Federal Reserve losing control

Moderators: Elvis, DrVolin, Jeff

Postby schadenfreude » Mon Jan 21, 2008 1:01 pm

Hmmm. I still can't get it to appear, tried IE and Firefox. Never mind.

...and about this:

"By the way, I also posted something about non-borrowed reserves of banks, which fell off a cliff at the start of January.

Well, the number has gone negative.
That means, in aggregate, all the loss reserves of the US banking system have gone."


erm, that sounds really, really scary. Where did you get the data for this? - links very much appreciated.

Thanks Anti, you've kept me up to speed with this, and I appreciate it.

Anyway, now we all are starting to understand that all the banks are penniless, and as a consequence so are we, how long until the breakdown of Western Civilisation?

Anyone...?
schadenfreude
 
Posts: 23
Joined: Wed Oct 31, 2007 2:41 pm
Blog: View Blog (0)

Postby ninakat » Mon Jan 21, 2008 2:00 pm

schadenfreude wrote:Anyway, now we all are starting to understand that all the banks are penniless, and as a consequence so are we, how long until the breakdown of Western Civilisation?

Anyone...?


I don't make predictions, but I read stuff from others who do. And it seems there are more and more economic pundits raising some serious concerns. Go to LATOC's Breaking News page for some startling articles:

http://www.lifeaftertheoilcrash.net/BreakingNews.html

Can all of these writers be wrong? It appears we're in for some serious trouble. Looks like a hard landing, really hard. But, I don't think anybody can really know for sure just how events will unfold, simply because the global economy is so complex. That said, there are a LOT of warning signs of impending nastiness.
User avatar
ninakat
 
Posts: 2904
Joined: Tue Nov 07, 2006 1:38 pm
Location: "Nothing he's got he really needs."
Blog: View Blog (0)

Postby antiaristo » Mon Jan 21, 2008 2:36 pm

schadenfreude wrote:Hmmm. I still can't get it to appear, tried IE and Firefox. Never mind.

...and about this:

"By the way, I also posted something about non-borrowed reserves of banks, which fell off a cliff at the start of January.

Well, the number has gone negative.
That means, in aggregate, all the loss reserves of the US banking system have gone."


erm, that sounds really, really scary. Where did you get the data for this? - links very much appreciated.

Thanks Anti, you've kept me up to speed with this, and I appreciate it.

Anyway, now we all are starting to understand that all the banks are penniless, and as a consequence so are we, how long until the breakdown of Western Civilisation?

Anyone...?


schad,
Look here:
http://www.federalreserve.gov/releases/h3/Current/

The first table is seasonally adjusted, so go to the second table about halfway down for the raw unadjusted numbers.

The second column is non-borrowed reserves, in millions of dollars.

Dec 5 44160
Dec 19 34843
Jan 2 11424
Jan 16 -1387
antiaristo
 
Posts: 2555
Joined: Wed May 18, 2005 9:50 am
Blog: View Blog (0)

Postby barracuda » Mon Jan 21, 2008 3:06 pm

schadenfreude wrote:... how long until the breakdown of Western Civilisation?


Judging from the performance of the European and Asian markets on Monday, this week should ring a few bells in this regard. Although "not with a bang but with a whimper" is how these things usually progress. It took about two or three years for the crash of '29 to become the great depression.
The most dangerous traps are the ones you set for yourself. - Phillip Marlowe
User avatar
barracuda
 
Posts: 12890
Joined: Thu Sep 06, 2007 5:58 pm
Location: Niles, California
Blog: View Blog (0)

Postby ninakat » Mon Jan 21, 2008 3:24 pm

Stock markets plunge worldwide

TOBY ANDERSON
AP News

Jan 21, 2008 12:45 EST

Stocks fell sharply worldwide Monday following declines on Wall Street last week amid investor pessimism over the U.S. government's stimulus plan to prevent a recession.

U.S. markets were closed for Martin Luther King Jr. Day, but the downbeat mood from last week's market declines there circled through Europe, Asia and the Americas. Britain's benchmark FTSE-100 slumped 5.5 percent to 5,578.20, France's CAC-40 Index tumbled 6.8 percent to 4,744.15, and Germany's blue-chip DAX 30 plunged 7.2 percent to 6,790.19.

In Asia, India's benchmark stock index tumbled 7.4 percent, while Hong Kong's blue-chip Hang Seng index plummeted 5.5 percent to 23,818.86, its biggest percentage drop since the Sept. 11, 2001, terror attacks.

Canadian stocks fell as well, with the S&P/TSX composite index on the Toronto Stock Exchange down 4 percent in early afternoon trading. In Brazil, stocks plunged 6.9 percent on the main index of Sao Paulo's Bovespa exchange.

Investors dumped shares because they were skeptical that an economic stimulus plan President Bush announced Friday would shore up the economy that has been battered by problems in its housing and credit markets. The plan, which requires approval by Congress, calls for about $145 billion worth of tax relief to encourage consumer spending.

"We've taken our lead from the Asian markets who have not been impressed by the U.S. There's debate if there's going to be a recession in the U.S. I don't think there's much chance of that though," said Richard Hunter an analyst at Hargreaves Lansdown Stockbrokers Ltd. in London.

Concerns about the outlook for the U.S. economy, a major export market for Asian companies, has sent the region's markets sliding in 2008. Just last Wednesday, the Hang Seng index sank 5.4 percent.

"It's another horrible day," said Francis Lun, a general manager at Fulbright Securities in Hong Kong. "Today it's because of disappointment that the U.S. stimulus (package) is too little, too late and investors feel it won't help the economy recover."

Japan's benchmark Nikkei 225 index slid 3.9 percent to close at 13,325.94 points, its lowest close in more than two years. China's Shanghai Composite index plunged 5.1 percent, partly on worries about mainland Chinese banks' exposure to risky U.S. mortgage investments.

"People are certainly nervous about a potential recession in the U.S. spilling over to the rest of the world," said David Cohen, Director of Asian Economic Forecasting at Action Economics in Singapore.

"Maybe there's still some wariness about politicians are able to come up with a compromise and act sufficiently quickly" on a stimulus package, Cohen said. "I think the impact would be marginal anyway."

Investors took cues from the negative reaction to the president's plan on Wall Street on Friday, when the Dow Jones industrial average slid 0.5 percent to 12,099.30, bringing its loss for the year so far to nearly 9 percent.

Traders also have shrugged off assurances from Federal Reserve Chairman Ben Bernanke that the U.S. central bank is ready to act aggressively — which means a likely big interest rate cut later this month — to help the sagging economy.

Some analysts predict that Asia won't suffer dramatically from a U.S. recession because increased trade and investment within Asia has made the region less reliant on the United States than in the past. Excluding Japan, 43 percent of Asia's exports go to other nations in the region, Lehman Brothers calculates, up from 37 percent in 1995.

But on Monday, uncertainty and pessimism reigned.

In Tokyo trading, exporters got hit hard, partly because of the yen's recent strength against the dollar. Toyota Motor Corp. lost 3.3 percent and Honda Motor Co. sank 3.4 percent.

Shares of Bank of China dropped 6.4 percent in Hong Kong after the South China Morning Post newspaper reported that the bank is expected to announce a "significant write-down" in U.S. subprime mortgage securities, citing unidentified sources. In Shanghai, the bank's stock declined 4.1 percent.

India's the benchmark Sensex index fell 1,353 points, or 7.4 percent — its second-biggest percentage drop ever — to 17,605.35 points. At one point, it was down nearly 11 percent.

The decline hit companies across the board, with power utility Reliance Energy Ltd. falling 16.4 percent. Major software company Tata Consultancy Services Ltd. slid 7.6 percent

"A gloomy U.S. climate has affected the global markets. Even if those markets recover, it will take sometime for the recovery to reach India because today's fall has been so drastic," said Jayant Pai, of the Mumbai investment company IL&FS Ltd.

Still, Pai and others suggested that the declines could lead to a buying opportunity.

"The sell-off today takes us close to the bottom," she said.

Since the start of the year, Japan's Nikkei index has declined 13 percent, while Hong Kong's blue-chip index is down more than 14 percent. Even China's Shanghai index — which nearly doubled last year — has fallen 6.6 percent over the same period and nearly 20 percent from its all-time closing high on Oct. 16.

___

Associated Press writers Cassie Biggs in Hong Kong, Ramola Talwar Badam in Mumbai and Elaine Kurtenbach in Shanghai Carl Freire in Tokyo contributed to this report.
User avatar
ninakat
 
Posts: 2904
Joined: Tue Nov 07, 2006 1:38 pm
Location: "Nothing he's got he really needs."
Blog: View Blog (0)

look at the numbers people

Postby slow_dazzle » Mon Jan 21, 2008 4:02 pm

Every single one is a minus figure as at the time of posting. Every one. Even the Asian markets are shedding points.

This is scary stuff. Keep an eye on this page over the next few days and remember that Argentina's economy collapsed in days.

link
On behalf of the future, I ask you of the past to leave us alone. You are not welcome among us. You have no sovereignty where we gather.

John Perry Barlow - A Declaration of the Independence of Cyberspace
slow_dazzle
 
Posts: 1132
Joined: Sat Nov 11, 2006 3:19 pm
Blog: View Blog (0)

Postby ninakat » Mon Jan 21, 2008 4:21 pm

Global Bloodbath
Mish's Global Economic Trend Analysis

I have been telling everyone for weeks "Markets do not crash from overbought. Markets crash from oversold. It's a low probability event but one guaranteed to eventually happen." This could be the start of one. Here is a recap of global markets.

US Markets are closed but S&P futures are down 4.5% and Nasdaq futures are down 4.0%. We are looking at a possible lock limit down open on Tuesday unless Bernanke pulls a magic rabbit out of his hat. Don't count on it.
User avatar
ninakat
 
Posts: 2904
Joined: Tue Nov 07, 2006 1:38 pm
Location: "Nothing he's got he really needs."
Blog: View Blog (0)

Postby barracuda » Mon Jan 21, 2008 7:07 pm

ninakat wrote:Global Bloodbath
Mish's Global Economic Trend Analysis

I have been telling everyone for weeks "Markets do not crash from overbought. Markets crash from oversold. It's a low probability event but one guaranteed to eventually happen." This could be the start of one. Here is a recap of global markets.

US Markets are closed but S&P futures are down 4.5% and Nasdaq futures are down 4.0%. We are looking at a possible lock limit down open on Tuesday unless Bernanke pulls a magic rabbit out of his hat. Don't count on it.


U.S. markets have lost 20% of their value in the last three weeks. This seems like more than just the beginning of a crash. This sounds distinctly like a crash. Full stop. Whatever else may come, an incredible amount of money has already been flushed.
The most dangerous traps are the ones you set for yourself. - Phillip Marlowe
User avatar
barracuda
 
Posts: 12890
Joined: Thu Sep 06, 2007 5:58 pm
Location: Niles, California
Blog: View Blog (0)

Postby Sweejak » Mon Jan 21, 2008 10:08 pm

Every single one is a minus figure as at the time of posting. Every one. Even the Asian markets are shedding points.

What is the Norway BRIX composed of? It is up.
http://money.cnn.com/data/world_markets/
User avatar
Sweejak
 
Posts: 3250
Joined: Sat Jul 02, 2005 7:40 pm
Location: Border Region 5
Blog: View Blog (0)

Postby ninakat » Mon Jan 21, 2008 11:09 pm

FWIW:

Worst financial crisis since WW2: Soros
January 22, 2008 - 1:23PM

Billionaire investor George Soros said the world was facing the worst financial crisis since World War Two and the United States was threatened with recession, according to an interview with the Austrian daily Standard.

"The situation is much more serious than any other financial crisis since the end of World War Two,'' Soros was quoted as saying.

He said over the past few years politics had been guided by some basic misunderstandings stemming from something which he called "market fundamentalism'' - the belief financial markets tended to act as a balance.

"This is the wrong idea,'' he said.

"We really do have a serious financial crisis now.''

Asked whether he thought the United States was headed for a recession, he said: "Yes, this is a threat in the United States''.

He added he was surprised how little understanding there had been on how recession was also a threat to Europe.

European shares fell nearly 6 percent on Monday, their biggest one-day slide since the September 11 attacks of 2001, as fears of a US recession and more write downs in the financial sector sparked a broad-based selloff.
User avatar
ninakat
 
Posts: 2904
Joined: Tue Nov 07, 2006 1:38 pm
Location: "Nothing he's got he really needs."
Blog: View Blog (0)

Postby ninakat » Tue Jan 22, 2008 1:43 pm

This is an excellent overview of the current economic situation, IMHO.

Devastating Crisis Unfolds
— Bob Brenner, for the ATC editors

THE CURRENT CRISIS could well turn out to be the most devastating since the Great Depression. It manifests profound, unresolved problems in the real economy that have been — literally — papered over by debt for decades, as well as a shorter term financial crunch of a depth unseen since World War II. The combination of the weakness of underlying capital accumulation and the meltdown of the banking system is what’s made the downward slide so intractable for policymakers and its potential for disaster so serious. The plague of foreclosures and abandoned homes — often broken into and stripped clean of everything, including copper wiring — stalks Detroit in particular, and other Midwest cities.

The human disaster this represents for hundreds of thousands of families and their communities may be only the first signal of what such a capitalist crisis means. Historic bull runs of the financial markets in the 1980s, 1990s and 2000s — with their epoch-making transfer of income and wealth to the richest one per cent of the population — have distracted attention from the actual longterm weakening of the advanced capitalist economies. Economic performance in the United States, western Europe and Japan, by virtually every standard indicator — the growth of output, investment, employment and wages — has deteriorated, decade by decade, business cycle by business cycle, since 1973.

The years since the start of the current cycle, which originated in early 2001, have been worst of all. GDP (Gross Domestic Product) growth in the United States has been the slowest for any comparable interval since the end of the 1940s, while the increase of new plant and equipment and the creation of jobs have been one third and two thirds, respectively, below postwar averages. Real hourly wages for production and non supervisory workers, about 80% of the labor force, have stayed roughly flat, languishing at about their level of 1979.

Nor has the economic expansion been significantly stronger in either western Europe or Japan. The declining economic dynamism of the advanced capitalist world is rooted in a major drop in profitability, caused primarily by a chronic tendency to overcapacity in the world manufacturing sector, going back to the late 1960s and early 1970s. By 2000, in the United States, Japan and Germany, the rate of profit in the private economy had yet to make a comeback, rising no higher in the 1990s cycle than in that of the 1970s.

With reduced profitability, firms had smaller profits to add to their plant and equipment, as well as smaller incentives to expand. The perpetuation of reduced profitability since the 1970s led to a steady falloff in investment, as a proportion of GDP, across the advanced capitalist economies, as well as step-by-step reductions in the growth of output, means of production, and employment.

The long slowdown in capital accumulation, as well as corporations’ repression of wages to restore their rates of return, along with governments’ cuts in social spending to buttress capitalist profits, have resulted in a slowdown in the growth of investment, consumer and government demand, and thus in the growth of demand as a whole. The weakness in aggregate demand, ultimately the consequence of the reduction in profitability, has long constituted the main barrier to growth in advanced capitalist economies.

To counter the persistent weakness of aggregate demand, governments, led by the United States, have seen little choice but to underwrite ever greater volumes of debt, through ever more varied and baroque channels, to keep the economy turning over. Initially, during the 1970s and 1980s, states were obliged to incur ever larger public deficits to sustain growth. But while keeping the economy relatively stable, these deficits also rendered it increasingly stagnant: In the parlance of that era, governments were getting progressively less bang for their buck, less growth of GDP for any given increase in borrowing.

From Budget-Cutting to Bubblenomics

In the early 1990s, therefore, in both the United States and Europe, led by Bill Clinton, Robert Rubin and Alan Greenspan, governments moving to the right and guided by neoliberal thinking (privatization and slashing of social programs) sought to overcome stagnation by attempting to move to balanced budgets. But although this fact does not loom large in most accounts of the period, this dramatic shift radically backfired.

Because profitability had still failed to recover, the deficit reductions brought about by budget balancing resulted in a huge hit to aggregate demand, with the result that during the first half of the 1990s, both Europe and Japan experienced devastating recessions, the worst of the postwar period, and the U.S. economy experienced the so-called jobless recovery. Since the middle 1990s, the United States has consequently been obliged to resort to more powerful and risky forms of stimulus to counter the tendency to stagnation. In particular, it replaced the public deficits of traditional Keynesianism with the private deficits and asset inflation of what might be called asset price Keynesianism, or simply Bubblenomics.

In the great stock market runup of the 1990s, corporations and wealthy households saw their wealth on paper massively expand. They were therefore enabled to embark upon a record-breaking increase in borrowing and, on this basis, to sustain a powerful expansion of investment and consumption. The so-called New Economy boom was the direct expression of the historic equity price bubble of the years 1995-2000. But since equity prices rose in defiance of falling profit rates and since new investment exacerbated industrial overcapacity, there quickly ensued the stock market crash and recession of 2000-2001, depressing profitability in the non-financial sector to its lowest level since 1980.

Undeterred, Greenspan and the Federal Reserve, aided by the other major Central Banks, countered the new cyclical downturn with another round in the inflation of asset prices, and this has essentially brought us to where we are today. By reducing real short-term interest rates to zero for three years, they facilitated an historically unprecedented explosion of household borrowing, which contributed to and fed on rocketing house prices and household wealth.

According to The Economist,, the world housing bubble between 2000 and 2005 was the biggest of all time, outrunning even that of 1929. It made possible a steady rise in consumer spending and residential investment, which together drove the expansion. Personal consumption plus housing construction accounted for 90-100% of the growth of U.S. GDP in the first five years of the current business cycle. During the same interval, the housing sector alone, according to Moody’s Economy.com, was responsible for raising the growth of GDP by almost 50% above what it would otherwise been — 2.3% rather than 1.6%.

Thus, along with G. W. Bush’s Reaganesque budget deficits, record household deficits succeeded in obscuring just how weak the underlying economic recovery actually was. The rise in debt-supported consumer demand, as well as super-cheap credit more generally, not only revived the American economy but, especially by driving a new surge in imports and the increase of the current account (balance of payments and trade) deficit to record levels, powered what has appeared to be an impressive global economic expansion.

Brutal Corporate Offensive

But if consumers did their part, the same cannot be said for private business, despite the record economic stimulus. Greenspan and the Fed had blown up the housing bubble to give the corporations time to work off their excess capital and resume investing. But instead, focusing on restoring their profit rates, corporations unleashed a brutal offensive against workers. They raised productivity growth, not so much by increasing investment in advanced plant and equipment as by radically cutting back on jobs and compelling the employees who remained to take up the slack. Holding down wages as they squeezed more output per person, they appropriated to themselves in the form of profits an historically unprecedented share of the increase that took place in non-financial GDP.

Non-financial corporations, during this expansion, have raised their profit rates significantly, but still not back to the already reduced levels of the 1990s. Moreover, in view of the degree to which the ascent of the profit rate was achieved simply by way of raising the rate of exploitation — making workers work more and paying them less per hour — there has been reason to doubt how long it could continue. But above all, in improving profitability by holding down job creation, investment and wages, U.S. businesses have held down the growth of aggregate demand and thereby undermined their own incentive to expand.

Simultaneously, instead of increasing investment, productiveness and employment to increase profits, firms have sought to exploit the hyper-low cost of borrowing to improve their own and their shareholders’ position by way of financial manipulation — paying off their debts, paying out dividends, and buying their own stocks to drive up their value, particularly in the form of an enormous wave of mergers and acquisitions. In the United States, over the last four or five years, both dividends and stock repurchases as a share of retained earnings have exploded to their highest levels of the postwar epoch. The same sorts of things have been happening throughout the world economy — in Europe, Japan and Korea.

Bursting Bubbles

The bottom line is that, in the United States and across the advanced capitalist world since 2000, we have witnessed the slowest growth in the real economy since World War II and the greatest expansion of the financial or paper economy in U.S. history. You don’t need a Marxist to tell you that this can’t go on.

Of course, just as the stock market bubble of the 1990s eventually burst, the housing bubble eventually crashed. As a consequence, the film of housing-driven expansion that we viewed during the cyclical upturn is now running in reverse. Today, house prices have already fallen by 5% from their 2005 peak, but this has only just begun. It is estimated by Moody’s that by the time the housing bubble has fully deflated in early 2009, house prices will have fallen by 20% in nominal terms — even more in real terms — by far the greatest decline in postwar U.S. history.

Just as the positive wealth effect of the housing bubble drove the economy forward, the negative effect of the housing crash is driving it backward. With the value of their residences declining, households can no longer treat their houses like ATM machines, and household borrowing is collapsing, and thus households are having to consume less.

The underlying danger is that, no longer able to putatively “save” through their rising housing values, U.S. households will suddenly begin to actually save, driving up the rate of personal savings, now at the lowest level in history, and pulling down consumption. Understanding how the end of the housing bubble would affect consumers’ purchasing power, firms cut back on their hiring, with the result that employment growth fell significantly from early in 2007.

Thanks to the mounting housing crisis and the deceleration of employment, already in the second quarter of 2007, real total cash flowing into households, which had increased at an annual rate of about 4.4% in 2005 and 2006, had fallen near zero. In other words, if you add up households’ real disposable income, plus their home equity withdrawals, plus their consumer credit borrowing, plus their capital gains realization, you find that the money that households actually had to spend had stopped growing. Well before the financial crisis hit last summer, the expansion was on its last legs.

Vastly complicating the downturn and making it so very dangerous is, of course, the sub-prime debacle which arose as direct extension of the housing bubble. The mechanisms linking unscrupulous mortgage lending on a titanic scale, mass housing foreclosures, the collapse of the market in securities backed up by sub-prime mortgages, and the crisis of the great banks who directly held such huge quantities of these securities, require a separate discussion.

One can simply say by way of conclusion, because banks’ losses are so real, already enormous, and likely to grow much greater as the downturn gets worse, that the economy faces the prospect, unprecedented in the postwar period, of a freezing up of credit at the very moment of sliding into recession — and that governments face a problem of unparalleled difficulty in preventing this outcome.

[This statement was written by Robert Brenner, a member of the ATC editorial board and author of The Economics of Global Turbulence. References for all data cited here can be found in this book, especially in the Afterword.]

from ATC 132 (January/February 2008)
User avatar
ninakat
 
Posts: 2904
Joined: Tue Nov 07, 2006 1:38 pm
Location: "Nothing he's got he really needs."
Blog: View Blog (0)

Postby anothershamus » Tue Jan 22, 2008 2:09 pm

Both of these from Urban Survival ( http://urbansurvival.com/week.htm )

Collapse of Fractional Reserve Banking: I must be reading the Federal Reserve's H.3 "Aggregate Reserve of Depository Institutions and the Monetary Base" all wrong. If you scroll down to Table 2 and look at the not-seasonally adjusted figures for the "Reserves of depository institutions" you will see three columns on the left. Total (Reserves) "nonborrowed (reserves) and "required" (reserves).

The shocker is that the preliminary January 16th number showed that the required reserve of banks was $39,989 million dollars. This means how much money the banks claim to have on hand as their portion of the 'fractional reserve' banking system is (ballpark) $40 billion.

OK, the third column says the amount of reserves they are required to have by the Federal Reserve is only $38,278 million. (*$32.3 billion, ballpark).

OK, I've saved the scariest for last: Column #2. It says the amount of nonborrowed money (*money that the banksters didn't have to borrow to meet their reserve requirements was negative. In other words, if I am reading this right, the whole fractional reserve banking system's reserves required is being held afloat strictly by borrowed money at this point!

I've heard about people wanting to take money out of this account or that (*in major brokerage firms so far) but being told they may have to wait a week to get their money, but if I am reading the H.3 report right, that might soon happen to banks - and the specter of Bank Holidays may be on us sooner than we might like. The sharp-eyed readers who sent this along to me said they went back through the history of the Fed to 1959 and could find no similar event, but hey, maybe this will be massaged out when the next Fed H.3 update is released. You better pray it is.


Now, people have less cash and rely more on credit (debt). As the economy deteriorates circumstances will lead many to believe that they have no choice and/or realize that things are going to get so bad they have nothing to loose. You will see a run up in debt as people max out payday loans, personal loans, and credit cards. I suspect in anticipation of this the banks will start limiting cash advances, reducing credit commitments, and the amount of credit allowed to be advanced during a certain period of time. Once the general public realizes this it will accelerate the run on credit.

After all, does anyone really know the total outstanding credit limits the banks are committed to under personal lines? A panic of this type could further sap banks of working capital literally overnight.


A worse that 1929 situation looms large and could happen very soon!
)'(
User avatar
anothershamus
 
Posts: 1913
Joined: Fri Jun 23, 2006 1:58 pm
Location: bi local
Blog: View Blog (0)

more soros

Postby smiths » Tue Jan 22, 2008 10:04 pm

a sight for soros eyes



The worst market crisis in 60 years

By George Soros

Published: January 22 2008 19:57 | Last updated: January 22 2008 19:57

The current financial crisis was precipitated by a bubble in the US housing market. In some ways it resembles other crises that have occurred since the end of the second world war at intervals ranging from four to 10 years.

However, there is a profound difference: the current crisis marks the end of an era of credit expansion based on the dollar as the international reserve currency. The periodic crises were part of a larger boom-bust process. The current crisis is the culmination of a super-boom that has lasted for more than 60 years.

Boom-bust processes usually revolve around credit and always involve a bias or misconception. This is usually a failure to recognise a reflexive, circular connection between the willingness to lend and the value of the collateral. Ease of credit generates demand that pushes up the value of property, which in turn increases the amount of credit available. A bubble starts when people buy houses in the expectation that they can refinance their mortgages at a profit. The recent US housing boom is a case in point. The 60-year super-boom is a more complicated case.

Every time the credit expansion ran into trouble the financial authorities intervened, injecting liquidity and finding other ways to stimulate the economy. That created a system of asymmetric incentives also known as moral hazard, which encouraged ever greater credit expansion. The system was so successful that people came to believe in what former US president Ronald Reagan called the magic of the marketplace and I call market fundamentalism. Fundamentalists believe that markets tend towards equilibrium and the common interest is best served by allowing participants to pursue their self-interest. It is an obvious misconception, because it was the intervention of the authorities that prevented financial markets from breaking down, not the markets themselves. Nevertheless, market fundamentalism emerged as the dominant ideology in the 1980s, when financial markets started to become globalised and the US started to run a current account deficit.

Globalisation allowed the US to suck up the savings of the rest of the world and consume more than it produced. The US current account deficit reached 6.2 per cent of gross national product in 2006. The financial markets encouraged consumers to borrow by introducing ever more sophisticated instruments and more generous terms. The authorities aided and abetted the process by intervening whenever the global financial system was at risk. Since 1980, regulations have been progressively relaxed until they have practically disappeared.

The super-boom got out of hand when the new products became so complicated that the authorities could no longer calculate the risks and started relying on the risk management methods of the banks themselves. Similarly, the rating agencies relied on the information provided by the originators of synthetic products. It was a shocking abdication of responsibility.

Everything that could go wrong did. What started with subprime mortgages spread to all collateralised debt obligations, endangered municipal and mortgage insurance and reinsurance companies and threatened to unravel the multi-trillion-dollar credit default swap market. Investment banks’ commitments to leveraged buyouts became liabilities. Market-neutral hedge funds turned out not to be market-neutral and had to be unwound. The asset-backed commercial paper market came to a standstill and the special investment vehicles set up by banks to get mortgages off their balance sheets could no longer get outside financing. The final blow came when interbank lending, which is at the heart of the financial system, was disrupted because banks had to husband their resources and could not trust their counterparties. The central banks had to inject an unprecedented amount of money and extend credit on an unprecedented range of securities to a broader range of institutions than ever before. That made the crisis more severe than any since the second world war.

Credit expansion must now be followed by a period of contraction, because some of the new credit instruments and practices are unsound and unsustainable. The ability of the financial authorities to stimulate the economy is constrained by the unwillingness of the rest of the world to accumulate additional dollar reserves. Until recently, investors were hoping that the US Federal Reserve would do whatever it takes to avoid a recession, because that is what it did on previous occasions. Now they will have to realise that the Fed may no longer be in a position to do so. With oil, food and other commodities firm, and the renminbi appreciating somewhat faster, the Fed also has to worry about inflation. If federal funds were lowered beyond a certain point, the dollar would come under renewed pressure and long-term bonds would actually go up in yield. Where that point is, is impossible to determine. When it is reached, the ability of the Fed to stimulate the economy comes to an end.

Although a recession in the developed world is now more or less inevitable, China, India and some of the oil-producing countries are in a very strong countertrend. So, the current financial crisis is less likely to cause a global recession than a radical realignment of the global economy, with a relative decline of the US and the rise of China and other countries in the developing world.

The danger is that the resulting political tensions, including US protectionism, may disrupt the global economy and plunge the world into recession or worse.

The writer is chairman of Soros Fund Management

Copyright The Financial Times Limited 2008
User avatar
smiths
 
Posts: 2205
Joined: Wed May 18, 2005 4:18 am
Location: perth, western australia
Blog: View Blog (0)

Postby schadenfreude » Thu Jan 24, 2008 6:31 am

This smells like a 'blame a minion' play to me.

http://www.bloomberg.com/apps/news?pid= ... refer=home
schadenfreude
 
Posts: 23
Joined: Wed Oct 31, 2007 2:41 pm
Blog: View Blog (0)

Postby ninakat » Thu Jan 24, 2008 2:05 pm

Faith In The Fed: The Last Bubble To Pop
by Mike Shedlock

A mad rush by Congress, Bush, the Treasury department and even foreign central banks to "Do Something" is now underway.

If the Fed, Congress, and Central Banks would just stop and think, they would realize they already "did" something. They created the biggest credit bubble in history and we are on the backside of the credit bubble bust right now. It's too late to do anything about that now.

Leverage Continues To Unwind

Market action now suggests leveraged hedge funds are selling what they can (oil stocks like Exxon Mobil (XOM) and tech stocks), not what they want (junk mortgage backed securities). The latter simply has no bid. Recent action smacks of margin call selling or a derivative blowup somewhere.

A Tipping Point For Tech was reached and latecomers hiding out in Apple (AAPL), Research In Motion (RIMM), Cisco (CSCO), Amazon (AMZN), or Motorola (MOT) have been punished mercilessly. Tech is now catching up to financials on the downside.

US Bureaucracy In Action

The US is in a Mad Rush To Nowhere.

"Testifying before the Senate Finance Committee, the official, Peter Orszag, said workload issues at the Internal Revenue Service would prevent the mailing of rebate checks until after the peak tax filing in late May or early June.

And then it could take 8 to 10 weeks to distribute the checks, meaning the impact of the action might not be felt until the second half of 2008 or early 2009."

Add that to the growing list of reasons the Fiscal "Stimulus" Plan Doomed To Fail.

ECB Attempts To Slay Dead Dragon

Meanwhile, across the ocean the ECB valiantly attempts to fight inflation.

"The European Central Bank President Jean-Claude Trichet moved to quash speculation that he'll follow the Fed's lead, saying he's committed to fighting inflation. Investors shrugged off the comments and raised bets on an ECB interest-rate cut. Yields on June rate futures dropped 20 basis points to 3.68 percent."

Those placing faith in the Fed, Congress, or foreign central banks to do something intelligent here need to think again. Faith in the Fed specifically and Central Banks in general has reached bubble proportions. It will be the last bubble to pop.
User avatar
ninakat
 
Posts: 2904
Joined: Tue Nov 07, 2006 1:38 pm
Location: "Nothing he's got he really needs."
Blog: View Blog (0)

PreviousNext

Return to General Discussion

Who is online

Users browsing this forum: No registered users and 4 guests