The Fed is expected to cut their key rate by 50 basis points today (½ of 1% to 1%), this following the coordinated 50 bp rate cuts of Oct/8 (ECB, BofE, Fed & 4 others). Japan may follow Friday, then the BofE and the ECB most certainly next week. China cut its key rate today, the third time in six weeks, claiming it does not want to join the funeral march.
Over the near term, the stock market will remain a freak show, maybe fun to watch but providing little insight. World credit markets remain key and these continue to thaw gradually, today’s 90 day LIBOR rate at 3.42% indicating modest to fair activity in world inter bank lending. The commercial paper market is moving thanks to Fed purchases of this short-term business credit. These are good things.
Government rescue packages are beginning to kick in, US, UK, EU. Other countries, originally laggards, are now coming around. Japan will increase its bank bailout scheme, S Korea will take "drastic steps," Kuwait’s central bank just rescued the Gulf Bank. Those governments lacking the resources to rescue their own are applying to the IMF, the most recent hike in Iceland’s key rate the price that country was required to pay for the assistance. A proposed new liquidity fund at the IMF may be approved as soon as next week, offering countries up to 5 times their IMF quota. Hungary, Iceland, Belarus, Ukraine and Serbia and Pakistan are in line. The politics of application of all of this - beyond our pay grade.
Background: As Bernanke’s bubble has burst, world commodity prices have collapsed and with that, so too the economies of developing countries who primarily exported these goods (and the whining ethanol lobby) This activity had been financed by western banks, not so much US but EU and Brit. So the vicious circle. With credit and demand scarce, shipping has collapsed, as good an indicator of world health as we can get. For example, a few months ago one payed about $240,000 as daily rental for a large container ship. That last printed $7340! Empty ships are everywhere. To see how things are intertwined, Greek families control a third of the global freight market for bulk goods. Thus, there is flight from Greek bonds. The UK’s Royal Bank of Scotland and HSBC financed the share of the shipping activity. Both these banks are this instant taking major chunks of UK taxpayer cash. And so it goes.
We continue to be fairly optimistic. We have no idea which bank will be next, but world authorities have moved quickly to address these situations. Only a sovereign default (Russia, Argentina) at this point would open new windows of risk.
We had earlier broached the idea of a Bretton-Woods-like conference; sure enough we will have such an event Nov/15 in Washington. A regional pre-event was recently concluded in Asia and things seemed surprisingly cooperative. We don’t know what to expect other than the world’s financial landscape will change forever, or at least, during our lifetime.
Robert Craven
Wednesday, October 29, 2008
Thursday, October 23, 2008
Small World
We are in a recession even if it has not been officially announced. Technically, that means two consecutive negative Qts. Details, details.
The so-called sub-prime crisis cut off the economy’s life blood in that it did away with trust. Bankers lied to each other, and, to their regulators. One banker in the UK suddenly regarded his counterpart in the US as a leper. The heart of the world credit system - inter-bank lending - came to an abrupt halt. A few weeks of this is enough to convert a slowing but positive growth rate into a corrosive event. However, the near-miraculous quick fix of two weeks ago put a floor under the free fall. How bad would it have been? The finance ministers knew; no way they would have sculpted a deal so quickly if they had not. We would have experienced a near depression (not a full depression in the sense of ‘29 - soup cans - only because of the lesson taught by Friedman and Schwartz some 40 + years ago).
The US plan is not perfect. "In the long run, Americans will always do the right thing after exploring all other alternatives," Winston Churchill said during WWII, as Americans were debating whether or not to enter the European theater. We are still grouping. For example, in the case of the 9 banks initially selected the injection of capital is through (non-voting) preference shares yielding an absurdly low 5%. In the UK, the taxpayers are getting 12%, and, with a gov’t-appointed board. Without voting shares, the gov’t has no voice in running these banks. And, it has no seats on their boards. And the whole shebang will be managed by a 35 year old. What?
Still, we know by monitoring the 90 day LIBOR rate that $’s are flowing again between banks. US, UK and EU banks have started to lend rather than hoard cash. We’re seeing the worst of the seizure in money markets come to an end. Clearly the global rescue effort is having an effect. This is a very good thing.
Over the near term we will watch world events because they impact most of us directly these days. Thus, we need to know that shipping is slowing world wide, that freight rates for grains, coal and iron are down substantially. We need to know that deliveries dropped 15% in Long Beach last month. We need to know that the IMF just had to rescue Hungary and the Ukraine. We need to know that the German economy is stagnant. We need not be surprised if we see Russia fail to pay its debts (again). We need to know that Brazil is in a free-fall, that Argentina may go into default next week. This and more will give us a clue about what is in store over the near term. But at this juncture there is reason for optimism. Here is why: The mkt crowd, after missing entirely what could have been a fatal flaw now feels suddenly enlightened, given to original insight even, and, as is almost always the way has rushed to the other extreme, that is, has priced in a far worse scenario for next year than reality, our view. Once again, more psychology than economics.
Robert Craven
The so-called sub-prime crisis cut off the economy’s life blood in that it did away with trust. Bankers lied to each other, and, to their regulators. One banker in the UK suddenly regarded his counterpart in the US as a leper. The heart of the world credit system - inter-bank lending - came to an abrupt halt. A few weeks of this is enough to convert a slowing but positive growth rate into a corrosive event. However, the near-miraculous quick fix of two weeks ago put a floor under the free fall. How bad would it have been? The finance ministers knew; no way they would have sculpted a deal so quickly if they had not. We would have experienced a near depression (not a full depression in the sense of ‘29 - soup cans - only because of the lesson taught by Friedman and Schwartz some 40 + years ago).
The US plan is not perfect. "In the long run, Americans will always do the right thing after exploring all other alternatives," Winston Churchill said during WWII, as Americans were debating whether or not to enter the European theater. We are still grouping. For example, in the case of the 9 banks initially selected the injection of capital is through (non-voting) preference shares yielding an absurdly low 5%. In the UK, the taxpayers are getting 12%, and, with a gov’t-appointed board. Without voting shares, the gov’t has no voice in running these banks. And, it has no seats on their boards. And the whole shebang will be managed by a 35 year old. What?
Still, we know by monitoring the 90 day LIBOR rate that $’s are flowing again between banks. US, UK and EU banks have started to lend rather than hoard cash. We’re seeing the worst of the seizure in money markets come to an end. Clearly the global rescue effort is having an effect. This is a very good thing.
Over the near term we will watch world events because they impact most of us directly these days. Thus, we need to know that shipping is slowing world wide, that freight rates for grains, coal and iron are down substantially. We need to know that deliveries dropped 15% in Long Beach last month. We need to know that the IMF just had to rescue Hungary and the Ukraine. We need to know that the German economy is stagnant. We need not be surprised if we see Russia fail to pay its debts (again). We need to know that Brazil is in a free-fall, that Argentina may go into default next week. This and more will give us a clue about what is in store over the near term. But at this juncture there is reason for optimism. Here is why: The mkt crowd, after missing entirely what could have been a fatal flaw now feels suddenly enlightened, given to original insight even, and, as is almost always the way has rushed to the other extreme, that is, has priced in a far worse scenario for next year than reality, our view. Once again, more psychology than economics.
Robert Craven
Sunday, October 19, 2008
Anna Schwartz Disagrees
Anna Schwartz does not feel compelled to impress people with her grip on yard-long equations and cosmic economic theory. She is naturally inclined, in the spirit of this blog, to explain complex problems in simple terms - the greatest gift any of us can make to our friends. (We are not always equal to the task but we give it our best shot.)
Readers recall that Schwartz in 1963 co-authored with Milton Friedman, "A Monetary History of the United States", a book which placed conventional wisdom about the cause of the Depression, squarely on its head. The last time we saw Schwartz was 10/93 when we two testified before the House Banking Committee on Fed reform. At 92 and still working at the NBER she remains an icon in the profession.
We heralded the administration’s about face in adopting Darling’s plan. We knew that the Fed had flooded the market in vain - no trust, no lending. We figured then that taxpayer capitalization would work to thaw the inter bank market, key to our troubles, and anyway, we didn’t think banks would cooperate with the other plan - endless arguing about the best price to sell their rubbish to us taxpayers. Recall that the 90 day LIBOR rate best reflects banks’ willingness to lend; prior to Paulson’s decision that rate was 4.82% but last it was 4.42% so indeed, there has been some improvement, some movement in money lent bank to bank since that announcement.
Chicken feed argues Schwartz. She says that resuscitating flawed institutions sets the wrong precedent, carrying a chronic infection with it. Recapitalize all you want; the so-called toxic securities will remain - no one knows how little they’re worth and despite the Fed’s or the adm’s efforts, if they remain we’re going nowhere quickly.
That is why Schwartz welcomed Paulson’s original plan when we did not. And why did Paulson abandon that plan and join Darling’s? Because if this garbage is priced at current market levels, selling this stuff, as Schwartz in quoted in a recent WSJ editorial, "would be a recipe for instant insolvency at many institutions." (Which is why we suspected they would not cooperate) Yet Schwartz argues that keeping insolvent firms afloat just prolongs the crisis. "Firms that made wrong decisions should fail," she says. "You should not rescue them. And once that’s established as a principle, I think the market recognizes that it makes sense. Everything works much better when wrong decisions are punished...." .
Tough to argue with this, at least the theory. Well, perhaps with implementation. But what about "systemic risk" you may ask Schwartz, that risk originating from the opaque web connecting most of the world’s major financial institutions, the domino effect? She doesn’t buy that either, dismissing most of that noise to market whiners.
Finally this from Schwartz, an anchor no matter how we view the details: "I think if you have some principles and know what you’re doing, the market responds. They see that you have some structure to your actions, that it is not just ad hoc—you’ll do this today but something different tomorrow. Now, instead of looking principled, the authorities looked erratic and inconsistent. The market respects people in supervisory positions who seem to be on top of what’s going on. So I think if you’re tough about firms that invested unwisely, the market won’t blame you."
Robert Craven
Readers recall that Schwartz in 1963 co-authored with Milton Friedman, "A Monetary History of the United States", a book which placed conventional wisdom about the cause of the Depression, squarely on its head. The last time we saw Schwartz was 10/93 when we two testified before the House Banking Committee on Fed reform. At 92 and still working at the NBER she remains an icon in the profession.
We heralded the administration’s about face in adopting Darling’s plan. We knew that the Fed had flooded the market in vain - no trust, no lending. We figured then that taxpayer capitalization would work to thaw the inter bank market, key to our troubles, and anyway, we didn’t think banks would cooperate with the other plan - endless arguing about the best price to sell their rubbish to us taxpayers. Recall that the 90 day LIBOR rate best reflects banks’ willingness to lend; prior to Paulson’s decision that rate was 4.82% but last it was 4.42% so indeed, there has been some improvement, some movement in money lent bank to bank since that announcement.
Chicken feed argues Schwartz. She says that resuscitating flawed institutions sets the wrong precedent, carrying a chronic infection with it. Recapitalize all you want; the so-called toxic securities will remain - no one knows how little they’re worth and despite the Fed’s or the adm’s efforts, if they remain we’re going nowhere quickly.
That is why Schwartz welcomed Paulson’s original plan when we did not. And why did Paulson abandon that plan and join Darling’s? Because if this garbage is priced at current market levels, selling this stuff, as Schwartz in quoted in a recent WSJ editorial, "would be a recipe for instant insolvency at many institutions." (Which is why we suspected they would not cooperate) Yet Schwartz argues that keeping insolvent firms afloat just prolongs the crisis. "Firms that made wrong decisions should fail," she says. "You should not rescue them. And once that’s established as a principle, I think the market recognizes that it makes sense. Everything works much better when wrong decisions are punished...." .
Tough to argue with this, at least the theory. Well, perhaps with implementation. But what about "systemic risk" you may ask Schwartz, that risk originating from the opaque web connecting most of the world’s major financial institutions, the domino effect? She doesn’t buy that either, dismissing most of that noise to market whiners.
Finally this from Schwartz, an anchor no matter how we view the details: "I think if you have some principles and know what you’re doing, the market responds. They see that you have some structure to your actions, that it is not just ad hoc—you’ll do this today but something different tomorrow. Now, instead of looking principled, the authorities looked erratic and inconsistent. The market respects people in supervisory positions who seem to be on top of what’s going on. So I think if you’re tough about firms that invested unwisely, the market won’t blame you."
Robert Craven
Thursday, October 16, 2008
VIOLENCE
In the markets the business of the future is to be dangerous. For example, we don’t have a clue regarding short term fluctuations in the most watched of indicators - the stock market. World wide that market has been just a tad violent. Some of this is due to the inevitable second guessing of the rescue, that if not impotent it is at the very least lacking in horsepower. We did not anticipate this crisis, find it all too easy to criticize those who are trying to rectify it - simply shots from the cheap seats. Instead, we need to develop some notion of economic underpinnings, those anchors which will hold past the chaos and confusion. The rescue plan as sculpted last weekend is one of those; it is substantive. Economic ministers kept the secret. The choice was this: either come up with the money needed to allow them to nationalize the bulk of their banking systems by Monday or come up with the money needed to nationalize the bulk of all listed companies by the end of the week.
Yesterday’s reaction in the world equity markets was also triggered by a US Sep retail sales release that was over double the decline expected, and by the Fed’s dismal appraisal of near term economic conditions, both of these raising the notion of a recession (already baked in the cake, our view, and meaning two consecutive negative Qts). Other indicators included rocketing unemployment in the UK, slowing demand in China and signs that the highly levered economies of Easter Europe will need a bail out soon (Iceland acting perhaps as the canary). Finally, there is in the mix a whole myriad of factors that none of us can isolate. That does not stop the talking heads from telling an anxious audience exactly why we had a dive, knowing that the listeners will go home feeling (falsely) secure.
Robert Craven
Yesterday’s reaction in the world equity markets was also triggered by a US Sep retail sales release that was over double the decline expected, and by the Fed’s dismal appraisal of near term economic conditions, both of these raising the notion of a recession (already baked in the cake, our view, and meaning two consecutive negative Qts). Other indicators included rocketing unemployment in the UK, slowing demand in China and signs that the highly levered economies of Easter Europe will need a bail out soon (Iceland acting perhaps as the canary). Finally, there is in the mix a whole myriad of factors that none of us can isolate. That does not stop the talking heads from telling an anxious audience exactly why we had a dive, knowing that the listeners will go home feeling (falsely) secure.
Robert Craven
Wednesday, October 15, 2008
Simply Stunning
Throw a dart; it lands in the middle of a Des Moines pig farm. Ask the proprietor - "Do housing prices always go up?" "What? You nuts sonny? Been around much? Everything goes in cycles you dumb bunny." Indeed, and yet despite the fancy conduits, models, and the rest of the Rube Goldberg contraptions employed in the sub-prime crisis, no one factored in that truth.
Now we have seen the weekend decision to copy Darling’s plan. In Britain the government can decide to do something and, thanks to the parliamentary system, it becomes law in an instant. That is what happened.. Most striking about what might now be called the Brown-Bush, Darling-Paulson plan is that it represents an explicit repudiation of the first US administration proposal that passed through Congress two weeks ago. The old country to the rescue!
Now we have not just US and UK partial or majority ownership of their lending institutions, but world wide sovereign support of their respective lending institutions. This is simply stunning. How did we get here? What lies ahead?
Over the next week we will offer three installments, simplifying and explaining just what happened, and in some detail. However, in the most distilled sense: Greenspan’s mismanagement of the Fed created excess liquidity; it had to go somewhere. Most went into the best inflation hedge around - housing (not business investment). The twins under pressure from Congress supported the sub-prime mortgage market, converting risky loans into the near equivalent of Treasury bonds - but with higher returns. Lenders first resisted intimidation from ACORN and the like, but then went along willingly, discovering that the profits were as easy to come by as they were bloated. Wall St did its part to package the stuff; end line investors were happy. Problem is that no one bothered to call the Des Moines farmer.
Over the near term our core concern is that some nations themselves will have to be bailed out in order to bail out their own financial sector! Iceland of course comes to mind. In Iceland, the funding gap of the banking sector exceeds the fiscal capacity of the government. Period. There may be others; we will know before the year is out. If so this will call for an entirely new world bureaucracy.
Past that we want to believe that the state-ownership-and-control phase be as short as possible. History tells us that government is a dreadful owner and manager of anything. But then the idea is that this is all temporary. We want to believe that. And in the intermediate term the taxpayer may make a killing. This is certainly a real possibility. Yet key for now is to anticipate the new world financial landscape. Since the near collapse was due in large part to the old system of soft-touch regulation, or self regulation, or, in the case of the Democrats refusal to reform the twins - toothless supervision, we can assume that all will change before governments hand back the banks. What the banking industry now hopes will be necessary but minimal reform will likely be a comprehensive overhaul. We expect a world conference something on the order of the Bretton Woods of 64 years ago (created the IMF & World Bank) to sort these things out.
Robert Craven
Now we have seen the weekend decision to copy Darling’s plan. In Britain the government can decide to do something and, thanks to the parliamentary system, it becomes law in an instant. That is what happened.. Most striking about what might now be called the Brown-Bush, Darling-Paulson plan is that it represents an explicit repudiation of the first US administration proposal that passed through Congress two weeks ago. The old country to the rescue!
Now we have not just US and UK partial or majority ownership of their lending institutions, but world wide sovereign support of their respective lending institutions. This is simply stunning. How did we get here? What lies ahead?
Over the next week we will offer three installments, simplifying and explaining just what happened, and in some detail. However, in the most distilled sense: Greenspan’s mismanagement of the Fed created excess liquidity; it had to go somewhere. Most went into the best inflation hedge around - housing (not business investment). The twins under pressure from Congress supported the sub-prime mortgage market, converting risky loans into the near equivalent of Treasury bonds - but with higher returns. Lenders first resisted intimidation from ACORN and the like, but then went along willingly, discovering that the profits were as easy to come by as they were bloated. Wall St did its part to package the stuff; end line investors were happy. Problem is that no one bothered to call the Des Moines farmer.
Over the near term our core concern is that some nations themselves will have to be bailed out in order to bail out their own financial sector! Iceland of course comes to mind. In Iceland, the funding gap of the banking sector exceeds the fiscal capacity of the government. Period. There may be others; we will know before the year is out. If so this will call for an entirely new world bureaucracy.
Past that we want to believe that the state-ownership-and-control phase be as short as possible. History tells us that government is a dreadful owner and manager of anything. But then the idea is that this is all temporary. We want to believe that. And in the intermediate term the taxpayer may make a killing. This is certainly a real possibility. Yet key for now is to anticipate the new world financial landscape. Since the near collapse was due in large part to the old system of soft-touch regulation, or self regulation, or, in the case of the Democrats refusal to reform the twins - toothless supervision, we can assume that all will change before governments hand back the banks. What the banking industry now hopes will be necessary but minimal reform will likely be a comprehensive overhaul. We expect a world conference something on the order of the Bretton Woods of 64 years ago (created the IMF & World Bank) to sort these things out.
Robert Craven
Monday, October 13, 2008
MONDAY MORNING
We predicted in Saturday’s sketch (Thank You Darling) that if adopted by other major world credits, that Darling’s plan would place a floor under the free fall. After an extraordinary series of meetings this weekend, most of the G-20 (G-7, the EU & 12 countries) have accepted that plan of action; initial reactions, both in European and UK equity markets and LIBOR indicate a warm acceptance.
Of course, the treatment scares the living daylights out of all of us. Like early 19 century inoculations for smallpox, this could kill us, or at least make us very sick. For example, although the temporary nationalization of a good part of the G-7 banking sectors is unavoidable and indeed necessary, we hope we can avoid the introduction of the other trappings of comprehensive state ownership of the means of production, distribution and exchange. Should economists begin to dust off their manuals on central planning, cast Hayek into the recycling bin?
Robert Craven
Of course, the treatment scares the living daylights out of all of us. Like early 19 century inoculations for smallpox, this could kill us, or at least make us very sick. For example, although the temporary nationalization of a good part of the G-7 banking sectors is unavoidable and indeed necessary, we hope we can avoid the introduction of the other trappings of comprehensive state ownership of the means of production, distribution and exchange. Should economists begin to dust off their manuals on central planning, cast Hayek into the recycling bin?
Robert Craven
Saturday, October 11, 2008
THANK YOU DARLING
If you strike a king you had better kill him. Or, as a UK Treasury official noted Friday, "The lesson of the US plan is that you only get one shot at this. When you fire the bullet it has to hit its target." Indeed. World citizens must acknowledge a debt to UK Chancellor Alistair Darling for the concept, Bank of England governor Mervyn King for the support and Prime Minister Gordon Brown for the implementation of a (now model) strategy which if adopted by other major nations will first retard, then halt the world’s credit market free fall.
The total shutdown of interbank markets (see earlier posts) has begun to impact the real sector - honest to goodness businesses - and with death-ray speed. This key development, all too clear by late last week, panicked world governments. Earlier, the US team reacted in incremental fashion. Last week the UK team adopted the shock and awe approach.
The G-7, the G-20 - great big clubs; these guys all talk to each other, and all the time, perhaps the 15 or 20 most powerful people in world finance. Instead of many little things they all know one big thing - lending in the money markets must re-start soon or it’s all over (we did not select 1929 as a past headline with a dart throw). If banks do not start lending to each other we are guaranteed a depression. It gags most of us but partial nationalization is the only option left now. If that doesn’t work - full nationalization.
Darling’s rescue package has taxpayers effectively becoming shareholders in troubled banks. The government may even take seats on these banks’ boards. The package makes $340bln available to provide liquidity to the money markets so that banks will lend to each other again. It provides $42.5bln immediately to invest in the 8 biggest banks in the UK; in turn, the taxpayer receives preferred shares, paying anywhere from 8% to 10%. There is $42.5 bln behind that if needed. Originally Darling looked to own minority stakes. Developments at this writing indicate the UK may take majority stakes in some, perhaps RBS, HBOS, Lloyds & Barclays. Finally, the government will guarantee all loans that UK banks make to each other, up to around $425bln; it will charge the banks a fee for the guarantee. This is the biggest peace-time intervention the free world has ever seen. Truly stunning.
This will do the trick, or would except for the minor inconvenience that all the major world credits are linked. To rescue US or UK banks in isolation won’t cut it. Thus, the G-7, then the IMF took Brown’s plan under consideration this weekend. The IMF chief economist, one Olivier Blanchard, claimed yesterday that world equity markets may fall another 20%. This is nonsense; Oliver (there are no "Oliviers" where we come from) doesn’t have a clue, any more than my mule Speedy. However, it might happen if he and the rest of these clowns don’t get off their butts and actually do something for once.
Some countries will nationalize a few banks; some the entire banking system, our view. Within a few days, all major countries have to back taking stakes in their banks or we’re sunk. Next, all must in one form or another guarantee their banks’ loans made in the inter bank market, provided the banks sign up for each government’s recapitalization program and pay for the privilege. It’s a good bet that most will comply.
The US has already changed tack to follow the Brits, Paulson allowing he too will inject capital directly into banks, taking some stakes in return (goodbye Land Of The Free).
Let’s monitor developments with G-20 compliance tomorrow and Monday.
Robert Craven.
The total shutdown of interbank markets (see earlier posts) has begun to impact the real sector - honest to goodness businesses - and with death-ray speed. This key development, all too clear by late last week, panicked world governments. Earlier, the US team reacted in incremental fashion. Last week the UK team adopted the shock and awe approach.
The G-7, the G-20 - great big clubs; these guys all talk to each other, and all the time, perhaps the 15 or 20 most powerful people in world finance. Instead of many little things they all know one big thing - lending in the money markets must re-start soon or it’s all over (we did not select 1929 as a past headline with a dart throw). If banks do not start lending to each other we are guaranteed a depression. It gags most of us but partial nationalization is the only option left now. If that doesn’t work - full nationalization.
Darling’s rescue package has taxpayers effectively becoming shareholders in troubled banks. The government may even take seats on these banks’ boards. The package makes $340bln available to provide liquidity to the money markets so that banks will lend to each other again. It provides $42.5bln immediately to invest in the 8 biggest banks in the UK; in turn, the taxpayer receives preferred shares, paying anywhere from 8% to 10%. There is $42.5 bln behind that if needed. Originally Darling looked to own minority stakes. Developments at this writing indicate the UK may take majority stakes in some, perhaps RBS, HBOS, Lloyds & Barclays. Finally, the government will guarantee all loans that UK banks make to each other, up to around $425bln; it will charge the banks a fee for the guarantee. This is the biggest peace-time intervention the free world has ever seen. Truly stunning.
This will do the trick, or would except for the minor inconvenience that all the major world credits are linked. To rescue US or UK banks in isolation won’t cut it. Thus, the G-7, then the IMF took Brown’s plan under consideration this weekend. The IMF chief economist, one Olivier Blanchard, claimed yesterday that world equity markets may fall another 20%. This is nonsense; Oliver (there are no "Oliviers" where we come from) doesn’t have a clue, any more than my mule Speedy. However, it might happen if he and the rest of these clowns don’t get off their butts and actually do something for once.
Some countries will nationalize a few banks; some the entire banking system, our view. Within a few days, all major countries have to back taking stakes in their banks or we’re sunk. Next, all must in one form or another guarantee their banks’ loans made in the inter bank market, provided the banks sign up for each government’s recapitalization program and pay for the privilege. It’s a good bet that most will comply.
The US has already changed tack to follow the Brits, Paulson allowing he too will inject capital directly into banks, taking some stakes in return (goodbye Land Of The Free).
Let’s monitor developments with G-20 compliance tomorrow and Monday.
Robert Craven.
Thursday, October 9, 2008
The Equity Market - A Side Show
Difficulties with the equity mkt pale when compared to what’s implied by the state of the inter-bank lending market (LIBOR, and readers now know what this is).
As our acquaintance Willem Buiter, Prof at the London School of Economics and (when we knew him) past policy maker at the Bk of England illustrates, "Gordon Brown is absolutely right in his proposal that the G7 offer state guarantees, on ‘commercial’ terms (really terms that provide the state with an adequate risk-adjusted return on the funds it commits) to restore life to interbank lending. Banks today don’t lend to each other without high-grade security at any but the shortest maturities. When banks don’t lend to each other, they don’t lend to the real economy - non-financial businesses and households. That is the road to economic disaster."
Buiter continues, "Large-scale fiscally financed injections of capital into the banking systems of the US and the EU (sans UK) are required immediately. In addition, there is an urgent need for direct interventions in the financial markets, targeted directly at the blockages/distortions preventing these markets from functioning. That means either unsecured lending by the central bank to the banks (i.e. the central bank interposing itself as counter party of last resort in the interbank market) or Treasury guarantees of interbank transactions. The banks participating in the interbank markets are inherently border-crossing institutions. Only if all EU members, the EU orphans (Switzerland, Norway, Iceland), the US, Japan and Canada decide on a common approach to getting interbank lending going again is there a realistic chance of success."
Translation for our friends: Continental European governments, the UK and US authorities better stop hoping for a miracle. Systemically important markets have failed. Now, only the power of the state offers sanctuary. How sad.
Robert Craven
As our acquaintance Willem Buiter, Prof at the London School of Economics and (when we knew him) past policy maker at the Bk of England illustrates, "Gordon Brown is absolutely right in his proposal that the G7 offer state guarantees, on ‘commercial’ terms (really terms that provide the state with an adequate risk-adjusted return on the funds it commits) to restore life to interbank lending. Banks today don’t lend to each other without high-grade security at any but the shortest maturities. When banks don’t lend to each other, they don’t lend to the real economy - non-financial businesses and households. That is the road to economic disaster."
Buiter continues, "Large-scale fiscally financed injections of capital into the banking systems of the US and the EU (sans UK) are required immediately. In addition, there is an urgent need for direct interventions in the financial markets, targeted directly at the blockages/distortions preventing these markets from functioning. That means either unsecured lending by the central bank to the banks (i.e. the central bank interposing itself as counter party of last resort in the interbank market) or Treasury guarantees of interbank transactions. The banks participating in the interbank markets are inherently border-crossing institutions. Only if all EU members, the EU orphans (Switzerland, Norway, Iceland), the US, Japan and Canada decide on a common approach to getting interbank lending going again is there a realistic chance of success."
Translation for our friends: Continental European governments, the UK and US authorities better stop hoping for a miracle. Systemically important markets have failed. Now, only the power of the state offers sanctuary. How sad.
Robert Craven
1929 ?
Radical measures taken yesterday have yet to impact. The 90 day LIBOR rate jumped to 4.75% this am ( http://www.bloomberg.com/markets/rates/keyrates.html). Take our word for it - this means that aside from a little O/N activity, banks are not lending to each other.
Central banks continue to lower key rates. Our problem has nothing to do with rates at this juncture, but lack of trust.
The WSJ editorialized this morning that there is "Progress Amid the Ruins." Maybe so. They’re smarter than we are. We just don’t see it.
KEY - Banks are not raising enough capital to offset losses.
Certainly yesterday’s UK Treasury mandate appears to be a positive - injections in return for partial gov’t ownership. Certainly Paulson’s flirting today with a similar rescue (US taxpayers inject capital and take a position), although it would gag Hayek and please Marx, may be a positive. There are other plans afoot.
May the force be with us.
Robert Craven
Central banks continue to lower key rates. Our problem has nothing to do with rates at this juncture, but lack of trust.
The WSJ editorialized this morning that there is "Progress Amid the Ruins." Maybe so. They’re smarter than we are. We just don’t see it.
KEY - Banks are not raising enough capital to offset losses.
Certainly yesterday’s UK Treasury mandate appears to be a positive - injections in return for partial gov’t ownership. Certainly Paulson’s flirting today with a similar rescue (US taxpayers inject capital and take a position), although it would gag Hayek and please Marx, may be a positive. There are other plans afoot.
May the force be with us.
Robert Craven
Wednesday, October 8, 2008
CONTAGION
The loss of confidence in financial institutions, as of yesterday pm, was complete. Today’s globally coordinated package aims to insert trust into a world wide financial web that has been completely without it. In addition to the Fed, the European Central Bank, the Swiss, Canada, China, Hong Kong - all cut rates drastically. The UK announced their rescue plan which among other things partially nationalizes major banks. German, Ireland and Greece pledged to guarantee savers deposits. Iceland took over two of its largest banks. Spain agreed to bail out its banks by taking on $68 Bln of their assets. My goodness.
What was at first a liquidity problem, triggered by the US mortgage mess (and key within that, the failure of Fan/Fred) has now become a world wide solvency crisis. All the world’s major banks are intertwined and in incredibly complex ways, many of these unregulated and hidden. Now funding has evaporated; no one trusts anyone else not knowing what’s on their books. Interbank lending, the life blood of the system, is unsecured. If one bank lends to another it relies (or relied) on trust that it will get it back with interest. Central banks have been flooding the markets with cash but to little avail. Banks simply hoarded anything they can get their hands on because of fear of counter party risk. Hoarding cash to rebuild one’s balance sheet quickly becomes a habit, a state of mind. This is one reason part of today’s UK package in effect guarantees banks’ debt to, hopefully, restore confidence and get banks lending to one another again.
Contagion has moved quickly in the US from the financial to the non-financial sector. The so-called commercial paper market provides corporations with short term funds - anywhere from a few days to a few months. This is how they fund their day-to-day operations (not capital operations). This was a well established (over 90 years), deep and liquid market. Last week this market became frozen. Nobody wanted to take any risk at all, not even to GE. So with the recent announcement the Fed is now backing that market too, meaning the Fed is in the direct business of making loans to the private sector. This is a stunning development.
Look at this as a very large wicked loop. Weakness spreads from the financial arena quickly to consumer and capital spending, from a global slowdown to US exports (until recently a real strength), promoting further and more intense declines in employment, then pressuring income, consumers and lenders, on and on.
Robert Craven
What was at first a liquidity problem, triggered by the US mortgage mess (and key within that, the failure of Fan/Fred) has now become a world wide solvency crisis. All the world’s major banks are intertwined and in incredibly complex ways, many of these unregulated and hidden. Now funding has evaporated; no one trusts anyone else not knowing what’s on their books. Interbank lending, the life blood of the system, is unsecured. If one bank lends to another it relies (or relied) on trust that it will get it back with interest. Central banks have been flooding the markets with cash but to little avail. Banks simply hoarded anything they can get their hands on because of fear of counter party risk. Hoarding cash to rebuild one’s balance sheet quickly becomes a habit, a state of mind. This is one reason part of today’s UK package in effect guarantees banks’ debt to, hopefully, restore confidence and get banks lending to one another again.
Contagion has moved quickly in the US from the financial to the non-financial sector. The so-called commercial paper market provides corporations with short term funds - anywhere from a few days to a few months. This is how they fund their day-to-day operations (not capital operations). This was a well established (over 90 years), deep and liquid market. Last week this market became frozen. Nobody wanted to take any risk at all, not even to GE. So with the recent announcement the Fed is now backing that market too, meaning the Fed is in the direct business of making loans to the private sector. This is a stunning development.
Look at this as a very large wicked loop. Weakness spreads from the financial arena quickly to consumer and capital spending, from a global slowdown to US exports (until recently a real strength), promoting further and more intense declines in employment, then pressuring income, consumers and lenders, on and on.
Robert Craven
Saturday, October 4, 2008
This Time - It Is That Simple
A frustrated Thomas Sowell inquired this morning, "Do facts matter any more?". Indeed they do, yet they require explanation, to be made simple, in little bites so the masses may digest leisurely and at their own pace. Surely the McCain campaign understands that facts matter yet it is about to squander that very key fact, one which is undeniable, not in shades, but black from white and upon which the fate of the election rests - the role of liberal Democrats as the agent of the current crisis. This is not judgement; it is a fact. For those liberal friends of ours who nonstop whine about their 401K, their house price and are in search of the villain - they need only look to their own party. This time - it is that simple.
From early Sep we have highlighted the complicity of Fannie/Freddie and the Democrats, how those agencies became a cash cow for Barney Frank, Dodd, Clinton, Obama and others. It was liberal Democrats led by Dodd and Frank who for years, even this year, denied that the twins were taking outsized risks. It was liberal Democrats who for years push the twins for go further and further into sub-primes, into poorer and poorer neighborhoods. It was the same bunch who for years refused requests from the Bush adm to set up an agency to regulate Fan/Fre, the same bunch who defeated S-190, the bill co-authored by McCain which carried major reform and would have prevented this very crisis. If that bill would have become law, today’s world would be different. That such a reckless stand could have been taken by one party is obscene, unforgivable. The Democrats who opposed portfolio limitations could not possibly have gotten away with it if their constituents understood what they were doing. But then Obama, Clinton, Dodd and others of the left received mind-boggling amounts of $ support from the twins, the twins’ private profit finding its way back to the left, who then killed the fix.
We have already demonstrated that it was the gov’t that pressured banks and others to lend to poor credits through the CRA, coupled with threats of legal action from Janet Reno if they did not. And it was the gov’t, not free enterprise, that encouraged the twins to go along. It was Fan/Fre which played THE key role in the creation of sub-primes AND, through their incestuous relationship with wall st, the sub-prime mortgage-backed securities themselves. For the left, this was win / win: by pressuring banks to serve poor borrowers in poor regions Frank and Dodd and others could go on record pushing for an increase in home ownership and urban development, and by working with the twins, encouraging them to take more risk, they effectively could subsidize low income housing off budget. Off budget that is, until just a few days ago.
Robert Craven
From early Sep we have highlighted the complicity of Fannie/Freddie and the Democrats, how those agencies became a cash cow for Barney Frank, Dodd, Clinton, Obama and others. It was liberal Democrats led by Dodd and Frank who for years, even this year, denied that the twins were taking outsized risks. It was liberal Democrats who for years push the twins for go further and further into sub-primes, into poorer and poorer neighborhoods. It was the same bunch who for years refused requests from the Bush adm to set up an agency to regulate Fan/Fre, the same bunch who defeated S-190, the bill co-authored by McCain which carried major reform and would have prevented this very crisis. If that bill would have become law, today’s world would be different. That such a reckless stand could have been taken by one party is obscene, unforgivable. The Democrats who opposed portfolio limitations could not possibly have gotten away with it if their constituents understood what they were doing. But then Obama, Clinton, Dodd and others of the left received mind-boggling amounts of $ support from the twins, the twins’ private profit finding its way back to the left, who then killed the fix.
We have already demonstrated that it was the gov’t that pressured banks and others to lend to poor credits through the CRA, coupled with threats of legal action from Janet Reno if they did not. And it was the gov’t, not free enterprise, that encouraged the twins to go along. It was Fan/Fre which played THE key role in the creation of sub-primes AND, through their incestuous relationship with wall st, the sub-prime mortgage-backed securities themselves. For the left, this was win / win: by pressuring banks to serve poor borrowers in poor regions Frank and Dodd and others could go on record pushing for an increase in home ownership and urban development, and by working with the twins, encouraging them to take more risk, they effectively could subsidize low income housing off budget. Off budget that is, until just a few days ago.
Robert Craven
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