Subscribe to Dollars & Sense magazine. Recent articles related to the financial crisis. Dialectic of ExaggerationsThis posting is from D&S collective member and frequent blogger Larry Peterson. To see more of his posts, click here.Yesterday the Dow Jones average had yet another 400-point day (this time downward), as the TARP program underwent the final step of its spectacular unraveling. Today, it has more than reversed direction, as investors bought into energy shares, of all things. From ad-hoc to one-size fits all and back again, it is clear that the policymakers have no clue not only in coming up with constructive ways to deal with the crisis, but even as to where the chief problems lie. In this they are not altogether at fault. A perusal of today's Financial Times indicates several areas that will get in the way of dealing with the clear deflationary trend that is only beginning to exert its full power on simultaneously deleveraging economies (for more on this, see another post of today, of Anatole Kalesky's Times piece, "It's an Emergency: Long-Term Cures Must Wait"). First of all, the TARP program itself: it's gone from being a means to provide a floor under mortgage debt that would, conceivably anyway, revive a still-essential, if overpriced housing market, to a selective recapitalization (sans voting rights) of banks. But the remit of the recap program has come to potentially include so many firms, financial (non-bank, insurance, credit-card, what have you) and even industrial (auto firms), that the effect has been an unprecedented bloating of the Fed's balance sheet, and that without loans making it out into the wider economy at all. So it became necessary to shrink the program. Et voila: no more buying-up of distressed assets, which, after all, is what the program was named for (Troubled Assets Relief Program) in the first place. Now, according to the FT's Krishna Guha, who spoke with Treasury Secretary Henry Paulson, the administration wants to "leverage the public funds," by matching companies' capital infusions from the private sector with taxpayer-supplied funds. The fact such leverage will be taking place amidst a veritable torrent of deleveraging, and in an environment characterized by exceedingly poor consumer demand--and hence profits (unless the government picks up the slack and then some, which will take far more than public leveraging of the few selected winners who might be favored in the current clime)--suggests that the already-dead corpse of the TARP program retains some phantom limbs that still need to be killed off. On top of the giant contradictions and confusion at the heart of policy, which will no doubt continue to erode investors'--not to mention consumers'--confidence, two other likewise twisted themes deserve mention, both of which featured in strangely juxtaposed stories in today's FT. First of all, the International Energy Commission's Nobuo Tanaka said it "would be possible, but very hard" to cut greenhouse emissions such that atmospheric concentrations remain below the critical 450 parts per million threshold (which would be consistent with a rise in global temperatures of an "acceptable" 2 degrees centigrade), and, consequently, that technologies not yet commercially developed would have to be somehow implemented to prevent such a temperature increase. Right next to this ("IEA Warns on Severe Climate Cost of 'Business as Usual Policy") story (I can't find these stories online) was another ("Crash in Oil Exploration Puts World 'on Bad Path")on the continuing decline in oil exploration, which has continued despite the recent, unprecedented spike in oil prices, and which will be enhanced by its equally rapid plunge. So, energy costs look set to continue to be a nuisance, especially if energy retains its status as a commodity prone to bouts of intense speculation (especially if its inverse relationship to the US dollar holds up), even if the ultimate aim is to convert to more efficient technologies: for these probably aren't commercially available yet, and the world economy will need a lot of energy to recover from the economic downturn, which will only exacerbate the environmental degradation, and so on. For global recovery to be sustainable, global trade will need to revive (though this will also contribute mightily to ecological deterioration), especially given the fact that it, too, is now subject to a credit crunch (the drying up of "letters of credit" financing). But another FT story ("Tax Rebates Raised for Chinese Exporters") shows that attempts to revive China's bloated export sector are calling forth protests from trade competitors, just as attempts to stimulate its consumer sector with subsidies did so during the inflationary uptick early this year. No matter how you look at it, and even with the global duel between inflation and deflation settled with a clear victory on the part of the latter, there are enough kinks and remaining complications in key global markets that will hamstring policymakers worldwide, and at every turn, even if the next lot turn out to be a lot more competent, and even responsible, than those who brought us this cataclysmic mess. Labels: bailout, environmental crisis, financial crisis, Financial Times, Henry Paulson, Krishna Guha, Larry Peterson, trade policy Some (Belated) Thoughts on Obama's VictoryThis posting is from D&S collective member and frequent blogger Larry Peterson. To see more of his posts, click here.One week ago, after Senator Barack Obama had been anointed President-elect by the high priests at the TV networks, I witnessed some things I never thought I'd see in the United States at the conclusion of one of its peculiarly puerile, mercilessly interminable, all-too-often ineffectual and, last but certainly not least, offensively expensive national political campaigns. And the late-night cheering and horn-honking reminded me, in a very slight sense, of some of the clips I had heard or seen in broadcasts from places like Haiti and South Africa, when popularly elected governments finally replaced unspeakable dictatorships. Particularly in the case of the latter, the comparison, though exceedingly small, is, I feel apt; for Obama's election not only signaled an undeniable liberatory movement on the part of the whole society away from a shameful racist past, but marked a point at which the days of the the Bush administration--surely the worst in the history of the country--could finally be put behind all of us. But the euphoria should stop right there. It must be remembered that it took no less than two wars (one clearly illegal, and both, in important ways, lost), a financial meltdown the like of which hasn't been seen in three generations (and this before the potential extent of the economic fallout of that collapse really seemed to hit home with much of the electorate earlier in the autumn), scandals--including indictments and imprisonment of key personnel--unlike any since Watergate (which isn't surprising, since a key objective of many administration personnel, especially Vice-President Cheney, who served as President Ford's chief of staff after Nixon resigned in disgrace, was to reverse Watergate-era checks on the powers of the presidency, a task at which they far more than succeeded), and a spectacularly bad campaign by an opposing candidate, McCain, who seemed unable to believe that any other strategy could prove victorious bar the one that vanquished him in the 2000 Republican primaries (i.e. pandering to religious and social conservatives organized in the type of rigid vanguards so artfully exploited by Bush-fixer Karl Rove), to get Obama elected to the presidency, and to maintain Democratic control of both houses of Congress (though not with a filibuster-proof majority). And Obama will not only have to face the truly unprecedented challenge of the economic crisis, but also--and more-or-less simultaneously with--the full onset of a whole host of unfavorable demographic (think pensions here), ecological and geopolitical trends (which will require huge outlays merely to address, never mind handle appropriately). And that probably without the luxury of being able to print money that will be bought up by our trading partners at will. And with a population already blighted by decades of neglect where wages, savings, education, health care and even quality-of-life indicators are concerned. Even racial progress shouldn't be emphasized too much. I actually heard the fools on the Chris Matthews roundtable enthusing about the invigorating sense the American population will develop having finally attained a prolonged and visible access to a successful, functional black upper-middle class family (the Obamas). Meanwhile, just about every other social and economic indicator for blacks continues stuck in unacceptable territory, if not trending downright downward. Nothing to honk about here. As I write, at 1.45 pm EST, US stock indices are suffering significant declines and oil is down yet another 6% for the day, with all of this due to an economic situation that relentlessly surprises on the downside. Meanwhile, the Bush administration is obstructing the stimulus program Obama promised last week, the Fed and Treasury are being coy about spending on the TARP program, and Obama has said he won't attend the G-20 meeting on the 15th. Maybe all those horns honking last Tuesday night were just car alarms. Labels: Barack Obama, Chris Matthews, financial crisis, financial crisis bailout, Larry Peterson D&S Piece on Historic Events since SeptemberWe just posted a rather long piece on the impressive string of historic events that have taken place in the last two months, from the nationalization of Fannie Mae and Freddie Mac to the election of Barack Obama. It's the fifth part of a series on the subprime/securitization crisis D&S collective member Larry Peterson has written over the last year. All the pieces can be found on the D&S website, in the "Special to the Web" section at the bottom of the site.Labels: financial crisis, financial crisis bailout, Larry Peterson The G-20 CommuniqueThis meeting, which President-elect Obama has said he won't attend anyway, has been pushed in some circles (even on our blog, in a highly conditional way: see posting of 22d October "NOT a Slow News Day") as a possible "Bretton Woods II." The Harvard trade theorist Dani Rodrik managed to get his hands on the documents, which he posted on his blog.Rodrik's introduction: Everyone knows that the final communiques of summits held by political leaders are written way in advance by their "sherpas." Through my contacts in the Bush administration I have managed to get my hand on the communique that will be issued at the conclusion of the G-20 summit being held on November 15th in Washington, DC. Here is how it reads: The G-20 communique of November 15th We, the leaders of the G20 nations, have come together to develop a common action agenda to prevent the further spread of the financial crisis and to ensure that the consequences for output and employment are minimized. We are pleased that G7 member governments have agreed to engage in an appropriate degree of fiscal expansion to stimulate their economies. While the degree of reflation of different economies can be best evaluated by policy makers in individual countries, we believe joint action on this front will be more effective than isolated changes in policy. We also call on countries with large current account surpluses to adopt policies that boost domestic demand. China has a particularly important role to play here, and we are happy to report that the Chinese government has decided to embark on a significant program to increase domestic consumption--both private and public--by boosting spending on infrastructure, health, education, and social transfers. We are particularly concerned that the financial crisis, which has already hit emerging markets, will have even more serious consequences in the weeks to come for the stability of their banking and financial systems. We welcome the creation of the new Short-Term Liquidity Facility (SLF) at the International Monetary Fund, and the Federal Reserve's new swap facilities for four emerging market economies. These countries are the casualty of financial excesses that are not the result of their own doing. So we emphasize that access to the SLF will be available to all developing countries that are adversely affected by the financial turbulence emanating from the subprime fallout. Further, G7 member governments emphasize that they stand ready to expand these facilities as needed, in case they are not sufficient to restore stability to markets. We also welcome the decision by the Chinese government, described in greater detail in the accompanying communique, to make available part of its foreign currency reserve assets towards an expanded swap facility in support of global financial stability. The weeks and months ahead will be trying times for economic policy makers everywhere, as they try to contain the fallout for output and employment. Raising trade barriers against imports will be a temptation, especially when currencies fluctuate so much. But the experience with the Great Depression teaches us that this is the surest way to magnify the costs of the crisis, and to spread it to other countries. Hence the most serious challenge for the global trading regime at the present is to ensure that the financial and economic crisis does not lead to a vicious cycle of protectionism, greatly exacerbating the economic downturn. So we jointly commit ourselves in public to not raising protectionist barriers in response to perceived threats to employment from imports. We further ask the secretariat of the World Trade Organization to monitor and report unilateral changes in trade policy, with the purpose of "naming and shaming" G20 members that depart from this commitment. The unfolding financial crisis has made it amply clear that we need a new regulatory approach to finance--both domestically and internationally. The rules that govern financial globalization need to be rethought to ensure that finance serves its primary goals--allocate saving to high-return projects and enhance risk-sharing--without leading to instability and crises. Our discussions have revealed that there exist great differences amongst us with respect to our respective needs and therefore with respect to how to achieve these ends. A key challenge will be therefore to strike an appropriate balance between common international regulations, on the one hand, and space for domestic approaches that may diverge from harmonized regulations, on the other. Recent experience has taught us that there may need to be a greater role for the active management of international financial flows by governments. Designing the new traffic rules for international finance, as it were, will take considerable time and thought. We have asked our ministers of finance to establish a high-level working group that will convene as soon as practically feasible to seek wider input, and craft a framework for discussion among heads of governments. Despite our differences on the details, we share a common goal: to make international finance safe for the world economy--and not the other way around. Labels: Dani Rodrik, financial crisis, financial crisis bailout, G-20, Larry Peterson, Monetary Policy Co-centric Vicious CyclesThis posting is from D&S collective member and frequent blogger Larry Peterson. To see more of his posts, click here.The European Central Bank and Bank of England, as expected, cut interest rates (with the BoE coming down an unprecedented 1.5% to 3.0%), but exceedingly poor corporate and consumer outlooks are pulling stocks down anyway. In Asia, both the Japanese Nikkei and Hang Seng in Hong Kong endured terrible losses. Obama is putting on a full-court press to contain the damage (expect him to name Clinton ex-Treasury secretary Lawrence Summers or New York Fed chair Timothy Geither today to head the Treasury Department), but if stocks continue their slide, he'll have to announce some sort of stimulus proposal, probably involving infrastructure spending, very soon. It remains extremely worrying that extraordinary measures, like the BoE cut, and circumstances, like the hurry-up Obama transition, have exerted only temporary effects on a downward spiral in global markets that has seen trillions wiped away from pension funds and other forms of wealth people really rely on (not just the ill-gotten gains of the filthy-rich), in just a few weeks: there will be a real shock when people get their fourth-quarter 401 K statements, even if they don’t spend much on Christmas shopping, which will itself deliver another body-blow to the economy. And, meanwhile, hedge fund redemptions continue, and that cycle of deleveraging shows no sign of abating: in fact, be prepared for an uptick in hedge fund bankruptcies. What you have here is a series of co-centric vicious cycles, all collapsing into each other. What anyone can do to stop it is still anyone's guess. Tomorrow the employment report for October comes out, and I believe it will be horrible (expect 150,000 jobs to be gone). At this rate, the Obama administration could be worn out before it even officially takes office. Labels: Bank of England, Barack Obama, european central bank, financial crisis, Larry Peterson, larry Summers, stock market, Timothy Geither SpoilsportThis posting is from D&S collective member and frequent blogger Larry Peterson. To see more of his posts, click here.Markets are rallying big time (as is oil, up 11% as the Saudis seem to have cut supply), no doubt encouraged by prospects of change--of any sort--from the policies of the current administration, but particularly if Obama wins, on this election day. But a number of items in the news urge severe caution. I'll give links to the essential stuff and provide a few tidbits. First, the domestic economy. Domestic manufacturing, and especially automaking, is in a slump the likes of which hasn't been seen since the severe hollowing-out of US manufacturing in the early '80s. And that wwith the automakers offering desperate discounts. Next up: finance. The Financial Times reported today on the fall of the collateralized loan market (remember collateralized debt obligations?). Combined with the difficulties of private equity, which D&S re-posted an article about yesterday, and continuing problems in shipping finance, which Yves Smith posted about, there are loads of reasons to be worried on this score, even as interbank markets show impressive signs of recovery and corporate earnings surprise on the upside. Commercial paper issuance, however, fell. Meanwhile, on the regulatory front, the Treasury appears set to purchase stakes in more firms, even those outside the banking and insurance sectors, and may purchase distressed assets directly, rather than through auction. The International Herald Tribune had a piece on what a secretive process the disbursement of funds to financial firms is turning into. Finally, on the international front, the Financial TImes' Lex column had a disturbing piece on the possible next shoe to drop in Asia, Japanese and Korean medium and small enterprises (it's a very short piece, and well worth reading); and Nouriel Roubini has some gloomy thoughts on the ability of China to rapidly turn into a demand-led economy, and whether the rapid decline in Chinese economic indicators presages a hard landing there. Labels: economic indicators, financial crisis, financial crisis bailout, Larry Peterson, Nouriel Roubini Singing for Our SalvationThis posting is from D&S collective member and frequent blogger Larry Peterson. To see more of his posts, click here.One of the reasons Mozart's Requiem is the sublime work it is is that the end of the "Kyrie" (or, "Lord Have Mercy") expresses such a powerful entreaty that it seems that a superhuman mercy will surely take pity on the petitioners. But the "Dies Irae" ("Day of Wrath") immediately following is so savage, and impresses on us the majesty of superhuman justice so effectively that the former is reduced to a pathetic display of pride that should, and must, be punished accordingly. It seems like the global economy is getting to this part of the record. At 12.15 PM Eastern time, US and European equity markets are still in positive territory--only just--despite large gains earlier in the morning. The rally has been powered by the Federal Reserve's .5 % rate cut yesterday, the likelihood that the Bank of Japan will cut by a quarter-point (to .25%), and a flurry of bottom-fishing among investors. The Japanese cut is noteworthy not only because Japanaese rates are already so low: instead, the recent Yen strength that developed out of the unwinding of carry trades (a lot carried out by hedge funds cashing out to fund huge redemptions in other trades) promises to choke off Japan's all-important export sector, and that will, in turn, affect Japanese shares, which will hammer the Japanese banks that hold a lot of the shares, thereby making the banks vulnerable to a global bank crunch that only weeks ago Japan's banks were thought to be immune from (remember the Japanese bank, Mitsubishi UFJ, buying a stake in Morgan Stanley a few weeks ago?). Well, the Fed move and hopes for a Japanese one (done by a Bank of Japan that is as spooked by deflation--it's dealt with nearly 2 decades of it-- as the European Central Bank is by inflation) to follow promised to reverse this unwinding, and investors have responded accordingly. Also, Federal Reserve has teamed up with the IMF to offer swap lines to some important emerging economies. And though this does not, as yet, address the really huge problems in places like Ukraine and Pakistan, which are enduring intense crises, but do not have the dollars to deal with them, it shows global authorities are at least not going to sit back and wait for something really bad to happen before doing something. And that has added to the return of confidence, if you can call it that. Until now. Today, US GDP figures for the third-quarter came in, and there was a decline of .3%. In addition, bad news about pension underfunding of major US companies and a potential $8 billion charge to hospitals as a result of bad derivatives trading has spoiled the party. But the gloom goes further than this. Ultimately, it is another breakout of extreme pessimism that keeps resurfacing and is founded on the thought that despite all the extraordinary measures--and that's putting it mildly--that authorities worldwide, sometimes even, unusually, working in relative concert, have initiated, the blow to corporate profits (especially for US multinationals as long as the dollars remains a haven of saferty) of the slowdown we're facing now, which is characterized by long wage-and savings poor consumers abruptly cut off from all credit and continuing to face high, if levelling prices, will be particularly severe, especially given the wildly optimistic forecasts of profitablility that held only months ago. Not to mention the wave of deleveraging that is sapping the world of capital, and will continue to do so for a while, at an advanced rate. And this already dire situation is only to be exacerbated by the fact that banks will be cutting back lending even more to shore up their books for the end of the year, and the retail sector will be in for a very, very black Christmas. A true double-whammy here. Anatole Kaletsky of The Times had a interesting piece in the paper today, in which he mused over the steps that absolutely need to be taken if really, really serious pain is to be spared the US, and the world. His list of proposals includes: "emergency economic measures, which should be quickly implemented. Such measures could include a six-month moratorium on home foreclosures; a compulsory programme for reducing unsustainable mortgage debts; an urgent review of international monetary relations to protect emerging markets from the financial meltdown; and emergency tax cuts to support consumption, paid for by long-term revenues from a large-scale energy or carbon tax." So far, so good, and, from the point of view of a leftist (unlike the mainstream Kaletsky), a mere beginning. But the politically keen Kaletsky also notes that this stage of the crisis could exert so much of an adverse impact on the economy that the constitutional provisions regarding transfer of power between the incoming Obama (if it's McCain, by some miracle of American stupidity or fraud, we can just forget about it) may make even bold initiatives taken in the first hundred days rather moot in effect. He's hopeful that American politicians will be up to the challenge of speeding up the transition somehow to do something before the nominal transfer of power, something actively involving the presiodent-elect and the incoming administration. I think he's right. But I also believe, rather than sitting around waiting for the politicians, we must get out and agitate, and try like hell to force them, for once, to respond, now, to our concerns. Rather than chanting Kyries under our breath, we need to be chanting slogans, loudly and in unison, on the streets. Now. Labels: Anatole Kaletsky, financial crisis, financial crisis bailout, Larry Peterson Something Has To GiveThis posting is from D&S collective member and frequent blogger Larry Peterson. To see more of his posts, click here.Last week global markets sold off big-time on Friday, and observers of the financial scene were puzzled due to the fact that no specific event seemed to set off such panic. Today, on the contrary, as of one PM Eastern time, stocks remain in positive terrritory, despite huge gyrations in the US, UK and Europe. And this in spite of these headlines, which I've just taken off Reuters: Consumers gloomiest ever as home prices plunge Iceland hikes rates massively W.House: Autos may be eligible for rescue package Emerging Europe scrambles to contain crisis threat OPEC officials say ready to act again to boost oil Industry bailouts risk unfair trade challenge And though shares are being boosted by a long-awaited stretch of bargain hunting (fuelled also by the certainty of a one-half percentage point interest rate cut by the Fed this week) the bad news does not end there. Trade expert Dani Rodrick published this salutary thought on his website on 26 October: "I have a feeling that this will be the make-it-or-break-it week for emerging markets. I hope the IMF will make an announcement in time to make a difference." Let's hope (against hope?) the news settles down a little before then. Or maybe not? Labels: Dani Rodrick, financial crisis, financial crisis bailout, Larry Peterson NOT a Slow News DayThis posting is from D&S collective member and frequent blogger Larry Peterson. To see more of his posts, click here.Assuming we're all becoming inured to the idea that greater-than-five-percent losses on US and global stock markets are becoming an everyday occurrence, a couple of things happened today that simply demand our attention if we're going to maintain a handle on this crisis. First, Wachovia. Wachovia announced today that it lost $24 BILLION--that's billion--in a single quarter. This is simply staggering. Added to the second quarter, the company has lost the equivalent of the GDP of Guatemala, as Reuters noted today. And Wells Fargo and Citibank were fighting over it.... Back to the point, though, that announcement was merely the beginning of a slew of poor third-quarter earnings reports that came out today. These indicate weakness spread broadly across the economy, which has reinforced the fears of recession that have been dragging down stocks despite improvements in money and commercial-paper markets, which have been force-fed staggering amounts of money by the Federal Reserve. But the problems don't end there. Regarding the improvements in interbank and commercial-paper markets, Yves Smith, in a post that should be required reading, indicates that the market for credit-default insurance continues to deteriorate, and there is reason to believe that it will do so at an accelerating pace. Seeing that this market, in tandem with the other two troubled ones, has been at the center of the unprecedented freeze-up in credit since the fall of Lehman Brothers, problems here could well reverse what improvement we've seen in the other markets (not to mention having further adverse effects on equity markets, etc.). And if that happens, the game is up, at least until the the free-marketeers at the Treasury and so on decide to socialize more--a lot more--bailout costs. And there's more, much more, afoot on this score, as well. Emerging market currencies are posting huge losses (some have been forced back into the arms of the IMF), even in places like Brazil, which had been considered strong enough to withstand the crisis (in another fantastic post, Smith points us towards the plight of Brazilian and other emerging-market exporters, who hedged their local-currency exposure with currency derivatives, only to see their supposed hedge turn into a problem of vastly larger proportions; and, on this score, Brad Setser's Tuesday post--"The End of Bretton Woods 2"--is also absolutely essential reading) only weeks, or even days ago. And that brings me to my final point. A conference has slated for the 15th of November in Washington, in which the so-called G-20 (which, unlike most similar international groupings, includes important developing countries) group of major economies are to discuss the international aspects of the crisis. Many will probably consider the proceedings a joke, presided over as it will be by one of the most unpopular US governments ever, and one set to leave office within two months. But I wonder: it seems virtually certain that Bush will go down as the worst president in US history unless he can pull some rabbit out of the hat in his mercifully few weeks left. The administration has, after all, been making major overtures to North Korea (taking it off the list of sponsors of terrorism--making Cuba, by implication, more of a threat to the US than North Korea). Now, especially with this administration, will can by no means be confused with ability or competence. Still, I can see a faint possibility of a major initiative being taken at the conference, especially if events (like a reverse spike in interbank rates, or a currency crash in a major emerging market) intervene; in fact, the conference (not to mention the US elections) may turn out too late to prevent something of this sort from happening. And, it's hard to see how any initiative could even be taken up by Congress before it recesses and is replaced by the next (almost certainly overwhelmingly Democratic) Congress in January. But any initiatives will probably center on somehow extending to the developing world some means to attain dollar support which they are lacking now (and which prevents them from flooding their markets with a cash defense, as the developing countries have been able to do). So we've been through quite a day. Be ready for tomorrow. A quick note: barring a "major event" I'm not planning to blog for a few days: I hope to post a longer piece on the D&S website (not the blog!) early next week on the historic events of the last few weeks. Labels: Brad Setser, financial crisis, Larry Peterson, Naked Capitalism, Yves Smith Some Quick Opening Comments, October 17thThis posting is from D&S collective member and frequent blogger Larry Peterson. To see more of his posts, click here.Asian and European markets generally followed the US upwards after the big late afternoon rally on Wall Street yesterday afternoon, showing that some buyers are finally probing the market for bargains. This sentiment is no doubt fortified by the improvements in the interbank and commercial paper markets, which have finally, after several weeks, shown signs of revival, albeit of a frustratingly tentative sort so far. Then again, it's a bit much to expect confidence to return to these markets amidst volatility of unprecedented levels and a bleak economic outlook that gets bleaker daily, and is in fact spreading geographically at a phenomenal rate. Other causes for concern: US mortgage rates have spiked, as holders of US agency (the recently nationalized Fannie Mae/Freddie Mac) debt have, in response to US plans to recapitalize the banks, sold off and piled into riskier, higher-yielding bank assets. As US recovery seems predicated on the eventual revival of the housing market (so that house prices will find a floor, and repossessions/payment defaults stop), this rise, as the Financial Times noted in breaking the story, is a pernicious effect of the plan to recapitalize the banks, and shows how complicated, and risky, this plan can be. Also, hedge funds are selling their assets at a rapid pace to pay off investors headed for the exits, creating a spiral of losses and further sell-offs that has led to a number of funds being closed, and this trend is set to accelerate at a potentially alarming rate. That means downward pressure on stocks, though hedge funds' unwinding of their huge speculative positions in oil and commodities should keep inflation falling, barring a brutal Northern hemisphere winter or geopolitical event of some magnitude. Still, the fact that the funds are in this trouble partially because they are having problems cashing out of failed banks like Lehman shows how delicate all bank-related finance still remains, and more turmoil in hedge fund land will only exacerbate these tensions. Finally, US industrial production statistics show a decline the likes of which hasn't been seen in decades, and September housing figures just came in and are poor. So the economic gloom element may be the dominant factor as US trading starts today, even as the extraordinary measures taken by Central Banks and finance ministries worldwide starts to show signs of having an effect (though, as was the case with US mortgage costs, as we saw above, these effects are far form straightforward and completely serendipitous). Also: watch the situation in South Korea: the currency there fell some 9% yesterday, and its financial situation is dire, characterized by a large current account deficit, falling exports, stubborn inflation, and a banking sector heavily reliant on short-term debt (interbank and commercial paper problems again). And though they accumulated huge reserves in response to the Asian crisis ten years ago (and the subsequent, masochistic IMF structural adjustment program imposed on it), its position is very fragile, especially given the rapidity with which the crisis is now infecting emerging markets, even ones considered only weeks ago to have "decoupled" from the western world's messes. Also watch Eastern Europe: Ukraine and Hungary now, but possibly Baltic countries which borrowed heavily in euros from Scandinavian and Eurozone banks now feeling the pressure. Labels: Fannie Mae, financial crisis, Financial Times, Freddie Mac, Larry Peterson Central Bankers, et al: Supply and, uh, What?This posting is from D&S collective member and frequent blogger Larry Peterson. To see more of his posts, click here.Well, the verdict from the markets is in, and they rejected the new Treasury plan to recpitalize the banking system with almost as much enthusiasm as certain members of the House of Representatves rejected the first Treasury plan in late September. As befits a country with a disgraceful healthcare system, the soggy plaster hurriedly applied by the financial mandarins was washed away by a torrent of bloodletting on Wall Street today, with US indices giving up almost all the enormous gains they made after the unprecedented Central Bank interventions at the weekend. And this in spite of a halving of the cost of credit default insurance, and tentative signs of improvement in the all-important interbank and even commercial paper markets. The reason? A poor monthly retail sales report confirmed evidence from the just published Federal Reserve Beige Book on the health of the economy, and the indications are quite poor. As a consequence, non-financial stocks, which never really got going anyway after the announcement of the plan, fell sharply, particularly in cyclical industries and consumer goods. The (quite sensible) sentiment seems to be: all the corporate liquidity in the world (assuming it becomes truly and safely available) won't help sell to consumers who have nothing to pay for products and services anyway, as they are up to their necks in debt, and facing the prospect of swingeing job cuts, recession and--ahem--paying off the still incalculable debt of the banks anyway. And that goes for overseas consumers, too: the recent export boom, which accounted for a vast part of the otherwise inexplicable growth of the economy for the first half of the year, is bound to tail off, as trading partners find themselves, as the Europeans did, swiftly caught up in recession, or have to concentrate on shoring up domestic economies, as China and other countries still experiencing growth may have to do. Especially if the US dollar retains its position as every speculator's security blanket in time of turmoil. So bad times are on the way. What to do? Well, once Obama is elected (I have no doubt that he will humiliate the hapless McCain and his pathetic sidekick--and I wouldn't be surprised if Obama announces the outline of a semi-ambitious economic program during the presidential debate tonight, in order to consign the economically illiterate McCain to Dole-like irrelevance in the waning days of the election season), and even before, we must be on his case: we need to pressure him to focus oin the demand-side of the economy, replacing the rot of increasing consumer-indebtedness from the outsourcing of good jobs and speculative asset-bubbles that engender increasingly jobless recoveries with public works programs of huge proportions. We can't let him, as was the case with our current economic bureacrats, make the mistake that a crisis of this nature can be solved merely by adding to one side of the equation. And these public works programs must be focused on productive endevors, of which there is no shortage: a single-payer healtcare system, serious, even drastic, environmental reform, and the end to global military adventures: we can't squander the money on favoring the housing sector, or trying to subsidize heavy polluters. But it's not going to be easy. So get out there, or be prepared to feel some serious pain, sucker. It's that simple. Labels: financial crisis, john mccain, Larry Peterson, Obama, recession, stock market Keep Your Irony Meters on HighThis posting is from D&S collective member and frequent blogger Larry Peterson. To see more of his posts, click here.Well, they've finally succumbed to the inevitable. No less a devout free marketer than President Bush announced this morning that the US government will buy stakes amounting to $250 billion in the largest US banks. This followed similar nationalizations carried out in Europe, of the sort the US had initially resisted for itself: but the fear that foreign banks would attain a competitive advantage over their US rivals essentially forced the administration's hand. So a process that started as a beggar-thy-neighbor policy in Ireland (when it guaranteed bank deposits some two weeks ago) has ended with the reluctant signing-on of the sole superpower, a call for a "New Bretton Woods" by the strangely ascendant UK government (it had initially protested vehemently against the Irish move, once again fearing the advantage the deposit guarantee would give Ireland's banks in an atmosphere characterized by bank failures of gargantuan proportions), and only with the help of tiny Iceland's near-death experience. But the expected surge on Wall Street has, as of one-thirty EST, failed to materialize. It seems investors are now switching their concern to the profit outlook of US corporations (third-quarter reports will be coming in fast and furious for the next few weeks), and the picture there is dire. Consumer activity is dormant, debt levels remain stressed, and employment will probably take a big hit. In addition, corporate bankruptcies are expected to jump, a situation exacerbated by the gumming-up of short-term credit markets, which are still, despite the nationalizations, in an extremely sensitive state. And if that weren’t enough, states (especially the one with the biggest economy, California) and municipalities are finding their sources of borrowing dry up, and their costs skyrocketing. One thing I'd point out as I close this very short post. Inflation figures in the UK chalked up a stunning 5.2% in September, and that while home sales plummeted 55% in August. This alone, for a country with large current account and budget deficits, and a faltering currency, could encourage comparisons with some developing country enmeshed in crisis, and at the mercy of the world. But the UK is now in the forefront of the semi-nationalized recapitalization movement, putting huge sums of public money on the line to save its banks. And it won't have the luxury, as the US does, of borrowing from foreigners in its own currency. Prime Minister Brown's day in the sun may be a short one. Labels: Bretton Woods agreement, george bush, Gordon Brown, Larry Peterson Monday's DevelopmentsThis posting is from D&S collective member and frequent blogger Larry Peterson. To see more of his posts, click here.Here's the skivvy on the government interventions that triggered huge stock rallies (as for US stocks, Dow up some 750 points, S&P nearly back at 1,000, with about 15 minutes left in the trading day) worldwide (with the notable exception of Japan), from Reuters. But notice especially the following: That had an instant impact on bank-to-bank lending rates, which eased, but there was still no clear evidence of funds cascading from banks to companies. Global bank rescue aims to halt crisis I'll close by citing two blog posts that pick some holes in the new arrangements. From Yves Smith's excellent Naked Capitalism: The reader/investor who sent the link to this Bloomberg story provided the comments below. No, he does not resort to capital letters casually: And this, from the fine Across the Curve: In the previous posting I noted that the German government rescue plan which includes guarantees and capital injections totalled 470 billion euros. Labels: Across the Curve, george bush, Gordon Brown, john mccain, Larry Peterson, Naked Capitalism, Paul Krugman, Yves Smith Perdition PostponedThis posting is from D&S collective member and frequent blogger Larry Peterson. To see more of his posts, click here.Stocks worldwide suffered huge losses again Monday, after the worst week for US shares since September of 2001. The Dow fell below the psychologically-significant level of 10,000 (as did the Nikkei in Japan), but the final number was a vast improvement on the 700 odd point loss the index showed earlier in the day, with the index closing a mere 389 points down. And it was probably only the prospect that the Fed would be forced to cut interest rates perhaps by half a percentage point in an emergency (i.e. before the scheduled meeting of the Federal Reserve Board of Governors late in the month) that prevented the slide from eclipsing a record slide--which it did only last week. In addition, oil dropped to about $85 a barrel, a level unseen for a year. Clearly the markets are not impressed by the passage of the Treasury plan, passed on Friday, to buy the toxic assets on the books of the banks: instead, they fear worldwide recession, one thing (amongst many) the Treasury plan is singularly ill-equipped to deal with. Meanwhile, bond yields are falling, but, as cash continues to be hoarded by banks, borrowing costs continue their relentless upward advance. It is clear that markets are no longer anywhere near as concerned about the toxic assets on the books of the banks as they are about the possibility--which increases by the day, so long as the crisis remains in its seemingly terminal phase--that bank and even shadow-bank counterparties may go bust before they can meet their short-term obligations. The banks, faced with rapidly increasing costs of capital (and insurance against default), shareholder flight, and paying off agreed emergency credit lines of firms who can't access funds on the wholesale market (due to the jamming up of the commercial paper market), are looking more and more desperately to governments to guarantee deposits beyond the levels they already do. This, of course, was one of the central points of the Troubled Asset Relief Program, which increased deposit insurance in the US from $100,000 to $250,000, and of regulations in the US which guaranteed money market funds, which, though considered risk-free, bore no government guarantee. In Europe, however, Ireland's move to guarantee the deposits of all depositors of its six largest banks has given rise to a kind of race to the bottom, with the initially reluctant Germans now providing a like guarantee, and the positively mortified British poised to do the same at any moment. In the end, though, it seems clearer and clearer that, only a blanket public guarantee of all financial liabilities, even those held by hedge funds and their ilk, can stop the downward spiral. But it's hard to imagine, after the drama of last week, that such an outcome will be politically feasible. Labels: bailout, financial crisis, Larry Peterson Roll Over or DieThis posting is from D&S collective member and frequent blogger Larry Peterson. To see more of his posts, click here.Well, yet another apocalyptic week has passed on the markets, and the global financial system still appears to have enough life in it to allow for the possibility of more of the same in the weeks ahead. The week has ended with Congress passing, and President Bush signing, the revised revision of the Troubled Asset Relief Program. The bill's passage, however, prospects of which had sustained market advances Friday, could not prevent significant falls on all major US indices by the closing bell on Friday. This is because of two things: first, horrible economic data continued to pour in, with the all-important monthly jobs report for September showing a loss of some 150,000 jobs, far more than was forecast. On top of this the US service sector put in a poor, if slightly positive performance, magnifying concerns about severe economic slowdown given the horrific reports on manufacturing activity and consumer spending that came out earlier in the week. Second and more significantly, though, it is becoming clear that investors are more concerned about the the breakdown of the commercial paper and interbank markets than they are about the various fixes proposed to get them going again. As well they might be. Commercial paper basically consists of short-term bonds issued by companies to meet working capital outlays, including payroll and rent. These loans tend to be for very short periods, and require frequent rollovers, which was no problem in the days before banks started hoarding cash to cover potential losses they couldn't even trace in their books, and money market funds started to become suspect (inasmuch as they invested in some other short-term securities, like, you guessed it, subprime loans, and started to "break the buck", or hold less than they took in from investors). Now, of course, these problems are so great that even huge multinational firms, like GE, are having trouble raising money in the commercial paper market. If this continues, even for a short time, lots of vendors--and even possibly employees--will not be able to be paid. And while GE can borrow for very short periods, other smaller firms are finding it virtually impossible to raise money at all. And this is for working capital requirements: this point cannot be emphasised enough. If this thing shuts down and stays down, the macroeconomic impact will be vast, horrific and extremely sudden. Needless to say, the, the bill's passage didn't do much to sooth the CP market, or the interbank market (which deals with banks lending amongst themselves)--the latter rate actually rose. The markets clearly think the TARP package is too little, too late, at least right now: we'll see what happens next week. But the situation right now is extremely dire, and there isn't much time to get it sorted before, as I noted above, the propect of lots of ordinary people not gettting paid will become a real possibility. And consumer spending, which accounts for a rather bloated 70% of the US economy, is already hitting the skids, and will, regardless of what happens in the CP market, probably take a big hit due to increasing credit card defaults (and that's on top of the bad mortgage situation...). Oh-before I forget: Governor Schwarzenneger of California, the largest state economy in the country (and still fifth largest in the world?), has informed Washington that California, which is one of the states in which the subprime mania really got out of control, of $7 billion within weeks. Finally, to end this post--and I could keep going on about alot of other things), the situation with hedge funds is contuing to deterioirate. Hedge funds has a horrible September, and while few of us have any sympathy for them class-wise, the fact that they are being forced to liquidate their positions so quickly to pay off investors who are heading for the exits (remember, these extremely wealthy investors or well-endowed pension and other--including other hedge--funds pay exorbitant fees and expect massive outperfomrance, and will not tolerate for long the kind of losses so many of the funds are now suffering) means that equities, particularly in financial firms, will continue to be pressured. And that means they'll continue to hoard cash, regardless of the prospect of being able to sell their dud assets to the Fed. This thing has taken on a life of its own, like the proverbial monster. Labels: bailout, financial crisis, Larry Peterson Postmortem on the "End of the World"This posting is from D&S collective member and frequent blogger Larry Peterson. To see more of his posts, click here.Equities worldwide posted gains Tuesday, with US shares leading the way by a long shot (the S&P posted its highest one-day gain in six years). The stellar performance was predicated on one thing, and one thing only: the anticipation that a new bailout package will be swiftly passed by Congress, in spite of Monday’s stunning rejection of the first bailout bill—and the sometimes unprecedented losses on stock markets that followed in its wake. And the rallies occurred despite the fact that just about all the other economic and market news was very, very bad (and with Friday’s US employment report for September expected to be poor): a record fall in US home prices in July, and the rise in the overnight dollar-based LIBOR rate (at which banks lend to each other) to a staggering 700 basis points (or 7 percentage points); and this rate rise in spite of the vast sums being injected into the banking system by the Federal Reserve and other central banks. In the case of the latter, the prospect of a new package did nothing to help: indeed, the outlook for interbank lending only got worse. And it also occurred as governments worldwide (indeed, groups of governments, as was the case with Belgian, Luxembourgeois—yes, that’s what they’re called—and Dutch authorities who joined forces in an attempt to shore up Fortis; but less accord was seen between Irish and British officials over Ireland’s unilateral guarantee of the bank deposits and debt of the six largest Irish banks: British officials fear that Ireland’s banks, which are now exposed to a gargantuan property bubble, partially the result of huge capital inflows from investors and firms like Microsoft, who used the island as a tax shelter, may now enjoy a competitive advantage over less-protected British banks) scrambled to protect banks that were considered, only a few weeks ago, to be more-or-less removed from the crisis—geographically and otherwise. In the wake of the collapse of Lehman Brothers, though, which involved the wiping out of certain classes of bond holders, banks, even relatively healthy ones, geographically removed from the epicenter of the crisis, are being pressured to shore up their capital bases and boost their share prices; and since the interbank market and other wholesale cash markets (as reflected in the LIBOR rate) are effectively shut down, and asset values on the banks are far from transparent, governments are being pressured to show depositors and bondholders that they will not lose their money. Indeed, extending such protection will almost certainly be part of the new US package. As I write, talk is of increasing federal insurance on bank deposits from $100,000 to $250,000. The other major provision concerns what is known as “mark-to-market” accounting. As things stand, banks and other financial firms are supposed to value their assets at market value, or what they could presently fetch in the market, in order to participate in important transactions. But with many markets effectively shut down, there is simply no such price for many assets, even though they may ultimately be untainted by subprime and other defaults on their component revenue streams. This is because, on the one hand, no one knows—or probably will know for a long time—who holds the tainted securities (or insurance against losses on such securities, which takes the crisis way beyond subprime), and, on the other, all the banks are thereby being pressured to hoard their cash reserves, preventing funding for any sales that might get the markets going again, thereby establishing the sought-after market prices. Thus, the banks (and their lobbyists, of course), are arguing for at least a temporary suspension of this provision. Will these measures pass? And will they work if implemented? It’s clear to me that authorities worldwide are now committed to doing everything in their power, up to and including nationalization of banks, to effectively force banks to start lending to each other if they must. This is especially the case inasmuch heroic resistance (which I fully applaud, and indeed participated in, in my infinitesimal way) developed to the idea of paying whatever the Treasury Secretary, that revolving-door Wall Street manikin, thought appropriate to getting the assets of the banks’ books and getting them profitable again, regardless or not the rest of us would have to pay the difference when the time came. But it remains the fact that getting the banks lending to each other again is the only way we can prevent a complete meltdown of the global financial system as we know it--which is interconnected to a point unknown in history--and all the economic and political turmoil that would ensue upon such an event: it’s that simple. If we, and any of our political partners joining us in opposition to the Treasury bills, had even an idea of what could replace this rotten system, I would be all ears: but I don’t believe most people currently in opposition even think there’s a problem here. But it simply won’t suffice to say that anything’s better than the system we now have; for that system was driven by the kind of desperation finance that accompanied a generation-long stagnation of wages and benefits that caused many of the same people complaining now, at the time distracted by their own skyrocketing house prices and the cheap goods they could buy in unprecedented quantities from sweatshops abroad, and with oodles of debt, to lose sight of any solidarity they might have with fellow workers who were experiencing more and more difficulty finding living-wage jobs, even as the economy, profits and productivity boomed. This is why I remain in a state of frustratingly deep ambivalence about the bill. I’d like to think, as some even in the mainstream press have come to proclaim, that a fed-up populace is finally standing up to one of the most corrupt, inept and irresponsible constellation of ruling elites in American history. But I fear that many of those who oppose the bill now will jump ship as soon as their own money is threatened, as it will be if a bill is not passed, no doubt about it, and that the same people may be willing to give the government even more power (to the incoming administration) under those circumstances than to the one asking for it today. That might not seem like such a bad thing in the case of a Democratic victory, but, by that point, whoever is in power will have to recapitalize the whole, gargantuan system, and pay off creditors around the world as much as we can; and less and less will be available to spend on ordinary people, who will be bearing a whole lot more pain. And then there’s the argument from history to complicate matters even further: given the fact that we may well have almost no time left to combat climate change in particular, the idea of the global financial system, which has done much to make this problem so much worse in only a generation or two, going down, even in flames, is not so much just a good thing as a kind of necessity. I remain very frightened. Help me out, comrades: show me something to believe in. Labels: bailout, financial crisis, Henry Paulson, Larry Peterson Time to Start WorryingThis posting is from D&S collective member and frequent blogger Larry Peterson. To see more of his posts, click here.I'm scared. After the stunning rejection by the House of Representatives of the revised bailout bill, financial markets throughout the world are tanking. As I write, Tokyo is down four percent, and Latin American stocks dropped a jaw-dropping thirteen percent in Monday's trading. The Dow lost 777 points, its largest one-day decline ever, and oil is trading at levels unseen since nearly last year. Meanwhile, US bond yields are dropping fast, but the dollar is trading at four-month lows versus the Japanese Yen, and gold is back over $900 an ounce. Meanwhile, tottering banks worldwide are being bailed out by governments or are scrambling to save their skins. And despite huge central bank infusions into global money markets, banks refuse to lend to each other, and the only debt anyone will by is that issued by the US government, which is finding itself increasingly indebted by orders of magnitude every week. If banks don't start lending to each other soon, the economic effects of the crisis are going to start cascading, as investment (especially that involving debt, which, after all, has been the predominant form of investment for some time by far) and consumption plummet, and what savings are available are drawn down. Tuesday will be quite a day in Europe and here in the US, and, due to a religious holiday, Congress won't reconvene to possibly consider another bill until Wednesday and Thursday. I was opposed to the bailout bill, and, for what it's worth, duly sent emails to Congress encouraging its defeat. But I always assumed the revised bill would pass. Now that it hasn't, I feel a kind of disorientation the likes of which I haven't felt since September 11th, 2001: no kidding. Our economy requires restructuring of the most fundamental sort, and if we on the left were seriously in the game, I would be almost enthusiastic about the crisis: it could present an historic opportunity to do what needs to be done, though that would require serious, perhaps even heroic, sacrifice. But this is clearly not even close to being the case, and all I see from the defeat of the bill is, in the worst case, a whole lot of pain, most of which will fall on working and middle class people, if the economic crisis cascades in the manner I suggested above. In the best case, a new bill will be renegotiated, but House Republicans will now have to sign on, which means it's certain the new bill will be worse than its predecessor. Then there's another pretty awful alternative, that of a bill cobbled together after things have got so bad, so fast, that some Republican voters will overcome their fears of creeping socialism just to keep their bank deposits intact and pensions being paid. And that may involve either the kind of power transfer to the Treasury Department the first revised bill did at least something to address, and that would be after a certain amount of irreversible pain will be made virtually inevitable, involving job losses on a scale not seen for decades, considerable asset writedowns, or even a redoubling of subprime-type mischief through large scale credit-card defaults. It's a terrible shame that the world financial system is structured so that an attempted--and not necessarily successful, not by a long shot--bailout of it is the price we have to pay to save our own skins. I would be thrilled, as I said before, to trash the whole, rotten thing. But we don't have the political power to do this yet. And given that void, if the crisis escalates, others, who are at present more powerful, and more dangerous, will certainly step in. Americans are both largely apolitical and, increasingly, resistant to suffering any degree of pain that is visible on a large scale. This means that it's hard to say what might happen politically if this crisis really turns into something of historic significance; it's possible that the second impulse will trump the first, and that a far more humane society could arise from the crucible of crisis. But, at the moment, it appears as if the first impulse is still the dominant one. I hope I'm wrong about all this, but I don't think I am. And I'm very, very afraid. Labels: bailout, financial crisis, Henry Paulson, Larry Peterson The Bailout Negotiation BreakdownThis posting is from D&S collective member and frequent blogger Larry Peterson. To see more of his posts, click here.Beyond the Elite Reality Principle? The failure of Congress to pass the Treasury’s plan to bail out the shadow banking system may portend nothing less than a fundamental shift in the American—even global—economic development, akin to that which ushered in the deregulatory, neoliberal regime after the crisis of corporate profitability and labor/social unrest of the ‘seventies. Combined with apparently considerable opposition from constituents throughout the country, lawmakers’ resistance (even discounting both grandstanding, election year politicking, and the tendency, in times of crisis, to take refuge in wacky ideologies—like Republicans who complain about the United States becoming socialist, etc.) indicates that a central force that held both Democratic and Republican coalitions together for over a generation, namely, wildly pro-business, and especially financial sector, policies that massively enrich increasingly globalized elites, largely by setting constituencies of working people worldwide against each other, and arbitraging the difference, is no longer sustainable. That conservative lawmakers/politicians, even for purely political reasons (John McCain perhaps being the best case in point) have rejected this bill, which was seen as being almost certain to pass only yesterday afternoon, shows this clearly: and our foreign creditors will just have to get used to the fact that, at least temporarily, and surely intermittently in future, even if/when a new bill is passed, the old consensus is a thing of the past. Today should be quite a wild ride on the New York and Chicago markets (foreign markets fell on the news of the breakdown), and this morning’s revelation that Washington Mutual has finally gone down in the largest bank seizure in American history, will only increase the agony. And, lest we forget, a batch of negative economic indicators were released yesterday: the overhang of unsold houses back about its highest levels for the year, durable goods crashing after the export boom of the last few months, initial claims for unemployment rising. The fact that is, despite all this turmoil, and despite the understanding amongst those of elite opinion that this crisis demanded a drastic cure that would be “better than the alternative,” ordinary people—and their representatives, long infinitely more responsive to lobbyists, often from the financial industry, and all too often to foreign ones at that—than their constituents, are just not going to accept this “responsible” bill as it stands now. Even the extraordinary silly spectacle of Secretary Paulson kneeling in front of Speaker Pelosi, and all the shouting in the White House behind closed doors won’t change that. But there is a huge danger. The thing that has ultimately held the world financial order together through thick and thin for the last generation is the unrelenting willingness (some would call it stupidity) of the American taxpayer to fork out money. This has held despite the fact that ordinary workers have had to pay for more and more, despite stagnant incomes and falling (especially state-provided) benefits, as tax rates for the wealthy and corporations have both declined, and been diverted by hugely increasing incidences and opportunities for (not to mention highly profitable, for legal and financial “wealth managers”) dodges to tax shelters throughout the world. And it has held in spite of the fact that the money has been spent on phony wars, tax cuts for the already wealthy that do nothing to provide—and may even hinder—new jobs or rising incomes, as the latter’s ideologues claimed for so long, or was increasingly used for obviously politicized activities or dissipated in a kind of conspicuous corruption that would have engaged the great Veblen himself. Foreigners have come to see this as a kind of galvanic response on the part of Americans: perhaps until now. Are we ready to hold to our rejection of the elite reality principle, and attempt, under extraordinarily difficult conditions, to create, or at least articulate, a true alternative to the health-indicator-destroying, pollution-spewing, warmongering, mind-numbing regimen most of us seem to have finally acknowledged having serious reservations about now? I wonder; and that’s why I’m signing this post. Perhaps unlike some of my comrades at Dollars & Sense, I fear that the effects of turmoil in global markets will cause the majority of even those who stood up to the bailout package and forced legislators to bend to our will at last to falter; and that eventually, either lack of political will or desperation will allow for a temporary (and it’s not sustainable, but whether or not we can take advantage of the creation of the political void to insert something better I very much doubt) resuscitation of the elite consensus, and the passage of a new, perhaps even worse package. If so, it will be a huge irony: the quest for the unrealistic maintenance of a lifestyle characterized by our addiction to cheap imports, and fueled by the debt that was profitably foisted on us by the financial industry, will trump a political will for meaningful change (please don’t confuse this with Obama’s pitiful slogan) that hasn’t found similar expression, even, in my opinion, after September 11th, for over a generation. Looking at the faces of people around me, unconcerned and bored, worries me. But then again, the bailout package failed. Aux armes, comrades! —Larry Peterson Labels: bailout, Henry Paulson, john mccain, Larry Peterson, Treasury Department Ownership Society We Can (Are Forced To) Believe InThis posting is from D&S collective member and frequent blogger Larry Peterson. To see more of his posts, click here.Well, the "plan," such as it is, is finally on the table. A three-page document outlines the Treasury Department proposal, hints of which set markets worldwide skyrocketing late Thursday and into Friday, to buy as much of the questionable (to put it politely) assets held by private banks, investment companies and insurers as is necessary (up to $700 billion, anyway; after that, Treasury will have to go to Congress for a top-up) to get banks--spooked by the pile-up of potentially toxic assets into hoarding cash with an abandon not seen since the days of the London Blitz--to each other again. Indeed, talk now is that foreign banks will be invited to sell their dud loans to the American taxpayer as well. Next week the plan will go to Congress, where legislators must amend and approve it by the end of the week, as well as expanding the budget deficit ceiling to account for all the new government borrowing. Otherwise they (many of whom face re-election) will go home to their constituencies with nothing to show for their efforts. Lobbyists are swarming all over the Washington trying to influence the outcome (with campaign cash that will no doubt be even more enticing to lawmakers in the waning days of their campaigns than it ordinarily is). The basic plan is three-fold (only the first of which is directly addressed in the proposal): first, as mentioned above, it gives Treasury (in the person of the Secretary) unprecedented powers to purchase mortgage-related assets, and also the funding to do so, up to $700 billion. The second part involves short-selling: this practice (in which shares in companies that are expected to underperform are borrowed, sold into the market before they fall in value, and then bought back on the market after any price fall, with proceeds kept by the short-seller before s/he returns the shares borrowed), which has been used by many big investors, like hedge-funds, to capitalize on the difficulties of the financial firms that we've seen threatened--or even disappear--over the last few months, has been effectively banned. Finally, money market funds (previously considered safe as cash, though without a guarantee, and which were coming under pressure last week, seeing large redemptions) will be guaranteed along the lines of bank accounts, with deposit guarantees. As the Financial Times notes, these measures will complement historic supports already put in place to expand the activities of the mortgage-lenders Fannie Mae and Freddie Mac, as well as to keep the insurer AIG solvent. So what we have here is the following: the US taxpayer will buy dodgy loans that private firms wouldn't be caught dead buying, from firms which have been hoarding cash in the fear that they'll (as they should be, in many cases) be on the hook for the losses. This, it is hoped, should have the effect of freeing up that cash, which the firms should make available to potential borrowers, rather than hoarding. This should cause demand for good assets to rise, increasing their prices to such an extent that even loans associated with the duds may come to be seen as bargains, especially if, with the passage of time, many are found to be, in fact, untainted. This will allow the mortgage market to recover, along with it a newly invigorated--and, presumably, highly re-regulated--financial sector and this will ensure recovery for the US economy, even in the face of the job losses, prolonged weakness in demand, and far higher debt the program will invariably cause. What are we to make of this plan? The biggest flaw to my mind concerns the attempt to re-start the mortgage market. This market is still, in many ways, overvalued, and any attempt to create a floor for it seems fundamentally misguided. This is all the more so when one considers that potential consumers will be offered neither the indiscriminate loan availability nor super-low, indeed nonexistent initial interest rates (partially as a consequence of all the government borrowing that's going into the bailout) that enabled much of the home price appreciation that so madly overshot the bounds of sustainability between 2004 and 2006, and still remains in that territory; and the fact that wages are expected to be stagnant (at best, given the persistently rising levels of unemployment), in the face of rising or continued-elevated general consumer price levels, and the delivery of less benefits and social services as public coffers are depleted by bailouts and the implementation of automatic stabilizers to deal with economic downturn, makes the suggestion even more unrealistic. In addition to this (as if anything else were needed), the administration has been far less active in coming up with measures that will help present mortgage-holders hold on to their homes in the face of a major economic downturn. So relief on this front cannot be expected for several months, during which time many more homes may be thrown back on the market, depressing prices. And these developments will increase the already heightened fears that US commercial and regional banks will fail, due to nonpayment of credit card and other debt, assuming all the mortgage debt is absorbed by the government. And we still don't know the extent of the mortgage-related losses; not by a long shot. If they keep piling up, especially assuming the measures to create a floor for mortgage debt don't work, the cost to the taxpayer, already struggling with higher unemployment, and even to corporations, which are seeing their unrealistic profit levels of the bubble years come back to earth, will become even more of a burden, which, in true American fashion, may be foisted on foreign lenders. But many of these countries are following the beleaguered US consumer by retrenching as global growth slows, so their willingness to absorb this debt can no longer be taken for granted. And any pullback in this regard could re-ignite the inflation we've all so effectively forgotten about. The second objection I have concerns the short-selling ban. I'm not exactly sympathetic with short sellers on a class basis, needless to say, and resent mightily the privileges regarding leverage, taxes and so on which they've amassed through the years. But, as Anatoly Kaletsky has written, the attack on short sellers has been in this case totally misdirected, and has ended up hurting potential longer term investors as well as leading to the crisis has resulted in the burden being foisted on all the rest of us. In addition, the fact that many of those who have complained so vocally about short-sellers in the last few weeks have made quite a bit of money in fees serving as prime brokers to them gives us yet another example of how surreal this crisis (and our economy) has become. One last word before summing up: in one of his characteristically incisive and timely posts, Yves Smith cites the following, highly disturbing contribution from one of her readers: I worked at [Wall Street firm you've heard of], but now I handle financial services for [a Congressman], and I was on the conference call that Paulson, Bernanke and the House Democratic Leadership held for all the members yesterday afternoon. It's supposed to be members only, but there's no way to enforce that if it's a conference call, and you may have already heard from other staff who were listening in. In summary, then, it's been an extraordinary week: in the history of finance, it'll have to go down as a kind of "fall of the Berlin Wall" affair. A financial regimen that enjoyed unparalleled sway over much of the earth for a generation has been destroyed by its own contradictions and the abuses it built into itself. Unlike the fall of the Wall, however, there is no liberation to celebrate, and we certainly cannot be confident in the political situation to the extent that we can assume that, even in the long run, something better will come out of the situation. Labels: bailout, Henry Paulson, Larry Peterson, Naked Capitalism, Yves Smith Dangling On A Thread Whilst Pushing On A StringThis posting is from D&S collective member and frequent blogger Larry Peterson. To see more of his posts, click here.The financial crisis has now reached an undeniable inflection point. No one—no one--can simply assume any longer that the threat of potentially serious wealth destruction doesn’t hang directly overhead, poised to be snapped in an instant, especially given the next round of speculative assault on any policy turnarounds that will inevitably accompany the failure of another big player (some still remain which are considered too interconnected to fail, even though their numbers have been considerably reduced by the events of the last two weeks), on the one hand, or sign of pronounced economic weakness on the other. And instances--possibly occurring at an increased rate—of both now seem to be bound to occur. Central banks, regulatory authorities and finance ministries around the world are now focusing as much attention as they can (given those annoying bailouts) on getting the money markets unclogged; and this, in turn, will require them, somehow, to figure out a way—“quasi-socialistic” or not, monopoly-enabling or not, protective of national [elite] interests/competitive advantages or not, to separate tainted assets from dud ones once and for all, so that all assets can find a price and get money market and housing markets—both indispensable to economic recovery--moving again. Needless to say, this is a truly Herculean task, one the market has been spectacularly unable to carry out more-or-less on its own in the last year, and will only get all the more difficult as other firms fail and economic conditions continue to deteriorate (which will lead to more failures, which will make assets fall more in value and resistant to stabilization at some level, which will lead to yet more failures, etc.). But at this point we have to begin to wonder: if they do not fully succeed, and fast, will things like pensions, and even accounts dedicated to payment of wages and benefits, necessarily continue to be turned over? This question, one would think, must be settled before we can believe the wider economy will definitely avoid a shutdown along the lines of one which has, so far, seriously impacted the functioning of financial sector alone. Why the switch from severe caution to open alarm? Well, events on the money market in the last week have clearly shown that, in spite of bailouts and support programs of more than historic size and scope, the appetite for risk has only declined—and precipitously. The always rather optimistic hope that losses on the subprime mortgage market, which, it is true, constituted only a small part of the US mortgage market a year ago, has been replaced by a realization by everyone (with the exception of George W. Bush and possibly John McCain) that mere subprime debt in arrears is compounded by the bets taken out it by insurers (like an AIG, which might not be able to pay out the enormous losses on misplaced bets by huge firms it insures, like Lehman), and that vast areas of the financial universe that even regulators know little about may consequently have to be carefully and slowly bled of tainted assets and nursed back to health, nationalized outright, or liquidated altogether. Accordingly, whoever has cash is hoarding it, because there is no one to deal with who either holds tainted assets, or does business with firms who may hold such risky securities. So, even profitable Morgan Stanley (one of the two remaining investment banks, along with Goldman Sachs) is finding it hard to do business, because questions not so much about its finances, but concerning the firms which sold it insurance on Morgan’s winning bets, but may not be able to pay these bets off, are putting pressure on Morgan’s share price (it is so bad that Morgan is now looking to Wachovia, a mere regional bank, as a buyer, after considering a bid from a CIC of China). And, for many firms, |
