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Reinko
299 Comments
Where We Go from Here: Best and Worst Cases
Yet every crisis has it's own characteristics and it is important to take the local characteristics into account if you study only one crisis.
But the comparison with 1870 is very good, I never heard of that crisis because from the 19th century I only know a bit of math history and a bit of military history.
The next article that was quoted via via from in the above article is good reading, link:
chronicle.com/temp/rep...
The similarities are striking, but now we have fiat money and debt exponential growth that is always above GDP growth and stuff like that was also observed in the 19th century but never ever was a government tied so hard to it.
What Happens When Banks Are Nationalized
Here is a quote from that:
The episodes of credit crunches and housing busts are often long and deep. For example, a credit crunch episode typically lasts two and a half years and is associated with nearly a 20 percent decline in real credit. A housing bust tend to last even longer: four and a half years with a 30 percent fall in real house prices. And an equity price bust lasts some 10 quarters and when it is over, the real value of equities has dropped to half.
And here is the source link:
www.nakedcapitalism.co...
As a comparison my own rather elementary calcualtions indicate that housing prices will decline about 50% from the Summer 2006 top, the DOW will hit 7000 points and if the present and future US government keeps on buying bad debt it might be up to 4 trillion US$ in 'bad debt' that has to be bought.....
If I could I would bring you better statistics & I am not a hypochonder. I am a realist!
Fear and Value: Together Again
It's going fast and furious but as usual invest only on P/E ratio's although you must carefully study the expected future earnings...
How Bad Is the Fed's Balance Sheet?
Just a factor 1000 to large.
I sometimes wonder what kind of math is teached at the US high schools...
Asset Securitization Crisis: The Butterfly Effect
On 12 Nov 2007 I predicted 7000 on the DOW or about a 50% decline from the 14 thousand level.
Today the IMF came with a big study where a staggering 124 housing bubbles and credit crisis were bundled together.
The most simple results were as follows:
On average 30% correction in housing value &
On average 50% decline in the stock markets.
Given the fact that from the 2006 top of US housing prices, declines could be as large as 50% before century long house affordabbility is restored again; you could be right and the DOW stuff will even go below the 7000 level...
My compliments for your insight!
Asset Securitization Crisis: The Butterfly Effect
No it are not unstable systems but systems that are vulnerable to very small changes in the initial value of some of the parameters.
The weather is just one of those examples; because there is extreme sensitivity to very small changes it is not possible to calculate the weather beyond a few days. No matter how much computer power you throw at it.
The butterfly has to be at the right spot to make a significant difference, let me give you and example of such a butterfly from lately:
Last week suddenly money market savings accounts got insurance, this caused a relatively small swap of 12 billion from the commercial banks to money market accounts.
But given the 8% reserve rule for the commercial banks, the banks need to take out about 10 times the 12 billion from their assets and sell these on illiquid markets.
The butterfly is in this case Secretary Paulson, about 4 hours of salary is a small amount of money. The effect is about 120 billion US$ for the US commercial banks.
Have We Learned Anything Yet?
I have done long thinking on why the Americans think they can avoid the rather natural downturn that comes with the economic cyclus.
The main reason is that there is some thought like the economy is just a machine that can work 27/7 with only some maintainace every now and then.
It goes even deeper; only the Americans have done extensive studies to the 24/7 soldier. All these projects doomed, soldiers are no machines but living tissue and after a few nights without sleep the brain simply cannot take it anymore.
If it would be possible nature would have coughed that up millions of years ago.
The most simple argument why the present FED policies will fail in a very hard way is very simple:
For as long as the FED keeps quarterly records on the debt on the US financial sector (since 2001 if memory serves), this debt has expended exponentially at over 9% a year.
Long term GDP growth is only 3% a year.
Right now the financial sector debt is over one US GDP: 16507.5 billion US$ to be exact.
From math we know that the biggest exponent always wins it so if the present FED policy stays in tact this debt will very soon be 20 trillion...
Big Troubles for the Euro
David is right about the German pm Angela Merkel who now suddenly came forward with putting an infinite ceiling of saving deposits. I think that in the panic this has emerged because contrary to the USA all rescue funds are filled with real money paid by the European banks themselves.
The US FDIC fund is only an accountancy vehicle, all money needed to rescue banks had to be borrowed. There are no reserves anywhere in the system.
Another example: Here in Holland in 2009 likely workers do not have to pay for unemployment insurance because the fund is overfull. We name that 'anti cyclical taxing', in the good times you save for the bad.
The USA can only stimulate the economy with more new debt.
To Talin: If you think the US government will make money out of their 700 billion investment better think twice: if they buy stuff on the cheap than losses have to be taken by the banks. This is not very realistic, Bernanke has stated that a lot will be bought at near maturity levels because otherwise 'it will not work'.
And believe me, it will not work because elementary calculations indicate there is at least another 3 trillion in toxic waste coming from the housing correction only. Under numbers like that I do not see any profits for the borrowed 700 billion US$ bailout fund...
Inflation, Deflation and the U.S.-China Relationship
For myself speaking I never understood that the Chinese did not pull the plug in the Spring of 2004.
Yet the Chinese folks did not do this and so the troubles only grew bigger and bigger.
__________
From the statistical point of view it is nice to observe that China needs about 24 million new jobs every year or about 2 million new jobs a months.
For the USA these numbers vary from author to author but the USA needs about 100 to 150 thousand new jobs to keep up with demographic growth.
In this light you must view the latest NFP release:
A decline of 159 thousand means a damage of about 300 thousand...
FDIC Insurance Limits: Eating My Humble Pie
For example the FDIC insurance fund is only one of those accountancy vehicles that measure only what banks have paid and what has gone out. In fact all cents and all dollars paid by the FDIC come from the US government.
There is no 45 billion in reserves at the FDIC; the money paid by the banks is spended a long long time ago.
With updating the 100.000 US$ rule to 250.000 thousand there is only a little bit more oxygen for small business.
Most citizens have not over 100.000 US$ in 'savings' on the account but small business often need to have over that kind of stuff in borrowed money.
To ensure this writer is as dumb as hell, let me quote his widom:
And, it never occurred to me, as reported in the New York Times article and also in the Wall Street Journal, that there was a chance that the insurance limit would be raised without increasing the premiums paid by banks.
Comment: It is very simple to understand why the premium is not raised, there is no real FDIC fund at all. If there would be a real fund, premiums would rise but this is not needed because we are only looking at some accountancy vehicle...
Paulson and Bernanke: A Conspiracy of Dunces
But first the healing of rule 157 needs to set in.
Don't forget that a lot of banks used rule 157 in their benifit; they wrote down about 200 billion of their own debt obligations...
That is about the same size of the reported down writings in the first year of this credit crisis, of course it is rather strange to write down your own debt obligations. This lays the axe at the roots of your credit ratings but the banks did it anyway.
Furthermore, all attention is now on the normal bank balances. There is a large shadow bank system behind it where the Basel 1 rules for bank reserves simply do not apply.
The real shit is of course nicely parked in the shadow bank system...
Home Prices See Record Declines in July
House prices should never be compared month to month or quarter to quarter. Housing has strong components in both prices and volumes sold.
For example:
Students mostly move in the Summer, farmers mostly in the Winter.
When you look at detailed graphs you see some sine curve combined with a trend curve; this goes both for prices and volumes sold.
So you must compare monthly figures with those of a year ago.
In case you want to see what is happening on a month to month basis you act as follows:
Compare August year on year figures with July year on year figures.
In that case the seasonaly component if filtered out...
Therefore moorer11 is completely right!
Wachovia Deal: A Home Run for Citi
Only 448 million US$ in deposits? (That is 0.4 billion by the way).
And 312 billion US$ in troubled Wachovia assets?
In other media files it is told that this costs the FDIC absolutely nothing...
In relation to the mark to market rule (accountancy rule 157) Barry Ritholtz has some details to share, link:
bigpicture.typepad.com...
It says:
Wachovia book value = 75 billion US$
Citi paid = 2 billion US$
While in the meantime the banks only complain about that stupid 157 rule because it makes 'no sense' to put prices on stuff that cannot be sold. But when you cannot sell this in a period of 15 months (the length of the credit crisis) what is the stuff actually worth?
It is mostly garbage, the banks did it all to themselves. It was garbage from the beginning and it is garbage now.
Getting Past the Panic
He also said "There is no way of telling when these down writings will stop" but the media did some truly bad reporting on what I consider a 'slip of the tongue'.
Next detail: It is unknown how far the bailout plan has changed, a lot of people are complaining.
If banks would need help it would be far better to simply buy up stock so when those banks indeed improve it could be sold at a profit. This could be done with or without dillution or a mixture of that.
At last the mark to market rule:
Wachovia had 75 billion on it's banking books but was sold for 2 billion.
Go to Barry Ritholtz for the filing of that detail:
bigpicture.typepad.com...
So banks complaining that rule 157 does all this evil is not very trustworthy...
Speculating on the Future
Thanks for the compliment!
Now I am 45 years old and indeed now you bring up this Pablo Escobar bailout somewhere in the deep caves of my memory it says the fact is true: Pablo indeed offered to pay for Columbia's debt.
Your Pablo bail out plan is very funny; years ago I suggested that the Pentagon should take a Nasdaq listing so they did not need all that tax funding. Remeber: Taxes = stealing jobs.
After the US military is a privite international militia, they could use the Iraqi oil revenue's to pay for the dividends...