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
Wednesday, October 15, 2008
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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