Global economy, anyone?

[stephenc]

Our interest rates just soared again:

http://news.bbc.co.uk/2/hi/asia-pacific/7617976.stm

 

[faithfulchild]

* tipatoes-in*

Hey...USA, yous let us all down!

Oh well, we still love ya! It'll all
turn around after election...I hope!

*tipatoes out*

 

[stephenc]

I suppose there's not much to say...but I'm always surprised with how little expertise these "expert" economists are willing to part with when interviewed about the situation. It's like they might as well ask me what happens next!

 

[Cosmic Charlie]

My virus alert filter went off like a rocket when I tried to access this link.

Just saying....

 

[stephenc]

My virus alert filter went off like a rocket when I tried to access this link.

Just saying....

What, the BBC? You'd think they were quite reliable...

Huh!

 

[stephenc]

I suppose there's not much to say...but I'm always surprised with how little expertise these "expert" economists are willing to part with when interviewed about the situation. It's like they might as well ask me what happens next!

I take this back; just watched panel debate full of predictions of doom for "the likes of me", that is, people with largeish house loans (which is any house loans taken up over the last ten years).

(I don't even know what "Fannie Mac" does. Do they make Cheeseburgers?)

But seriously; I sure hope somebody knows what they're doing, it seems a lot of people all around the world may be struggling next year.

And, yes, of course there are people who struggle already.

 

[ShannonMcCatholic]

Fannie May makes great chocolates....

 

[InTheCloud]

Time to get rid of the US dollar. I have been talking with local politicians about that. There is a maverik in Mexico who wants to peg the peso to silver again.

Greenspan (artificially low interest rates), Clinton (lest the housing market artifically boom in a middle class populism), Bush (huge deficit again, lets the mistakes of the FED and Clinton flourish and deepen while leaving that for the next administration), did nothing to stop the bubble from growing and maistream economical advisor in the financial market were the most responsible for the mess.
I have yet to heard any kind of responsible policy from either McCain or Obama.
The problem according to game theorists is that right now they cannot say anything. They straight talks right now comes from Ron Paul who was the one making the right questions on the US monetary policy all along. The Congress (both parties) were clueless including both US cantidates to the Presidency
The US have to choose his poison.
A brief but painfull depression caused by expensive money (hight interest rates) and bank colapses or hyperinflation and stagnation casued but cheap but worthless money. I´ll take the first, but history shows politicians often go for the second.
In my opinion this is a proof of the problem with fiat money. Nixon was the one to blame for that.
And you have seen nothing yet. The colapse of Social Security and Medicare will be far more serious but are several years in the future. And again they are too sacred to touch.

 

[InTheCloud]

http://www.independent.org/blog/?p=186



Ticking Time Bomb Explodes, Public Is Shocked

By Robert Higgs on Sep 10, 2008 in Budget and Tax Policy, Economics, Elections, Healthcare, Housing, Politics, the State
The failure of Fannie Mae and Freddie Mac, setting in motion the biggest government bailout/takeover in U.S. history, brings a grim sense of fulfillment to competent economists. After all, what did people expect, that water would flow uphill forever?
This financial mega-mess is the same sort of event as the collapse of the USSR's centrally planned economy, another economically unworkable Rube Goldberg apparatus that was kept going, more or less badly, for decades before it fell apart completely. Along the way, of course, famous (yet actually unsound) economists assured the world that everything was working out splendidly. As late as 1989, when the pillars were crumbling on all sides of the temple, Nobel Prize winner Paul A. Samuelson informed readers of his widely used textbook, "The Soviet economy is proof that . . . a socialist command economy can function and even thrive."
In the future, we will see a similar breakdown of the U.S. government's Social Security system, with its ill-fated pension system and its even more inauspicious Medicare system of financing health care for the elderly. These government schemes are fighting a losing battle against demographic realities, the laws of economics, and the rules of arithmetic. The question is not whether they will fail, but when—and then how the government that can no longer sustain them in their previous Ponzi-scheme form will alter them to salvage what little can be salvaged with minimal damage to the government itself.
Our political economy is rife with such catastrophes in waiting, yet the public always seems startled, and outraged, when the day of reckoning can no longer be deferred, and another apartment collapses in the state's Hotel of Impossible Promises, loading onto the taxpayers more visibly the burden of sheltering the previous occupants.
Each of these time bombs has at least one element in common: it promises current benefits, often seemingly without cost; but if it must acknowledge a substantial cost, it places that burden somewhere in the distant future, where it will be borne by somebody else. From the standpoint of society in general, every such scheme is a species of eating the seed corn. It satisfies the public's appetite to consume something for nothing right now, with no thought for the morrow. It represents the height of irresponsibility by permitting people to live higher today than they can truly afford, financing this profligacy by borrowing recklessly and by taxing politically weak and ill-organized people in order to shower benefits on politically strong and well-organized special interests.
Call it democracy in action or utterly corrupt governance; they are the same thing.
The architecture of the Hotel of Impossible Promises is not arcane. All competent economists understand these things. Ludwig von Mises explained as early as 1920 why a centrally planned economy could not work as a rational system of allocating resources. The reasons why Social Security, especially its Medicare component, and many other such government programs contain the seeds of their own destruction have been explained time and again. Are the politicians who construct these structures really such idiots that they cannot understand the logic of what they are doing?
Not at all. But they are not striving to create economically viable institutions that serve the general public interest; they are feathering their own electoral nests in the only way they can in the context of our political institutions. As H. L. Mencken explained back in 1940, the politicians "will all promise every man, woman and child in the country whatever he, she or it wants. They'll all be roving the land looking for chances to make the rich poor, to remedy the irremediable, to succor the unsuccorable, to unscramble the unscrambleable, to dephlogisticate the undephlogisticable," because they understand that "votes are collared under democracy, not by talking sense but by talking nonsense."
And are members of the public so dense that they will fall for such promises? Yes. Moreover, they are greedy, impatient, and immoral, because the present benefits they hope to gain via politics, however unsustainable in the long run, come entirely at the expense of the taxpayers from whom the government extorts its revenues.
"Politics, under democracy," Mencken wrote more than 80 years ago, "resolves itself into impossible alternatives. Whatever the label on the parties, or the war cries issuing from the demagogues who lead them, the practical choice is between the plutocracy on the one side and a rabble of preposterous impossibilists on the other." And in a declaration even apter now than it was at the time, he concluded that what democracy "needs beyond everything is a party of liberty."
The trouble is, however, that now, even more than then, the American people have little interest in liberty. Instead, they want the impossible: home ownership for those who cannot afford homes, credit for those who are not creditworthy, old-age pensions for those who have not saved, health care for those who make no attempt to keep themselves healthy, and college educations for those who lack the wit to finish high school. Moreover, they want it now, and they want somebody else to pay for it.
If you think that Fannie and Freddie's bust is a big deal, just wait until Medicare comes crashing down. Then, the wailing and gnashing of teeth will be truly unbearable. As that day rapidly approaches, however, you'll notice that the politicians are doing utterly nothing to forestall it.

 

[InTheCloud]

Henry Paulson's Frankenstein
SEPTEMBER 17, 2008, 11:33 AM
Link to This
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TOPICSLegal INDUSTRIESFinancial Services

This is how a federal bailout works these days.

The government purchases 79.9 percent of the company in question. It can't be more
than that, because if it goes over the magical number of 80 percent, the company's debts
are then required to be consolidated onto the federal government's balance sheet.
Keeping it at 79.9 percent allows the government to maintain the fiction that it is still not
responsible for the company's solvency.

The purchase isn't even a purchase of the stock of the company. Rather, it is a purchase of
warrants giving the federal government the right to buy some number of shares. This
permits the federal government to further claim that it doesn't even have an ownership
interest.

Steven M. Davidoff, writing as The Deal Professor, is a commentator for DealBook on the
legal aspects of mergers, private equity and corporate governance. A former corporate
attorney at Shearman & Sterling, he is a professor at the University of Connecticut School
of Law. His columns are available at The Deal Professor blog.
Meanwhile, the necessary debt funding is placed at a politically appropriate level. The debt
can't go too high in the capital structure of the company being rescued, because that
might cause more turmoil or tick off foreign buyers.

Rather, the debt must go in just right, like porridge — sufficient to knock out the security
holders it is politically acceptable to dilute (usually preferred and common stock holders),
but keep other interests happy.

Then, you probably want to replace management; after all, they are the ones that got you
into this mess. (It will be even better if the government actually takes a stab at fighting
moral hazard by stripping the executives of their pay packages.)

The details of the bailout of American International Group are still emerging, but it is
already clear that it follows these lines — similar to the rescues of Fannie Mae and Freddie
Mac.

There will be an $85 billion revolver loan, and the government will have a 79.9 percent
interest. It is unclear if these are warrants or an actual interest, but I suspect warrants. The
loan will be for two months and have a yield of three-month LIBOR plus 8.5 percent
(about 11.3 percent these days).

To be honest, I hope they do bring back Hank Greenberg to run it. It is time to forgive him
of his sins for the sake of the country. Sorry, Eliot Spitzer.

I'm hard pressed to say how we got into this mess yet again so quickly. It is certainly a
lesson in the need for trust in the market to survive, the dangers of precipitous share-
price falls and the weird role the ratings agencies still play.

Jim Cramer, the host of "Mad Money," said last night it was the fault of the short-sellers,
and while I usually hesitate to agree with him, I do think that we should put limits on
naked shorting of financial institutions. Now.

(Notably, the Securities and Exchange Commission responded to this crying need
Wednesday morning by announcing a complete ban on naked short-selling effective the
following day.)

Again, we have the vague notion of "too big to fail" being thrown about.

Basically, A.I.G. was too interconnected — and its failure came on too quick — to let it fail.
I'm going to take this for true, because everyone is saying it.

But the problem now for Treasury Secretary Henry Paulson and his crew is that they cannot
turn back. When push comes to shove and a "too big to fail" company comes along, the
private sector now knows they can step back and let the government shoulder the burden.

That is what happened with A.I.G.: Goldman Sachs and other Wall Street firms couldn't or
didn't put together a loan package. This was certainly because of the state of the markets
— but A.I.G. clearly has sufficient assets to support such a loan, and the Fed got security
over all of A.I.G's assets for its loan. The problem is that these assets are illiquid.

But Goldman and Morgan Stanley are suffering from the same whispers as the other banks
did. This is not the time to take on more leverage if you are a financial institution, and
perhaps not big enough to not fail. Why do so, if you know the government will pick up
the slack?

Paulson and Co. have now backed themselves into a corner. They can allow the Lehmans
of the world — those who fail to collapse too quickly or are otherwise unfortunately too
small — to go under, but they can't let companies like A.I.G. go. And after Bear, Fannie,
and Freddie, the private sector knows that, too.

People will throw around the word "moral hazard" a lot today. But this is not about that
concept: this is what we call free riding. The private financial companies are letting their
good neighbor do the clean-up, and they're not helping because they know the neighbor
will do it anyway.

In the meantime, I fear that we are creating Frankenstein.

Fannie Mae and Freddie Mac are deliberately being grown over the next year and a half to
accommodate the housing crisis.

Meanwhile, the semi-strong banks are eating the weak financial institutions, creating
more too-big-to-fail institutions. There may be nothing wrong with that, but in its race to
provide liquidity (and not have to be seen cutting interest rates), the Fed is engaging in
some incredibly risky maneuvers.

First, the Federal Reserve just adopted a rule that allows insured banks to accept equities
as collateral. If this equity goes south (as equity is tending to do these days), the Federal
Deposit Insurance Corporation's insurance fund — in other words, the government — is on
the hook.

Meanwhile, the Fed also announced Sunday that it would take as collateral much riskier
assets, including equities, junk bonds, subprime mortgage-backed securities and even
whole mortgages, in exchange for emergency loans through the Primary Dealer Credit
Facility.

And finally, my colleague, Professor Patricia McCoy, an expert on the subprime crisis,
recently pointed out to me that Bank of America is actually now asking that its capital
requirements be reduced.

Bank of America is looking to take on more leverage now! BofA is definitely in the too-big-
to-fail category.

All of this is combining to make the federal government the direct and indirect guarantor
of the entire financial system and its investments. Henry Paulson may now run the United
States economy (our President was again noticeably silent yesterday), but I hope for our
sake that Mr. Paulson soon takes steps not only to delever these institutions but to shrink
them sooner than he has previously announced.

Otherwise, we risk being the cat who swallowed his own tail.

Final note: Of all the amazing things I have seen this week, perhaps the most stunning is
that Barclays agreed Tuesday to buy Lehman Brothers` U.S. investment bank operations for
$250 million (if you exclude the real estate purchase). Barclays, Bank of America and
JPMorgan Chase are going to be very happy campers a few years from now.

 

[InTheCloud]

And they just bailed out AIG

http://www.philly.com/inquirer/opinion/20080914_Let_the_markets_find_their_own_recovery.html
Posted on Sun, Sep. 14, 2008



Let the markets find their own recovery


Robert P. Murphy
is a senior fellow in Business and Economic Studies at the California-based Pacific Research Institute
The takeover of mortgage giants Fannie Mae and Freddie Mac, yet another expansion in government intervention from the Bush administration, could end up costing hundreds of billions of dollars and in the long run will only make the U.S. financial crisis worse.
The costs of the takeover are scary. By pledging to inject capital into the troubled giants, the government has just put U.S. taxpayers on the hook for possibly huge sums if the housing market deteriorates further.
The two firms reported combined losses of $11.7 billion in the last three quarters alone, and many analysts expect the bleeding to continue for years. In last Sunday's announcement, the government already pledged up to $200 billion in government funds if Fannie and Freddie need them to remain solvent. Saddling taxpayers with more liabilities is always dangerous, but the timing of the bailout could hardly be worse.
If Congress defangs the alternative minimum tax, as it did last year to prevent a large increase on the middle class, the latest Congressional Budget Office forecast projects a record deficit of more than $500 billion for the fiscal year starting Oct. 1. Making the federal government ultimately responsible for roughly half of the nation's mortgages will make it impossible for the next president to take other measures to help a sputtering economy, such as tax relief.
In exchange for these potentially huge costs, the takeover of Fannie and Freddie offers few benefits. On Monday, the stock market rallied, indicating that investors were reassured by the move. Yet these gains were more than erased the next day. Not only has the mortgage move failed to fix the financial markets, but it will arguably make things worse.
Because of the desire to avoid "moral hazard" - encouraging risky investments by large firms because they believe the government will bail them out if things turn sour - the government-engineered rescues of the Bear Stearns Cos. Inc. and now Fannie and Freddie were designed to punish common shareholders. Fed Chairman Ben S. Bernanke and Treasury Secretary Henry M. Paulson Jr. did not want to reward bad bettors on Wall Street with taxpayer money. Yet this insistence on stern terms might have doomed Fannie and Freddie, making the takeover inevitable.
Private investors are now much more reluctant to inject billions into solvent yet illiquid enterprises because they know they might be left holding the bag in the event of another bailout of a firm deemed "too big to fail." This paradoxically makes it difficult or even impossible for such firms to raise private funds, and then they have no choice but to turn to the government.
In a vicious cycle during the last year, investor behavior has been based less and less on fundamentals and more on government announcements. If Paulson's secret strategy has been to show that throwing around billions of dollars won't fix a broken economy, taxpayers can only hope this was the final demonstration of the rule. This is hardly the path to economic recovery.
When it comes to housing, the American public wants ever-rising prices, and yet they want homes to be affordable. They want the government to encourage banks to offer below-market mortgage rates, and yet they don't want taxpayers to be on the hook if those loans turn sour. The public needs to remember that the government cannot create wealth, but only redistribute it. Ever larger government bailouts will only weaken investor discipline, and ensure the need for more "rescues" down the road. If the politicians would just leave the markets alone, investors could assess their losses and then get on the road to recovery.

 

[hsilgne]

It appears to me that most economies, is nuttin but a house of cards that is set to collapse. Just a matter of time. If I ran my business like Canada and the US run their budgets - well, it just wouldn't exist. I sure wish I could just keep spending, spending and spending with only a forecast that the business will generate the revenues to cover the spending as collataral.

I really just do not get it.

 

[InTheCloud]

There is no "moral hazzard" for most politicians, that allows them to take risks they should not take with other people money. Sadly that is the problem with shareholders owned big bussiness like most huge corporations, the CEOs are just well payed employees with no moral hazzard too. If the business goes under is the shareholders problem, not theirs.

 

[ShannonMcCatholic]

Those editorials were pretyy interesting, thanks resoto!

It's an area where I am woefully underinformed.

 

[Sianelle]

Romans: 13.8. Owe no man anything, but to love one another. For he that loveth his neighbour hath fulfilled the law.

When I was still a health professional with a 'good' job I had all manner of lovely things, good clothes, a mortaged apartment I rented out for $$$$$, credit cards, hi-tech cell phone, etc etc. Then I became ill and I could no longer work and slowly at first and then with increasing speed the whole house of cards came tumbling down.
It took almost three years of awful stress and heartache, becoming a registered bankrupt, having no income at all for some months, struggling to pay for medication and doctors & so on, before I managed to get myself on my feet again. I'm glad I had my faith, my Rosary actually started to fall to pieces through being used so hard. God+ is utterly kind and good and He+ does indeed answer prayers.
These days I have no bank account, I use no instruments of credit at all and I buy all my clothes at the Thrift shops. My bicycle is my main means of getting around as I don't own a car and I don't want one either. And I am wonderfully happy and content. I think this modern Western Civilisation of ours is being given a very hard lesson at the moment, - just as I was given a very hard lesson when I wasn't listening to the voice of God+ in my heart either.
Live simply, live modestly and don't sell your soul to the usurers (sermon over).