The Calm Before the Storm? 35 comments
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It's definitely not just stocks: the credit markets have failed to deteriorate today as everybody expected them to, on the day after the largest banking collapse in US history. Libor's down a little, TED's down a lot, and generally there's no sign at all of any panic.
Justin Fox has a few theories for why this might be the case. The first one is the least likely: basically, that John McCain is right when he says that "there has been significant progress toward a bipartisan agreement" on the bailout. The facts, of course, is that he isn't and there hasn't.
The second theory is that liquidity injections by global central banks, after signally failing to work for the past 14 months, have suddenly started working. That seems improbable to me, too -- if anything, central banks are now lending so much money so freely into the banking system that there's little if any need for banks to lend money to each other. Extra liquidity, in such a scenario, can increase interbank rates as easily as it can decrease them.
The third theory is the least unlikely and the most hopeful:
Maybe we don't need the bailout, at least not in the this-must-happen-tomorrow-or-we'll-all-die sense of late last week. By acting to backstop money market mutual funds, and magically transforming the last two big investment banks standing -- Goldman Sachs and Morgan Stanley -- into banks, the government already addressed the two big panic button issues of last week. And now most all the remaining financial institutions that anybody might have serious worries about are within the banking system, where we have pretty well-established rules for dealing with insolvency and experienced civil servants who administer them. Not problem solved -- nowhere near -- but problem steered in a direction where it could conceivably be resolved without emergency legislation right now.
I devoutly wish this were true; I put it at p=0.5, or thereabouts. But even if it is true, it would only represent a slight change in the thing that the bailout is designed to avert. Rather than immediate and certain financial chaos in the event the bailout doesn't happen, we'd just have contingent and could-happen-at-any-time financial chaos. Which is an improvement, but not much of one.
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People are worried about a TED spread of 3% when loans to banks for 3 to 6 months go begging at rates with that many digits. That is $1 trillion more in liabilities at those two institutions alone.
Bank of America, JP Morgan, and the Fed are doing their duty. Pols are running around like headless chickens and irresponsible journalists are cheering for the end of the world as likely to make good copy.
Nobody here is living up to the height of the times.
I think Felix may have a point; however I'd like to add a fourth possibility: Since everyone (and I mean EVERYONE) expects a crash, there might be no one left to sell to foment a crash.
the market was speaking last week, as it moved in the direction of political mood. It was up when their was confidence in the deal to get done, and futures tanked when talks broke down.
I do not want a bs deal to go through, but the markets want something. We don't get a deal before market opens monday, the market stops waiting to pick a direction... it will choose down... big time.
Nobody is doing anything for fear that it will be the wrong thing and as a result of the bailout terms they will lose bunches like happened to everyone who ponied up 'rescue' money earlier this year at LEH or WM.
Think deer in the headlights. Don't move because it might prove finacially fatal when the rules change.
The Paulson plan remains, unsurprisingly, the most rational policy response. Also unsurprisingly, people who know far less are unwilling to accept that because it is Bad News (TM). So they run around playing let's pretend. But in the end, bank failure concentrates minds.
Being against bailouts for 48 hours over Lehman cost $5 trillion and counting in market cap, and a half trillion and counting in government interventions, half central bank and half treasury. Being against them for another 2 weeks or so would probably cause another $1 trillion in bank failures.
Wrap your heads around it already - it doesn't matter what policy you want, it doesn't matter who is to blame, it doesn't matter who you think should take what part of the hit. They flat do not have it, there is no blood in stones. The hit gets bigger, not smaller, and hurts you at least as much as anybody else, every time you demand another institutuon goes to the wall, and the longer the merry-go-round of denial continues.
Not zero sum. Fighting over it is negative sum, huge. Get it over with already.
Paulson proposed handing over cash for garbage assets with no equity.
A bank would never make a deal like that, why would the Treasury?
- Keeping cash around, in the long term, is not good because of inflation.
- I already have 5% of the portfolio in commodities; buying more commodities would be too risky as they could tank if the market rallies.
- Already have 40% of portfolio in foreign stock funds or ETFs; if depression kicks in it's pretty clear foreign markets be dragged down, they will not be completely decoupled.
My point is, I don't see a reason yet to sell, as all investment alternatives are equally risky.
FED maintenance crews spend weekend giving final preflight checks to entire helicopter fleet.
Monday should be interesting, one way or another.
Why be pussies about it? If $700 Billion is good, isn't a whole $Trillion better? Hell, why not go with Bill Gross' "the banks will need another $500 Billion" and go to $1.2 Trillion? Plus $25 Billion each for Ford, GM and Chrysler. And so those of us that you think are too stupid to "get it" don't feel left out, we should pass another $500 Billion in economic stimulus, including roads, bridges, solar and wind farms, ANWR drilling, and ANWR drilling-induced eco damage remediation.
How much is enough? Can you guarantee that this is enough? If it isn't enough, do we get to hang everyone associated with this theft? We will want to.
If we're going to destroy the dollar, I agree with your final comment: "Get it over with already." I'm growing tired of this death-by-a-thousand-cu...
Foreign lenders are already quite wary of US debt. They don't want monopoly money in payment ten years from now. CDS on McDonalds are trading at lower spreads than CDS on Treasuries. So where is the money going to come from to pay for this? Taxes? Borrowing? Printing? Which is it, please tell me.
Even the damned socialists know that a free market economy is needed to be the goose that lays the golden eggs. Once the takeover of US markets by government is complete, once regulatory intervention makes free buying and selling impossible, investors will look elsewhere for investment opportunities.
We don't need a czar with a stolen bazooka in his pocket, and we don't need a Wall Street waterboy masquerading as Treasury Secretary. We need free markets, including the freedom to fail, and yes, even to fail mightily. Free markets know what to expect and know how to recover.
As for the amounts, everything SWRichmond thinks a ridiculous overdoing it might be entirely prudent right now, and no it isn't going to destroy the dollar or cause inflation. Inflation is the least of our worries when half trillion dollar institutions are failing every week.
Mortgage issuance in the second quarter was $80 billion. That is 93% below the rate of 2005. The entire real estate financing market has seized. In a hyperinflation men are scrambling to get out of nominal claims and into real assets - here they are doing the reverse, scrambling to get into the most liquid and financial strong short term debts and away from anything that smacks of equity exposure, even indirectly.
As for bobomite's question, nobody else owns 20% of the entire future income stream of the whole economy. The US treasury does. Anything that makes that stream collapse hurts the US treasury, and anything that keeps it from doing so benefits the US treasury.
Do you think you could save money by smashing the entire financial sector to atoms? Make them pay for something that way? The US financial sector is a net payer to the US treasury to the tune of $480 billion a year, rising at a 7% annual rate, as a long term average. It is a Golden Goose. Do you want to keep it, or wreck it out of moralizing spite?
If you choose the latter, we are all still on the hook. Pick which hat you want to wear as you pay the bill. Taxpayer through US treasury - the bottom half pay nothing and the top 5% pay nearly all of it, and the total bill comes from the losses on all this, a fraction of the sums advanced. Or instead, you can wear a holder of US dollars hat and let the Fed monetize the paper the banks and money funds have to dump at their depositors flee into physical cash. Or instead, you can put back on your taxpayer hat as the FDIC makes depositors whole, if the Fed stands aside and lets the banks fail. Or instead, if you don't want to refund the FDIC, you can take the hit as a bank depositor. In all of the above, you can also pay through deflation and destruction of economic activity.
Here is what you can't do - make it all go away by screaming loud enough that you hate everybody else. Try putting the remaining hit on Wall Street. OK, half the banks go down like ninepins, and see above. They have reached their capacity to pay, after $500 billion in bank writeoffs and $19 trillion in lost stock market capitalization world wide, since last July.
Wachovia paper yields 130% over 6 months. National City is only at 65%. Morgan Stanley, a mere 40%. Think anyone can make that up by smart trading? That is another $2 trillion in liabilities right there.
Do you want no banking system, deflation, and the bill? Or just the bill?
You don't have to like any of it, the laws of economics are as merciless as gravity. Walk off a cliff, you fall and are dashed to pieces.
Grow up, people.
The TIC report shows exactly what the foreign CB's are doing with the dollars: they're buying Treasuries. So our Fed is loaning money to foreigners to buy our Treasuries. Cool, that's a great plan for prosperity, and it's certain to be sustainable. Their plan isn't prosperity, it's propping up the dollar monetary regime.
"The US financial sector is a net payer to the US treasury to the tune of $480 billion a year, rising at a 7% annual rate, as a long term average. It is a Golden Goose. Do you want to keep it, or wreck it out of moralizing spite?"
You neglect to mention that it was all a lie. It was phony money, knowingly loaned to people who couldn't pay it back so that the money machine could have more MBS to slice, and do it all again, and get the commish. Financial engineering my ass. Golden goose? More like a Ponzi scheme, now gone flat. All done with the certain knowledge that "too big to fail" would be applied.
I note you didn't mention where the money was going to come from?
"They have reached their capacity to pay, after $500 billion in bank writeoffs and $19 trillion in lost stock market capitalization world wide, since last July."
After all these losses, you still trust these people and want to give them more money. Amazing, absolutely amazing.
I'm sorry about your losses. I got out in November. I'm not happy about this situation either. But throwing good money after bad is NEVER a good idea.
I have had it with this duo. Ben - please go back to the Princeton debating society where you belong. Paulson - please enjoy your ill gotten $ 600 M with your Wall street buddies. Stop killing the 401Ks of ordinary American.
1) because they are not fixing what caused the problem - leverage.
2) because under this plan the big bozos get the most benefit and there is no compensating the inequities to the poor bastard.
3) because the markets are not reacting to a crisis
4) because we are in a recession and no government official is admitting it - and nothing in this package will stimulate an economy.
5) because they are lying
having said that, i recognize that if is unbelievably stupid to allow a company to fail at this time when it could have easily survived in "normal" circumstances. so:
a) open a fed credit window to business. use normal lending practice in processing the loan. get buffett type benefits for cash injections.
b) simply insure all deposits at a bank. this stops the run on banks.
For whatever reason, people do not understand that this lack of action will cause Great Pain to them, I don't understand. The Pension Funds have this Rank Paper, The Money Market Funds have this Rank Paper, Insurance Co's, Municipalities, their Local Banks, Credit Unions...This is Systemic & not only to the US, it is Global in scope.
Thank You for attempting to make sense of this. It really won't be reality until the Crisis-is a Frozen System.
P & B were Attempting to stop a Panic, w/this Plan. The cost of waiting is going to be far higher. More difficult to contain. Open Pandoras Box...It's really hard to close thereafter.