or shares they suspect may be over-priced, betting that they can sell them quickly at a profit to a "bigger fool" somebody, perhaps, who thinks the value is reasonable or, having seen others make a fortune, wants a piece of the action.
The smart money gets in and out often several times before sensing the peak of the boom is too close and shifting into a different investment.
At least in real estate bubbles the bunnies who are stuck with the houses and land when the bubble bursts have something potentially real, even if they have to deal with the problem of negative equity (owing more than the property is worth).
Now that the music has stopped in the derivatives market, however, many of those holding the parcel are finding that, under all the reassuring layers of AAA-rated wrapping paper, they are holding a big fat zero.
Their investment is now worthless and it isn't clear when or if it will ever recover any value. In the meantime it is clear they won't be able to sell it or to raise healthy finance against it.
For some organisations that's potentially fatal because holding large parcels of dud debt affects share prices, perceptions of creditworthiness and capacity to refinance.
Some of the organisations saddled with this toxic debt are so big and so adversely affected that the entire US economy is said to be threatened with meltdown.
The problem has been made all the worse by the piratical behaviour of big multinational funds which have made it their business to take bets that certain banks or other organisations will fail, then using their wealth to intervene in the market and ensure a winning outcome for their gambles.
Governments have moved, belatedly, to curtail some of this activity, but the monsters of greed and fear, once unleashed on this scale, are hard to pacify.
The US Government has been forced by Wall Street and the Federal Reserve to conclude that it has no choice but to underwrite many of the contingent losses, adding colossal piles of debt to the immense stacks it already had.
Already the Government has bailed out investment bank Bear Stearns, nationalised the Fannie Mae and Freddie Mac mortgage businesses, taken over the insurance giant IAG and changed the banking rules to convert investment bankers Morgan Stanley and Goldman Sachs into commercial banks, giving them breathing space to survive. Now the US Government looks set to spend hundreds of billions of dollars to buy toxic debt, removing it from corporate balance sheets and transferring it to public ownership. The sobering fact is that the US taxpayer may be forced to pay artificially high prices for rubbish investments which, sooner or later, will have to be written off.
Investors all over the world including foreign governments such as those of China, Japan and the oil-rich Middle Eastern nations, sovereign wealth funds and central banks that fear the consequences of a sudden collapse in the US financial system, are frantically bailing the sinking boat, sucking a share of the toxic debt in a bid to avoid having to eat a much bigger dose later.
Whether they succeed will depend on how much of the mountain of derivatives hanging over the world economy is ultimately found to be worthless paper.
The events of the past couple of weeks were part of an inevitable shake-out.
The pity is that some of this action didn't happen at least a few years ago when the crisis might have been more manageable.
Preferring the illusion of growth and prosperity to revealing the reality of its actual financial circumstances, the US Government lacked the courage to intervene.
Now the derivative bubble is so huge that its deflation represents an extraordinarily daunting challenge.
It will take years for all the worthless IOUs to be extracted from the world financial system.
This will be an unavoidably painful operation. The dollar has been the world reserve currency for decades. It seems inevitable that the currency must undergo a major devaluation and it will not please foreign creditors to be repaid in less valuable dollars than the ones they originally loaned.
Confidence in America's ability to pay its debts will be sorely shaken and it is likely that Americans will have to adjust their standards of living to suit their actual, heavily indebted circumstances. Prices of imports including energy will rise, foreigners may stop financing US deficits, thereby endangering social programs and credit will be in painfully short supply.
The consequences for the rest of the world are unclear, but they are unlikely to be favourable.
A really serious global credit squeeze, caused by a rush of banks, corporations and other investors to exit dubious derivative products and repair their balance sheets with solid capital would hurt Australia as much as any other country.
Drastically curtailed credit means drastically curtailed business investment, growth, demand and employment.
That's why the Reserve Bank of Australia is working as hard as any of its overseas counterparts to maintain liquidity in the economy.
A big question is how a US slowdown would affect China and similar growing Asian economies. If China's skyrocketing economic growth comes to a sudden halt, demand for Australian resources would be hit, hurting Australia's terms of trade and compounding our own latent debt problem.
If the US crisis can't be contained and calmly managed the global consequences are impossible to predict. The only certainty is that nobody will be completely immune.
http://www.theherald.com.au/specialfeature.aspx?id=1206
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Mermaid
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Re:We're Fucked - The Coming Economic Crisis
« Reply #48 on: 2008-09-28 14:01:26 » |
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kmo did a wonderful podcast with ellen brown, author of web of debt that specifically explains the derivatives game and its role in the current disaster. its very succinct and enlightening.
its called 'full faith and credit'
http://c-realmpodcast.podomatic.com/entry/572396
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Hermit
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Re:We're Fucked - The Coming Economic Crisis
« Reply #49 on: 2008-09-28 17:25:45 » |
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According to UN research, global tangible individual wealth was worth $125 Trillion in 2005 http://www.guardian.co.uk/money/2006/dec/06/business.internationalnews (A short but interesting article well worth reading). Given actual inflation and the collapse of the dollar (as opposed to the official rates (ie lies)) this might well have doubled by now. The US GDP is between 10 and 13 Trillion pa depending on how you calculate it. BIS estimates the total of all on book derivative trades at 600 Trillion, of which it warned in January 2008, 60 Trillion are uncovered and unpayable.
Which keeps the mess in perspective.
Kind Regards
Hermit
PS The Guardian article from Mermaid is superb, and another on the same page by Nouriel Roubini, http://www.guardian.co.uk/commentisfree/2008/sep/18/marketturmoil.creditcrunch says much the same things as I do. Very gratifying given that he is as close to competent as I have seen from an economist for a while.
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With or without religion, you would have good people doing good things and evil people doing evil things. But for good people to do evil things, that takes religion. - Steven Weinberg, 1999
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Re:We're Fucked - The Coming Economic Crisis
« Reply #50 on: 2008-09-28 19:24:05 » |
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Quote from: Blunderov on 2008-09-28 13:06:11
but here is the problem...if the money ..whether its real or not...isnt 'thrown' at the problem that is wall street, they will extract their pound of flesh...their revenge...the banks held everyone hostage just after the great depression...there was no credit. the entire mid west became a dust bowl because farming came to a standstill.
but remember...after 1929, there was a period of industrialisation and productivity. in 2008, everything is outsourced. the factories are shut down and production is a word from the dictionary.
the money here isnt backing anything 'real' or 'tangible'. the wall street stocks dont back factories or brick and mortor stores or even services rendered...its not even paper money. its artificial.
this is what is known as a classic 'lose-lose' situation.
meanwhile..
http://thecurrent.theatlantic.com/archives/2008/09/presidential-debate.php
"Why did John McCain wait until the debate to announce that he supports the Treasury's plan?"
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Walter Watts
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Re:We're Fucked - The Coming Economic Crisis
« Reply #51 on: 2008-09-28 20:51:43 » |
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Hermit, Blunderov, Lucifer, Sat, Fritz, letheomaniac, Mo, and Mermaid.
I have a business proposition for you.
Loan me a dollar. I need to give it to my neighbor so he can buy some food. Otherwise, in a hunger fed psychosis he might violently try to eat my face. That would be bad. Soon as he's satiated, I'm going to eat his face and steal his money. I'll pay you back then.
Thanks in advance.
I knew I could count on you.
Walter
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Walter Watts
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No one gets to see the Wizard! Not nobody! Not no how!
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Fritz
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Re:We're Fucked - The Coming Economic Crisis
« Reply #52 on: 2008-09-28 21:32:50 » |
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Quote:[Walter Watts]
Loan me a dollar. |
[Fritz]...please save me an ear in lieu of money  funds attached.
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Where there is the necessary technical skill to move mountains, there is no need for the faith that moves mountains -anon-
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Re:We're Fucked - The Coming Economic Crisis
« Reply #53 on: 2008-09-29 12:26:39 » |
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[Fritz] Monday Morning cheer 
Source: Stirling
Author: Lord Stirling
Date: 28.09.2008
The Quickening ~ USA serious gasoline shortage
Reports are reaching me that American gasoline supplies are in critical shortage nationwide. The shortages that have already begun to show up in Atlanta, Georgia and other parts of Georgia could expand.
There is a sequence of events that could turn ugly quick. If the public begins to panic about the supply of gasoline, the first thing that they will do is "tank up". Supplies are so low nationally that masses of people tanking up could have a major impact.
The US gasoline inventory has reached its lowest level since August 1967 (during the '67 Middle East war era). The demand for gas, today, is twice what it was in 1967.
The most immediate danger is a food shortage due to a coming inability to maintain food supply with the current "just in time" gasoline delivery/inventory management system. American cities have at most three days of food, depending on daily incoming shipments for resupply of grocery stores.
Lack of gasoline and especially lack of food will certainly cause rioting in the street of America, triggering martial law.
Stirling
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Where there is the necessary technical skill to move mountains, there is no need for the faith that moves mountains -anon-
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Re:We're Fucked - The Coming Economic Crisis
« Reply #54 on: 2008-09-29 12:32:30 » |
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Quote from: Hermit on 2008-09-28 17:25:45
<snip>60 Trillion are uncovered and unpayable.
Which keeps the mess in perspective.</snip>
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[Blunderov] Indeed it does. 5 or 6 times GDP - another very big hit. And not to forget the ongoing expense of the ME fiasco which might well widen yet further as events continue to spiral out of control in Pakistan.
The national debt is mounting up so fast that, to paraphrase Apocalypse Now, you need wings to stay above them. (Which will not be provided by the US Air Force which, along with the US Army, is now quite broken.)
http://www.antiwar.com/engelhardt/?articleid=13520
September 29, 2008
The Pentagon Bailout Fraud
by Chalmers Johnson and Tom Engelhardt
TomDispatch
Let's start with the money the Bush administration has already thrown at the war in Iraq. According to the June congressional testimony of William Beach, director of the Center for Data Analysis, the war has cost $646 billion so far. The new defense budget for 2009 tacks on another $68.6 billion for Iraq and Afghanistan in the coming year. However, military expert Bill Hartung of the New America Foundation puts a conservative estimate of the costs of a single week of the Iraq War at approximately $3.5 billion (or about $180 billion a year).
In other words, the war in Iraq will cost far more in the next year than the Iraq portion of that $68.6 billion Congress is about to pony up in the defense budget, and so will be funded, as has long been true, through supplemental war bills submitted by the Bush administration (and then whatever administration follows). In other words, sometime in 2009 the direct costs of the war the Bush administration once predicted would cost perhaps $50-60 billion in total will stand at more than $800 billion, or $100 billion above the cost (if all goes well, which it won't) of the bailout of the financial system now being proposed in Washington.
Estimates of the true long-term costs of the president's war of choice, including payments of health care and veterans benefits into the distant future, soar into the budgetary stratosphere. They range from the Congressional Budget Office's $1-2 trillion to an estimate by economists Joseph Stiglitz and Linda J. Bilmes of up to $4-5 trillion. So we're talking somewhere between one-and-a-half and seven bailouts-worth of taxpayer dollars flowing into the morass of disaster, corruption, and carnage in Iraq.
And here's another curious bit of information: Just the other day, the Web site ThinkProgress pointed out a strange glitch in Iraq planning. The Bush administration, deep into negotiations with the Iraqi government, evidently managed to wheedle an extra year's time for the prospective withdrawal of American combat troops from Iraq; they pushed the date from 2010 – the year suggested by both Barack Obama and Iraqi Prime Minister Nouri al-Maliki – to 2011. According to Maliki in an interview with an Iraqi TV station, this change came from the administration's concern over the "domestic situation" in the U.S. (that is, the needs of the McCain campaign).
"Actually," said Maliki, "the final date was really the end of 2010 and the period between the end of 2010 and the end of 2011 was for withdrawing the remaining troops from all of Iraq, but they asked for a change [in date] due to political circumstances related to the [U.S] domestic situation so it will not be said to the end of 2010 followed by one year for withdrawal but the end of 2011 as a final date." So we're talking about another perhaps $150-180 billion in 2011 – or approximately the full suggested initial payout in the Washington bailout plan of at least one key Democrat. This gives the phrase "presidential politics" new meaning. Now, just imagine for a moment the situation we might be in if there had been no Iraq War. We could have bailed ourselves out many times over.
As Chalmers Johnson, author most recently of Nemesis: The Last Days of the American Republic, the final volume of his Blowback Trilogy, has pointed out for years, the Pentagon, the military-industrial complex, and America's wars are in the process of bankrupting us. How strange then that, as he indicates below, no one in the mainstream even blinks when a staggering new Pentagon budget sails through the House of Representatives and then, by voice vote, through the Senate just as negotiators in Washington have been scrambling to find a similar sum to deal with a catastrophic financial meltdown; nor does anyone in the mainstream bother to make any connection between that budget and the funds we don't have available to use elsewhere, or between the looting of Iraq and the looting of our financial system (and, in both cases, of course, the looting of the American taxpayer). Tom
We Have the Money
If only we didn't waste it on the defense budget
by Chalmers Johnson
There has been much moaning, air-sucking, and outrage about the $700 billion that the U.S. government is thinking of throwing away on rich New York bankers who have been ripping us off for the past few years and then letting greed drive their businesses into a variety of ditches. In fact, we dole out similar amounts of money every year in the form of payoffs to the armed services, the military-industrial complex, and powerful senators and representatives allied with the Pentagon.
On Wednesday, Sept. 24, right in the middle of the fight over billions of taxpayer dollars slated to bail out Wall Street, the House of Representatives passed a $612 billion defense authorization bill for 2009 without a murmur of public protest or any meaningful press comment at all. (The New York Times gave the matter only three short paragraphs buried in a story about another appropriations measure.)
The defense bill includes $68.6 billion to pursue the wars in Iraq and Afghanistan, which is only a down-payment on the full yearly cost of these wars. (The rest will be raised through future supplementary bills.) It also included a 3.9 percent pay raise for military personnel and $5 billion in pork-barrel projects not even requested by the administration or the secretary of defense. It also fully funds the Pentagon's request for a radar site in the Czech Republic, a hare-brained scheme sure to infuriate the Russians just as much as a Russian missile base in Cuba once infuriated us. The whole bill passed by a vote of 392-39 and will fly through the Senate, where a similar bill has already been approved. And no one will even think to mention it in the same breath with the discussion of bailout funds for dying investment banks and the like.
This is pure waste. Our annual spending on "national security" – meaning the defense budget plus all military expenditures hidden in the budgets for the departments of Energy, State, Treasury, Veterans Affairs, the CIA, and numerous other places in the executive branch – already exceeds a trillion dollars, an amount larger than that of all other national defense budgets combined. Not only was there no significant media coverage of this latest appropriation, there have been no signs of even the slightest urge to inquire into the relationship between our bloated military, our staggering weapons expenditures, our extravagantly expensive failed wars abroad, and the financial catastrophe on Wall Street.
The only congressional "commentary" on the size of our military outlay was the usual pompous drivel about how a failure to vote for the defense authorization bill would betray our troops. The aged Sen. John Warner (R-Va.), former chairman of the Senate Armed Services Committee, implored his Republican colleagues to vote for the bill "out of respect for military personnel." He seems to be unaware that these troops are actually volunteers, not draftees, and that they joined the armed forces as a matter of career choice, rather than because the nation demanded such a sacrifice from them.
We would better respect our armed forces by bringing the futile and misbegotten wars in Iraq and Afghanistan to an end. A relative degree of peace and order has returned to Iraq not because of President Bush's belated reinforcement of our expeditionary army there (the so-called surge), but thanks to shifting internal dynamics within Iraq and in the Middle East region generally. Such shifts include a growing awareness among Iraq's Sunni population of the need to restore law and order, a growing confidence among Iraqi Shi'ites of their nearly unassailable position of political influence in the country, and a growing awareness among Sunni nations that the ill-informed war of aggression the Bush administration waged against Iraq has vastly increased the influence of Shi'ism and Iran in the region.
The continued presence of American troops and their heavily reinforced bases in Iraq threatens this return to relative stability. The refusal of the Shia government of Iraq to agree to an American Status of Forces Agreement – much desired by the Bush administration – that would exempt off-duty American troops from Iraqi law is actually a good sign for the future of Iraq.
In Afghanistan, our historically deaf generals and civilian strategists do not seem to understand that our defeat by the Afghan insurgents is inevitable. Since the time of Alexander the Great, no foreign intruder has ever prevailed over Afghan guerrillas defending their home turf. The first Anglo-Afghan War (1838-1842) marked a particularly humiliating defeat of British imperialism at the very height of English military power in the Victorian era. The Soviet-Afghan War (1978-1989) resulted in a Russian defeat so demoralizing that it contributed significantly to the disintegration of the former Soviet Union in 1991. We are now on track to repeat virtually all the errors committed by previous invaders of Afghanistan over the centuries.
In the past year, perhaps most disastrously, we have carried our Afghan war into Pakistan, a relatively wealthy and sophisticated nuclear power that has long cooperated with us militarily. Our recent bungling brutality along the Afghan-Pakistan border threatens to radicalize the Pashtuns in both countries and advance the interests of radical Islam throughout the region. The United States is now identified in each country mainly with Hellfire missiles, unmanned drones, special operations raids, and repeated incidents of the killing of innocent bystanders.
The brutal bombing of the Marriott Hotel in Pakistan's capital, Islamabad, on Sept. 20, 2008, was a powerful indicator of the spreading strength of virulent anti-American sentiment in the area. The hotel was a well-known watering hole for American Marines, Special Forces troops, and CIA agents. Our military activities in Pakistan have been as misguided as the Nixon-Kissinger invasion of Cambodia in 1970. The end result will almost surely be the same.
We should begin our disengagement from Afghanistan at once. We dislike the Taliban's fundamentalist religious values, but the Afghan public, with its desperate desire for a return of law and order and the curbing of corruption, knows that the Taliban is the only political force in the country that has ever brought the opium trade under control. The Pakistanis and their effective army can defend their country from Taliban domination so long as we abandon the activities that are causing both Afghans and Pakistanis to see the Taliban as a lesser evil.
One of America's greatest authorities on the defense budget, Winslow Wheeler, worked for 31 years for Republican members of the Senate and for the General Accounting Office on military expenditures. His conclusion, when it comes to the fiscal sanity of our military spending, is devastating:
"America's defense budget is now larger in inflation-adjusted dollars than at any point since the end of World War II, and yet our Army has fewer combat brigades than at any point in that period; our Navy has fewer combat ships; and the Air Force has fewer combat aircraft. Our major equipment inventories for these major forces are older on average than any point since 1946 – or in some cases, in our entire history."
This in itself is a national disgrace. Spending hundreds of billions of dollars on present and future wars that have nothing to do with our national security is simply obscene. And yet Congress has been corrupted by the military-industrial complex into believing that, by voting for more defense spending, they are supplying "jobs" for the economy. In fact, they are only diverting scarce resources from the desperately needed rebuilding of the American infrastructure and other crucial spending necessities into utterly wasteful munitions. If we cannot cut back our long-standing, ever increasing military spending in a major way, then the bankruptcy of the United States is inevitable. As the current Wall Street meltdown has demonstrated, that is no longer an abstract possibility but a growing likelihood. We do not have much time left.
Chalmers Johnson is the author of three linked books on the crises of American imperialism and militarism. They are Blowback (2000), The Sorrows of Empire (2004), and Nemesis: The Last Days of the American Republic (2006). All are available in paperback from Metropolitan Books.
Copyright 2008 Chalmers Johnson
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letheomaniac
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Re:We're Fucked - The Coming Economic Crisis
« Reply #55 on: 2008-09-30 10:42:44 » |
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Quote:Hermit, Blunderov, Lucifer, Sat, Fritz, letheomaniac, Mo, and Mermaid.
I have a business proposition for you.
Loan me a dollar. I need to give it to my neighbor so he can buy some food. Otherwise, in a hunger fed psychosis he might violently try to eat my face. That would be bad. Soon as he's satiated, I'm going to eat his face and steal his money. I'll pay you back then. |
[letheomaniac] Dear Walter, I have at my disposal 1, 000, 000, 000 Zimbabwean dollars. In total they should add up to approximately $1. Please supply an address for delivery of the crate. 
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"You can't teach an old dogma new tricks." - Dorothy Parker
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Hermit
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Prime example of a practically perfect person
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Re:We're Fucked - The Coming Economic Crisis
« Reply #56 on: 2008-09-30 23:06:59 » |
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Letheomaniac,
The problem is that your offer is far too generous. GW Bush is doing his best for emergent nations by reducing the value of the dollar at such a rate as to make the Zimbabwean Dollar look positively stable. Meanwhile, US Homeland Insecurity has greatly increased the time between goods arriving in the US and being able to deliver it to the recipient (this does not mean more secure, merely more delays, you understand). This means that by the time your crate arrives it may well be that Walter would only need to extract one or two Zimbabwean notes, but would then be forced to ship the whole kit and kaboodle back lest he become one of the wealthiest in his district and a target of beggars and mendicants. Unfortunately, by then, the cost of shipping is likely to be many times greater than the value of the crate. So I suggest you burn the money there as a symbolic offering, and Walter can sniff the aroma of burned constitutional freedoms, bridges and the hope of a brighter future here and enjoy the warm feeling of not being entirely abandoned.
Kindest Regards
Hermit
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With or without religion, you would have good people doing good things and evil people doing evil things. But for good people to do evil things, that takes religion. - Steven Weinberg, 1999
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Fritz
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Re:We're Fucked - The Coming Economic Crisis
« Reply #57 on: 2008-10-02 14:02:28 » |
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Amidst the sarcasm, this seemed like a cute recap of this thread.
Cheers
Fritz
Source: CanadianBullshit
Date: 2008.08.29
Autthor: Capt. Ron
THE PRESENT FINANCIAL CRISIS EXPLAINED (finally!)
Ok here goes but first a warning. The media is having a difficult time explaining the present crisis because of its complexity. Our media business people are certainly smart enough but the problem is that Editors demand a format that a slow grade fiver could understand and this situation is just a little over most grade fiver's heads. Many directly involved in the financial industry and even their regulators have had to rely on extensive briefings in order that they understand the problem and possible options.
I have discussed this with Marcie and she has suggested a general approach to explaining the situation. In reality, it is not quite as complex as it first seems but you need to understand some things first. Luckily, having graduated from the best University in Canada -the University of Guelph I do understand this stuff. Just as an aside the University of Guelph also had the best sticky buns in Canada which a lot of students had for breakfast and their giant hamburgers called the UniGoo Biggy were works of culinarty art almost beyond description. But I digress. I didn't get to where I am today by digressing so here goes: We are here to explain the financial crisis!
First of, all world economies are subject to cycles where there are periods of growth and expansion and growth of wealth and followed by periods of contraction and reduction of wealth. These cycles are caused by many factors but the important thing to realize is that they do occur on a regular basis.
During a period of growth the stock market sees ever increasing prices for the value of stocks so the index for the markets which is a representation of selected indicator stocks increases. This situation is called a bull market and generally its a very happy time for investors because wealth is being created and they are getting richer by the day. Yes there are always a few stocks that go down but generally investors are doing very well and the economy continues to expand. Credit for investments is relatively easy to get because lenders realize that investment values are going up so the risk of default is low. Consequently credit is extended to people with less than perfect credit histories and lower net asset values because the risk of default is still perceived to be low.
During a period of contraction the stock market reduces in value and indexes fall. This is a bear market. There is a net decrease in wealth creation and investors loose money on paper and loose wealth should they sell. Often in this type of market major companies will go out of business and this causes very significant loss of wealth to investors. In this case lenders are increasingly reluctant to lend money to people without excellent credit histories and strong net asset positions. The risk of loss by default is now very high and lenders quickly start restricting their loans. This in turn impacts the economy as consumers are no longer able to obtain the credit (which now is charged at higher interest rates) to purchase goods and services and demand falls causing prices to fall and supply to be reduced which in turn causes employment to shrink and so the cycle goes.
What causes these cycles? As mentioned, many factors cause them. It would be a mistake to take one factor and say "there it is that's what caused this mess". Here are some of the major factors at play today:
* Manufacturing jobs from the US economy have been moved to China. This is causing a annual negative net cash flow in the current account which essentially means that wealth is flowing out of the economy to other world economies.
* The present ultra high military spending in the USA associated with the Iraq war is resulting in huge debts which will need to be paid off by future generations ( See note1 for important considerations on this point)
* The energy needed to run the economy in the USA is being provided by foreign countries
* The net trade with other nations in goods and services is now in significant deficit to the tune of almost a trillion dollars every four years. This represents a net reduction in wealth in the US economy.
* Real Estate in the USA has peaked and is now starting in 2006-2007 falling in value and that in combination with the job loss is resulting in widespread defaults in mortgages. There are approximately 5 million sub prime mortgages in the USA and approx 40% of them are likely to default in the next two years.
* The value of the US dollar which reflects the net wealth in the US economy is falling as net values fall making it less desirable to hold by foreign countries. Thus foreign countries are less inclined to invest their money in the USA
* The continual upgrading of computer technology represents a conversion of wealth in the form of software and hardware assets into assets with no value. This is a multibillion dollar leakage of wealth from the economic system every year. [Fritz]Would be interesting to hear some feedback on this point, it is not something that had occurred to me
The key thing to remember here is that economies work in cycles and the reduction of net wealth results in the contraction of economies. Simple and that is what is going on now.
Now lets take a look at Sub Prime Mortgages and ARM mortgages These were the mortgages extended to approximately 5,000,000 mortgage holders who did not have ideal credit ratings and or who had lower incomes- the thinking being that despite not being good credit risks in a falling market these people would be acceptable risks in a rising market as the property values supporting the mortgages would continue to rise.
Then a horrible thing happened. The value of real-estate appreciation started to slow down and then fall and the job market continued to shed jobs and the unemployment rate went up as the quality of jobs went down. This translated into situations where mortgage and loan holders were in default. Although even good mortgages defaulted the percentage of defaults with the sub prime mortgages were much higher. The ARM mortgage is an adjustable rate mortgage that starts with a lower rate and then after two or three years or more suddenly gets goosed up ("resets") to a higher rate. Here the idea is to get somebody into the housing market and it would have worked IF the market had kept expanding. The sub prime default problem is considered to be in the 300 billion dollar range.
Now we need to shift gears slightly. Where do you suppose the actual funds came from for these mortgages? If you received a sub prime mortgage or a car loan who actually gave you the money so that you could purchase your house or car? And where did they get that money?
Institutions that issue mortgages require working capital -the funds that they actually release to the individual so that he can purchase the home. An institution that issues mortgages will have payments coming in all the time which represents a cash flow and money going out. In order to spread the risk of the mortgage and to obtain working capital to allow the purchase of the homes the institution will raise working capital via the sale of commercial paper. There are several types of commercial paper but the important thing to remember is that all are short term type investments of less than a year. Until recently they were considered to be low risk and many large financial institutions such as banks invested in them.
There is a critically important difference between commercial paper (CP) and asset back commercial paper (ABCP). Commercial paper has been around for a long time and is considered to be a low risk type of investment. Its basically a unsecured promissory note where the issuing company promises to pay back to the amount of the note in a specific time period of 1 to 270 days. It's a low risk investment because the company issuing the note stands behind it. In fact the company issuing the note places the note on it's balance sheet as a liability. In effect the note is a part of the company and represents a claim on the company's assets. So the logic goes that if you have a strong company the commercial paper it issues will also be of very good quality and low risk. Now keep that thought!
ABCP is still commercial paper but its almost entirely different from commercial paper and I personally think it should have been called something else. Instead of the issuing company standing behind the commercial paper a separate entity which is a subsidiary company of the issuing company and not tied to the books of the issuing company called a "ABCP conduit" stands behind the paper.
The conduit is a subordinate company and separate legal entity consisting of a combination of mortgages and loans that the funds raised by the sale of the ABCP. So wrap your brains around this one- the very assets put up by those loaning money is what is used as collateral for the ABCP which must be repaid at maturity. Note also that this "separate entity subsidiary company" is an excellent way of effectively hiding debt from the balance sheets of the issuing company something done by the clever rascal Accountants over at ENRON) Now keep that thought.
Because Commercial paper including ABCP has a maturity date of between 1 and 270 days something needs to happen at the maturity date. You need to either "roll" the paper ie renew it or pay for it. OK keep that thought. One more point and we will bring it all together. If you have gotten this far you will soon understand the situation so please press on!
Now you will be happy to know that there is a difference in the ABCP market in Canada and the USA. Point of fact you will be pissed off. So here is the difference. In the USA there was a requirement at time of Roll (when the ABCP) matured that the issuer had to purchase back the paper if it was unable to Roll. But in Canada there was no such requirement. This is despite the fact (and this is cute) that some of the assets for Canadian ABCP were in fact American Subprime and ARM mortgages). So when the shit hit the fan so to speak in Canada and the ABCP did not roll there was a crisis which occurred on August 13th 2007. The issuers of ABCP got together and came up with a plan called the Montreal Accord that froze the ABCP market in Canada. Here the idea seems to be to convert the ABCP into FRN (fixed rate notes) with a maturity of about nine years) At time of writing this article (April 7/08) the market is still frozen. This means that investors in ABCP in Canada have their investments frozen. They cannot get access to them. We are talking about 35 Billion dollars in frozen assets. Now with no market for the ABCP the actual market price of the paper is in doubt. One could look to companies holding paper and the write downs they have taken on their accounting statements (balance sheets) for some indication of the perceived value but this is not the actual value which can only be determined at the time of sale. Companies holding the ABCP are taking write downs of between 5% and 30% or more.
Now lets look at what happened as a result of the ABCP not being able to roll and the impact on issuing companies and the banking system.
There was a liquidity problem. Lending institutions could not meet short term cash requirements because they couldn't sell the commercial paper that was supposed to fund those requirements. And in the USA they were responsible for buying back the ABCP that did not roll when it came up to its maturity date and there were no buyers. So the institutions very quickly expended their available capital and were suddenly left insolvent. In the case of Bear Stears this happened so quickly that the company went from healthy to insolvent in a few days resulting in the emergency sunday fire sale price.
The failure of New Century Financial in 2007 was the first of several-(over 50) lender failures as a result of the Sub Prime crisis The UBS bank in Switzerland recently wrote down 19 Billion dollars in assets representing the losses they took. Three German banks have recently failed. Bear Stearns an investment banker with an 85 year history of success suddenly suffered a liquidity crisis and was purchased for pennies on the dollar on a emergency basis on a Sunday. Merrill Lynch, Morgan Stanley and Citibank wrote down 36 Billion. Does it all stop there Even Canadian banks were not immune to the crisis. In fact the market for Asset Backed Commercial Paper in Canada has been frozen and investors are unable to get access to their funds while lenders attempt to come up with a rescue plan. ?
Now.... because the institutions suffering the losses are listed on the stock exchanges and the value of their share prices plummeted in other words wealth was destroyed. These are for the most part blue chip stocks the ones that you hold in retirement and mutual funds the ones that pension plans hold. Last year Bear Stearns was selling at well over $100 a share and its fire sale emergency price was $2. So the loss of wealth quickly spreads throughout society. Besides being called a financial disaster this is called a correction as the market reacts to changes in wealth.
How does one make money in this environment? You may have heard the comment that one person's loss is another person's gain. Foreclosures and repossessed cars and other assets mean that assets are going onto the market at less than retail market value. I recently saw a foreclosure bus tour in California where prospective buyers were taken on a tour of foreclosed properties for a $200 fee refundable on purchase of a property and even provided with a free lunch! Apparently there were some fabulous deals on homes that had been abandoned by very unfortunate home owners who could no longer afford to make payments. Here is a clear case of others gaining by the loss of others or as they often say of the rich getting richer and the poor getting poorer.
Is it time to buy stocks when they are down? Maybe it is maybe its not. If the working capital has been removed from an institution it might not be a time to buy its stock because without the working capital things are only going to get worse. If the fundamentals are still good and there is a chance working capital can be built up again perhaps it is a good buy at lower stock prices.
The more important issue here is not how to make money but how to avoid loosing what you have in this market. If you have no net value then its not an issue but there are millions of people in North America that have substantial net values both in real-estate and in other assets. In Canada there are over 330,000 millionaires NOT including the net asset value of their homes.
For example there was a rush to gold and gold mining stocks with the thought that it was a very secure asset. Consequently the price of gold went to over $1000 an ounce as the demand for gold suddenly shot up as people panicked looking for a safe place for their wealth. When demand spikes as we know prices increase. Subsequently gold has fallen off in price so would have been both a good and a bad investment on the short term. Real estate values are falling and in some markets are considered to be in free fall. Stock prices in the financial sectors are in question due to the continued write downs in the commercial paper market and the sub prime mortgage exposure. There is one problem looming on the horizon.
If the present situation goes from a recession or near recession to a full blown financial meltdown and a depression then we as a society and we as individuals have a major problem. This is a possibility although all the best financial minds in society are working hard today to prevent it from happening.
But should it happen then we are pretty much screwed. Because then so much wealth would have been destroyed that life as we have known it will completely change. I note that Zimbabwe recently put out a 50 million unit note that is worth only about a dollar Canadian. Could the same thing happen here? In effect what happens is that an economy is brought down to zero or as close as one can get and this is followed by a period of stagnation and extreme poverty followed by growth again sometimes several years later. The north American depression lasted a decade from 1929 and the stock market crash and reached a depth in Canada in 1933 coming out of depression in 1939 with the start of world war II. During those times unemployment hit 27% and GDP fell 40% exports were down by 50% family assets evaporated and debts increased. Could this happen again?
One can apply some logic here to reduce the stress level. If for example we should fall into a depression the economic situation could be catastrophic and beyond our power as individuals to do much about it. In that case why bother worrying about something you can't control.
If the economy goes into recession which some in the USA claim it already has then some very predictable events will occur. Unemployment will go up, demand will drop, prices will fall, debt will go up, supply will contract, government revenue will decrease and deficit spending will increase, public services will decrease. Real Estate prices will decrease. There will be major negative impacts to the fast food industry which may be a good thing.
And then like magic the next economic cycle will appear as the economic pendulum having swung one way as far as it will go finally stops and starts on the growth swing again.
That pretty much explains it. As Marcie said it can "all be solved if you take two shots of Screech because "Da arse is gone right out of her.". (Sometimes Miss Farsea slips back into her Corner Brook dialect and nobody is quite sure what she means.) She also remarked that "watching some people trying to explain this ABCP crisis is like watching molasses run uphill on a cold day." My best advice is buy Marcie's book then a lot of business will start to make sense.
This is the end of the article on the reasons behind the present economic crisis hope you enjoyed it and see it now in a different light! In times like this when hard working people experience large financial losses its a time to reflect on life itself. Is the cup half full or half empty? Is it cracked and half full of cat pee?
Our spin on it? Every day above ground is good!
Note1 -Military spending Iraq War - This is a complicated issue. Its likely that historians may look kindly on the net effects of this war vs allowing anti -western elements to capture Iraq and then having access it's oil treasures and population to fund a military-religious campaign against western interests. The actual dollars spent are still (to date) a small fraction of US GDP -about 1 to4% which although significant is not as high as the fraction of GDP spent in previous wars which was as high as 30% for WW2 and 9% for Vietnam. The cost to date for the current cost to date for this war is approx equal to the Korean and Vietnam wars when corrected for inflation but again the percentage of GDP is significantly lower. Also the accelerated depreciation of military equipment is not included in the costs. A more plausible cost is 2-3 trillion to date including equipment and future costs to look after injured vets. The equipment needs to be replaced anyway but because of the war equipment is being worn out in 1-3 years that would normally have lasted ten or more times that long)
However the perception is that military costs are a huge burden and this perception is what is effecting financial markets
July 24/2008 UPDATE Its now been quite a few weeks since we first wrote this page. It's a good time for an update. As suspected and predicted things have gotten considerably worse as the American economy continues to retract with the fall of real estate asset values and the deepening recession compounded with a sudden and unsustainable rise in fuel costs which impacted the entire economy in a very negative way. The Indy Mack Bank has failed and the nations two largest mortgage lenders Fannie Mae and Freddy Mack two absolutely ridiculous names for banks - effectively failed and had to be propped up by the US Government. Approximately 150 US Banks are in serious financial trouble all connected to the reduction of real estate values and the tightening up of credit. The sudden rise in fuel costs has significantly damaged the US auto industry and they have reacted with closed plants, staff reductions and a desperate attempt to change production to fuel efficient vehicles. Auto companies have experienced massive losses. As consumer disposable income is diverted to energy costs consumers have greatly reduced spending resulting in contraction of the retail marketplace and smaller profit margins as prices are reduced to attract sales. Stock values have fallen reflecting the downturn in the economy and the reduced asset value of companies. Financial services, Retail, Manufacturing and even the Resource based sectors are all suffering. Oil companies continue to total up record profits.
The question now is -are we headed into a Depression? with a melt down of the American Economy? The answer is that Yes we are headed in that direction. At this point in time it is unknown how far we will go towards a Depression. Regulators and Government and Financial Services Sectors are all attempting to put their best spin on the current conditions but despite that the conditions continue to worsen.
In Canada so far we have remained in a favorable financial position despite being joined at the hip to the American economy. This situation could change overnight something that commentators and media folk seem to be oblivious to. .
The big problem is that the US economy is now poised for a disaster. If it does happen it will happen very quickly in hours or days not weeks or months. There will be one incident followed by a cascading effect that regulators and governments will be unable to control. The incident could be the failure of GM or FORD or a devastating terrorist attack, followed by the failure of dozens of banks and it would take little to begin the trend. Unfortunately the USA has the most unpopular leader in recent history at this time which further erodes confidence that he can deal with the problems.
It is impossible to predict what will happen at this time but it is entirely possible to note that the economy is poised for disaster and that the possibility of disaster is very high.
Senior people and those with significant financial assets are now engaged in establishing a PLAN B. Plan B is a scheme to fleece the public of its remaining wealth and concentrate that wealth in the hands of a few.
That's how I see it!
Update August 22/2008 Things are developing exactly like I said they would when I wrote the article several months ago. At this point in time things are still going down and the two main Mortgage holders in the US Market Fanny Mae and Freddy Mac are on the verge of collapse and appear to be headed in that direction with an agreement with the government that they will take over the companies if necessary which of course would wipe out billions of dollars of shareholder wealth and add huge debt to the already large debt in the US economy which will in turn cause the dollar to fall. In addition to this the financial crisis is hitting the major banks and we are now on the verge of seeing a major US bank fail. Unlike Canada which has never had a bank failure ( see Banks) Bank failures with US banks are fairly common but NOT large bank failures. The unprecedented rise in energy costs has increased the cost of living by raising prices and this is now having an impact on consumer demand which traditionally has been the engine and powerhouse of the US economy. So my prediction at this point is that the US economy will get significantly worse and there may be precipitous drops as large corporations in the financial sector fail. Its also looking increasingly likely that John McCain will be elected the next American President and this will result in a backlash in the black community who had expectations raised only to have them shattered. This will effect a full 10% of the US population (Blacks) and there will be outbreaks of violence as a result.
Update September 14/2008 I am not one to say "I told you so" but clearly the turkeys are coming home to roost. Fannie Mae and Freddy Mac failed as predicted and the Government had to come in and take them over and fire the executives. Now Lehman Brothers is declaring bankruptcy and Merrill Lynch is being taken over by Bank of America. There will be additional bank failures as the implications of these moves impact investors and pension plans. Alan Greenspan commented that the USA is now in a 100 year financial crisis and indicated more bad news was looming. September 15 will be an interesting day on the American and world stock markets and we are headed for unchartered territory. On the good side there is a tremendous amount of wealth and resilience in the American and world economies and after the necessary and very painful re-evaluation of real-estate and stocks we can look forward to another decade of bull markets. Right now the bear is out and she is angry and there is a lot more pain to come.
Its odd that the Canadian election campaign is paying almost no attention to the financial crisis. Now why is that? Even in the USA where they are taking more of an interest in the topic it seems to be shoved aside to talk about the personality and appearance of candidates and did the pig wear lipstick or not and change is required. Well change is here and its not pretty. Its not wearing lipstick and its got lots of warts and stinks. Its called a "financial crisis" aka depression. As a result there will be great change. Lets wait and see....
Update September 16/2008 I think its time to draw your attention to one of the salient facts concerning this crisis. That is the concept of wealth. Wealth can be expressed in many forms but essentially it is the value of ALL assets within an economy. Some will claim that it is the net value of all assets that is the asset value less any liabilities associated with that asset. Lets look at that. Lets say that you have a nice four bedroom house in a nice location and that it was valued last year on the market at $500,000. OK. An Accountant will come along and correctly inform you that since you have a $400,000 mortgage on the home that the actual value of the asset to you is $100,000 using the standard accounting formula assets less liabilities equals owners equity. The Accountant would be correct. They are just excellent with Accounting theory. But we are talking about economics not accounting. In fact your house has a value of $500,000 or whatever the fair market value is that day. I won't belabor the point but its important to understand in this crisis. Simply because our North American economy is an extremely wealthy economy even in crisis. We still have countless trillions of dollars of wealth in our economy in the form of land, buildings, infrastructure, institutions, an educated and trained population, technology etc etc. That is the good news. What is happening is that a huge price correction is racing through the economy right now. Certain assets have been overvalued and their prices are dropping to better reflect their value.
In the case of real-estate my thoughts are that the market is over valued by at least 50% perhaps as high as 70% in some market areas. Ultimately an asset is worth what somebody is willing to pay for it. That is its market value. Overvaluation crept into the real-estate market with speculation as buyers purchased properties with nothing or little down in order to re sell them at a profit. This continued on until the prices went up so far that no buyers were left in the system to purchase the properties at this level and as demand fell off so did prices. Then when prices began falling a reverse expectation set in that prices would continue to fall and suddenly it was somewhat like a dog chasing its tail. Suddenly nobody knew where the bottom was but they knew that prices were falling and if they were in the market they were motivated to get out and take what profits they could. And here is where the problem started because those with no or little equity in the houses suddenly had no profit and instead were faced with a debt when the house was converted back to cash. Suddenly they were out of the market and the mortgage holder was faced with a loss so the investment value of the mortgage company fell accordingly.
There is a happy ending here. But we aren't there yet. You see the property still has some intrinsic value to it. In other words there is some value there. In fact there is significant value there based on the value of the lot and the replacement cost for the structure. When home prices fall down to that value whatever it is the price drop will stop and prices will firm up and a new cycle of growth will start. But there is bad news too.
Wealth associated with the difference between the intrinsic value of the real-estate and the inflated price of real-estate will be destroyed and this is what is happening now. Its that wealth that supports banks and investment companies and every business in our economy. It supports wages and pensions and benefits and government operations. All will need to adapt to the new conditions. You will find that prices will begin to drop as people work for less money and demand more value for their purchases. Financial institutions will raise credit standards and demand higher standards for loans and credit.
The adjustment will affect a lot of people but not all of us. If for example you do not sell your house you do not take a loss. Your net asset value has been reduced that's all. No big deal. If however you have placed a second mortgage on your house to gain access to that extra equity as millions have done you have a problem as now you have a debt that is not backed up by the additional equity value in your home. If you have used that second mortgage money to purchase another asset it might not be all that bad. If you have simply spent it on baubles, booze and vacations then again you have a problem.
So the point of this update is to give a bit of a realty check. Yes the sky is falling. No doubt about that as this is the most severe correction in decades - perhaps ever in the US economy. And yes it will impact the Canadian economy too. However the North American and European economies have so much accumulated wealth in them that there will be no total collapse of the economic system. That is not to say that some people won't be hit hard because they will and their life styles will be changed as a result. But all this wealth will not evaporate over night leaving us all destitute. In the case of Canada we still have trillions of dollars of natural resources in the ground, and trillions more in infrastructure and a trained work force. But there are many who are no longer millionaires, many who have lost or will loose their jobs and many more mortgages to go into default before this adjustment is over. These will be very tough times for a lot of people who thought they were in pretty good shape.
But the sun will still shine every day and every day above ground will still be good! Hang in there!
At this point everyone is looking to AIG the monster insurance company from the USA as they are teetering on the brink of disaster. Also what will the market do to digest the Fannie, Freddie, Merrill Lynch and Lehman Bros. losses?
For those with lots of guts there are some very interesting stock investment opportunities these days. Have fun!
Update Sept 20/2008 I have been contacted by several senior people pleading with me to explain to them what is going on with the world financial system vis a vis the recent changes implemented by the US Government in an attempt to resolve their financial crisis. Usually I remind them that I am retired. Then that I have type 2 diabetes and finally if they still demand information that I have E.D. That normally stops them. But one Lady - I won't name her- begged for an explanation and appeared to be hyperventilating and sobbing and on the verge of a panic attack. Ok here goes...
The US economic system is in crisis. As I explained in previous paragraphs here. Rather than let the large companies go bankrupt the government waded in and bought them out for pennies on the dollar. The government took an equity position that is they effectively socialized American financial systems that were in the process of failing. They are also buying bad debt to allow liquidity in the financial system with the objective of stopping any further losses. The refer to this debt as "toxic debt" which is an interesting but devious spin. Bad debt is bad debt but toxic debt infers a certain type of debt that investors would avoid because their returns would be high risk. If you think about it and most don't there is a huge difference here.
However as they say there are "issues" here. The most basic idea behind capitalism is the old accounting formula owners' equity is equal to the assets minus the liabilities. As a consequence of that when your liabilities exceed your assets you are out of business- you are bankrupt or as they say insolvent. Now what has happened is that some very large companies went bankrupt and the government in its infinite wisdom refused to let that happen and instead purchased the bad debt making up the liabilities and transferred it over to the taxpayers account. This sends all sorts of bad messages to those in the financial system. One message is that if you are big enough and go bankrupt the government will come in with taxpayers funds and bail you out. This changes the entire dynamic.
It is critically important that the reader understand that in the capitalist system the big stick that makes it work is the concept that if you make mistakes and do the wrong thing you will go out of business and if you make the right decisions and do the right things you will live long and prosper.
The big problem is that the bad debt liability still exists it is merely transferred over to the government accounting system as part of the public debt. In effect the government actions are addressing the symptoms of the economic crisis not the causes. The other part of the big problem is that public funds are not infinite there are limits. You will likely ask "what does this mean to me?"
It means a lot to you unfortunately.
1. The US economy based on capitalism has been converted to a socialist economy with the Government not the private sector in control.
2. The public debt is now huge and this means that owners equity or the collective wealth of all Americans has just been significantly decreased
3. A nation with significantly less wealth is not able to provide the same level of services to the public and must collect more in taxes to provide those decreased services.
4. Because wealth and power are inextricably connected the USA is now a significantly less powerful nation in the world than it was just a few days ago.
5. The value of the US dollar which is a reflection of the wealth of a nation and the willingness of foreigners to hold the dollar is now less valuable and this will result in the dollar dropping against world currencies
6. Inflation will increase to reflect the reduced buying power of the US dollar
7. Credit will become more expensive and more difficult to get resulting is less value and more costs to American consumers
8. The government actions will allow the very rich and powerful to pursue an orderly withdrawal from the American economy preserving their capital and re investing it in economies with a better prospective for growth and profit. Furthermore the turmoil will present these people with wonderful profit opportunities as large businesses are sold at fire sale prices. (such as the recent acquisitions of Warren Buffet)
9. Until the underlying causes of the economic woes are solved the situation will continue to degrade in accordance with a basic law of the universe the law of minimum energy.
There I have done my bit. Free advice and consultation. Use what you can. Believe what you want to. Just remember my points about the inherent wealth in the Canadian and North American economies. The sky IS falling it. But this is not Bangladesh either. Look around. All that you see is accumulated wealth within the economic system in the term of real assets. Just don't pretend its not a crisis because it is.
When you realize that an average pickup truck in Canada now sells for over $40,000 and that the average home in Victoria is now approaching half a million dollars and the minimum wage is $8/hr you begin to understand what the problem is. When the bank prime is 2% and the banks are charging you 27% for your credit card balance PLUS an annual fee PLUS late charges you can see what the problem is. When oil companies are making horrendous profits and your price of gas is fixed to the world price NOT the well head production costs then you begin to see what the problem is. Somehow the government regulators who were supposed to be standing up for the best interests of the population began to defer to the wishes of big business instead. We see huge CEO and senior executive salary packages where the companies are actually loosing money. We see benefits going to big business and then they shift production to lower cost areas. We see financial services companies exhibiting greed to the point where their clients are being ripped off rather than served. In Canada we see cellular services and cable companies simply ripping off the consumer.
I rest my case.
Update September 23/2008 I was pleased to see Professor Allan H. Meltzer at Carnegie Mellon University nail the problem with the existing crisis. He gets it. We both agree that taxpayers buying bad debt to help liquidity is stupid (my term). I agree with Professor Meltzer that the government only if necessary should provide interest bearing loans which the companies would need to pay off with conditions such as no payment of dividends or executive bonuses until they are paid off. And we also both agree that until the value of real estate is known we won't know how much bad debt there is out there. The Professor did not suggest a value for that real estate but I do - its at a 50-70% discount to the value of the real estate at the beginning of this crisis. So a $400,000.00 house is really worth between $120,000 and $200,000 and that means the difference between the actual value and the mortgage amount above that value is the effective amount of the bad debt. That asset is gonzo. poof! That's well over a trillion dollars possibly three or four trillion.
Also interesting to see that the Fed Chairman and the Treasury Chairman both confirmed my assessment of how serious the present situation is. Both are claiming that 700 billion will solve the four trillion dollar problem. Both need to study basic arithmetic.
On the good side there are some pretty smart people in the US congress and they should be able to see where the quicksand is. Lets see what they do. And Americans are an incredibly hard working people with huge reserves of wealth and infrastructure. I wouldn't count them out yet. But clearly they have been knocked down several pegs and it will take them a bit of time to realize they are not the most powerful nation in the world anymore. There are basically three groups reaching for that supremacy - North America, Europe/UK and the Orient. It may be they are actually number three. Note that the other two groups are picking at their bones with the British picking up assets of Lehman Bros and Oriental interests picking away at their bank stocks. What may be confusing them is that as a single country they are certainly very powerful but as a member of one of the three large economic superpower groups they are number three.
Well that's it for now. I guess I don't need to tell you that some of us are making huge amounts of money in the market right now. When there are wild swings in stock values that's where you make the big bucks. That will be our little secret. I see Warren picked up a nice little deal for 50 cents on the dollar. You can too!
Last point. We are now in uncharted waters. What that means is that we don't know where we are going or where the rocks are. The only thing for sure is that more bad news looms. And our Skipper is ...George W. Bush.
Update Sept 24 2008 As predicted things are getting worse and the crisis is being recognized by the two Presidential Candidates. John McCain has suspended his campaign to return to Washington. More and more energy is being focused on identifying the best response to the problem. There is now concern based on a realization of the facts that a catastrophic stock market crash is now a possibility or worse a probability for sometime next week. Some very powerful people are making huge amounts of money during this crisis. I see Warren is at it again with more massive purchases for pennies on the dollar.
Update Sept 25 2008 As predicted another large bank failure today the largest bank failure in the US to date with the collapse of Washington Mutual and its purchase for pennies on the dollar by JP Morgan Chase. Say goodbye to investors shares in Wamu. Say goodbye to billions. The inability of the American executive to forge a bail out plan is the best indicator that they don't fully comprehend the nature of the problem. Its really incredibly simple. The bottom of the real estate market has not been reached yet. Therefore nobody knows what the loss in mortgage assets is. One thing is for sure and that is that it is way more than 700 billion. Any idiot can clearly see its at least 2 or 3 trillion. THATS the problem. I hate to say it but things are going to get even worse. Even the Bank of Canada has issued dire warnings about "historical" corrections. Something we have been saying here for months. And why isn't this getting into the mainstream media in Canada? Its because our media is totally controlled by a few very powerful and rich people who don't want us to know what is going on. Interesting eh?
UPDATE SEPT 29/08 The stock market is melting down today as previously predicted here. We are now in the midst of a financial disaster of "historical proportions". The market is now discounting the value of assets in a severe correction and panic reigns. This is when some people with money are going to pick up some fabulous gains and millions are going to loose their shirts. Banks and Financial services companies will begin to fail, credit will dry up, companies will declare bankruptcy, unemployment will rise. This is not a good time. The only good thing about a free fall is that bottom will be hit fast. This is black monday Sept 29 2008.
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Where there is the necessary technical skill to move mountains, there is no need for the faith that moves mountains -anon-
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Hermit
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Re:We're Fucked - The Coming Economic Crisis
« Reply #58 on: 2008-10-02 18:00:34 » |
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A good article Fritz, but IMO not good enough.
So far as I can see, the assertion of the cyclic nature of economies is not based on anything more than inference from observations taken during an era of unprecedented access to cheap energy. It certainly has not applied to any culture of which I am aware at the 300 year level or longer in the 1800 years prior to the last 200 years of cheap energy availability. As this era draws to a close, a more proper view might be that of a future beginning with a short, sharp and massive reduction of global populations, with the risk of the total elimination of humans; or a long slow and grim future of attrition back to a sustainable - but much poorer - population. If the latter, it is probably going to be within the next 2 years and that most probably will be predetermined by the next 3 months.
A factor not sufficiently acknowledged, never mind not taken into account in the analysis is that the energy and housing markets are intertwined and will likely collapse in the same lock-step as that in which they arose. Because of the incredibly poor build quality resulting in rapid depreciation and so high gray energy levels, non-use of recyclable designs causing total loss of embedded value and energy at life end, and most of all, abysmal insulation standards and unbelievable humidity susceptibility causing very poor thermal performance and continuous need for high power input to maintain livable conditions, the existing housing stock is effectively not just worthless but of negative worth. It also tends to be built in suburbs with lousy transport systems, again utterly dependent on not just cheap energy, but specifically the no longer available cheap oil. It is clear that falling incomes (50% of US income was derived from Ponzi like financial services sector), collapsing dollar value and increasing energy demand has set up a graph where attainable income is lower than the cost of the energy required to maintain the existing housing stock. That will wipe out most of the remaining 20% of value buried in the deflated building pool. Putting it in numbers the actual value of the USA's housing stock, currently valued at $13 Trillion, has a firesale price of $3 Trillion and a net value of under zero, as it will take energy (money) to harvest what is worthwhile (if anything) from it (We will be harvesting as we don't have the ability to replace the raw materials in the 20 to 30 years before before the end of cheap energy prevents further exploitation).
And as you know, the housing crises is only at the forefront of the collapse. There remains some $60 Trillion of funny money in the form of unsupported and unrecoverable derivative trades coming down the pike. Add to this the existing food crises, the coming water crises, the poisoned media, the delusional populations, so deep in denial that they don't even realize that crops will be rotting in the fields this time next month unless a rescue package bypassing the existing financial system is invented and implemented in the next fortnight - and the future seems very bleak indeed. Manufacturing can't save us now. Only 12% of US income is from manufacturing. A lower percentage than under Tsarist Russia in the early 1900s! And let us not forget the 3 day food supply in most of the USA. What will the teeming millions eat when the system finally implodes?
Is there a way out. There are many. But I think that the reluctance to face reality is going to preclude most of them - even for those who have become uber-wealthy treading others ever deeper into the mire. So long as there are people around, GW Bush and the Republicans will likely be remembered for more than merely the destruction of the USA as the suffering that will accompany it is difficult to visualize.
Kindest Regards
Hermit
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With or without religion, you would have good people doing good things and evil people doing evil things. But for good people to do evil things, that takes religion. - Steven Weinberg, 1999
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Fritz
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Re:We're Fucked - The Coming Economic Crisis
« Reply #59 on: 2008-10-03 18:21:20 » |
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Well Hermit, you ensured I needed Sweetener in my coffee this morning and I'm not able to argue your bleak outlook; and since articles like the one below certainly would have been considered untenable in the main stream media when this thread began .... so clearly ... "the cup is half full with cat piss" .... and we have to hope Walter will share the fatt'd other white meat he's gathering .... tastes like pork I hear .....
Cheers
Fritz
Source: Economist
Date: 2008.10.02
Author:
Whatever happens in Congress, the crisis is now global; that means governments must work together
AMERICA’S Congress is not used to being second-guessed. But as lawmakers wrestled in the Capitol, world stockmarkets have been giving real-time odds on the Bush administration’s $700 billion bail-out becoming law. After the plan’s thrashing by the House of Representatives on September 29th, spurred on by voters’ loathing of “casino capitalism”, investors panicked. Yet as The Economist went to press, they were optimistic that, after winning the Senate’s approval on October 1st, the plan would pass.
Even if it does, that should not be a cause for optimism. Look beyond the stockmarkets, especially at the seized-up money markets, and there is little to see except bank failures, emergency rescues and high anxiety in the credit markets. These forces are drawing the financial system closer to disaster and the rich world to the edge of a nasty recession (see article). The bail-out package should mitigate the problems, but it will not avert them.
The crisis is spreading in two directions—across the Atlantic to Europe, and out of the financial markets into the real economy. Governments have been dealing with it disaster by disaster. They have struggled to gain control not just because of the speed of contagion but also because policymakers, and the public they serve, have failed fully to grasp the breadth and depth of the crisis.
What’s the Icelandic for “domino”?
Step forward, Peer Steinbrück, Germany’s finance minister, who rashly declared on September 25th that America was “the source…and the focus of the crisis”, before heralding the end of its role as the financial superpower. Within days, the focus shifted and Mr Steinbrück and his officials were obliged to arrange a €35 billion ($51 billion) loan from German banks and the German government to save Hypo Real Estate, the country’s second-biggest property lender.
The hapless Mr Steinbrück is not alone. European banks were collapsing at a dizzying pace even as Christian Noyer, governor of the Bank of France, declared that “there is no drama in front of us.” Hypo Real Estate was just one of five banks in seven European countries bailed out in three days. Belgium, Luxembourg and the Netherlands carved up Fortis, a big bancassurer; Britain nationalised Bradford & Bingley; Belgium, France and Luxembourg saved Dexia; and Iceland rescued Glitnir. Separately, Ireland took €400 billion of contingent liabilities onto the national balance sheet, when it stood behind the deposits and debts of its six large banks and building societies. You have to wonder what Mr Noyer regards as dramatic.
By some measures, many European banks look more vulnerable than their American counterparts do—and that is saying quite something, given the past week’s forced sale of Washington Mutual, America’s biggest thrift, and Wachovia, its fourth-biggest commercial bank. In America, outside Wall Street, the banks have lent 96 cents for each $1 of deposits. Continental European banks have lent roughly €1.40 for each €1 of deposits. They have to borrow the rest from money-market investors, who are not especially confident just now. Some Europeans, including the British, Irish and Spanish banks, have housing busts of their own. And they must contend with the toxic American securities they bought by the billion, as well as their own slowing economies.
Western Europe is not the limit of this: the panic has also struck banks in Hong Kong, Russia and now India. And it is not just the geographical breadth of this crisis that is alarming, but also its economic depth. Because it is rooted in the money markets (see article and article), it will feed through to businesses and households in every economy it hits.
Take a deep breath
Most of the time nobody notices the credit flowing through the lungs of the economy, any more than people notice the air they breathe. But everyone knows when credit stops circulating freely through markets to banks, businesses and consumers. For almost a year the markets had worried about banks’ liquidity and solvency. After the bankruptcy of Lehman Brothers last month, amid confusion about whom the state would save and on what terms, they panicked. The markets for three-, six- and 12-month paper are shut, so banks must borrow even more money overnight than usual.
Banks used to borrow from each other at about 0.08 percentage points above official rates; on September 30th they paid more than four percentage points more. In one auction to get dollar funds overnight from the European Central Bank, banks were prepared to pay interest of 11%, five times the pre-crisis rate. Astonishingly, rates scaled these extremes even as the Federal Reserve promised $620 billion of extra funding.
Bankers have always earned their crust by committing money for long periods and financing that with short-term deposits and borrowing. Today, that model has warped into self-parody: many of the banks’ assets are unsellable even as they have to return to the market each day to ask for lenders to vote on their survival. No wonder they are hoarding cash.
This is why those politicians who set the interests of Main Street against those of Wall Street are so wrong. Sooner or later the money markets affect every business. Companies face higher interest charges and the fear that they may one day lose access to bank loans altogether. So they, too, hoard cash, cancelling acquisitions and investments, in order to pay down debt. Managers delay new products, leave factories unbuilt, pull the plug on loss-making divisions, and cut costs and jobs. Carmakers and other manufacturers will no longer extend credit (see article) and loans will become elusive and expensive. Consumers will suffer. Unemployment will rise. Even if the credit markets work well, the rich economies will slow as the asset-price bubble pops. If credit is choked off, that slowdown could turn into a deep recession.
Financial markets need governments to set rules for them; and when markets fail, governments are often best placed to get them going again. That’s pragmatism, not socialism. Helping bankers is not an end in itself. If the government could save the credit markets without bailing out the bankers, it should do so. But it cannot. Main Street needs Wall Street; and both need Washington. Politicians—and President George Bush is the most culpable among them (see article)—have failed to explain this.
Governments need not just to communicate, but also to co-ordinate. Past banking crises show that late, piecemeal rescues cost more and work less well. Ad hoc mergers work for a while, but demands for help tend to recur. Inconsistency sows uncertainty. Cross-border banking can make one country’s policies awkward for the neighbours: the Irish government’s guarantee of all deposits threatens to suck in money from poorly protected British banks. France’s suggestion on October 1st that Europe’s governments should work together was a good one; Germany’s rejection of it was wrong.
Central banks have co-ordinated their liquidity operations. Now that oil prices have plunged and worries about inflation are receding, interest-rate cuts are possible. They would be more powerful if co-ordinated. But it is not only central banks that need to combine. Whatever America’s Congress does, governments should work together on principles to stabilise and recapitalise banks—not just to stem panic but also to save money. Even if, as the Europeans claim, the crisis was made in America, it now belongs to everyone.
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Where there is the necessary technical skill to move mountains, there is no need for the faith that moves mountains -anon-
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