Subscribe to Dollars & Sense magazine. Recent articles related to the financial crisis. China To TIGHTEN CreditThey did this in the run-up to the crash, too. And were blamed for it then. Article contains a distressing picture of China's real estate market from one of Chiona's chief economists, which would pour some cold water on hopes that China's stimulus program can create, rather quickly, demand on the scale required to put a serious dent in trade and currency imbalances. From The Financial Times:Beijing to tighten controls on credit By Kathrin Hille and Jamil Anderlini in Beijing Published: April 12 2009 16:43 China's central bank on Sunday warned it planned to "strictly control" credit to some sectors of the economy after the country recorded a record surge in bank loans and money supply in March. The central bank's statement, made after a routine quarterly monetary policy meeting, followed the release on Saturday of the money supply data. The data appeared to confirm that Beijing's stimulus measures are revitalising the domestic economy but raised credit risk and inflation concerns. Read the rest of the article Labels: bailout, China, financial crisis, Monetary Policy, Trade Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). The Dull Compulsion of the Economic (iii)Links only today; there's lots of stuff out there, and I have a headache anyway:(1) Some people may have missed these Financial Times articles earlier in the week (I didn't see them covered on any of the blogs I monitor): (i) it seems that half of all Collateralized Debt Obligations (the favored vehicle for peddling subprime-mortgages) created out of other securitized bonds (namely, asset-backed securities, or ABSs) have failed; (ii) Could the TALF lead to a two-tier market? and (iii) in a sign that the yen carry trade, which played no small role in channeling Asian savings into wacky investments in the US, is kaputt, Japanese retail traders have started buying yen. (2) On climate change, a member of the International Panel on Climate Change refers to two mechanisms which may make climate change worse than forecasted. He also notes that the 2007 IPCC report, covering 2000-2007, seriously underestimated the amount of carbon emissions, largely because it failed to take into account the vast increase in coal-generated electricity use in India and China. (3) Ambrose Evans-Pritchard writes that Eastern Europe may prove to be the ruin of many Western European banks, if not the countries in which the banks are domiciled. He comments on the frantic efforts of Austria to cobble together a rescue plan, and notes that as European banks are more leveraged than American ones, they could be more harmed by losses in Eastern European than US and UK banks have been by the subprime mess and exposure to property bubbles. This is an extremely dangerous situation, particularly with the EU being pulled in several different directions in dealing with the crisis as it is. (4) The Independent on Sunday reports that the HBOS (which just announced a cool 10 billion pound loss) whistle-blower whose revelations led to the resignation of a top UK regulator plans to make public documents he says will show Prime Minister Gordon Brown's personal culpability in the banking crisis (Brown was Chancellor of the Exchequer during the lead-up to the crisis). (5) Business Week's Michael Mandel on the end of the "trade bubble". (6) Japan's 4Q GDP falls a jaw-dropping 3.3% (or 12.7% annualized). (7) Inquiries into the role of US officers in graft schemes in Iraq. This is important because, as the report says, "The wider investigation raises the question of whether American corruption was a primary factor in damaging an effort whose failures have been ascribed to poor planning and unforeseen violence." (8) Michael Perelman makes an important point about the lack of bank lending (short). (9) Marxist writer David Harvey reveals Brad DeLong's refuge in pedantry. Hat tip to Ian J. Seda-Irizarry of the Marxmail list. John Hicks' IS/LM formalization, which DeLong alludes to in support of his screed against Harvey, is dissected by Steve Keen in his book Debunking Economics; it's also referred to in several of his works available online for free, but I can't remember the titles right now. Larry Peterson Labels: bailout, Brad DeLong, climate change, David Harvey, Eastern Europe, financial crisis, Gordon Brown, HBOS, Iraq, Larry Peterson, Steve Keen, Trade Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). The Dull Compulsion of the Economic (ii)Links:(1) Japan and Latvia rack up whopping double-digit 4Q annualized GDP declines. That's two trade-loving nations in one day, one of them being a major trading partner of both the US and China, and the second largest economy, after the US, on earth. And Japan's (in an "unimaginable contraction") 1Q '09 could be worse. Comparable numbers from much of the rest of Asia are discussed here. All from today's (it's still Tuesday in Cambridge, MA) Financial Times. (2) Mexico's drug-related violence is horrific, and what the next story describes is the last thing they need given the fierceness of the former, but the next time anyone in the US threatens to decertify their efforts in the "war on drugs," Mexico should imprison all Coca-Cola executives (including former exec and President Vicente Fox). The dollar amounts (never mind the human cost) lost because of the obesity epidemic in Mexico to foregone productivity and increased health care provisioning must reverse to a respectable degree the GDP gains (disappointing and ill-distributed as they have been) from NAFTA so beloved of free-traders. And remember, much of this US production is subsidized. From The Financial Times. (3) The Treasury is issuing a record $67 billion in debt this week. This Lex column from The Financial Times gives a short summary of essential points (though one of its points became somewhat obsolete by the end of the day it was published, as will become apparent below). Today's comment: Stimulus Passes Senate, Bank Bailout Plan (Partially) Unveiled, Markets Tank Stock prices dropped sharply today, and bond prices surged, as investors expressed confusion at best, and in some cases contempt, for Secretary Geithner's bank bailout proposal. The Dow lost 4.6% in its biggest fall since December 1st, and other indices reported similar falls. The proposal, which, according to a JP Morgan summary (hat tip to the fine site Across the Curve), features the creation of a "Public-Private Investment Fund," or P-PIF (just what we need, after TARP, TALF, M-LEC and all the others...). Such a "bad bank" would operate much as the TALF, providing non-recourse loans (on which the lender can only collect the collateral in case of default) to purchasers of (bad) assets held by the banks. But, in this case, it would be private investors who would be the beneficiaries. And, as the JP Morgan report put it: ...this plan's so-called private sector pricing of assets would be directly related to hoe much leverage the P-PIF extends to other investors. The greater the share of non-recourse lending extended to investors, the higher will be the new "market" prices for assets. The dilemma that first surfaced last September--the higher the price the greater the support for the banking system, but also the greater the risk for taxpayers--is not resolved by the P-PIF but is instead transformed into a decision about how much leverage the P-PIF will provide to investors. Wonderful. This means that hedge funds and their ilk are the targets of this move. No doubt the Treasury is looking both at halting the record redemptions that have prevented this part of the financial industry from putting much needed cash on the markets. Once again, it seems the Obama administration and its acolytes consider that any recovery from the crisis will have to involve intimately the people who got us into it. Anyway, back to the report: There was nothing in today's announcement about providing insurance or guarantees to assets on bank balance sheets, a proposal that seemed to be the centerpiece of the reform as late as last Friday. Any announcement related to foreclosure mitigation was deferred for a few weeks. Note that it appears the majority of P-PIF and TALF would be funded by the Fed balance sheet, thus not requiring Treasury issuance and possibly not even requiring Congressional action. That's change we can believe in, all right: we just endured several months of it before the new administration took office.... Of all I've seen written on the subject, Brad Setser has the most intriguing notions on why the administration is looking to the leveraged players in this desperate attempt to get bad assets sold off once and for all: . This is simply unbelievable: assets worth virtually nothing because they consisted of much less than their hyper-excessive leverage multiples are to be peddled to the very same sort of investors who have just been burned by these things, simply because the leverage is now to be put up by uncomplaining (not to mention increasingly skint) taxpayers and foreign investors, and not the banks. And this in an attempt to make a transition to a less-leveraged system! It's no surprise that nobody seems to be buying it. All together, the proposals put forward today could amount to nearly $3 trillion. And everyone except the administration seems to believe that won't be nearly enough. Be prepared for new, and even clunkier acronyms.... Labels: Across the Curve, Asia Times, bailout, Barack Obama, financial crisis, Japan, Larry Peterson, Latvia, Lex, Mexico, the dull compulsion of the economic, Timothy Geithner, Trade Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Asian Trade/IP Meldown: Biblical in Scope?These numbers are simply astonishing. Two discussions. First, Brad Setser leads off by quoting from The Economist:"many of Asia's tiger economies seem to have been hit harder than their spendthrift Western counterparts. In the fourth quarter of 2008, GDP probably fell by an average annualised rate of around 15% in Hong Kong, Singapore, South Korea and Taiwan; their exports slumped more than 50% at an annualised rate.... In the fourth quarter of 2008, real GDP fell by an annualised rate of 21% in South Korea and 17% in Singapore, leaving output in both countries 3-4% lower than a year earlier. Singapore's government has admitted the economy may contract by as much as 5% this year, its deepest recession since independence in 1965. In comparison, China's growth of 6.8% in the year to the fourth quarter sounds robust, but seasonally adjusted estimates suggest output stagnated during the last three months. Asia's richer giant, Japan, has yet to report its GDP figures, but exports fell by 35% in the 12 months to December. In the same period, Taiwan's dropped by 42% and industrial production was down by a stunning 32%, worse than the biggest annual fall in America during the Depression." Read the rest of the post And from Yves Smith, who refers to points made by Frank Veneroso: 1)The Japanese industrial production data and METI forecast was bad beyond all imagining. Industrial production might fall by 1/3 in the 12 months ending in January. It could fall in a mere four months between November and February by more than half the U.S. Great Depression decline which took almost four years. 2) Nothing like this has ever happened to a major industrial nation to my knowledge --not even during the 1929--1933 Great Contraction. 3) The trade weighted yen is by far the strongest currency in the world. Japan is losing competitiveness fast. Given the lags in trade matters will get worse. 4) The insane trader community continues to push the yen up as a safe haven. It is all so detached from reality I suppose they could take it higher. Read the rest of the post This is really, really scary stuff. Lord knows what lies ahead.... Labels: Asia Times, Brad Setser, exports, financial crisis, Frank Veneroso, manufacturing, Trade, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Trade: Throwing Oil on the FireFrom The International Herald Tribune. Particularly noteworthy (i.e. scary):"China will resort to tariff and trade policies to facilitate export of labor-intensive and core technology-supported industries," Li Yizhong, the minister of industry and information technology, said at a conference Dec. 19. Increased export incentives by China have the potential to create a trade issue for the incoming U.S. administration of Barack Obama, particularly regarding textiles. China's measures to help exporters are starting to cause concern in other Asian countries that compete with it, and raise the risk of a protectionist reaction against China. Indonesia, one of the largest Asian markets, imposed a series of administrative measures Thursday that were meant to reduce smuggling but will have the practical effect of making it harder to import Chinese goods. Looks more and more like the crash precipitated in no small part due to reliance on the export model and credit is to be combated by redoubling of key policies of the export model; and this without the credit! Rising desperation as China's exports drop International Herald Tribune By Keith Bradsher Thursday, January 1, 2009 HONG KONG: At the docks here, the stacks of shipping containers that used to loom above the highway overpass are gone. Logistics managers say they negotiate deeper discounts every week on ships that are leaving half empty. In nearby Guangdong Province, so many factories are closing without paying employees that some workers are resigning pre-emptively and demanding immediate pay before their employers go bankrupt. In Sichuan and other interior provinces, municipal officials are desperately searching for ways to provide jobs for millions of out-of-work migrant laborers whose families no longer need them for farming. Those are the effects of millions of Americans' cutting their spending. American retailers, after suffering a dismal holiday shopping season, are delaying payment for Chinese goods 90 or even 120 days after shipping, in contrast to the usual 30 to 45 days, requiring their suppliers to try to borrow more money to cover the difference. Some Chinese suppliers who cannot raise the money - many already operate on thin margins - are going out of business. At the same time, retailers are demanding that exporters show that they have strong balance sheets and will not go bankrupt before completing orders. Exporters, worried the retailers will fail before paying for their purchases, are reluctant to let goods be loaded onto ships. And banks, for the same reason, have cut back on guaranteeing retailers' payments to exporters. Read the rest of the article Labels: bailout, China, financial crisis, Trade Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Trade Deterioration ContinuesJust when you though things might--might--be staggering back to a point somewhat close to a vastly degraded normality, horrible news comes in on the trade front. This could be a huge problem in tandem with an expected slow Christmas and year-end accumulation of cash at the banks. And it's occurring as letters of credit, virtually a kind of currency among shippers and their banks, are not being honored. Again, Yves Smith:Sunday, November 2, 2008 More Grim News on the Trade Front Reader Michael appeared to be on a mission on Saturday and sent quite a few links on trade/shipping related matters. They were remarkably consistent in pointing to simply dreadful conditions and no expectation of near-term improvement. Indeed, further deterioration seems entirely possible. From Lloyd's List: Freight rates in the Asia-Europe trades have crashed to record lows as consumer demand continues to crumble, with the crisis compounded by the first signs of customer insolvencies.... A 20 ft container could now be shipped from Hong Kong to Hamburg for as little as $350, excluding surcharges, compared with around $1,400 per teu last summer. "In all my years in the business, I do not ever remember such difficult trade conditions," said the trade director of a big Asian line.... "Has it been as bad as this before? No, not in my 20 years," the trade manager at another global carrier concurred. Yves here. By definition, that includes the Asian crisis of 1997-1998. Read the rest of the post Labels: Lloyd's of London, Shipping, Trade, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Letters of Credit and Trade Finance FreezeFrom Naked Capitalism, another excellent, sobering post. Gives you an idea of the increasingly all-embracing extent of the crisis:Confirmation of the Role of Financing Difficulties in Collapsing Trade Volumes One of our pet themes in recent weeks is that the fall in trade traffic, indicated and possibly overstated by a dramatic fall in the Baltic Dry Index, is due at least in part to difficulties in arranging and getting other banks to accept buyers' letters of credit. For those new to this topic, international trade depends to a large degree on letters of credit. While they can help finance shipments, an even more fundamental role is that they assure the shipper that he will be paid for the cargo sent. Without banks using letters of credit as the means to send payment to exporters, parties that are new to each other or conduct business with each other infrequently could never trade with each other (one type, a documentary letter of credit, requires that forms, often a very long and elaborate set of them, verifying that the goods have been inspected and certified, that customs, have been cleared and all relevant charges and duties paid, be presented and vetted before payment is released). Some readers scoffed at the idea that a fundamental element of trade could be breaking down and yet attract more notice; a few argued that the L/Cs were being used as an excuse for buyers to break commodities deals struck when prices were higher. However, as has been discussed in gruesome detail, banks are reluctant to take credit exposures to other banks on the most plain vanilla. short term exposures, namely interbank lending. It has been a struggle for central banks to get banks to lend to each other for longer than overnight. Trade financing is a backwater, operationally intensive, low profit area that simply does not register on senior managements' or regulators' radars. And problems in this area would have virtually no impact on banks, so even acute problems here would simply not register, particularly in comparison to all the other fires that central banks are struggling to smother. Read the rest of the post Labels: Baltic Dry Goods Index, financial crisis, letters of credit, Naked Capitalism, Trade, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). |
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