For the Global Credit Boom, the End Is Near 10 comments
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Bloomberg is reporting European Crisis Deepens; Officials Vow to Save Banks.
The global credit crunch deepened in Europe as government leaders pledged to bail out troubled banks and protect depositors.
BNP Paribas SA will take control of Fortis's units in Belgium and Luxembourg after government efforts to ensure the company's stability failed, while Germany's government and financial institutions agreed on a 50 billion euro ($68 billion) rescue package for Hypo Real Estate Holding AG. U.K. Chancellor of the Exchequer Alistair Darling said Britain is "ready to do whatever it takes" to help its banks.
The developments yesterday came a day after a summit in Paris where leaders of Europe's four biggest economies stopped short of a plan mirroring the $700 billion rescue in the U.S. to counter the worst financial crisis since World War II. Instead, they agreed to work together to limit the economic fallout, ease accounting rules, and seek tougher financial regulations.
"Until now the solutions have appeared to be uncoordinated, so perhaps it's time for a more coordinated approach globally," said Torsten Slok, an economist at Deutsche Bank AG in New York. "It's not just the U.S. and Europe, it's banks in every part of the world."
French President Nicolas Sarkozy, who convened the Oct. 4 meeting, called for a global summit "as soon as possible" to implement "a real and complete reform of the international financial system." He said "all actors" must be supervised, including credit-rating firms and hedge funds. Executive-pay systems must also be reviewed, he said.
"We want a new world to come out of this," Sarkozy said. "We want to set up the basis for a capitalism of entrepreneurs, not speculators."
States, Corporate Borrowing Are The Next Crisis
Bernanke is in for pure hell. Banks and brokers are blowing up, unemployment is soaring, and states like California and Massachusetts are so cash strapped they may need to borrow from the Fed just to make day to day bills.
Bloomberg is reporting Fed May See Lending to Companies, States as Next Crisis Fronts:
Federal Reserve Chairman Ben S. Bernanke may find the next fronts of the financial crisis to be just as chilling as last month's downfall of Wall Street titans: its spread to corporate America and state and local governments.
Duke Energy, the owner of utilities in five U.S. states, last week tapped about $1 billion from a $3.2 billion credit agreement after concluding it may not be able to meet its plan for new financing. Caterpillar, the biggest maker of earthmoving equipment, had to pay the biggest premiums over Treasuries in at least three decades at a sale of five-year and 10-year notes.
Lending between banks is also seizing up. The gap between the three-month London interbank offered rate and the overnight indexed swap rate, a gauge of cash scarcity among banks, climbed to a record 2.80 percentage points three days ago.
State and local governments having trouble meeting cash needs may push for help. Schwarzenegger told Paulson in an Oct. 2 letter that California and other states "may be forced to turn to the federal Treasury for short-term financing" if the crisis doesn't ease.
Cash & Carry Economy
The WSJ is reporting Paulson to Tap Adviser to Run Rescue Program:
Treasury Secretary Henry Paulson is expected to tap Neel Kashkari, a key adviser on whom he has come to rely heavily during the financial crisis, to oversee Treasury's $700 billion program to buy distressed assets from financial institutions, according to people familiar with the matter.
Mr. Kashkari, 35 years old, a Treasury assistant secretary for international affairs and a former Goldman Sachs Group Inc. banker, is expected to be named interim head of Treasury's new Office of Financial Stability as early as Monday.
It's quite fitting that Kashkari sounds like Cash & Carry.
Sun Is Setting On US Dollar Supremacy
The end of the US dollar's supremacy as the world's reserve currency is finally approaching. How long it takes to play out is anyone's guess.
What central bankers need to do is abolish fractional reserve lending and ideally return to currencies backed by hard assets. Unfortunately, the most likely short term action by central bankers is to try and force liquidity into the system to spur more lending.
Such actions cannot and will not work because the problem is too much lending already, evidenced by rampant overcapacity in housing, in commercial real estate, in restaurants, and nearly everywhere one looks except in the energy arena.
The biggest global credit boom in history is now over. We must now pay the consequences whether Bernanke or anyone else likes it or not. Attempts to force more liquidity into the system will only make matters worse.
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This article has 10 comments:
This may eventually result to one world wide currency.
Would things really be better if our monetary policy was limited by gold? Yes we would be more stable, but we could not have wide spread economic prosperity.
See tradesystemguru.com/co...
This guy gets it. Dollar's days are numbered, best replacement would be a gold backed currency, but that's not going to happen any time soon as it would mean giving up economic control for the government.
Stockguy: Go back and revisit US history. We were on a pure gold standard from 1800 to 1912 when our country went from an agrarian backwater to the world's dominant economic power in a very short period.
Stable monetery value (based on limited amounts of gold) allows for everyone to benefit from increases in productivity as the general price levels for everything decline due to increased efficiencies in production.
The CPI in 1800 was in the high 40s. In 1910 it was in the high 20s. Your money would purchase approximately 40% more in 1910 than it purchased in 1800, yet it was always convertible to gold at $20/oz.
Your $5/hour job would get you more stuff in 1910 than in 1800, whether you got a raise or not. If that's not being "more prosperous" then I don't know what would be.
To really do something we need to do away with the federal reserve. But the powers of the world will not give up this money machine. It would take a revolution and what will the fall out be??
fora.tv/2008/09/02/Ron...
To 'fix' things we will need to return to a gold standard, abolish the FED or other central bank/fiat currency issuer and let the chips fall where they may.
We have been mis-allocating resources for 95 years. It will take some time to liquidate the errors and re-allocate toward better uses. That will be a painful process and one that cannot be avoided. Many will lose money, some will gain, in the short term. Everyone gains in the long run.
However, as the old saying goes; "There's no time like the present." to get started on the correct path. The sooner we begin, the sooner things return to a sustained 'normal' state.
I would insist on 100% reserves but some say this would not be necessary. Separate government and money. Allow competing currencies. Abolish the Fed. Let's have a free market in money without government interference other than enforcement of the usual laws against fraud and insolvency.
Is why spread economic prosperity followed by extreme recessions better than slow stable growth? Difficult to answer but surely there are those who have profited greatly from the volatility (up and down) in the market.
Surprisingly, no stunningly, the FOREX indicates there is still respect for the USD in times of uncertainty. For the life of me, I don't know what would replace it unless things really get bad and talk of a global currency starts up (look at the Euro). Of course, there's always dubloons and as some writers have discussed virtual e-dubloons.
"What central bankers need to do is abolish fractional reserve lending and ideally return to currencies backed by hard assets."
Fractional reserve banking (10-15%) adds excessive leverage to the system. Combine this with a twitchy FED that wants to micromanage the economy, and you get our economic roller coaster. The debt interest on fractional reserve lending also forces the money supply to increase, with or without growth. That's built in inflation.
The USD appears to be backed by oil lately, based on correlation only. The only problem with fiat currency in a representative democracy is there is no permanent, fool proof way to enforce government monetary responsibility, especially when combined with (low) fractional reserve banking. Surprisingly, the "barbaric relic" gold (Keynes) lasted a long time. Probably because 80% of the world supply has been discovered in the last 100 years, allowing for currency expansion.
We tried to enforce fiscal responsibility with a Balanced Budget Amendment and it failed.