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Scary indeed. Oh, FIRST! LOL!
Second!
Back from night out. Time to go to sleep. Only CR is capable of bringing me back here one more time before hitting the sac.
Can't wait until the next day in this saga.
to me it seems the IBs and the Cramer types have been spoiled/conditioned by the greenspan years to expect a bailout at the first sign of trouble.
i say, let 'em burn!
"And heres the truly scary thing about liquidity crises: its very hard for policy makers to do anything about them"
I dont agree. In the event of a disaster that wiped out all banks each person on the planet could be given as many digits as is needed to instantly create a booming economy.
All that is required is that a seller is willing to part with their thing for your digits and you are prepared to allow them to have your digits in return for the thing they dont want.
The current problem surely revolves around the large number of things that nobody wants rather than the amount of digits able to buy them?
If things are now worthless then those peoples digits are gone too. But even so there is an infinite number of digits looking for some person who wants to spend them.
What did the ECB do yesterday? It seems it did nothing. It already had a policy of supplying digits to anybody who wanted them at 4%. Seems like a massive number of people wanted digits. The only difference was that the ECB required good things in return.
"In the event of a disaster that wiped out all banks each person on the planet could be given as many digits as is needed to instantly create a booming economy."
Uh no. If they just gave money away we would be a hyper inflationary banana republic. They are not that abysmally stupid, that 'solution' works for about a day before the economy blows up.
The only thing they can do is give debt away - cheaply or more expensively. They've been giving away debt cheap for a long time now, which is what lead to these little problems. The difficulty being that an economy can grow fundamentally (from a booming population or new productivity), or from accumulation and spending of debt. Since 2001 or so we've bee growing from debt.
But the problem is you can't take on debt forever, eventually debt servicing exceeds income. Or from other reasons like a credit crunch. So entities prudently don't take on new debt, and trying to induce them to is like 'pushing on a string'.
Econ 101 ...
Tweaked and cross-posted from last thread as it is more pertinent here.
What I thought was scarier about Paul Krugman's column (who, whatever you think of his political leanings, is VERY good and respected for research into monetary crisis) was the following passage. It seems the person most able to help if we get into a liquidity crisis may be Dubya, who will probably not be ideologically inclined to do so.
"And heres the truly scary thing about liquidity crises: its very hard for policy makers to do anything about them.
The Fed normally responds to economic problems by cutting interest rates... It can also lend money to banks that are short of cash: yesterday the European Central Bank, the Feds trans-Atlantic counterpart, lent banks $130 billion, saying that it would provide unlimited cash if necessary, and the Fed pumped in $24 billion.
But when liquidity dries up, the normal tools of policy lose much of their effectiveness. Reducing the cost of money doesnt do much for borrowers if nobody is willing to make loans. Ensuring that banks have plenty of cash doesnt do much if the cash stays in the banks vaults.
There are other, more exotic things the Fed and, more important, the executive branch of the U.S. government could do to contain the crisis if the standard policies dont work. But for a variety of reasons, not least the current administrations record of incompetence, wed really rather not go there.
Lets hope, then, that this crisis blows over as quickly as that of 1998. But I wouldnt count on it."
Roubini had similar things to say on liquidity crisis and in scarier detail.
RGE - Worse than LTCM: Not Just a Liquidity Crisis; Rather a Credit Crisis and Crunch
Dr Deflation
Your econ 101 lesson to me falls apart once you have deflation:-)
There are ways around the pushing on the string argument in a deflationary scenario simply because the argument i have made is hyperinflationary.
econ 101?
Worried,
Don't act like deflation is the end of the universe. That only appears to us because we've lived through an extraordinary period of inflation - caused by a population boom, technology boom and a wartime economy (we've been in continual war for about 80 years now). War is highly inflationary.
If you study it historically deflation is the norm in peacetime, and is a regular occurance. The last time we had it was rather bad, we even called it the great depression we disliked it so much. And since then we've done everything possible to avoid that happening again. Unfortunately in a healthy capitalist economy a little deflation now and then is a GOOD thing. It rights the wrongs of inflation. It corrects inventory and prices, and establishes the value of savings, and prices risk.
Anyhow give it up - the Fed is scared of deflation. Go peruse the BIS website for all the talks Bernanke and co have spilt ink over. But if you don't believe they don't want hyperinflation even more (orders of magnitude), then you're living on a different planet.
See, deflation would be bad and causes people to lose their jobs and such. Hyperinflation leads to regime change, like central bankers and political parties get run out of town. Which do you think they would choose?
Oh yes, and on exotic things the Fed could do. Sure, go look up the speech that gave Helicopter Ben his moniker. Back around 2002 or so. One would be to buy further up the yield curve. Can you say Treasury Rally? They have even proved they wouldn't have to do it, just the threat is enough.
Dr Deflation
You see deflation i dont see hyperinflation necessarily. But how can you have deflation? Sure a little bit. Can we agree on that?
Here is another tidbit of reassurance
Impact of Mortgage Crisis Spreads - WSJ.com
I si just a nice summary of all that has been happening and how serious it is. It was quite good and it certainly has an effect.
The BoJ also injected some liquidity. Abiut $8 billion.
There is NO hedge to liquidity issues. Policy makers can try to pump the system, but without liquidity it doesn't take long at all for financial institutions to get into trouble. See CFC below ... having to keep martgages on its books because it cannot sell them in the market. Now that is a real potential disaster.
SEC combs books of Wall Street giants for hidden losses: rpt
SEC combs books of Wall Street giants for hidden losses: rpt - MarketWatch
The U.S. Securities and Exchange Commission is checking the books at top Wall Street brokerage firms and banks to make sure they aren't hiding losses in the subprime mortgage meltdown, the Wall Street Journal reported Friday,
The European Central Bank said that it will hold a 3-day tender on Friday to add more liquidity to the money market, according to wire reports.
ECB to hold 3-day tender: reports - MarketWatch
Guys, go to sleep. I'll keep a watch over Europe markets until tomorow AM. You will have long day Friday.
It is nice to know that the BoJ "injected liquidity". Silly me I thought thios was part of what got us into this problem to start with....
"in a healthy capitalist economy a little deflation now and then is a GOOD thing. It rights the wrongs of inflation. It corrects inventory and prices, and establishes the value of savings, and prices risk. "
I agree.
Infaltion does the reverse: It creates an environmeny where people have no way of pricing risk or assets - there is no time to check, verify and compare prices because just the passage of time make you loose money. This can easily lead to break up of the social system - see south America in the late 70s and 80s.
LoL
You are very right Yal, but that's what the BoJ did
My head is about to explode
Ha, funny headline:
Bernanke, Paulson Were Wrong: Subprime Contagion Is Spreading
Bernanke Was Wrong: Subprime Contagion Is Spreading (Update2) - Bloomberg.com
Banks are in the dark as debt horror story unfolds
Viewpoint: Banks are in the dark as debt horror story unfolds |
Business |
The Guardian
excerpts
("If Ben Bernanke was right in alluding to sub-prime losses at $50bn-$100bn, then only a small percentage appears to have surfaced so far, and since he made those remarks, losses have likely extended across a much broader credit universe than sub-prime."
He could have added that the slime has reached unlikely places. Yesterday Dutch merchant bank NIBC was the latest obscure continental European lender to confess. It has notched up losses of 137m (£93m) on US asset-backed securities and warned the figure would rise.)
What in the world is going on?
It's currency interventions galore
Central Banks Again Intervene - WSJ.com
Currency intervention?
EUROPEAN CENTRAL BANK ADDS 61 BILLION EUROS IN LIQUIDITY
ECB injects further 61 billion euros into jittery markets
This time, however, it didnt meet all the demands made of it. The ECB said it received 62 bids totalling just over 110 billion euros.
ECB injects further 61 billion euros into jittery markets - MarketWatch
Carlomagno, yes in Asia two ro thre countries are trying to hold their currencies up according to that wsj link.
Besides the main topic of the article which is that all central banks are rpinting like nuts and injecting cash to
help with the credit crunch.
REBEAR now is saying the ECB pumped 61 billion euros.
This is a hell of a lot of money in two days.
What in the world is going on?
How bad is it?
dis - thanks, I don't subscribe to WSJ so can't get the whole article. Reference to currency interventions must be below the cutoff for non-subscribers. I wouldn't call the ECB and Fed moves "currency interventions".
In any case, the City does not appear to appreciate the news. FTSE is falling of a cliff at the moment: ^FTSE: Basic Chart for FTSE 100 - Yahoo! Finance
BAAA---HA-HA-HA-HA-HA!!!!
Stupid greedy capitalist PIGS!!!
Big man, pig man
Ha-ha, charade you are!!!
You well heeled big wheel
Ha ha, charade you are!!!
Gonna be great when you bastards are scrubbing the toilets for the working class. We'll make sure you can't kill yourselves to take the easy way out, either, stupid greedy pigs!!!
Carlomagno, the Fed and the ECB are trying to provide liquidity to get credit moving and support their target rates.
A bunch of others are injecting liquidity also, the BoJ, Australia, Singapore
Indonesia, the Philippines, and Malaysia
are intervening to support their currencies according to the article.
Bloomberg TV just refered to rumours about emergency FOMC meeting next week to cut rates!
dis: What in the world is going on?
It is quite difficult to get a clear picture from the news reports, but my best take on this:
Yesterday's ECB tender was only for one day, and with emergency conditions (4%, no limit). Today's tender is following the standard operations: limited amount, longer term, bids, resulting in a 4.05 % rate. I assume it was necessary to not drain all the liquidity that was injected yesterday, and as money markets still went up into the 4.2 or 4.3 % range vs the 4 % target during the night.
The Chinese said "Since the Americans and Europeans are having so much fun, let's join the game and let our Shanghai index drop by 0.1% today as a demonstration of our immense respect for the consumers of our exports"
I am still waiting expectantly for the nuclear reaction when the Chinese finally realised that they have already run off the cliff. Interesting times indeed...
Well, I woke up early to watch the cricket (life outside the stock market does go on - if, in 2007(not 1907) you can call cricket 'life' ) but looking at the early market action - heck, the stock ticker is more exciting - considering its cricket we are talking about I suppose that's not too difficult. Since there's no point in DVRing one of them I'll just have to keep switching between the two.
-K
Bernanke, Paulson Were Wrong: Subprime Contagion Is Spreading
They had plenty of ignoble company in that regard:
Greenspan, Freddie, Fannie, pertty much the entire mainstream financial press.
(Apologies to Colonel Kurtz)
I love the smell of non-containment in the morning ... it smells like ... vindication.
I hope ECB has enough to lend when
housing in Europe starts 'correcting'.
as we all watch the world markets "decouple" from the US this morning I am wondering when we will begin to see the mass layoffs needed to rid the financial community of worthless economists & strategists?
risk capital,
LoL !
Bloomberg TV just refered to rumours about emergency FOMC meeting next week to cut rates!
WHA-HA-HA-HA-HA!!
That should be good for the carry trade SLIME!!!
Praise be to Jah!!!
REBear:
Eurozone housing is difficult to
assess. Spain is definately a bubble with severe economic destortions; France and Italy bubbles with less economic impact; Germany still depressed prices from the 1990s. The ECB will react to the Eurozone aggregate, we'll see how big the impact will be when the bubbles burst.
UK real estate bubble is another animal. That one's scary.
btw: In my corner of the Eurozone, real estate loans are still 20-30 % down payment, no negative amortizations and at least partly fixed rates. Extremely old-fashioned and boring.
dis-
The VaR assumptions are likely being reworked en masse this morning "due to the recent turn of events"...
these morons crack me up!
central_scrutinizer - I think plenty of these people knew that the problem was not contained, but central bankers, treasury secretaries, etc. are not paid to appear on TV saying that the world is about to come to an end.
Illustration from Europe: the Slovenian CB governor recently went public saying that Europe would take a significant hit due to the US subprime exposure. He was quickly put back in his place by some of his peers. (He's new, maybe he didn't read the script yet.)
Euro,
The only non-bubbly real estate markets are in German-speaking countries. Larger or smaller bubble is everywhere else. There are terrible bubbles is Eastern Europe.
I'm not sure that the sanity of Germany will help. If you have one hand in boilding water and one is ice-cold one, on average everything is fine but the pain is still the same.
poszi: "There are terrible bubbles is Eastern Europe."
Sure, but they are outside the Eurozone. Within the Eurozone, we have Spain as a considerable mess. But overall, the real estate bubbles have not wiped out the savings rate, produced large current account deficit, and created loads of unservicable debt (well, there may be surprises on the last one).
But in the end, the effects of the credit bubble that started in the US will be global, no doubt. Just the question how they play out.
Euro,
Thanks for the update.
Add to that corrections in Asia and Russia.
I have friends in India who tell me that housing has not corrected in the last 25 years and therefore will never correct!
CENTRAL BANK ACTIONS
Aug. 9
ECB $131 billion
Federal Reserve $12 billion
Bank of Canada $1.1 billion
Aug. 10
Japan $8.5 billion
Australia $4.2 billion
ECB $84 billion
Total $240.8 billion
source MarketWatch - Stock Market Quotes, Business News, Financial News
future testimony in front of Congress-
"OK, so I had all these numbers in front of me, plugging default rates into my computer model, 0%, .1%, .2%, .3%, .4%, and .5%....the numbers all suggested extremely low chance of default, then-
they come to me on August 9th, 2007 and tell me to force through a default rate of 9% and HOKEY-JESUS the downside looked awful, who-da-thunk-it?
That said, it would be my opinion that now, the biggest long-term risk is a growing lack of confidence that could increase should something be uncovered at BS or one of the other investment banks. I believe a recession is likely unavoidable, but, in no way indicative of something more severe, I believe that the chances of a more severe meltdown are extremely small.
The yen is looking mighty strong, smug hedgie scum. BAA-HA-HA-HA-HA!!!
"Total $240.8 billion"
What was the amount of LBO unsaleable debt held by the banks?
You could see it in Bush's face and choice of words yesterday at the presser. What galls (as usual) is he was giving the press pack a big fat clue about how illiquid things were about to get, and instead of trying to cut through his smoke about the economy they asked their canned questions about Iraq and Pakistan.
Seems the liquidity problem is going round the world again this round:
"Fed Funds Begin Trading at 6%; Highest Opening Level Since 2001"
Fed Adds $38 Bln in Funds, Most Since September 2001 (Update9) - Bloomberg.com
Euro,
I'm not sure it does matter which country is in eurozone and which is not for the total impact. EU is currently very deeply interconnected. Eastern Europe has fairly low GDP but is growing very quickly and Germany greatly benefits from the trade with these countries.
I'm also not sure the overall problems are lower than in the USA. The bubble in Spain and Ireland is absolutely mind-boggling. And Spain was an important engine of the EU growth in recent years.
Ireland was a very special case.
A very well educated people doing not much at all. Once the internet arrived Ireland was connected to the world in a way it could not otherwise have been and it got massive EEC funds to transform communications. In 1983 people were still winding a handle to ring a bell and talk to the operator to get connected to the guy next door:-) Meanwhile electronics and software was already well established.
Spain has for years been a very popular place for Brits and Germans to visit - its a desirable location.
Russia finding it has economic clout will probably keep them interested in being cooperative before they are invading of eastern europe but it remains a risk. There are many reasons for Eastern europe to return to its former glory.
poszi, you are absolutely right that these economies are closely connected and the bursting bubbles will have their impact. I think that it makes a difference though for ECB policy whether an event hits in the Eurozone directly, or whether one from outside creates knock-on effects.
As for size, bubbles are difficult to quantify. Spain's coastal region is our California-Florida bubble-wise, but with less overall economic importance.
My view on the economic impact of the bursting bubbles is that it will depend on the macroeconomic distortions created, and here the Eurozone has a fairly balanced household savings rate and current account going in its favour. But short term there will be a massive hit here too, no doubt.
The ECB is reacting to US troubles which are outside the eurozone
Granted the scale of the problems is big and Nasty
surprisingly my ohio real estate contact tells me is it still very busy in their office and has been since mid February. Inventory on cheaper property is still going higher though.
Euro,
I agree that it is hard to qualify and the contest for the craziest bubble would not be clear. But I think Spain is worse than even California and Florida. Last year, they started about 900,000 dwellings in a 43 mil country. USA had about 2 million in 300 mil country at the peak of the bubble. The whole US West region (as of census) had at most 500,000 starts. And is about 50% larger than Spain population-wise. The ratio of prices to income is equal or worse than the worst American cities. In Spain, construction is almost 20% GDP and the economic impact will be larger.
Europe may be saner in other aspects of the economy (as a whole, the southern Europe managed to have also enormous imbalances) but the housing problems are on par with USA or worse.
I casually mention to people i meet when at my second job, or my first job about what has been going on in the markets that last few weeks..and people just stair at me with this blank look...or they say..what are you talking about...are people really this disconnected....amazing.
poszi - re: spain, are you taking into account second homes bought by non-resident foreigners? I suspect there are many given the Spain's huge popularity as a holiday destination. I do however agree that Spanish real estate has experienced a bubble.
I casually mention to people i meet when at my second job, or my first job about what has been going on in the markets that last few weeks..and people just stair at me with this blank look...or they say..what are you talking about...are people really this disconnected....amazing.
Why is it so amazing? the MSM never explains what the fed funds rate is, never explains how houses are funded. Most people don't know about securitizations, they think your bank holds the loan on their balance sheet. Why would they know about securitization? When MBS were developed there was a small headline with a bit of text in their local newspaper, and they just skipped over it.
Also, people don't invest in bonds. Stocks are more sexy. Their only connection to fixed income is monye market funds etc'. They just look at what MSM says: stock market indices, gold, oil. that's it.
Carlomagno,
Second-home purchases were large in Spain but it probably makes matters worse. An occupied house is at least productive (you can keep a productive worker in it). Empty house is just dead weight and somebody financed this wasted capital, either Spanish banks or somebody who purchased those mortgage-backed securities. Moreover, losses for foreigners are more likely to trigger spillover to other countries.
I think the Spanish coasts are equivalent to worse parts of Florida (but there are more of them) and the rest is equivalent to California. Deadly combination.
poszi - I think we agree on the key issue (Spain has a real estate bubble).
Not all second homes are unoccupied. I know several non-residents who bought property in Spain and who rent for at least part of the year. This is quite a feasible proposition given the large net immigration and seasonal tourist inflows. Don't know the proportion of occupied second homes though.
On the upside, there are no alligators on the spanish coasts.
Carlomagno,
Obviously, not all are unoccupied but the overbuilding and vacancies are enormous. Ghost towns in Spain.
poszi - thx for the link.
Those (recently capitalist) Chinese investors must be far more sophisticated than all the other investors/markets in the world.
Eh Candyman?
The full article.